How-To and Q&A User Webinar - Tax Lab Review (March 2022)

good morning everyone we will get the webinar started in about another minute or so as uh we have folks

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joining in

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so

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got a few more people coming in here another 30 seconds or so

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good morning afternoon everyone wherever you are in the states here uh welcome to

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our user q a uh webinar today um on the tax center the income lab tax center

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specifically looking at account types and distribution strategies before we kick it over to our two presenters uh

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derek and justin um two householding items for uh folks who are new uh to our

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user webinars we will have a presentation to start off and then we'll open it up for q a you'll see in our

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zoom here that there's a q a section in which you can drop all your questions there

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please keep a look out for other folks questions you can like and move that up on the queue and then once we open it up

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we'll just work through the queue and make sure we get all the questions answered um and for uh our folks who have been

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joining our webinars regularly our next one coming up on april 12th we will actually have cfp credit available for

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that one as well so you will also see that announcement come out tomorrow and

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i'll actually drop the link in the chat here for anyone who wants to go ahead and register for that next webinar as

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well outside of that justin derek glad to have you guys back again i will uh turn

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it over to you okay thank you malcoly and uh thanks everybody for joining um i apologize

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for my voice if you notice it's a little little horse you have three kids under six uh you

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catch everything within about a hundred miles of you so um but uh we'll we'll get through it

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so um so yeah today we're gonna we're gonna spend some time talking about the the income lab tax center and um we'll

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it'll be a mixture of some kind of higher level thoughts and some very specific kind of you know how

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to use it going over some settings and things like that to make sure that um you know

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people kind of can see the uh the the power and customization possible um

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with with kind of the tax engine in income lab and maybe that'll spur some some questions as well

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so um so let's get going quick quick outline of the uh

Outline

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of the presentation portion for today uh we'll do a little bit of talking about kind of the whys and hows of um tax

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planning and retirement so this will be a mixture of high level and and also a quick kind of overview of the of the tax

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center in income lab and then we'll talk about some trade-offs in retirement tax

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planning so i think you know one of the overarching themes of a lot of these webinars has been that there really is

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no such thing as an easy to follow rule of thumb that applies to everybody so this text planning is no exception um

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it's also a place where customization and and really getting to know a client situation and helping them through that

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adds a lot of value then we'll talk about some of the inputs especially focusing on account types

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and we'll close up with some thoughts on where retirement tax planning adds the most value what sorts

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of situations so first of all um there's sort of uh

Tax Planning

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a couple ways to look at this you can kind of um look at it from the

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perspective of the clients and the practitioner so for for clients tax planning is a place where

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um really it's it's almost impossible to do tax

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planning on your own um so text plan is extremely complex and it requires expertise and also tools like an income

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lab to handle all of the complexity but on the plus side the long-term

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benefits can be substantial at least for some households or many households and

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the potential benefits are quantifiable so um we'll see a little bit of that but that's that's always a nice mix where

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you know substantial benefits can be quantified um so that clients can kind of understand what the potential

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advantages of a particular strategy could be for practitioners um it's we're going to

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be discussing this but there is a actually a fair amount of art in tax planning it seems like it should

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just be very you know black and white do the math and there is a lot of that

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but there is some art and kind of understanding client preferences as well that we'll go through

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and as with so much in retirement income planning this also requires ongoing monitoring

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and updating so this is not a one and done you know send a client home with a hundred page ring binder um to follow

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the plan the rest of their life it's really part of an ongoing service um and as i just said not one size fits

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all okay so why retirement tax playing

Why Retirement Tax

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um as i mentioned it's extremely complex and and i i considered making uh you

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know an incredible flow chart showing which things uh um affect other things

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but it's almost too too hard to uh to do and visualize so what you see here is

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just a little bit of what goes on in in tax planning so we need to understand

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the timing of cash flows for example social security pensions when do they start and so on the characteristics of

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portfolio distributions are they taxable uh or tax-free are they

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you know investment um you know maybe long-term cap gains and so on are there rmds because those things can't be

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rolled over into roths and so on um and then all of the interacting parts

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of the tax code so ordinary long-term cap gains actually interact with each other because

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cap gains are kind of stacked on top of ordinary income social security taxability is affected

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by all this medicare irma state income taxes have um in many cases

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a lot of complexity surrounding retirement income types so this is just a little bit of uh

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of a picture of why this is not kind of back at the envelope material for most people even somebody with a

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relatively simple uh situation um but that being said it is possible

Example

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and we've we make every effort to make this value easily

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demonstratable demonstrable it's quantifiable and in this example

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which is i think a household was about 3.2 million dollars kind of in the early 60s

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for these folks it could be substantial right we're talking about well over half a million dollars in total tax savings

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over time um taking the uh effective rate um

