Masterclass 1.0 - Class 4: Tax-Smart Distribution Planning Part 1

se of

4:10

monitoring and and adjusting as time goes by um from the advisor and team

4:17

perspective it looked like this uh which was beginning with resources beginning

4:23

with what can I spend um then adding any crucial expense goals and Legacy goals

4:29

doing scenario planning and and finding this core plan next creating a tax smart plan

4:36

which is what the next two sessions are going to be about um which leads you to having a complete plan that you can present and

4:43

Implement okay so getting to tax smart distribution planning um I want to begin

4:53

um really by by and I know Jason this is kind of uh I know you love adjustment

4:58

based planning but planning I just see like the the joy in your eyes when uh when we I'm ready I'm

5:06

ready so back here let's let's just start with kind of what is tax smart

5:13

distribution planning from your point of view the kind of thing we're going to talk about and how is it different from other kinds of tax planning for sure I

5:21

think this all ties in really well with just that decumulation phase and you know you think about a lot of advisors

5:27

they really focus on the accumulation phase which is great and Incredibly important but decumulation is really a

5:33

differentiator for us uh which is why we've decided that we're going to work with clients five years pre-retirement

5:40

through end of life because that's who we feel we could really serve well and instead of going a mile wide and an inch

5:47

deep we go uh an inch wide and a and a mile deep and so from a differentiation

5:53

stpoint as we think about metaphors and analogies Justin do you mind sharing my

5:59

Iceberg slide sure that doable I I threw a little curveball in here but we like

6:06

to we like to talk in metaphors and talk in analogies and a common analogy and

6:12

metaphor that we'll use is the iceberg so what do I mean by an iceberg well with an iceberg you can see uh what's

6:18

above the water Lev and ultimately that's often times where people will focus their attention clients will focus

6:24

their attention retirees and investors will focus their attention uh but the reality is the majority of that Iceberg

6:32

the majority of the mass of that iceberg is below the water level so from uh from

6:37

a metaphorical standpoint oftentimes retirees are very focused on the

6:42

Investments and that's what they can see above the water level but what we've found is the true value and

6:48

differentiator between us and the other advisers we compete against is what's below the water level and that's where

6:54

we're managing uh taxes right so that's tax planning in a shortterm form that's

6:59

a year byye basis but then tax distribution planning is longer term in

7:06

nature 10 years 20 years 30 years from now and ultimately how do we coordinate

7:11

our clients Financial um variables into

7:17

one coordinated effort and that really is distribution planning and so you know

7:24

as we think through the distribution strategies there's the conventional strategy there's the pro a strategy

7:30

there's Dynamic and then there's Dynamic time sense and and the beauty of of uh

7:35

your software Justin income lab is that it actually shows us the impact

7:42

financially specifically from a tax standpoint which one of these strategies is optimal for our clients and so it's

7:50

really all about answering that simple question and that is you know given you're going to follow a retirement plan

7:56

and that plan involves portfolio withdrawals how should you Source those withdrawals and should you consider a

8:02

Roth conversion and that that's the long-term strategic nature of tax smart

8:08

distribution planning and really looking at that bigger picture stuff uh when it

8:14

comes to those distributions what accounts to withdraw from in what order and um how large should the withdraw

8:22

be and I notice on this graph you also have and you mentioned it even I think you short you call it short-term

8:29

planning um or ta you have tax loss harvesting here um I think it might be helpful just

8:35

to distinguish between what you just mentioned which is you're going to be taking withdrawals how should you take

8:41

them this year and then over the next you know decades should you do Roth conversions so on sequencing of

8:48

withdrawals and so on and other kinds of tax planning with that advisers may be doing and and that can be

8:56

valuable yeah when it comes to to really

9:02

relay how we help our clients it is more about trying to quantify the longer term

9:09

benefit of executing a Roth conversion or what

9:15

distribution strategy is most appropriate so we really want to look in a more longer term lens uh and that's

9:23

more strategic in nature whereas the Year bye is more tactical in nature and

9:30

quite frankly our clients are a little less concerned and really not that interested in the Tactical nature

9:36

they're more interested in okay can you quantify how a Roth conversion would

9:42

impact my situation is it advantageous or not and if it is advantageous can you

9:47

quantify you know approximately to what degree would it help me and my family and we're going to get into that so I

9:53

don't want I don't want to jump too soon uh with some of those kind of sound bites if you will but

10:00

that that definitely helps um so tax smart distribution planning it's it's

10:06

more about the long-term strategy and about um quantifying you know for the

10:13

the value over the long term um let me pull back up our other piece

10:22

here all right so um and I think underneath that comment of you

10:29

know quantifying the value over time is the concept that for a lot of clients

10:35

this can be a place where the Quantified value of long-term tax Mar distribution

10:41

planning sometimes can be really large um and so I'd love to get into from your

10:48

point of view kind of what the what the areas are what are the sources of that

10:54

value that you can provide for clients with this yes well there's a term we use

11:00

and that is the tax torpedo right so how do we avoid the inevitable tax torpedo I

