Hello, Texas this is retire smart Austin with Phil Capriotti senior He is the founder of Empower Wealth and tax. I’m your host, Mike Spangle. Every single week, we try to help you with retirement planning solutions. Mr. Phil Capriotti, what’s on your mind this week? What do you want to talk about?
Well, you know, I’ve been getting a lot of calls a lot of questions about taxes. And we’re getting ready to enter that beautiful tax season, which seems to be 12 months a year anymore. Yeah. Between extensions and, and revisions. And this, that, and the other thing, so let’s talk about taxes.
But you but you’re not just talking about that. We’re coming up on April 15. We’re talking about tax forward planning season; this is the time right now to start thinking about strategies to keep more of your money. I know you’ve been banging the drum on how we think taxes are going to be going up. So today, we want to talk about a very specific tool. It’s the Roth talking about the Roth IRA, maybe even Roth conversions, how do we get the IRS that tax partner out of our back pocket as soon as we can, so we can get to tax free income streams, possibly in retirement? We’re going to start with the definition, though, of the Roth IRA, what exactly it is?
Well, basically, the Roth IRA, I mean, everybody, by now should know, should know what a Roth IRA is, the idea is to pay the tax on the contribution or the seed and let the crop grow tax free. We’re getting a lot of folks who are retiring younger and younger, a lot of the people that I not only, you know, play golf with, but up in Horseshoe Bay.
Hello Horseshoe Bay! Just saying hell to y’all out there.
love you guys. And you know, funny thing is I am losing less balls. So, they tell me Your game’s improving. Your handicaps not, but your game’s improving, a lot of the folks that come into the office and call the show, and a lot of the folks that I’ve been meeting that, you know, we have a lot of new folks moving in from all over the country, into the hill country, they’re retiring early. And so Social Security is not even the picture, many of these folks are retiring it at 55, 58, 60, 61. Well, the best time to start implementing either Roth contributions, especially Roth conversions, moving money out of an IRA into a tax-free Roth, this is the time to do it. So, the idea is to tax efficiently, convert your government taxable retirement account into your own tax-free retirement income plan. So many folks, they don’t understand the benefit of the Roth, they’ve been programmed don’t pay the taxes now, don’t pay the taxes. Now, we’re in an all-time low tax rates spike, and we’re getting ready to hit the $35 trillion debt range. And the fact of the matter is, it’s simply unsustainable, taxes are going to go up on the 45 trillion that we have in qualified accounts, 401, Ks and SEPs. and things of that nature. And I fear that folks that aren’t paying attention to where we’re going to be with respect to our tax practice five years from now, 10 years, 15, and so forth. They’re going to miss the boat.
Yeah. And I know that you’ve been talking about it on your weekly radio show that we do together. It really is an alarm bell that we’re trying to solve a sound for everybody here, not just in Texas, but around the country. You’ve got to pay attention to what the tax brackets are, where it’s going, and what is most vulnerable. And right now, it’s that huge account that you haven’t paid taxes on. Right. So how much can people contribute to a Roth IRA? And is it worth it for the kinds of folks who call your phone number.
So, when it comes to Roth contributions, if you’re an individual you can contribute and over 50 You can contribute up to $7,000 a year you have to be 50 or over. As far as let’s say you’re self-employed, or you own a company now you can contribute to a 401 K and at 401 k you can max that out at about $32,000 including the ketchup per year that is the idea to circle back and answer your original question. A Roth IRA 401 K Sep and the like. It’s a tax advantaged or tax-free retirement account. It allows you to contribute into the account, pay the taxes on the contribution and if you follow the rules and regulations, you can let that money grow for decades to come and then pull distributions out completely tax free.
Okay. But when we’re starting with that Roth IRA of six $7,000, I’m sorry, I know the kind of folks who call in I know the kind of folks you help, we’re usually talking a much higher $6,000-$7,000 isn’t really gonna get me there in retirement. So, what else can we use.
No, and the Roth has income limits. So again, if you’re making over 191,000, and that’s where it starts, to up over 230,000. If you’re making in that area, you can’t contribute to a Roth because you make too much money, which seems to be ironic, in a way, because for folks who don’t make a lot of money, why would they need tax free planning? All right, so it’s kind of an oxymoron in a way, but at any rate, which brings me to our next limit. See, what the government has done is they put limits on contributions, but the next section conversions, Roth conversions, there are no limits, okay?