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from 19 down below 12 and um we'll talk about this in a second

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but the way that this household would do that would be by engaging in

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roth conversions early in their retirement so this happens to be um one of those households where tax planning

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um you know can potentially have quite a quite an impact on the uh

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on the long-term experience um but although that's a very nice neat

Updating your plan

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picture um it's important to remember that it's also gonna be necessary to update this plan

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um at least annually so typically what you might do is um take a look at things early in the year

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which have estimates um for what the actions for this year are and then toward the end of the year

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if the household um has a lot of um

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variation in its taxable income maybe they have large taxable accounts and so the amount of realized capital gains and

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dividends and things are not knowable ahead of time you would reevaluate that um but as you can see here uh there are

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other things that that can change as well that we that would require ongoing updates things like

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changes in um the tax code right so on the upper left you just see the top far

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federal marginal rate over time you see that it's changed quite a bit a little less so recently um

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but but obviously when their tax code changes it's time to time to update things

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um it's possible that uh you know the household makeup changes either through death divorce marriage and so on and so

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again there's a need to change there not just um for for tax purposes obviously also

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for for broader um income planning purposes but taxes are affected by your status as

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well right single versus married um and on the bottom you just see changes in dividends over time um again

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for those with taxable accounts that's going to be something that that requires kind of ongoing monitoring

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and management so how does income lab help you with this

How does Income Lab help

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kind of complex but valuable task well we have three broad categories of

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tax distribution strategies that you can model um the first is pro rata which is i guess

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our stand-in for um don't pay any attention to taxes um so it's a good kind of baseline to look at

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it just involves taking withdrawals um from investment accounts according to that uh to the account size

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right so larger accounts will have more withdrawals next we have tax ordering so this

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involves withdrawing from accounts of one tax type say taxable accounts until that account type is exhausted so until

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all your taxable accounts are exhausted then moving on to the next one let's say we're tax deferred so now it's our iras

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401ks and so on um note that in all of these cases we're

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we're always including rmds at 59.5 rules and so on behind the scenes right

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so that those can have an effect here that would um change exactly how much money is coming

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out of which sorts of accounts so for example in tax ordered you might be trying to take taxable uh distributions

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but if there are rmds those would be taken first and if they're enough to provide all the income needed you may

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not have taxable withdrawals in a given year at all because the rmds take precedence

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and then finally bracket management so this is maybe the uh the most complicated one um and it's the

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only one that includes um roth conversions so what's happening here is

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um we're withdrawing the funds needed to fund the lifestyle

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in a taxable tax-deferred tax-free order and then if that along with any other

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income maybe social security pensions rental income so on if um if there's

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additional space left in the um in the in the bracket that's specified

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and here we're talking about federal ordinary income tax brackets um if there's any space left we will figure

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out how much of a roth conversion would fill up that space

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that can be fairly complex because adding roth conversions can drag other money

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into taxability things like social security um so it's it's not a not a trivial um calculation

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so that's how the three sort of types of account of uh tax management strategies

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uh work now each of these other than pro rata actually have kind of subtypes right so

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um you can go in in order to set these in the software um there are a bunch of

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places that you can do it um within a plan so if you're not in the tax center

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you would go to the advanced settings and and choose your tax strategy

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and then once you've chosen a tax strategy for example if you have tax ordered you'll see three um kind of cards that you can drag

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around taxable tax for tax free and you put those in order if you choose bracket management you'll

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be asked which bracket you're trying to fill up you'll also see it in the tax center um

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in a couple of places um if you hit edit you'll see a list of all the tax

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strategies um and actually you can even apply a tax strategy to a particular

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plan you can say hey this plan is planning to do this tax strategy by clicking apply strategy to plan within

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the tax center so that's just kind of a a way to not force you to go from the tax center back to a plan going to the

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advanced setting so it's a shortcut basically um and then within the tax center there

Comparing Strategies

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are two sections and i'll actually go ahead and give an example here but

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there's a way to compare strategies so among all of those

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available strategies you might want to put two of them side by side and then there's a way to explore them

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so i will queue up a

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an example here for you

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so for example here we are comparing bracket management to the

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to the 32 bracket to taxable tax deferred tax-free by default

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this is always the um you know compared to the strategy two um the reason for that is this is kind

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of the most commonly seen rule of thumb for tax planning um but you can change um which

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these are by hitting edit and changing either strategy one or strategy two

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and you can see all of the strategies with their summary statistics

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here as well now in this case at least from a tax perspective the thing that is projected

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to have the the lowest total taxes is bracket management so 32 but we'll talk about reasons you might want to explore

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some of the other options as well but you see this is probably our most popular view

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for talking with clients right it's it's kind of summarizing estimates over the entire plan