11:06

know that sounds kind of ominous maybe James Bond like uh but the reality is there's there's a there's a lot of

11:12

torpedoes that can take place in the course of an individual's retirement you've got rmd rmds kick in you know

11:19

let's say it's 73 75 whatever the age is maybe they already taken it uh but you

11:24

know how do we help avoid those tax Torpedoes and does it make sense to start to move money out of those

11:31

traditional IRAs prior to rmd age go ahead and pay some of those taxes today

11:37

in the lower tax rate right now we're underneath the tax cuts and jobs act here for the next two years so we know

11:42

that's in place and what would be the benefit of that Roth conversion whether that is just executing a Roth conversion

11:49

here over the next couple years which you can do an income lab be very targeted with the size of Roth

11:55

conversion the duration you're going to have those Roth conversions or you know do we want to filet that out over a

12:01

longer period of time and maybe Target a tax bracket where is it a combination of both which is really would what would be

12:07

our preference um you know you've got the widower's penalty which unfortunately um it just is is what it

12:15

is and the idea that women typically outlive men and if they get married and

12:21

they're the same age from a mortality standpoint often times a female is going to outlive a male and so if they're

12:27

moving from a joint tax bracket to an individual tax bracket that could be a

12:33

significant torpedo specifically there's an age gap between the spouses and so

12:39

really trying to manage that the best we can through this planning software uh as

12:44

well as you know the beneficiary scenario around um you know the 10year

12:51

rule and if we have uh an heir who is still in their working years more than

12:58

like they're kind of in that 60 60 plus range I think the average inheritor is 65

13:06

don't quote me on that but that's oftentimes a higher income earning year

13:11

and so if we pile more uh distributions on top of their income as a result of

13:18

having to unwind those traditional IRAs to erode them over the next 10-e period

13:24

how's that going to influence your erors tax situations you got multiple components number one you've got the

13:29

component of taxes that the client could save individually or as their their

13:35

family you've also got the benefit to them now where they have additional dollars that they could spend um so how

13:42

do we help them understand the amount of money they will save in taxes and then

13:49

reposition those dollars into pursuing their goals uh maybe the vacation that

13:54

they didn't take uh that second home that they haven't purchased what have you and then last but not least U what's

14:02

going to be the impact of the beneficiary and that's where through this this process you know we think

14:07

about Legacy Legacy can mean the amount of money you pass on to your errors or it can mean in my mind it is the

14:15

memories you're able to make while you are alive and while your errors are alive and the dividends that the trip

14:22

you took together continue to repay you as you sit down at the dinner table and

14:28

rehash those memories and share those stories and the fondness of those stories grows and grows and grows and

14:35

sure there may be less dollars to pass on to your errors because you spent this money on a vacation upfront but the

14:41

dividends from those memories are going to last beyond our lifetime and so that's another way to look at a legacy

14:48

as well I think that's really important so you identify these are sort of the three

14:55

um biggest tax Torpedoes you know and they're easy enough to talk about with clients say this is why we're doing this

15:02

this is where some of the dollars and cents value comes from right helping you manage required minimum distributions

15:09

helping you manage the you know pretty much inevitable widow or widowers penalty helping you manage if if your

15:15

beneficiaries are higher income all of that but your point is and that's great

15:21

and you know maybe people just they intuitively understand that but tying it back to what does that mean for you as a

15:29

actual person living your life trying to do the best you can that actually ties us back to the that very first session

15:34

of the master class which is what's this all about what's the point um it can look like this is an accounting exercise

15:40

it's not it's about you know getting getting people's uh to lives in a

15:46

position where they can do the best they can yeah truly truly living their wealth so the way I think of it is you know

15:52

we're in tax lab for example and we're running these scenarios if Roth conversion is appropriate or not and the

16:00

degree at which uh and magnitude at which it could save the client money

16:06

save their taxes so that's all really important but what is equally as

16:11

important is understanding uh and helping the client understand the issue

16:17

if they continue to follow their current course of action what is the cumulative amount of taxes they will pay uh over

16:25

the course of their their plan um and sure there's some variables at place there but in general here's that that

16:31

total they will likely pay in taxes and then to say okay well what if we took a

16:37

tax planning approach or a tax strategy and we looked to Roth conversions and

16:42

how would that impact your situation and the reality is more times than not there's a tax savings as a result of

16:50

pursuing those Roth conversions and so comparing the

16:55

two no changes continuing course potentially de dealing with that rmd tax

17:00

torpedo potentially dealing with the widowers penalty tax torpedo or the beneficiary tax torpedo but what if we

17:07

were to convert some money today and how much would that save but then taking it a layer further and this is the most

17:12

important part the layer further is okay if we could save you through these Roth conversions approximately

17:19

$300,000 how would you reappropriate that money how would that change your

17:26

family's life what would you do differently today with those

17:32

$300,000 that you aren't currently and that's that's the key and

17:38

so I think oftentimes early on H when I first was introduced to income lab which

17:46

by the way my introduction to income lab was for this purpose we came we've

17:52

looked at a bunch of software decumulation software specific to tax

17:57

Mark distribution Strate strategies this is why we were the most interested in income lab and what I realized was

