Taxes and Your Retirement

taxes and retirement

The following is a transcript of Episode #51 of the Retire Happy podcast with Roger Gainer.

All episodes of the podcast can be found at Apple PodcastsGoogle Podcast, and Spotify.

Roger: Taxes are critical, you know. I hear people talk a lot about paying investment fees. “Oh, my God, your rate of return is reduced by investment fees,” so you don’t wanna pay any of those, while ignoring tax ramifications. At the end of the day, it’s what you get to spend, not what you earn. It’s what you keep. And taxes are a hurdle to get to your net spendable money.

Clark: You’re listening to “Retire Happy,” with Roger Gainer, president of Gainer Financial & Insurance Services, Inc. Thanks for joining us. I’m your host, Clark Buckner.

With so much uncertainty in the world today, it’s more difficult than ever to make decisions that can help you progress toward your financial goals. In this episode, Roger talks about the hierarchy of money. He also shares how to watch out for stealth taxes, and how to continue planning to retire in these uncertain times. There’s a lot to cover, so let’s dive in. And don’t forget to head on over to gainerfinancial.com for more content like this.

Roger, how you doing today?

Roger: Doing great. The days are getting longer.

Clark: The days are getting longer. That’s right. We’ve got a topic today. We’ve often talked about taxes and retirement, but something that we wanted to make time for today, putting these two topics together, kind of revisiting this whole concept of retiring during uncertain times. That’s a huge cornerstone of the show. So, I wanted to touch base with you about taxes, and what actually is going to happen, because you turn on the news, politicians are saying anything. They’re saying everything. So, what do you trust? How do you plan for this? What has not changed over the years, and what will change?

Roger: Well, you know, there’s an old saying that the only two things in life you can count on are death and taxes. And I, for years, have said, “Well, really, there’s only one thing you can count on,” because Congress, the one thing you can be sure of, will constantly fiddle with the tax code. There’s all kinds of reasons for that, but a lot of Congress’s power comes from that ability to amend and alter the tax code. In fact, we already know that under our current situation, taxes are going up. It is the current tax law that on January 1st of 2026, that’s less than four years from now, taxes are gonna go up to what they, the tax rates will be what they were back in 2017 before the Tax Cut and Jobs Act of December of 2017.

So, to give you an example, if we take a hypothetical taxpayer, let’s say we have a couple making $10,000 per month. And let’s say that they’re retired, what the heck, and they’re comfortably collecting 10,000 a month, but it’s all coming from their IRA and social security. So, if these guys, under the current tax code, would get a standard deduction of just under $26,000, and so they’d have taxable income of $94,100… There are some adjustments, so these are just for illustrative purposes, and I’m rounding things just to give you an idea…

Clark: Just to keep it simple.

Roger: …keep it simple, keep it followable to our listeners, and so understand how profound changes in the tax code can be in terms of our retirement security. So, the tax for these folks would be $11,936, which is 22% of the amount over $83,550, plus $9,615. So, under the current tax law, when we get to 2026, the standard deduction reverts back into that $4,000 range, and the tax brackets change. So, if we only… if you’re not going to itemize, and you’re just taking the…

Clark: And that’s what most people do. They don’t itemize, usually.

Roger: Well, especially folks in retirement that don’t have their mortgage around, so they don’t get a mortgage deduction, then they’re healthy, so they don’t exceed the floor for being able to deduct medical expenses, their house didn’t burn down, so they don’t have casualty losses. So there are very few things these days that are available. You know, we have, you can deduct taxes you pay to other folks, like the State of California, for example, or property taxes, which, all of that stuff has been capped under the current tax code. So, I’m not saying everybody’s gonna pay more tax. A lot more people will be doing itemized filing. But at the end of the day, that tax bill would go up to about a little over $19,000. That’s about 60% more tax. So, we go from $11,936 to $19,140. That is a huge jump. That’s $7,000 a year. That’s just in federal tax. So, could you use an extra $7,000 a year? That’s a pretty nice vacation when you’re retired. So…

Clark: A rainy day fund or something, at least.

Roger: A rainy day fund, exactly.

Clark: Instead of just vaporizing.

Roger: Right. Instead of just sending it off to the government. And, you know, the dirty little secret of retirement is, going back to the 1980s, we had a…in 1986, there was a major change in the tax code, and a lot of things that we used to be able to deduct from our taxable income just aren’t deductible anymore. And so…

Clark: What’s one example?

Roger: One example? Interest on credit cards. So, all interest is income to somebody else, and therefore, it was deductible to the payer of interest, and taxable as income to the receiver of that interest. But that’s no longer the case. You know, car loans, credit cards, personal debts, all that interest was tax deductible before 1986. There are some other things, stuff that we used to be able to deduct against ordinary income, that can only be deducted against capital gains and stuff like that. But I don’t wanna get too deep into that. What I want is our listeners to understand that if all of your money is in IRAs and 401(k)s, and you’re gonna receive a pension and social security, you’re extremely vulnerable. Ordinary income is the highest tax rates of any income that we have. You know, it’s higher than the capital gains tax rate. So, in order to…you know, if Congress has to raise taxes, or decides to raise taxes… After all, we’ve got record deficits, you know, the accumulated debt of the country is rapidly approaching $30 trillion, and that’s if you don’t count everything, but that’s another conversation for a different day. But, you know, at some point, I could easily make a case for having to raise taxes to keep our credit rating and, you know, the U.S. dollar and Treasury securities to be as highly regarded as they currently are.