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um average tax rate total taxes net income and so on but you you have lots of other

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options including looking at total taxes so this includes by the way federal and

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state um marginal tax rate um this is just the the federal bracket

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and break even point we'll be looking at these again

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again soon and then

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maybe a client found those compelling um the next step might be well what would

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what would following this strategy look like year over year and that's what the explore section

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um is for so

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go back here go to explore and by default it's going to pull in whatever you had in strategy 1 in the

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compare section and now you have a year picker

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showing each year projected amounts of income uh

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categorized by its by its type so you know we have ordinary and long-term cap gains income

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you can see here extremely aggressive roth conversions all the way up to the 32 bracket

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again pretty easy to just edit this maybe you say you know what 32 is pretty high

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let's check out 22.

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many more years of roth conversions in this case obviously it's going to take longer to to exhaust those roths

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but you can see now our roth conversions are much lower as well

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you can click through the years so maybe i want to look at 2027 it's a

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particular age or something see what things are looking like or look at the final year of projected roth conversions

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and we'll always see the details or you can see a given year's projected action so in

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this case we have withdrawals of 138 000 we're putting 107

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000 of that into the roth so not all of it and we're also supplementing with some taxable withdrawals

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but we can see each year's um details in a table format as well

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okay um so i i want to turn to another kind of software tip here that sometimes comes up and talking

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about taxes so income lab allows you to to do income calculations in

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in two different ways um you can either uh sort of ask hey how much can i afford

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and that's by telling the system all about your financial situation cash flows

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investments and so on along with preferences for um for income risk basically your

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your um your preference on uh you know how likely you would like it to

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be that there's an income cut at some point right so that's income risk you can also

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define how much income you want and the system will figure out the income risk so this is called solve for

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this income now this actually does have an effect also on how you do tax

Gross to Net Calculations

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tax calculations in income labs so for tax purposes kind of the how much can i afford

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approach does it gross to net tax calculations if you click solve for

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this income it does net to gross now both of these are useful for a

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variety of things and and if you're doing in-depth tax planning the typical um

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way to to actually run the system would be to start with the default that grows to net get a feel for how much this how

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much income this household can afford and then put that in as desired income do a net

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gross calculation and and see how that affects the overall plan um typically it does affect it somewhat

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i've seen it go in both directions actually in terms of risk uh maybe once you do solve for this income if maybe

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you're doing an aggressive roth conversion strategy i've seen that actually decrease the risk i've seen it increase the risk slightly um but that's

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a typical way to to kind of if you're doing in-depth tax planning to use that solve for this income uh

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uh possibility and you see here um some some summary on

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kind of the positives and negatives of both so um when you're doing this kind of tax planning uh which is so so

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complex there really is no um kind of single way to to just get an answer right off the bat

Tradeoffs

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okay so let's turn to some of the trade-offs in retirement tax planning as i said it's a little bit of an art as

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well as a science so for example let's say we have a plan uh

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where the projected lowest tax approach would be bracket management to the 24 percent bracket so

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large roth conversions which will mean large tax bills early on

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this kind of goes counter to what um you know it's it's a it's a little bit

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of a delayed gratification um situation right so we're asking someone to kind of pay rip the band-aid off

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early on in exchange for a high level of control over their taxability later on and so again this is

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this is not just about what's the total number it's a little bit about what are the other preferences

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for the household so for example some clients may not be able to stomach this kind of ripping off

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the band-aid approach whether that's um you know kind of purely an emotional

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aversion to paying high tax rates or based on some other um preference uh

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and so there are actions you can take uh when exploring uh approaches here um we

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already saw that you can explore in this case you could explore bracket management at a different level you know

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we have 24 here but maybe we want to go down to 22 or even lower um you can also

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set a roth conversion cap so maybe you've discovered that there's sort of an appetite for roth

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conversions that that at some point is exhausted um and maybe this household is only willing to do you know

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a hundred thousand dollars a year um you can set that cap by going to the advanced settings of the

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plan and um and putting it you see down here enforce annual dollar cap on roth

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conversions set that amount that's an inflation-adjusted amount note that you can do that no matter what

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the plan itself has as a tax strategy so um and and uh you know if it if it is

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doing roth conversions um for the plan itself that will obviously apply but even if it's not

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the system will apply that cap in the tax center so when you go to the tax center and explore

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or compare roth conversion strategies bracket management strategies that dollar cap

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will be applied in that case there's another sense in which uh this

Breakeven Visualization

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is a little bit of an art not a just a science um and that's that although total savings certainly matter um in the

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the statistics that we saw so does the time frame um and so we have this breakeven um

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visualization which is just the cumulative estimated taxes over time and the point

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at which those cross so in this case we see bracket management cumulative taxes quickly rise but then level off