18:05

clients really like income lab uh but they like to see the guard rails first

18:11

and then the tax lab is really valuable when it comes to the savings but you

18:16

can't rely on just them saving money in order to close the business okay this is

18:22

very very very important I used to think that I could show a Roth conversion

18:30

which would result in a saving of 200 300 $500,000 and that would sell itself that

18:37

doesn't close the business that you have to build a gap it is very important to ask a couple key

18:45

questions and when I go into a meeting I always ask you know what is the most important thing we need to accomplish

18:52

today so that is critical to understand what's the most important thing we need to accomplish today but then from

18:59

there what's the biggest reason you're looking into making a change or what's the reason you're looking into tax

19:05

planning or tax distribution planning and let them elaborate a little

19:11

bit and what Tax Strategies have utilized in the past because we want to know if they've tried this before and

19:18

what's their sentiment around this approach Andor what tax distribution

19:25

planning are they considering and then understand how they feel they will

19:30

benefit and then last but not least why now so you're building a bridge this

19:35

bridge is incredibly important when it comes to closing business uh I've got money in motion right now 14.5 million

19:42

that I close uh just about since our last session um so this this works but

19:49

you have to build the Gap you can't just assume the solution you have to build

19:55

the problem before you can solve so understand that that's a critical

20:02

element I see already a couple of great um comments and and questions here um

20:09

somebody did suggest adding to the tax Torpedoes um Social Security timing

20:15

which I think is a it's definitely a reasonable uh thing to consider here as well which that's going to be be part of

20:23

these uh these calculations and we're going to get to the calculations and tax

20:28

lab and examples and things but I do want to just dwell for a little while on

20:34

you know this higher level and get some examples I mean Jason you just mentioned you know over 14 million um in new

20:43

business coming to your um to your team just in the last couple weeks some of it

20:49

it sounds like uh where tax smart distribution planning was was crucial um

20:57

I'd love to just uh you know kind of maybe get a little bit more um color there some examples you know anonymized

21:04

of course um on you know what what sorts of clients seem to be most um interested

21:12

in this kind of planning most most who benefit best from this kind of planning and so on it's a great question so I'll

21:19

give you a couple examples um one of them was uh was was a prospect that I

21:27

literally just met a few weeks ago and I do host some some kind of tax planing seminars and some of those types of

21:33

things webinars and this was actually a a prospect from from that particular seminar and they've been self-directed

21:40

really over the years they had an advisor like 20 years ago and the clients 73 is and uh was just more in a

21:50

set it and forget it type scenario and as we know that that can be advantageous

21:56

in the accumulation years uh but in decumulation that's that's often times a

22:02

pitfall and so they had some unexamined areas that needed addressed uh which

22:07

were ultimately the tax torpedo of those rmds here they are at 73 they're already taking rmds so you might think okay well

22:15

gosh they're a little late in life uh is is this tax distribution planning still

22:20

advantageous and the answer is in their case absolutely so it's was about 6.3 million um and we just we ran through

22:27

income lab and we reviewed the advantages to Roth conversions and the

22:34

benefits to not only them as individuals but also the benefits to their family and what I found and we found is that

22:41

they felt it was really valuable to save on taxes number one they were willing to pay their fair share but they didn't see

22:48

any need to tip the government and that is by far uh the most common theme that

22:54

we see but then in turn once they realized we're giv the government you

23:00

know $600,000 how would we use that money to

23:05

our benefit so now we're talking about family vacations where they're going to bring the family together with

23:13

grandchildren and they're talking about going to Italy and it really opened up the conversation and as we're all aware

23:20

often times from a spousal situation there may be one spouse who's really comfortable from a financial standpoint

23:27

and L typ ly maybe leads the meeting and there may be another individual who's a

23:32

little more quiet a little more reserved uh but what what was helpful in this interaction was we were able to get the

23:40

more quiet and indivi quiet and more reserved individual engaged in the conversation and through tax saving now

23:49

the husband who was more you know financially involved he's able to loosen

23:54

up his per strings a little bit because he feels like they saved this money through tax planning and therefore um

24:02

what a great way to benefit the family in those memories that they want to create together that will last a

24:07

lifetime far beyond their life I think that example of the um

24:13

somebody already in their 70s still able to benefit from tax M distribution

24:19

planning is really good one because I I even admit personally you know I

24:24

sometimes if I see somebody already in their 70s or getting close to rmds I start to think myself like H there's probably not as much value now and and

24:32

to be fair I've seen that where you run the analysis and yeah it's just not going to really provide much there's

24:38

there's you know you're not going to you're not going to squeeze much out of it but what you're saying is really I

24:43

mean it's a drum that I beat a lot which is there are no rules of thumb don't like you need to actually do the analysis and um you know people's

24:52

idiosyncrasies what's particular to their situation could mean there's value here um so don't don't just pass it over