So, the fact that you have this vulnerability is something that must be acknowledged. You know, I have people call me all the time, and they say, “Well, you know, great, I’ve got $1.5 million in my 401(k). I think I can retire.” And what they didn’t realize is they’re invested along with Uncle Sam, and whatever state you live in, those people are your partners. And when they look at their, you know, potential taxes, suddenly, in many cases, they’re only got about two-thirds of what they thought. So that $1.5 million might be only $900,000 in net spendable after paying taxes. This can be a real blow. And that’s just income taxes we’ve been talking about. There are other taxes, or things that they call fees or surcharges. They’re really taxes, when it’s based on income.

Clark: There’s always a hidden fee.

Roger: Well, frequently. Let’s put it that way.

Clark: Frequently, yes. Right.

Roger: Yeah. And if your income’s over certain thresholds, you cannot take itemized deductions, for example. So that’s a tax increase. If your income’s over certain thresholds, your premium for Medicare Part B for a retiree can as much as triple. So, for a married couple, if you’re over certain thresholds, that can be an extra $10,000 a year in premium that you pay for your Part B Medicare coverage. That’s a tax, as far as I’m concerned. There’s a…

Clark: Oh, I see what you mean. Right.

Roger: There’s a Medicare tax. If you sell something, and it puts you over a different threshold, not only do you owe income tax, but there’s a Medicare surcharge of 3.8% that is tacked on, that helps pay for the Affordable Care Act. So, there’s a lot of these things, and looking at the bigger picture when you’re making your plans can make a huge difference in how much you get to spend later.

Clark: Right.

Roger: And, you know, I hear from a lot of folks, “Well, you know, I have this other money that’s not in my 401(k). And you know what, I’m not gonna spend that 401(k) money. I’m gonna defer my taxes as long as possible.” Well, what happens while you’re deferring taxes? You might be making money and growing the balance in that plan, so that when you do have to take your what’s called required minimum distribution, and that happens when you turn 72, there’s more money that you have to draw out from. And so your required minimum distribution can easily throw you into all those other columns we just talked about, and push up your taxable income ahead of time.

Clark: I’ve heard you talk about the hierarchy of money. This might be a good place to transition to that. What do you think?

Roger: Yeah. I’m glad you brought that up, because if you keep this in the back of your mind as you’re strategizing, it can help you to avoid many of the tax pitfalls that face so many retirees. You know, the younger you are as a saver and accumulator of wealth, the easier it is to change the road you’re on so that you’re not stuck in this all-taxable corner of ordinary income tax because all my money is, just like we said, in retirement plans, pensions, social security, all of which are taxable as ordinary income.

So, the best… Let’s talk about those four kinds of money. The best kind of money is free money. If somebody wants to give you money, take all you can get, because it’s free, right? So, even if I have to pay taxes, which, gifts don’t charge you taxes, but say an employer decides they’re gonna match your 401(k) deposit, we wanna take that match money, so we wanna contribute enough to get whatever the employer’s willing to give us, right? And we’re gonna pay tax on that gift, but I don’t care because it’s not my money to begin with. So, now, a lot of employer plans with that match today have Roth options. I was just with a client who changed employers, and they were signing up. Yesterday we logged into the benefit website, and they were offering a Roth option in the 401k. So, still get that free money, but now they’re gonna keep every penny of it on the back side. And yeah, they’ll pay some taxes now, but it might be a really good idea for them to pay taxes now since we have the lowest tax rates in decades, and arguably ever, at least since after World War I. So, free money is great money.

The second type on that hierarchy is tax-free money. So that you know I can spend a hundred cents on the dollar of that dollar that’s sitting there. I don’t have to pay a gatekeeper a tax to get at my money. So, yeah, tax-free money…we’re always looking for tax-free money, as I mentioned.

Clark: Right. And that might…

Roger: Roth IRAs…

Clark: Roth IRA, right. That’s what you often will talk about, one of those tools you can use, over a course of many years.

Roger: Yes. In Roth IRAs, there are several other kind of back door options that are available to people to accumulate and save money. In fact, we might just have a session on that sometime later this year, on how to accumulate wealth in a tax-free environment. Next, capital gains-taxed money. You know, today, you pay either 0%, 15%, or 20% on capital gains. That’s, for most people…

Clark: It could be zero, really?

Roger: Yeah. It can be zero. Certain taxpayers can sell things and pay no tax on capital gains. Most people that own investments that appreciate though will be at least in that lower bracket. But these tax rates are gonna be going up in 2026 as well. So this is a good time to strategize, reposition, take profits. You know, there are, again, strategies to pay tax, reset your cost basis, if you’d like that investment, you know, buy another piece of property, buy back into a stock. That kind of thing.