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whereas taxable tax deferred tax-free rise slowly over time and eventually become quite substantial in this case

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because of rmds but it's going to take until about 2045

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for that break-even to happen so that doesn't mean that this is a bad strategy or a good strategy it's

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something to think about is is 2045 a very reasonable time frame for this household um some other things that can

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have an impact are the tax status of the heirs um so you know it may even be worthwhile if

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this household cares a lot about uh their heirs tax bills um it may still be worthwhile making those changes even if

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they were to pass away before that break even point and if they're worried about changes in tax policy um

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you know maybe they have strong opinions about taxes being higher in the future this break even could be could be earlier

Account Types

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okay so let's turn to some tax settings perhaps one of the most important is

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um the account types so um you'll see here a list of all the account types we have available we are

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building a few more as well based on some feedback from advisors but this is

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really important that they get the account types right for each investment account

Exclude from Roth Conversion

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and let's talk about some fine-tuning that is also possible within account types so if for some reason there is an

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account uh it would be a tax deferred account that you want to exclude from roth conversion so if the if if you know

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for whatever reason you kind of want to set that aside make sure it's not available for roth conversions if it's a traditional ira or a simple kind of ira

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set by ira for example you can just click exclude from roth conversions on that account if it's a

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retirement account like a 401k you'll have to go you click on employment and distribution settings

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and check exclude from roth conversions even if funds are available for withdrawal

Separation from Service

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probably more common is getting things right in terms of separation from service and other

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special rules surrounding retirement accounts so for example whether that account allows in-service withdrawals if

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the person is still working for that employer whether that account owner is a greater

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than five percent owner because that affects rmds um and in the case in which you've already

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separated from service whether that person stopped working uh or separated from service in or after

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the year that they turned 55 because many retirement accounts

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have an exception to the 10 penalty in that case um also some more fine tuning

Distribution Plan

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if you have a deferred comp account or an inherited ira or roth account

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you'll want to specify the distribution plan for that account

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and it works very similar to what you might see in the tax flow section but you know maybe you have in the case

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of the deferred comp plan here some installment plan um

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uh this was just an example uh you'd normally expect that the next installment and the final installment are not the same uh inherited iras as

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well so in this case they have six years left or maybe i guess it'd be seven in this case um of a uh of kind of a stretch

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that they're doing and in this case it's annual distributions

Annual Distributions

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just as an example you'll you'll see um uh differences in the tax center or in

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really throughout the system based on these settings so if a 401k for

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example if the owner is currently age 57 but they separated at age 55 plus um

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you'll see right away they're they're having roth conversions in this example plan this 401k is the

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only possible source of roth conversions but if they're currently 57 and not

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separating until age 62 um you know you're not going to see any roth conversions available until 2027.

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so again this has a huge effect on on the calculations and the possibilities

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um so when do we tend to see tax distribution planning yielding a lot of

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value well kind of like i was saying there really aren't good rules of thumb in in

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most things because client situations can be so particular and idiosyncratic um it's a little hard

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to kind of set hard um differences here but in but typically there's more value earlier in a plan or

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younger versus older um maybe this is obvious but larger tax

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deferred balances will tend to have more of an effect if you're looking at roth conversion and

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typically if if it's possible to defer um certain types of income so security is

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the obvious one where deferral also increases that income amount but in doing so you make it more attractive to

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do roth conversions early on because you're not dragging social security into higher taxability

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um so that would be in contrast to taking social security or maybe there are

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pensions and things earlier so as an example i ran a a household um

Roth Conversion Example

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at age 62 and another at age 70. i kept their account balance the same but i sort of you know cut off everything

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in the in the case where they're 70. 70 that that comes before and you can see

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the effect here now they do still have a few years before rmds in that case because if they're

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70 today they wouldn't have rmds until 72 but you can see a pretty substantial

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uh decrease in the in the projected value of roth conversions over time

Comments

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so with that um i think we'll uh open it up to uh to some comments uh

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from derek if you have kind of um your thoughts on this but also in practice how you found um

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the tax center to be useful and then we'll go to questions yeah for sure um i think

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for me this has really been you know demonstrating the value generally

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of these tax planning strategies has really been a focal point for me as i'm going into

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um you know meetings with new potential clients is it's a way anytime you can actually try and quantify something

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that's what i love you know about tax planning is that in theory it's it's more quantifiable than

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say you know trying to convince somebody that your investment strategy is going to be you know worthwhile long term and

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you know so many advisors are you know perhaps you know

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maybe it's compliance for other reasons they're really afraid to have these long-term tax planning conversations

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like i still make it very clear i'm i'm not a cpa i'm you know these are rough strategies we're always going to want to

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fine-tune this get the tax professionals involved make sure we're not overlooking anything but trying to get that