Now, if you have a Roth 401 K, though, you’re not held to the 6000, or 7000, you can actually do in a Roth 401K, the same amount as a regular 401k, correct?
Yeah, that’s correct. And you can’t do both. But you could do up to you could do both, but up to the maximum contribution limit. All right. All right. So, I have some folks will say, Well, I’m gonna put 16,000 in my traditional 401k, add 16,000 In my Roth 401 K to give me a total of 32,000, you can do that in any combination. Excuse me.
And what is this other amount? Because you were talking about a SEP IRA, and you’re actually able to load more into there. Again, we’re talking about the wealth building strategies. For those who are fortunate. We’ve got a lot of folks here in Texas who make high level salaries, mid six figures, even above that. So, 6,000-7000 bucks, we’re going to do even the 32,000, we’re talking about really building the wealth. What does it say?
Yeah, so a SEP IRA. It’s a Simplified Employee Pension Plan. Okay. And basically, that’s what SEP stands for. Simplified Employee plan. Okay, what’s the maximum? Well, this year, we can contribute up to 62,000. It’s 25% of your net income, up to a maximum of 62,000 per year. So, the question is, Phil, can I put 62,000 into the Roth? SAP? And the answer is yes, I’ve been doing it for years. And that’s a wonderful way to maybe take the contribution. One of the other things that you can do, folks, is you can contribute to your SEP IRA or your simple IRA, take a tax deduction. And then in the next tax year, you can convert that from the, from the traditional SEP IRA to the Roth SEP IRA. And if you’re paying taxes anyway, it’s a great way to defer the taxes and kind of have your cake and eat it too. Take the deduction this year, lower my taxes, and then January 1, converted over to a Roth and let it grow tax free for the next year.
Phil, it sounds simple for you. We might need to have our viewers come in and sit down with you and figure out what’s best. We’re going to take a very very short break. I’m going to have the folks listen to a message from you personally right here but called the phone number you see right here for the first five callers this week. We want to get you started on your own tax efficient retirement plan. More of a tire smart Austin with Phil Capriotti, senior how can we make the word Roth, to work to your advantage in retirement? Find out more when you come back right after this message.
I watched my parents work, work themselves really to the bone. I saw my father retire at 63 and pass away six months later. And once he had stopped working, my mom looked at me and she said, You better be an accountant. You better learn the tax law. I went to a private school, got a great education, lived in the library and graduated without any debt. I realized the benefit of being debt free at a very young age. And I also realized the benefit of educating and speaking to people and I liked working with folks who actually needed help. I started my company 17 years ago, and now we employ two CPAs and two licensed tax professionals. We have a legal arm that helps folks design trusts as well as wills. We have an insurance and that offers property casualty insurance, we sell health insurance, Medicare Supplements, long term care life insurance annuities, and we have wealth management that I started to work with Ed Slott looking at tax efficient way Used to have retirees or soon to be retirees retired tax free. If your accountant or CPA is not also your financial advisor, you really have a conflict of interest.
Welcome back to retire smart Austin with Phil Capriotti senior. He’s the founder of Empower Wealth and tax right here in Austin. I’m your host, Mike spangle. Today we’re talking about the Roth. How do we really take advantage of that as we’re preparing for retirement? You say, tax season, it’s a year-round Festival. It’s not just April 15. We want to do tax planning all throughout the year. So, let me ask you, how do we do this conversion? How do we take the IRS out of our retirement accounts?
Okay, how do we buy out our partner, Uncle Sam, Nan, Samantha, beautiful question. What Congress did back in 2010, folks, is they lifted the income limits off of your ability to convert from an IRA a 401 k into a Roth IRA 401k, there is no income limit, there is no limit to be working, you don’t need earned income, you can be retired, like many of the folks that we work with, there’s no age limit. So I can do a Roth conversion on someone that has an account that’s 85-90 years old, I can’t convert the RMD that they have to take to a Roth, but I can convert the amount of over and above that, that’s not the time to do it. Okay, the horse has already left the barn, so to speak, the best time to do it is while you’re retired, and while you’re young, okay. And, and with that being said, if you retired, and if you have some significant income, depending on what your bracket is, we can start to move huge sums of money from that 401k, or from that traditional IRA, into the Roth. So, I had a client come in and said, Phil, can I do that without paying any taxes on it? I said, No, this is a government account, okay?