24:59

if you find a 75y old or something um go ahead and do the analysis and probably conversely somebody's in their 60s don't

25:05

just assume that Roth conversions will definitely provide a lot of value you know R the analysis absolutely yes I'm I'm with you

25:12

there is no such thing as a rule of thumb uh specifically in this day and

25:17

age and the back of the napkin calculation as popular as that used to be it's very difficult to quantify Roth

25:25

conversions uh on the back of a napin or spreadsheet and so you need the appropriate software to be able to

25:31

extrapolate out those details and this is a real clear and concise way to do that and so the way that I frame it is

25:38

you got strategy two here where it says total taxes they're at the bottom 1.1 million in cumulative taxes they

25:46

continue to uh you know live live out their financial lives the way it's set forth currently well if they were to

25:53

execute Roth conversions and Target that 24% bracket we'll see here there's a subst iial savings and so the way I

26:00

frame it is I say what looks like um you you are overpaying taxes by about

26:09

499,000 and I'll stop there so once again it's not saving taxes this is

26:15

actually they're choosing to overpay because now we've got a strategy that we believe will be effective and it is reframing the

26:24

position very differently uh saving money doesn't always always drive people for

26:31

change but if if you're telling them that they're choosing to pay more than they need to based on current

26:38

research and and tax strategy that reframes the situation very differ and

26:44

then from there you're able to say okay so you know of that 499,000 gosh what what you might what

26:52

might you do differently over the next course of your your financial plan how would that

26:58

change you and your family's life that tweak certainly Rings true to

27:04

me I I've definitely found myself in that situation where it's like oh I could save money yeah but you know it's effort and I got a lot going on and so

27:12

on but the overpaying it's just a tweak and language but you're right that's a great way to view it and just so that if

27:17

people sorry go ahead Jason I was just GNA bring it back to that last point and say you it it you know I talked

27:24

earlier most folks are willing to pay their fair share but they don't want to tip I go back to as it sits today it

27:33

does look like you're tipping the government 499,000 is that by

27:40

Design or how did that come to be and then and then you open up the conversation

27:46

right um just for those who maybe haven't seen tax lab before um let me

27:53

just give you a little bit of a feel for what you're looking at here and and what Jason's kind of been referring to um

27:59

over the last uh little bit of the conversation so this is just a uh a plan

28:04

I actually think this is the um one of the examples that you can just load into

28:11

um income lab if you wish um so this is just called the retired household uh

28:17

very creative name I know um and if we look at their situation you know

28:23

they're uh 2 and 3/4 million um they they can spend about you know 19,000 a

28:30

month they have guard rails it's a you know reasonably complex situation

28:35

they've got a rental they've got a pension they have two Social Securities the timing is different um they're still

28:40

paying off some things which is why you see these lumpy expenses they're following the retirement smile so it's a

28:47

it's a reasonable mix of some of the complexities um that we've talked about in the first three sessions

28:56

um and then what we've done what tax lab does is it takes this particular

29:03

plan and it runs it through a bunch of ways all of the most commonly uh looked

29:09

at ways to Source their withdrawals and do Roth conversions um and so you know

29:17

one of them is prata which is just take take from your accounts in proportion to their size it's it's probably the best

29:23

standin for the like pay no attention to to taxes that's a good standin for that

29:28

um of course you're still following rmd rules and 59 and a half rules and all that kind of stuff right but on on top of that take proportionally uh then we

29:36

have taxable tax deferred taxfree and all mixes of those that ordering which

29:42

is you could think of it as kind of a waterfall so first you know it take everything out of here then take it out

29:48

of the next bucket then take it out of the next bucket um and then we have Roth conversions targeting federal tax

29:56

brackets um and and then a bunch of Statistics here

30:01

summarizing the estimated differences in following these approaches um and so

30:07

what you see here is um Roth convergence to the 24% bracket which looks to be you

30:14

know quote unquote optimal for this uh particular plan compared to sourcing uh

30:21

those withdrawals first from taxable then tax deferred then taxfree in this case this is very much an apples to app

30:28

comparison because when you're doing Roth conversion targeting a bracket it's

30:34

actually funding all of the normal planned withdrawals first from taxable then from tax deferred then taxfree so

30:40

this is really you know with and without Roth conversions is what you're looking at here um and we can talk there's a lot

30:47

of you know there's already some questions and things we we'll talk more about the particulars of these and other things you can add to the the picture

30:53

and so on but that's what you're that's what you're looking at um in in uh tax

31:00

lab um so before we get into a little more of the details there are there any

31:07

you know particular challenges that come along with doing this kind of taxmart distribution planning um and ways that

31:14

you've dealt with those Jason absolutely the biggest challenge

31:20

as a practitioner

31:26

is help helping clients understand that there's a textbook answer and that is

31:33

what's optimal for their financial situation the size of Roth conversion

31:39

when to take Social Security all all those details and

31:46

outcomes there's also a psychological answer and that's what the client is comfortable