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long-term strategy right um and for me that's been a you know a powerful way

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just to give one example it wasn't too long ago i was on a

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you know meeting with the client for first plan presentation meeting they had one i

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think it was about 500 000 of potential tax savings from getting that strategy right

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um the the roth conversion strategy and you know they said to me you know if if

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we get this one thing right you know that basically pays our fee for a lifetime of working with you

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um i i don't set it up that way or pitch it that way but to me it you know it

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made it click that they could understand the value um you know that was it was there from getting the tax planning right that's

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not even opening up the door to the rest of the financial planning and getting the income plan on track so for me

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it's been a big part of what i'm doing and presenting to clients and prospective clients and really just

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trying to make sure that we can quantify that value and the tools here have been very helpful um i would

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say you know like kind of as is illustrated here um you know as you get

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more experience doing these types of analyses specifically you will see things like you know the longer you make

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that kind of that valley and tax rates that forms as somebody retires early has until age 70 social security 72 with

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rmds to kind of fill up that valley with roth conversions you definitely see there's a lot more opportunity there um

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so it you know sometimes makes retiring early nice from two perspectives uh if the plan otherwise

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works um so yeah it's uh something you pick up on and the other thing is the break-even age

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that's been a really helpful i have some other tools that i use and you know looking at tax planning um

QA Section

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income labs the first tool i've i've seen that gives me this the break even point uh that i can actually look at and it's

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definitely giving me some scenarios where i say yeah you know what you know the break-even point is 95 here you know what the

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chances at your age 95 the chances that that's actually gonna be that meaningful to you may be small and i've had other

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cases where the break-even point is really young and so it's a really valuable piece of

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information that that i've found useful

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there and now we will open it up for our q a section um

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i see we already have some questions in here so i will uh start reading them off

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and we'll keep going um let's see here first question um so in a tax bracket

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management strategy does income lab identify the source of funds to pay taxes on the roth conversion and the

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quarterly estimated taxes that will be necessary in the following year

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uh so it it does identify um the

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the withdrawal source um so in terms of taxable tax for text free i mean if it's a roth conversion

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it's unlikely it's a tax free source but um it would first preference um paying for

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those with any non-portfolio um funds that's relatively rare but if somebody maybe were

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you know still working or had maybe large um i guess this would be portfolio but maybe some non-qualified deferred

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comp or something um then uh it would pay taxes with that

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next it would pay it out of taxable accounts and finally out of um text deferred accounts in that case that's

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one position where you would see the amount withdrawn from tax deferred accounts is not the same as the amount that's going into

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into tax for your roth accounts um i mentioned kind of the normal workflow

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of uh you know starting with um you know sort of the default way of running the program and then

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really narrowing in using the solve for this income that's a a place where that's particularly useful because it

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will um it will uh will get you those estimates um as for the amount of estimated tax

34:49

payments no that's not a it's not part of the um the platform currently um

34:54

there is a uh the estimated actions section that i uh was showing earlier um

35:01

can be used and you can even uh export this as a pdf

35:10

all right um and you know sent with the client to

35:16

a cpa or maybe you have a cpa um that you're working with to to kind of dial in those numbers and then set a a little

35:22

bit of a plan for the following year

35:28

that this is kind of a follow-up question but more uh for you derek um says derrick since income lab current

35:34

doesn't currently have a table that details what specific accounts are being withdrawn for from to produce the

35:40

monthly income how do you communicate the specifics of what accounts are providing the monthly spending for

35:46

example when doing a roth conversion you might see additional withdrawals from taxable accounts to pay lifestyle

35:52

and the additional taxes owed i mean just in general i try to keep things

35:58

very high level um you know when i'm talking about where funds are coming from i am

36:03

generally talking in buckets in terms of like taxable funds tax deferred or tax free um you know i try not to

36:11

just personally my preference like that's the level i'd like to communicate at obviously you know when it comes to

36:16

actually doing that analysis which account are we going to pull from getting that level of detail uh it could

36:22

many different factors could influence that but so so i guess my answer is partially it actually kind of works in terms of

36:28

how i prefer to communicate that level of depth um you know then getting into the details

36:35

like year to year i'm also using other plan other tools like list to plan is a tool that i use

36:42

quite often so you know i've already have a copy of the client's tax return have that uploaded in

36:47

you know using kind of the general strategy here the long-term strategy taking that into a different tool

36:53

dialing in those numbers getting a little bit more precise um and then of course that still doesn't

36:59

answer the specific account question but that's that's kind of the next tool and it's outside of income lab i guess i would

37:05

say where i'm doing those fine-tuned steps to get to the actual action of where to pull those

37:10

funds from and this is an area that uh

37:15

several advisors have asked us about kind of a um you know getting down to

37:21

the account level implementation of these plans um so it is something that we're exploring um