Yeah, you have the conversion, the conversion word is basically you saying, Look, pay your taxes now.
I want to pay the taxes once! Folks, you want to pay the taxes once, if I want to move 100,000 of my 2 million or 1 million or 500,000, whatever. If I want to move 50,000 From my taxable IRA or 401 K over to the tax-free Roth, I move it over I transfer it trustee to trustee transfer. Once I move it over, I pay the taxes that quarter one the estimated taxes on what that would be and it’s finished. Now that gets to sit and it gets to grow tax free for the rest of your lifetime. If you’re married your spouse’s lifetime, and up to 10 years on inherited Ross as well. It’s really a beautiful thing.
What about if we’re under 59 and a half does that 10% penalty get charged? You know, because if we try to take something out of our retirement account, or 401k, there’s a penalty on it. And you got to pay the tax, as long as we’re doing a conversion. Is there a penalty?
No. So, a lot of my clients were doing conversions on their children, their children are 35, 40, 45. As long as you don’t take a distribution, okay. All right. So, if you take a distribution and take custody of a take it into your hands, yes. With minor exceptions, and exclusions, you’re gonna have a 10% penalty, plus, you’re gonna have to pay the tax on it as well.
Is there- Well, you were kind of saying the 80-year-old person, is there a time maybe when it’s too late? For instance, I always like to ask around 70 or 72. Is a too late to do a Roth conversion at that age?
No, not at all, not at all. And fact that this is why it’s important to come in and have a structure, a written retirement income plan. And then this way, what we can do is we can tell you how much you can convert and at what tax rate. Normally with our clients, we, in addition to managing their wealth and managing their portfolios, we manage their taxes, we do their tax returns. So, what we do with our clients is each and every year, and sometimes twice a year, I’ll do a mock tax return, we’ll see what money did you take out of which accounts; and I have software that we’ve designed and developed. And so, I can, I can literally dial it down to the dollar on how much you can convert at the lowest tax rate. Now I want to take yours. Now some folks will say you know what the heck with it move that million over to the Roth. I’ll write the check for 400,000 out of my savings account that I have making hardly any money. Most folks don’t want to do that they might convert 50,000 a year, 100, 150, 200. We want to convert up to a level that’s reasonable and up to a level their threshold of pain. What is your threshold of pain to pay taxes?
Your tax pain, your tax pain.
Tax pain. So, with that being what I like to do is we like to get those conversions done from the zero to 10% to 12%, up to the 20 to 24% tax bracket, I want to convert every dollar I can up to the into those tax brackets and not jump into the 30 to 35. And the Trump tax cuts expire January 1, actually, December 31, 2024. Now’s the time to get started. If you want to pay the lowest possible taxes on your conversion regarding regardless of who’s running the country, after the next election, it’s time to get started now.
Right, right. And so, we say we want to take advantage of tax brackets when they are lower. These are some of the lowest tax brackets in history right now. I’ll go back to: is this an all or nothing? You’re trying to make sure that we don’t jump up tax brackets? Is this better to do if you’re in a higher tax bracket already? Or is it more efficient if you’re in the lower tax brackets?
Depends on your net worth and it depends on your liquid, your liquid situation when I say net worth, you may own five or $10 million in properties, but are working on a shoestring budget and a checking account. Very few of them (indistinct)
Let’s say that I’m 62 years old, I’ve got $800,000 in a non-taxed account. So, a 401K, can I just take everything do the Roth conversion and pay the taxes from that account? Do I have to do it from the outside?
No, you don’t have to. But again, you’re using tax dollars. We don’t advise it. And let me explain why. Because if you’re taking withholding from that 401k, you’re basically and let’s say that you’re in a 22% tax bracket. Well, 22% of your 401k is not getting converted to the Roth, I want every single dollar into a tax-free retirement account. If I use if I do withholding from the 401K and send that to the IRS, that’s less I get to move over to the Roth 401 K or the Roth IRA.