31:51

with and the psychological answer often times does not align with the textbook

31:58

answer so our job as practitioners my job is to help convey the message to

32:05

demonstrate and quantify the benefits of different size Roth conversions maybe

32:11

it's optimal uh for example the the the client I just referenced who were in the

32:16

process of onboarding now uh we actually were were the optimal option was to Target 35% bracket uh but that was

32:24

uncomfortable right I I get it we need to our clients be able to lay their head

32:30

down at night and get what we call return on sleep R that's my number one job and so we basically decided to shoot

32:39

the Gap um and we're going to fill up about the mid 32% bracket in order to

32:44

avoid those Irma premiums because we all know those Irma hurdles once you exceed

32:51

Irma bracket by one penny now you're paying the high higher level premium you

32:56

got the exact same insurance that everyone else has it's just based on your greater income and now as a result

33:03

those Roth conversions being included in an income you pay more in medicare premiums so we we did decide to midpoint

33:11

32% bracket so that's one example another example that I haven't shared yet uh which I think people will really

33:17

find interesting is you know we work with a lot of senior leaders we work with uh I've got a number of CEOs

33:25

CFOs and uh life from Fortune 100 companies and one of them in particular

33:33

retired recently and uh he worked for a Fortune 100 very astute um capable of doing some

33:40

of this himself probably although there's constant change in tax code and planning

33:48

and uh he just really wanted to live out his retirement and he had already had an advisor is actually with his firm that

33:57

uh he he worked for and so he had an employee discount on that fee and they

34:02

were helping him through some Roth conversions they were doing some limit orders on concentrated stock and some

34:08

other elements and um basically in our conversation it was this is our core

34:16

Focus we work with a small subset of clients it's all about decumulation and it's all about the tax

34:22

efficiency and how do you coordinate this effort uh and even inol involve his

34:28

CPA in these conversations because the CPA we want to get the CPA stamp of approval on some of

34:35

these efforts as well and so through that conversation he was willing to to

34:41

to pay more and um we didn't quite double his fee but it was closer to that

34:46

range than not and it was all a result of quantifying the benefit of tax

34:53

planning and how imperative this would be for him and his family and how

34:59

beneficial and coordinating Social Security pensions you know do we take the monthly benefit do we take a lump

35:06

sum how do we coordinate um just all of these these income elements

35:12

together I think that uh that example is also a a good one I'm worth dwelling on

35:18

for just a second which is um all of this this analysis is really really

35:25

complex and all of it's interrelated so as someone mentioned on the Q&A you know taxability of Social Security and so on

35:32

and you can get you know these these numbers are are you know they they're

35:38

very precise and so on and almost certainly directionally correct but as you mentioned this is a this is a

35:45

one-time thing we don't know what you know tax brackets will be 10 years from now we don't know exactly what the

35:51

returns will be and so on and so it's really important not to be kind of um

35:57

you know lulled into thinking well okay I ran the analysis so I got the answer quote unquote um and also there's a

36:04

psychological component so this example actually with this example uh you know hypothetical household is actually not a

36:10

bad one you can see how these you know these brackets 22 24 32 35 they are all

36:15

very very similar in the kind of um value they um are estimated to provide

36:22

in particular these top three brackets you can see are I mean nothing to write home about we're talking about basis

36:27

point difference in average tax rate so we often hear exactly the kind of story that that you

36:33

just said Jason which is yeah maybe the tax numbers say do X but you're going to

36:39

do sort of a slight variation on that or a slightly different one in order to take into account other factors in the

36:45

client's life including their appetite for um for doing a large Roth conversion

36:52

um or other situations in in their life um so I think the way I like to talk

36:58

about it is there's there's science which is what you're looking at here and there's art which is the acknowledging

37:04

you're working with a human being and acknowledging that taxes are not the only thing in their life there are other

37:10

factors um including if you do large Roth conversions and you are grossing up

37:16

withdrawals to pay for them you'll actually have increased sequence of return risk right so there there're there're just really is no free lunch uh

37:23

in on Earth right so uh that's an important factor to consider we've also

37:28

had a bunch of people in the Q&A mentioning um the challenge of break

37:34

evens on Roth conversions um so I wonder if we could um just just show that here

37:40

briefly and it actually gets back to your one of your tax Torpedoes was beneficiary taxes which I think comes

37:46

into play here um so the break even on a Roth conversion is really saying hey you

37:51

know I'm I'm kind of ripping off the Band-Aid here uh in terms of taxes um at

37:57

what point will I be glad I did that you know at what point will sort of the uh the pain of tearing off the Band-Aid

38:03

have worn off and again it's you know the the predictions are hard especially

38:08

about the future and uh so we don't know exactly what the taxes will be if if someone passed away the break even could

38:15

be sooner because of what the uh I forget which torpedo it was the second one I think um and so on right so in

38:22

this case your break even about 20 years from now and that could be part of the

38:27

consideration right just thinking about um is longevity in the family you know

38:34

is 20 years a totally reasonable time frame um if the beneficiaries are not in a high tax bracket whereas if they are