37:27

as a as a possible offering in the future next question is is there

37:33

uh is there any intention to add the ability to simulate a single roth conversion that is how much would the

37:40

client benefit if they did a roth conversion for this year only as opposed to doing them every year

37:50

i i have not uh had that request before but it's an interesting one kind of saying hey just do the whole thing right

37:56

which would um allow you to get well you can't sit here but up into the 37

38:01

bracket for example um yeah happy to take that on board that would not be uh particularly difficult

38:07

to add as one of the strategies i i might quick add to that just my own

38:12

thoughts like i can see where um you know the big the big long-term strategy is

38:19

good to have um i think it's also sometimes overwhelming for the client right like year by year we just want to

38:25

do one thing so i like i could see the value not even necessarily like the whole i mean maybe you want to try and look at

38:32

the whole conversion but the question might have been getting at to like just a you know what's the value of

38:37

converting fifty thousand dollars this year um to put something to it and i i could see the value in that because then

38:43

i can go to my client and say yes we've got the long-term strategy this year we think you know 50 000 is the right

38:49

number here's the value you know that's going to cause long-term and just kind of focus that conversation in on the

38:54

narrower i'm not sure if that's what the question was getting at that's that makes sense it wouldn't have to be the whole thing so no that's a really good

39:00

question we've also had a request which actually we do have in our our product roadmap of you know

39:06

specifying maybe a window where you're not doing roth conversions um you know there might be reasons um that you

39:11

wouldn't want to do roth conversions in particular years so that's been a request as well that i i can definitely

39:16

see the the value of

39:22

and next question i think still kind of on the lines uh when the software considers the money needed for spending

39:27

first to determine bracket management is it looking at proposed income or budgeted expense

39:33

items it's looking at proposed income so now you can you can make those equal

39:40

uh you know by either hitting sell for income or or just uh having dialed it in

39:46

already but yeah it's looking at proposed income perfect and uh derek to your last thing uh we

39:51

just had a few users um kind of reiterate that being able to illustrate one or a couple years of that

39:56

roth conversion would be would be useful and then um

40:05

next question um so this about the bracket management module the tax center might show for example that it is

40:11

optimal to convert 24 up to 24 but when you run the plan and look at the total monthly income it goes down it

40:18

would be nice if the tax center worked with the income projections to come up with the scenarios that would produce

40:23

the most recommended income yeah so that's um what you're seeing there is the difference between

40:30

the gross to net and net to gross approach so as i said typically as you're narrowing in on on a

40:36

a particular approach you'll want to switch to solve for income which is going net to gross so what you're seeing

40:42

is uh perfectly reasonable if taxes are low you know maybe you're making a hundred thousand dollars and you're netting

40:48

95. um but if you have a lumpy tac a lumpy tax plan then that's not going to work right

40:54

you know we're not going to go uh 100 000 gross uh you know 10 000 net in the first three years and then 90 000 net

41:01

following um so that's where you'll want to use sulfur income which will gross up instead of netting down the

41:08

approach so that'll solve that problem for you um and the next question is uh what life

41:14

expect expectancy is used for optimizing the social security claiming decision

41:23

so um it's actually not um

41:28

i don't believe there's anywhere where we sort of claim that there's an optimal um claiming strategy for social security

41:35

but we do have a break even age which is just saying hey how long would you have to live

41:41

for the foregone social security um to have been made up by the

41:46

additional social security that they've gotten because of deferral um so there's no actuarial assumptions in

41:53

in that particular calculation um we have uh kicked around you know kind of like the tax center it would be

41:59

interesting to have a social security center that really did take a lot of that into account and all of the complexities surrounding those decisions

42:06

but that's not the way the system works at the moment this next one is a follow-up on the

42:13

source of funds for tax payments on conversions question um does it add in a capital gain assumption

42:19

if the funds are coming from a taxable account it does and actually that's a good um

42:26

that's a section i i skipped but um

42:31

ah yes right yeah i can shift over to another um account

42:37

here but um the each uh each firm

Assumptions

42:42

uh can set its own tax assumptions um and part of those assumptions are

42:48

taxability of um different kinds of gains for for taxable accounts and those are set by um

42:56

according to asset classes so i'm trying to find an example kind of

43:03

firm admin account i have here but if you go to the the settings you'll see tax settings um

43:09

available

43:14

um and then it is also making an assumption that anything you're withdrawing so that's for kind of um you could call it like

43:21

passive income right dividends and so on um yeah i'm having trouble finding uh

43:28

an example account to bring up for you but um then any withdrawals uh it assumes

43:34

there's um pro rata amounts of of gains and basis so if you know

PDF Reports

43:42

60 of the account or if the basis is is 60 of the current balance then it will assume that 60 of the withdrawal is