Okay, I know that you’ve got all this different software. So let the producer bring this up for us. We’ve got a complimentary review and tax analysis. Yeah, so review is more about the portfolio, what your investments are what you have your risk your costs, but then you also put in the tax analysis, and you do this at no cost.
That’s right. It’s complimentary. So let me explain something to you. Back in 2018, when we had the secure Act One, the government took away our ability to re characterize a convert Roth conversion. And what that means simply is once I do the Roth conversion, I can put it back the old law, I was allowed to put it back up to 15 months after doing the Roth conversion. So, if the market dropped, okay, I could put it back in the IRA now pay the tax that is that ship has long sailed. Now because we no longer can do read characterization. We want to run a Morningstar report on your portfolio to help you determine how much risk is in the portfolio, what is your actual return? What are your internal and external fees? All are these are variables we take into consideration when we’re executing a Roth conversion plan.
All right, take a short break here, call the phone number you see below. Not only will you do the complimentary portfolio review, but we’ll run the tax analysis, you’ll get those reports you will literally walk out of the building with them in that first meeting. But we’ve got a limited to the first five callers today and will continue to talk about tax strategies for you building your own wealth and retirement when we get back right after this.
My personal feeling is that no one who has worked in this country and paid taxes for 50 years, or 55 years should ever have to pay taxes in retirement if you put a plan together. That is tax efficient, so that when you retire, receiving money from Social Security should be tax free. receiving money from your pension should be tax free receiving money for maybe life insurance policies are tax free. If you put together the right combination. What you can find is you can structure a tax-free retirement plan for just about anyone to accomplish any retirement income goal. I now currently have clients that want $120,000 a year, 10,000 a month and I have clients that we’ve worked with for the last 10 years that pay zero taxes on that income.
Welcome back to retire smart Austin with Phil Capriotti, senior of Empower Wealth and tax. I’m Mike Spangler. We’re talking about tax strategies with your investment strategies as well. That’s why it’s in power, wealth and tax. It’s all of it together but today the Roth it’s really important. First can we trade inside of those Roth’s once we do those convert? Is that what kind of account I mean, I know it’s an individual retirement account, but the Roth does it still function the same way?
It does and it and so you can Use any investment that you would use an irregular IRA, you can use in a Roth IRA. The fact of the matter is you just simply cannot take the money out. When I say take, take it out, move it into your checking account, it has to stay in that custodial account. You can actively trade any investment that that meets your suitability, and your risk tolerance. Also, you know, I’ve had questions, can I do a Roth conversion with cryptocurrency?
Okay, hey, it’s okay. Why would you? but alright, what is the answer?
It depends on the custodian, if they allow you to do so. Okay, so the answer is yes, you can, as long as it stays. Now, can I move it from crypto into another investment after I’ve done that? And again, the answer is yes, you can do that if the custodian allows that and offers that investment choice.
Real quick. It just made me think of that in-service withdrawal, which I’ve learned from you. So, let’s say we’ve got an outside Roth IRA, we’ve started half a million dollars in our work account, we’re still at that workplace. So, I can take from my work account and transferred over do the conversion, pay the taxes, even if I’m still working.
Most of these plans allow for the in-service transfer or interest in service distribution; and the answer is yes, as long as you’re 59 and a half, for most plans, and the plan allows it, what we’re starting to see is some of these plans are allowing you to do it as young as 55. Once you retire, if you have a qualifying that if you retire if there’s a death. You can also so for many of these folks, if you have old 401K’s that are orphan, we call them orphan, you no longer work with that company started with a new company, well, that should have been moved over, not necessarily to your 401 K with your new company, because you have living choices. But you want to be able to manage it, get it out of there and get it out of that old company and manage it actively.
Right, and just for our viewers out there again, the benefit of doing a Roth is paying the taxes right now, while tax brackets are low, and trying to create your own tax-free income stream in retirement. But there’s another benefit to it. It’s for the beneficiaries. Can you explain that?