38:40

in a high tax bracket the beneficiaries break even maybe much sooner so I I'd

38:45

love it if you talk a little bit just about kind of those competing uh factors and and and how you as a team take those

38:52

into account yeah you know the break even is

38:57

is it comes up on occasion and I just I go back to the

39:02

idea of the federal deficit and I go back to the idea of the current tax rate

39:09

and I go back to the idea that we're underneath the tax cuts and jobs act that's going to Sunset uh you know in in

39:15

in 2026 and so what we know is the tax code that's that's going to be in place

39:21

for the next two years and those tax rates are lower um the percentages are lower than

39:28

they were in the past and then they will be as of 2026 and so with that in

39:35

mind I think it's really valuable to to execute those Roth conversions at least

39:40

for the next two years and we can filet that out and show them the the quantification if they were to take that

39:47

approach but then also the idea that you know when we think about business business is all about revenues minus

39:53

expenses well the government uh ultimately expenses is the federal

39:58

deficit and their revenues is Taxation and right now taxes are lower than they've ever been and so what direction

40:04

do you think taxes will go in the future I've had two people ever tell me and

40:09

I've I've done oh gosh I don't know I've had maybe a couple thousand registrants to my my webinars and things and I've

40:17

had two people that have said they thought taxes were going to go down and so it kind of puts that to bed um once

40:23

you get them to confirm what direction do they think taxes are going are they going to go up in the future are they

40:29

going to go down and then it really it relieves that that contention around the

40:34

break even point and it's not a matter of if it's going to be beneficial it's when and how long it takes and is it

40:40

going to be your direct benefit as the end client or is it going to be your

40:45

beneficiaries right yeah those are really good points so so the way the analysis is done here in for this

40:52

example that we're looking at um we're not um putting a firm data death for

40:57

either spouse um now you can do that in a plan and we I think we may have discussed that in other webinars you

41:04

know especially in situations of you know a terminal disease or or just you know maybe it's it's just something

41:10

you're trying to stress test uh also you you mentioned beneficiaries could make

41:15

the value come sooner but the other thing is we're we're using today's tax in this case we

41:22

are sunsetting um and I believe we'll probably be able to see that here yep so you can see you know we're actually

41:28

going from a 24 to a 28% bracket in 2026 um you could turn that off and you could

41:34

continue the tax cuts and job act throughout the plan to um maybe you think that that's a likely thing that

41:40

Congress will do um but the fact is we we simply don't know right I mean we don't and we certainly don't know 10 20

41:45

years from now um and as you said if if people are thinking well you

41:50

know I think they'll go up um you're really kind of understating the value

41:57

and overstating the break even in that situation and that's just good to know right I mean no one is uh going to uh

42:04

you know assume that you actually have a perfect crystal ball to say exactly how what the numbers will be over time

42:09

you're doing the absolute best you can with uh with the information in the plan and this is just one more of those

42:16

inputs into the discussion of what should we do it sure looks like some

42:21

kind of rough conversion strategy would do well for you here I mean even to the 12% bracket provides a little bit of of

42:28

relief um you know 22 and 24 certainly gets you in in in better shape um so just a just

42:36

another thing to consider all right

42:43

um I'd like to just um we have a ton of questions so I do want to get to to some

42:49

of those um so let's see here I

42:54

think let's go ahead and just quickly go over the um the tax planning

43:03

process um with everyone just so that they can kind of connect it to those other um

43:11

diagrams that we we started with from the first three sessions um so this the

43:17

first step is kind of you're starting at the

43:23

um at the at at the core plan right so you've done done this AB testing you've considered scenarios you've added your

43:31

you know important expenses you've gotten all the resources all of that is already done and now you're moving into

43:38

TX smart distribution planning and you're asking okay given that my plan

43:43

has distributions in it how should I phase them how should I order them and should I do brth conversions um so you

43:50

all you do is you grab the plan you go to the tax lab and you you the analysis happens for you by the way for those of

43:56

you who have been uh with income lab for a little while uh Jason mentioned Irma brackets we are

44:02

adding Irma brackets to tax lab we're adding some other cool features as well um coming up this year so stay tuned for

44:09

that um but at that point you then choose a distribution strategy from from

44:16

that list taking into account all of those things that Jason just discussed it's not just about the numbers it could be there can be competing

44:23

things um the next question is you know if we follow that uh approach does this

44:32

household have kind of enough spending capacity to to fund those Roth

44:40

conversions um from their from the plan as it exists so for this

44:46

household um they have quite a bit of spending capacity and they're

44:52

um we actually did a full uh expense plan I believe for these folks so so they can they're they're looking for I

44:59

think it was like a little under 13,000 in spending yep well this for

45:05

this year it's a little higher than that but the uh you know if we took out the mortgage payments and and so on um which

45:10

are independently funded in an income lab plan so we're really looking at kind of as your core spending uh apart from

45:17

that gon to going to fund these they don't have huge expenses and so sometimes what you'll see is there's a

