In this episode, Alex and Wade discuss tax-efficient retirement strategies, specifically focusing on tax diversification. They explain the three broad types of tax treatments in the tax code: taxable accounts, tax-deferred accounts (such as IRAs and 401ks), and tax-exempt accounts (such as Roth IRAs). They highlight the importance of having assets in each category to provide flexibility in retirement planning. They also discuss the characteristics and advantages of each type of account, including tax treatment, liquidity, and growth potential. Additionally, they touch on the different methods of tracking cost basis in taxable accounts. In this conversation, Alex and Wade discuss tax-efficient retirement distribution strategies. They cover the different types of retirement accounts, including tax-deferred accounts (such as traditional IRAs and 401(k)s), tax-exempt accounts (such as Roth IRAs and Roth 401(k)s), and taxable accounts. They explain the tax advantages and disadvantages of each type of account and discuss the importance of considering your current and future tax rates when deciding where to contribute. They also touch on the backdoor Roth contribution strategy and the concept of required minimum distributions (RMDs). Overall, the conversation emphasizes the importance of tax efficiency in retirement planning.

Takeaways

• Tax diversification involves having assets in taxable accounts, tax-deferred accounts, and tax-exempt accounts to provide flexibility in retirement planning.
• Taxable accounts are the least tax-efficient but offer advantages such as preferential income treatment, step-up in basis at death, and liquidity.
• Tax-deferred accounts, such as IRAs and 401ks, offer tax deductions on contributions and tax-deferred growth, but have required minimum distributions and early withdrawal penalties.
• Tax-exempt accounts, such as Roth IRAs, offer tax-free growth and tax-free distributions, but contributions are not tax-deductible.
• Tracking cost basis in taxable accounts can be done using methods like average cost, first in first out (FIFO), or specific identification of tax lots. Consider your current and future tax rates when deciding where to contribute to retirement accounts.
• Tax-deferred accounts (such as traditional IRAs and 401(k)s) provide a tax deduction now but are taxed upon withdrawal.
• Tax-exempt accounts (such as Roth IRAs and Roth 401(k)s) are funded with after-tax dollars but provide tax-free withdrawals in retirement.
• Taxable accounts have no tax advantages but offer flexibility and liquidity.
• The backdoor Roth contribution strategy allows high-income earners to contribute to a Roth IRA by making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA.
• Required minimum distributions (RMDs) are mandatory withdrawals from tax-deferred retirement accounts starting at age 72 (or 70.5 for those born before 1960).
• Tax efficiency is an important aspect of retirement planning and can have a significant impact on your overall financial situation.

Chapters

00:00 Introduction and Excitement for Tax-Efficient Retirement Strategies 01:26 Tax-Efficient Retirement Distributions as a General Theme 03:01 Understanding Tax Diversification and the Three Types of Tax Treatments 04:20 Advantages and Considerations of Taxable Accounts 15:11 Benefits and Limitations of Tax-Deferred Accounts 25:14 The Advantages of Tax-Exempt Accounts 26:04 Methods of Tracking Cost Basis in Taxable Accounts 00:31 Overview of Retirement Accounts 08:43 Tax-Deferred Accounts 18:30 Tax-Exempt Accounts 25:14 Taxable Accounts 28:47 Backdoor Roth Contribution 33:44 Required Minimum Distributions (RMDs) 38:26 Tax Efficiency in Retirement Planning 45:11 Retirement Tax Cliff 47:09 Conclusion

Links

The Retirement Planning Guidebook: 2nd Edition has just been updated for 2024! Visit your preferred book retailer or simply click here to order your copy today: https://www.wadepfau.com/books/

This episode is sponsored by McLean Asset Management. Visit https://www.mcleanam.com/retirement-income-planning-llm/ to download McLean’s free eBook, “Retirement Income Planning”

In this episode, Alex and Wade introduce a new arc on tax-efficient retirement distributions. They discuss the importance of tax planning and how it can add value to your bottom line. They explain the concept of marginal tax rates and how they differ from average tax rates. They also touch on state income taxes, filing options, and the different federal income tax brackets. Additionally, they mention other types of taxes, such as social security and Medicare payroll taxes. In this conversation, Wade Pfau and Alex Murguia discuss various aspects of income taxation and deductions. They cover topics such as ordinary income, non-qualified annuities, qualified dividends, long-term capital gains, above-the-line deductions, adjusted gross income (AGI), below-the-line deductions, standard deductions, itemized deductions, and preferential income stacking. They also touch on strategies like deduction bunching and gains harvesting. The conversation provides valuable insights into the complexities of the tax code and the importance of tax planning in retirement. Listen now to learn more!