43:50

the tax-free return of principal um so that's how the assumptions work there

43:57

and the next question is uh the pdf reports from the report center don't reference what tax strategy is being

44:03

used in the plant is that normal or will that change it should reference it um

44:12

if you're seeing a a a particular page that that isn't definitely let us know it should be saying which

44:19

which one is being used and then oh i'm saying uh we had some

44:26

questions in the chat so let me hop to some of those um

44:32

uh is there a way to see an impact on characteristics of legacy under different tracks tax strategies

44:39

what is the mix of tax deferred tax taxable and roth in roth and under each strategy

44:52

so i think in the um if i understand the question correct like i think in the um as far as looking at the legacy results

44:59

on the tax strategy are you is the user able to see kind of what's left in the portfolio that's tax deferred taxable or

45:06

tax free i think that's the question yeah the um

45:12

there is a portfolio kind of taxability view let me see

45:33

okay

45:48

so within the tax center

Comments Feature Requests

46:20

so in the explore section if you go to portfolio i suspect in this case it's all tax free so it's a little less

46:27

interesting but um you know if we shifted to um you know parata for example

46:41

yeah so um now you can see the tax deferred balance is is going down faster

46:46

than others because of rmds um and then this amount is what it for for figuring

46:51

out those legacy estimates net legacy estimates it's uh basically assuming a 50 year old

46:57

couple in the same state and complete just you know

47:03

taking everything out of each account paying all the taxes

47:10

and then uh this next one is um comment or feature request um

47:16

uh this is a notice uh still no features for charitable planning like gift giving appreciated assets or qcds

47:23

if i remember tax assumptions may use standard deduction assumptions they do and

47:29

that is very high on our on our radar in terms of uh some some more ability to do

47:34

specific tax planning especially um uh

47:40

you know non-standard deductions qcds and so on um so yes thank you for your your patience on that but it's

47:46

definitely a a complex area but we're definitely planning to add it

47:53

this next one's a comment it would be helpful if there was an hsa account type

47:58

yeah that's i mentioned earlier we're looking to add a few and that is definitely one of them perfect

48:04

um and then um next question for roth conversions does the software consider the five year

48:10

withdrawal rule before which roth monies cannot be withdrawn um this can slash

48:16

should be roth conversion by roth conversion right so talking about um

48:23

well i guess both both um contributions and and um conversions but um

48:29

that is not an area that's covered right now um

48:35

if it's something that that you uh you know really find would be useful um as you

48:42

say kind of an account by count um case we could add it um just as we do to say you know exclude roth conversions

48:48

we could ask when when the five-year rule would be up for that account

48:53

we actually picked for simples by the way so symbols have a two-year they have to be open for two years before you can

48:58

move the money um so it would be very similar to the simple except five year

49:05

um and then uh next question is does the software um optimize in the tax center optimize considering irma social

49:11

security taxation and net investment tax um it does include all of those um

Net Investment Income Tax

49:20

so let's see this example yeah they do get into some medicare irma later on because of rmds in this case um

49:28

they even get a little net investment income tax um late on here um

49:35

that's uh that's partly because their taxable account is growing and partly because net investment income tax the threshold

49:40

is not inflation-adjusted so it's just gonna hit hit earlier and earlier or at lower and

49:46

lower levels in the future

49:52

and then um next question in the chat here is uh does the software allow a 401k plan to avoid r b if the employee

49:59

is over the age of 72 and still working for the employer

50:04

it does so that's why we ask whether they are a greater than 5 percent owner because

50:11

that's if you are you don't get that that break um but you know if we ran an example where you

50:18

you know one person was going to continue working with that uh firm for

50:23

until 75 or 80 you would see that uh your rmds would be much lower

50:32

and then um we had one comment asking if the slides will be emailed after

50:38

i think we can include that in the uh the recording right with the recording

50:43

yep perfect uh and then um here it says that with large conversions

50:49

the proposed income in the income goal box can easily drop below the desired income i know this is due to taxes that

50:56

need to be paid but how do you address this it does not make sense to tell a client to come back on desired spending

51:01

for the purpose of paying taxes on roth conversions yeah again i think what what's needed

51:07

there and maybe we could even do a little more specific piece on this workflow i i without a doubt connecting

51:15

your dynamic income plan to a tax plan and so on is the most complex set of planning so typically what you'll do is

51:22

you'll start out without checking solve for this income that will give you a feel for what the household can afford

51:28

and dial into okay this is this is kind of a net income level we're going to seek

51:33

define that net income level and check solve for this income and then that problem will go away so you'll see that

51:38

uh it will no longer be going gross to net whatever net happens to be um it'll be