45:23

there's a surplus so if I go to life hub for example example um I'll see okay they can

45:31

actually fund from their available income they can fund their expenses and these Roth conversions um without any

45:39

extra work another place to see that is in this flow diagram so even with those

45:44

Roth conversions and the taxes associated with them they still have a little extra spending money um and

45:50

actually that that is true throughout their plan so this is one of those situations actually does come up a decent amount um as we talked about in

45:56

in past uh classes that someone's capacity is actually a little bigger than than their current spending however

46:03

if it's not enough and if doing Roth conversions is going to lead to um

46:10

really high taxes which will reduce their net income too much

46:15

um the net spending available if you're doing Roth conversions is not enough we

46:20

go down and we create a uh a plan that targets a particular net of tax spending

46:26

level um and so that's what you do I think there were a few questions asking hey

46:31

you know if I do Rod conversions uh it doesn't look like it's changing anything for example that my uh my gross spending

46:38

will be the same yeah your gross is but not your net um so that's the big change you would see and if the net is still

46:44

not enough that's when you you choose a spending level set it

46:51

uh and so what I did here is I said okay well let's let's spend this amount if I

46:57

go to um the level that spends 12,000 net now I will have my um expenses exactly

47:06

match my income no surpluses no shortfalls in any

47:11

given year and now tax slab will look different it will have net income being

47:19

identical right because I told it too that's not a you know that's not a discovery about the world I told it hey

47:25

run me a plan where I'm always spend this 12,000 and change and now what you've done by keeping that constant

47:33

you've forced the analysis to give you all the value in the net

47:39

Legacy and the the the total taxes right so you you're you're pass you're saying

47:44

hey um if I kind of kept this all if I kept net income constant um I've got in

47:51

this case almost $600,000 in in extra net Legacy now the fact is you probably actually would spend some of that right

47:58

maybe it's not all going to the airs um the other thing I've noticed is there are people who are just particularly tax

48:04

sensitive and so this number can still be you know even getting to the same place but paying less in taxes could be

48:11

a value to someone um so that that addresses a few of the the questions that we had and it kind of gives you a

48:18

feel for what the what the um what the path is for

48:24

doing this kind of planning so it's analyze it choose a distribution strategy that works that provides value

48:30

ask yourself could we fund the taxes um if you can you're done if you can't find

48:38

a net of tax level to to Target we talked about that that last time and

48:43

then do the uh you know choose a distribution strategy again so um just to give you a feel for that you're going

48:49

to look at these strategies it it happens here that still 24 is the best you won't always see that it may be one

48:55

of the The Neighbors to that once you've you've chosen a Target there um but uh

49:01

it's not uncommon that the you know you're still kind of in the same range and the same uh kind of net uh uh

49:08

savings to the uh or uh less overpayment uh as uh as Jason was talking about

49:16

there all right so um Jason I guess just

49:22

to uh wrap up before we add a few more questions um

49:27

what sorts of do you maybe you could help us with just some ways that you talk with clients about this process and

49:35

the fact that you know this is not I'm going to send you out with a a map and you find your own way you know this is a

49:43

it's actually part of the process we've discussed before um of the ongoing monitoring and and and

49:49

management it is yeah I mean life is an evolution right and so you think about your life a year ago five years ago 10

49:57

years ago it's very different today than it was at that point and as we look

50:03

forward there will continue to be an evolution and so financial planning is is an evolution because our goals our

50:09

dreams or aspirations are going to continue to evolve the tax code is going to continue to evolve but by having this

50:16

living breathing plan not a document that you put on the Shelf a living

50:21

breathing plan that clients can log into and that we can access regularly we're able to be very strategic in our efforts

50:30

whether that is Roth conversions whether that's qcds you know there's a number of ways that we can we can benefit clients

50:38

from a tax standpoint but how do you coordinate this effort for the client in

50:43

a really understandable and deliverable way that allows them to see the message

50:50

we're trying to convey and be empowered to now use use

50:57

this education and utilize these track strategies to their benefit and how it's going to impact them and their families

51:04

that's that's the key that's the tie-in right it's all about how we can improve

51:10

our clients lives and that's what gets me excited the savings is great but

51:15

what's more exciting is when they email me the photos from Italy from Europe

51:20

from Iceland that's what gets me excited because I know and they oftentimes

51:25

reference it the this through these efforts this tax planning this tax distribution strategy that's what

51:32

allowed them to take that trip and Empower them to take that trip and to be

51:37

able to have the confidence to spend some of their hard-earned money today because they understand that

51:44

tomorrow is not guaranteed and we've all lost friends and family too soon and

51:50

that's to me that's what planning is all about is we want to have confidence to know that the future is bright we're

51:57

taking the necessary steps today to secure our finances down the road but

52:02

let's have the let's be empowered to spend those dollars today and tomorrow

52:09

without perfect um let's uh let's hit a couple questions

52:15

here and uh since we have two sessions on texmart distribution planning any that we don't get to very likely we'll