Takeaways

• Tax planning can add value to your bottom line and is an important aspect of retirement planning.
• Understanding the difference between marginal tax rates and average tax rates is crucial for making informed decisions.
• State income taxes, filing options, and federal income tax brackets all play a role in tax planning.
• Other types of taxes, such as social security and Medicare payroll taxes, should also be considered in retirement planning. Understanding the different types of income and how they are taxed is crucial for effective tax planning in retirement.
• Above-the-line deductions, such as contributions to retirement plans and health savings accounts, can lower your adjusted gross income (AGI).
• Below-the-line deductions, such as mortgage interest and charitable donations, can reduce your taxable income.
• The Tax Cuts and Jobs Act of 2017 increased the standard deduction, making it less likely for many people to itemize deductions.
• Preferential income, such as qualified dividends and long-term capital gains, have their own tax brackets and can be taxed at lower rates.
• Strategies like deduction bunching and gains harvesting can help optimize your tax situation.
• Understanding the nuances of the tax code and working with a tax professional can help you make the most of your retirement income.

Chapters

00:00 Introduction to Tax-Efficient Retirement Distributions 04:28 The Basics of Marginal Tax Rates 15:44 State Income Taxes, Filing Options, and Federal Income Tax Brackets 23:38 Considering Other Types of Taxes in Retirement 27:11 Understanding Different Types of Income and Their Taxation 29:42 Exploring Above-the-Line Deductions and Adjusted Gross Income (AGI) 36:10 Utilizing Below-the-Line Deductions to Reduce Taxable Income 43:02 The Impact of the Tax Cuts and Jobs Act on Itemized Deductions 47:13 The Importance of Tax Planning in Retirement

Links

Join the waitlist for the next Retirement Income Challenge by visiting http://www.risaprofile.com/podcast

The Retirement Planning Guidebook: 2nd Edition has just been updated for 2024! Visit your preferred book retailer or simply click here to order your copy today: https://www.wadepfau.com/books/

This episode is sponsored by Retirement Researcher https://retirementresearcher.com/. Download their free eBook, 8 Tips to Becoming A Retirement Income Investor at retirementresearcher.com/8tips

The Retirement Income Challenge is a four-day event that helps individuals create a retirement income plan. Day one focuses on the Retirement Income Style Assessment (RISA), which analyzes two factors: probability-based safety first and optionality versus commitment. Day two introduces the funded ratio, a balance sheet approach to financial planning that compares assets to liabilities. The funded ratio helps individuals understand if they have enough assets to meet their retirement goals. Day three explores how the RISA and funded ratio work together to fill income gaps and create a comprehensive retirement income plan. The conversation covers the Retirement Income Style Awareness (RISA) framework and the Retirement Income Challenge. The hosts discuss the importance of reliable income to cover essential expenses in retirement and the role of the RISA framework in providing alternatives to fill income gaps. They emphasize that shooting for 100% on the RISS percentages is not necessary and that it's important to have reliable income covering essential expenses. They also mention the non-financial aspects of retirement and the importance of planning for what you want to do in retirement. The hosts highlight the interactive nature of the Retirement Income Challenge and the value it provides in helping individuals gain clarity and confidence in their financial plan for retirement. Listen now to learn more!

Takeaways

• The Retirement Income Challenge helps individuals create a retirement income plan
• The Retirement Income Style Assessment (RISA) analyzes two factors: probability-based safety first and optionality versus commitment
• The funded ratio is a balance sheet approach that compares assets to liabilities to determine if individuals have enough assets to meet their retirement goals
• The RISA and funded ratio work together to fill income gaps and create a comprehensive retirement income plan The RISS framework provides alternatives to fill income gaps in retirement and ensures reliable income covers essential expenses.
• Shooting for 100% on the RISS percentages is not necessary; it's important to have reliable income covering essential expenses.
• Planning for the non-financial aspects of retirement, such as what you want to do, is crucial.
• The Retirement Income Challenge is an interactive session that helps individuals gain clarity and confidence in their financial plan for retirement.

Chapters

00:00 Introduction to the Retirement Income Challenge 09:57 Day One: The Retirement Income Style Assessment (RISA) 11:33 Day Two: The Funded Ratio 23:37 Day Three: Integrating the RISA and Funded Ratio 25:33 The Role of the RISA Framework in Retirement Planning 28:40 Shooting for 100% on the Funded Ratio: Is It Necessary? 30:55 Planning for the Non-Financial Aspects of Retirement 39:25 The Value of the Retirement Income Challenge

Links

Registration for the next Retirement Income Challenge is OPEN: Learn more and join us for this LIVE 4-Day event starting on August 26th-29th, 2024 from 12:00 -2:00 PM ET each day by visiting risaprofile.com/podcast

The Retirement Planning Guidebook: 2nd Edition has just been updated for 2024! Visit your preferred book retailer or simply click here to order your copy today: https://www.wadepfau.com/books/

This episode is sponsored by Retirement Researcher https://retirementresearcher.com/. Download their free eBook, 8 Tips to Becoming A Retirement Income Investor at retirementresearcher.com/8tips