Yeah. First of all, I want to before we address that, I wanted to tell you the earlier you start conversion, the better off you are the reason is more years to grow tax free. So, for those of you folks who have become friends and clients, we can start doing this at 50, we could start doing it at 4060. The earlier the better, it gets to grow for a longer period of time tax free now with respect to inherited Ross, that I get a question and I get this often what happens when I inherit an IRA? Well, depends on when that IRA owner passed away. If it was prior to the secure act 2.0. You can use your you can take RMDs and stretch it over your lifetime. Let’s say it’s current after the new secure 2.0, which occurred about three years ago. What happens to the Roth, when the account holder passes away? If it’s not a spouse, if it’s a non-spousal beneficiary, they have to take a distribution. And the IRS is not clear on this. So, I’ve had the question, do I have to take an RMD? Yes, I know. Well, what does that mean? Well, there’s no uniform life expectancy code to take the RMD from the fact that the matter is, you can take all of that distribution in one year, you can take no distributions for 10 years. But at the end of the 10th year, you have to empty that account, or you will be subjected to a prohibitive transaction, which will cause all the gains to be taxed.
So, let’s put a face to this. So, we’re talking if it’s a non-spousal, it’s probably the kids. Right, right, because I would say maybe somewhere around the age of 80, so the kids could be somewhere in their late 50s, early 60s themselves, either maybe having a good salary already. And you’re saying they have to take it all out in 10 years. So, if it’s a half a million dollars, a million-dollar account that we’re passing to the kids, we could be doubling their taxes.
Oh, you know it. You know it. you’re gonna make the IRS the primary beneficiary of that retirement account.
I’m just gonna ask, are the ways to sidestep?
Well, here’s the thing, if you remember, it’s either pay me now or pay me later. So, fact be known. If you do not do these Roth conversions, your spouse is going to end up having to do them at a much higher tax bracket in all probability. If the spouse does not do them and takes RMDs the kids are going to have to empty that account. Now for many of us, I have five children. Many of you folks have children as well. Good lord willing and the creek don’t rise. These kids have been educated and have their own careers and their own families. Now can you imagine your son or daughter having to take a distribution of 500,000 a million dollars or more, after you and your spouse have passed away while they’re working, they’re going to pay the highest tax bracket, whatever it is at that time, and everybody talking about increasing tax brackets to 40, 50 and 60%. To help pay down his debt, we’ll soon find out when 2025 comes around. But we believe that from 2025 to 2030, we’re going to see a significant increase of tax rates, we’re also may even see larger taxes on any distribution of an IRA. So, the moral of the story is, you want to buy out your partner? Who was your partner, your partner in your retirement plan? Remember, it is not your 401 K? It is the government’s they allowed you to save tax deferred. Why? Because they can get you in taxes later allow it to grow. So, when I open up the window for the Roth conversion, they not only did us a huge favor, they did themselves a huge favor, because any elected official that had a retirement plan, you better believe that they’ve converted it to a Roth.
Okay, one more time, gosh, only a minute 30 left on this, but can we then do the conversion over to the Roth, once it’s in the Roth, maybe do something like consider purchasing indexed universal life to be able to leave that tax free to the kids? I mean, since we pay the taxes on it.
You can, and that is a good product to use for certain folks, not for everybody. It’s a small percentage of the population. I’m gonna say maybe one out of five, because it has helped variables. One of the questions I get is, can my spouse to the Roth after they inherit it? And the question is, yes, the spouse, if the spouse is a beneficiary, she can only do a Roth, she can actually put it and convert it into her own. The other thing is about inherited IRAs. Okay. Can my child inherit an IRA, and I just had this situation, we had a child inherit and million-dollar Ira while she’s in college. And so, dad comes in and says, Phil, what do you know, what, what would you recommend? I said, How much is the College where she going to school? And she said, Well, we’re paying $100,000 a year, she’s going to a private school. That’s what she’s paying. And I’m taking it out of my taxable money. I said, No, this is what I would recommend. What I would recommend is take that 100,000 from the million dollar- from that million-dollar IRA that she inherited because she has to empty it in 10 years anyway, and then pay the taxes on converting the rest of it to a Roth.
All right, Phil, high level strategies for high level folks. I really do appreciate it. But it is fun. As Phil says, It’s fun for him. Call the phone number you see right here so you can get started on your own complimentary review and a tax efficient plan for your retirement. Thanks for watching. We’ll be back again next week.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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