52:22

hit them in two weeks so um thank you for your patience on that um someone was

52:28

asking basically you know how are the taxes paid here I I think we addressed a little bit of that but another place I

52:35

want to draw people's attention to is um life Hub is actually really useful for

52:42

looking at the actual flows um when you're doing a Roth

52:47

conversion plan so for example you know here we're seeing in the first year uh

52:52

all of those Roth conversions are going to be coming out of John's IRA we're not doing Mar's yet I believe maybe in this

52:58

plan she's still working for a few years um so you can see where all that's coming from and we're really were paying

53:04

the taxes in this case from the the taxable account um if there were no taxable funds it would be netting out

53:13

that IRA withdrawal and not putting all of it into the um into the Roth right so

53:19

it's it's it's sequencing how you do this in the most tax efficient way um possible and I know someone said you

53:25

know sometimes my clients can't pay all those from another account that that's exactly what would

53:31

happen in that situation so it would say okay I'll take you know 214 from the IRA but only a certain you know maybe it'll

53:37

be 180 will actually hit the uh the um the Roth uh another place you can see

53:44

not at the account level but more at at a higher level is go to the tax lab and go to explore and you'll see also

53:51

someone was asking about you know quantifying the number of years of conversions this purple are Roth those

53:57

are Roth conversions so you can see here it's it's uh it's four five years of Roth conversions um you can see how it

54:03

all Stacks up um and uh and and where

54:09

everything is going um let's see here we did also have a few people asking about um additional

54:18

things that can make plans even more tax efficient um people have mentioned um

54:24

you know deductible Medical expenses um qcds uh there are some people are a

54:30

little bit concerned about uh converting all tax deferred dollars into um into

54:37

roths all totally reasonable um uh concerns we're going to cover some of

54:42

that um in two weeks but I did want to at least draw attention for some people

54:48

that in the advanced settings of any plan there's a very uh robust taxes uh Place uh section and it's it's

54:57

not uncommon that you know adding a floor on your

55:04

um on your IRA and 401K um balances can add a little bit of

55:12

value um basically now it's saying don't Roth convert everything leave a little bit around I want some

55:18

rmds uh because maybe those will hit kind of a lower tax bracket um so that is all that is all very much doable uh

55:25

but again we're going to we're going to uh do a lot more of that um next week um

55:33

let's see here all right how about are have you

55:40

had any interesting um discussions with client CPAs is there is that a challenge

55:47

is that a is that a um a valuable um kind of interaction around this kind of

55:52

planning Jason yeah you know there's always risk there right and by risk I mean the CPA

55:58

might contest uh your your approach or recommendation and you know the reality

56:06

is it's probably a coin flip whether the CPA agrees with the size of Roth

56:13

conversion that we're recommending and I tell the clients that up front uh CPAs

56:19

are really focused on this year and maybe next year maybe um and so our job

56:26

is to look further into the future uh whereas the CPA's job is to

56:32

look more in current time and year and so just

56:37

setting the stage early is very helpful uh and CPAs have been more than

56:45

open to the conversation and quite frankly it's a way to actually Garner a

56:51

center of influence because once you've shown a CPA this software and these

56:57

tools they're interested in how it would influence their other clients and so

57:03

there we've gotten introductions and referrals we call them introductions uh through that effort as well we spent

57:10

about the last nine months 12 months actually interviewing about two dozen

57:16

CPAs as cois so there's some fruit there that can be can be harvested yeah yeah

57:27

let's see here um we have a we have just a ton of

57:33

questions that I'm I'm having a little bit of trouble getting through but we only have two minutes um so rather than

57:38

can kind of trying to find one there I will just um ask everyone to um you know

57:46

submit in the the final uh the thing you get as you log off anything you want to

57:52

make sure that uh that we we have your submitted questions so we'll get to those next time as well but if there are

57:57

things you want Jason to address in two weeks um we'll do our best to uh to

58:02

include those and um yeah any any uh final words on this topic Jason yes I

58:11

just want to go back to the value of an advisor and and the value that we really

58:16

bring to the table value is really important but if

58:22

if our client or our Prospect isn't open-minded and hasn't answered those setup

58:28

questions prior to discussing a Roth conversion the benefits of a Roth

58:34

conversion I found that the likelihood of them following through with it is is

58:41

less likely and so if we really want to impact our clients to the best degree

58:47

possible and we understand and believe that Roth conversions are a valuable component I would encourage you to work

58:54

on your setup questions you really have to build that Gap because if a client

59:00

doesn't understand or a prospect doesn't understand that there is isn't a problem

59:05

and when I say problem I don't mean they just acknowledge that it's a problem we need to we need to actually continue to

59:12

plant more and more seeds to get them to really talk about the pain of that issue

59:18

uh before we can jump to a solution as advisers I think we jump to solve too soon but in the prospecting process in

59:25

particular it's about building the Gap you want them to know you have a solution but you don't necessarily want

59:30

to tell them what that solution is right um great way to to end the

59:38

session and thank you everyone for joining we will um see you all for the

59:43

continuation in two weeks so have a great week everybody thank you