51:44

it'll be assuring that you have the right net amount of of income

51:50

and um this next one i think uh kind of touched upon it but maybe just uh make sure we answer this specifically um does

51:57

the tax model include the extra medicare tax of 3.8 percent on

52:02

married couples in income over 250 000 a year um and or long

52:08

and or long uh long-term cap gains we did touch on it but actually so so here it is the net investment income tax

52:14

uh we also include the extra um fica tax if you have earned income

52:21

and then um this is more of a comment sequence of return risk should influence roth

52:27

conversion strategy example draw down a taxable account to pay the taxes

52:33

does the system consider this it does actually i i had i thought about including that in the initial

52:39

presentation but it would have made it a bit longer um so that's another one of those art um

52:45

art and science pieces um and you're exactly right um

52:50

there's a variety of things that increase your portfolio withdrawals early in retirement one of them is roth

52:56

conversions another would be delaying social security or other income flows and uh that's not cost free it sometimes

53:04

it makes a lot of sense but it the cost is typically higher sequence of return risk and you'll see that

53:11

uh in a in a couple of places um you know probably the most obvious will

Income Adjustment Plan

53:17

be um right here and the income adjustment plan the

53:22

typically if there is more secrets of return risk then this uh

53:28

kind of guardrail amount will be closer so it'll be more likely that you will see an income

53:34

decrease in the future um i've played around a bit with this and

53:40

and um in a lot of the example plans i've seen it that is true but not hugely so it might be a few percentage

53:46

points different um but i i'm i expect there are situations where it's

53:52

substantial um i just haven't haven't found them yeah i might just quickly add on to that

53:59

that i think that the whole art versus science particularly for this topic is really really important it's

54:05

too easy to uh sometimes get caught up in the the numbers and trying to perfectly model

54:12

the exact scenario and sometimes i you know i've tried to do that dug into it tried to find workarounds

54:18

and then realize take a step back and you know it didn't have a big impact on the plan um or at least in terms of the high level

54:25

outcome obviously i understand we all want the software to get it as as perfectly right as as possible

54:32

but that's that's an area where i've had to pull myself back a little bit just in terms of you know asking

54:38

is this really going to move the needle too much if i get this particular accounts treatment of the rmds perfect

54:44

versus just getting the general strategy and knowing we're going to need to adjust and update as time goes on

54:50

anyways yeah i think it's helpful to compare two cases and then if the differences are not huge like in this case if i ran

54:57

another one um that had wrought convergence then it was you know i would see a decrease at 17.8 instead of 19.8 i

55:05

might say well you know that's that's with intolerance i feel fine about that um or you could look at the the plan

55:10

test outcomes that's another place where you see risk at play um so i think there are useful

55:16

risk measures um in the kind of main dashboard for the plan here that where you can you know make sure that a

55:23

particular strategy doesn't just knock everything completely out of whack um it's definitely useful in that

55:29

sense well looks like those are all the questions

55:34

um actually one just popped in uh any thoughts on rounding the income numbers

55:40

i.e instead of 14 664 just 14 600.

55:46

yeah that's a that's a a common thing that derek is bugging us about so uh

55:51

definitely uh i i i agree completely that uh you know this probably sends the wrong uh

55:58

message with uh precision uh people may interpret uh perfect accuracy

56:03

so uh i that is a a relatively easy change that's on the agenda yes

56:09

and just in terms of you know how you're actually presenting things to clients a lot of times i'm taking

56:15

information especially with all the zoom meetings i've been doing things like that and moving them into like a powerpoint that has the key things i

56:22

want to highlight so for myself you know when i when i look at the income adjustment plan i'm just rounding some

Closing

56:27

of the numbers to where i feel comfortable um you know talking about it and that's that's my work around

56:33

personally um to that it still it's nice to have the precision but at the same time yeah communication

56:39

sometimes it's i like the round numbers well um

56:45

feedback uh this is it's always really helpful to to understand what would move the needle most for advisors who are using the

56:51

software so we we really will take your input uh seriously yeah

56:56

thank you so much everyone for the questions um and for joining um oh sorry this is uh any chance derek

57:03

could share a high level workflow for you to build and test the plan um i like that idea i think we could

57:10

possibly do another webinar focused on that so we'll note that for the future

57:15

um but yeah thank you so much everyone for the great questions and for participating um justin and derek as

57:20

always thank you so much for taking the time to put these presentations together and to share the knowledge and help with the

57:26

questions um for our users still on here uh just a quick note that our next webinar

57:32

will be on april 12th and we did put the link to register for that webinar in the chat as well um but you'll get that link

57:38

as well in the follow-up message um and that webinar will have an hour of ce credit available as well so thank you so

57:46

much everyone and i will close out the webinar for now take care guys

57:52

thanks everyone