Clark: So, what you’re describing, we know for sure, 2026. That’s a guarantee.

Roger: It’s today’s law. We know that that law can be changed, but, you know, we used to always believe, in the circles I run in, that when Congress would leave something like that hanging out there, they would always fix it before the deadline. But back in 2010, the Bush tax cut had a thing that said the estate tax would go away in 2010. Now, nobody believed that Congress would just leave it like that. It was part of a move to reduce estate taxes on middle-class folks. So, again, without getting into too much of the weeds, estate planners, and folks like me, other planners, we just figured, “All right, Congress will come back, they’ll give us a higher exempt amount, and, you know, this won’t be a problem.” Well, 2010 came around, and Congress had not dealt with it. And anybody that died in the year 2010 had a nightmare for settling their estate. It’s because there was something called step-up in basis, that no longer happened.

So, if you can imagine your folks living in their house for 40 years, and under normal estate tax, upon the death of the owner, the basis is stepped up so that when the inheritors sell, they don’t pay tax on all of that stuff. So if you bought the house for $50,000 and now it’s worth a million, that $950,000 wouldn’t be taxable because of the step-up in basis. But now, in 2010, that didn’t happen. So, suddenly, somebody who inherited that house had to pay tax on $950,000 worth of income, on the appreciation. So, you know, I cannot say for sure that the tax code…that’s where we started, remember? Two things you can count on, death and taxes. Well, at least you can count on death, right?

Clark: Right. It’s very unlikely taxes would go down. I mean, they can’t really go down much further, so…

Roger: Well, you know, never say never is kind of my watch word there, because we just don’t know. But we can make educated guesses. That’s the best we can do. And protect yourself. That’s the key, protect yourself. So, when I’m planning retirement strategies for a client, we want our clients to diversify under the tax code, into these different types. Oh, we didn’t try…I forgot to mention, the fourth type of money, and that’s ordinary income. Ordinary income tax money, IRAs, pensions, earned income, interest, that sort of thing. That’s the highest tax rates, and the hardest to offset. So, being diversified, being in these different positions with capital gains, tax-free money, taxable money, ordinary income, income streams, that sort of thing. Then, when Congress zigs, you can zag, and minimize the impact of that.

Clark: Makes sense. So, a hierarchy of money, starting with free money, which, hey, if you can get it, take it, all the way down to ordinary income that’s taxed. And so, one of the things that we said at the beginning, and this is an oftentimes a conversation we have here about retiring during uncertain times. So, how does that come into play here? Taxes on…

Roger: Well, retiring under uncertain times, you know, that was a podcast that we did a number of months ago. And in that podcast, we talked about five different principles, and this is principle number four, right? Know your why, that was number one. Number two, know your when. Number three is setting up your income so that you can not be stressing about running out of money. And then today, number four, protect that income from taxes. So, our next month, we’ll be having the fifth in the series, and we’ll tie all this together, because volatility seems to be increasing, not decreasing, these days. Have you noticed that?

Clark: Right.

Roger: Okay. Big swings in the stock market, interest rates are rising. We’re seeing inflation like we haven’t in quite some time. So, this uncertainty, this volatility, means retiring is more challenging, really, than ever. So, we have to do certain things to make sure that you can retire, and not be stressing and worrying. I talk to people all the time who are worried about, “Oh, if the stock market goes down, I’m really gonna have to tighten my belt because, you know, I’m retired, I have no other income. I’ve gotta pull off my portfolio.” And, you know, folks like that can alter strategies, but they have to be open-minded to alter strategies in order to make sure that you have income that isn’t gonna go away under volatility and the changing environment.

Clark: Well, this all comes back to thinking through the thought organizer. This is something that you provide totally for free, for someone to be thinking about what’s important to them, how do they value this, what’s their risk tolerance, how do you think through all of these unknown things like taxes, and preparing for retirement. So, in your own words, what is the thought organizer, and how can someone fill it out?

Roger: Well, the thought organizer is available on our website, www.gainerfinancial.com. You scroll all the way to the bottom of the landing page, and there’s a little button that you can click to access it. I recommend that everybody involved in their planning fill that out separately. So, if you’re a couple, you should each fill one of those out separately. If you’re an individual, then obviously you do it yourself. There are no wrong answers. It takes about 10 to 15 minutes, but it really helps tap into how you feel, and what your priorities are, and what you’re really trying to accomplish. Money is just a tool. It’s not an end to anything. You can’t take it with you when you die. You know, it’s here to help make your life easier. And so, the thought organizer is there to help create the context for making decisions. And, you know, you want your decisions to feed your vision for what you want your future to be like.

Clark: That’s good. Good way to look at it. Well, Roger, thank you again for taking a few minutes to talk us through some of the most important things right now to be thinking about. As always, I always enjoy our conversations. Thank you so much.

Roger: My pleasure. Take care.

Clark: Roger L. Gainer, RICP, ChFC, California insurance license number 0754849, is licensed to sell insurance and annuity products in California, Illinois, Arizona, and Nevada. Roger L. Gainer is an investment advisor representative, providing advisory services through HFIS, Inc., a registered investment advisor. Gainer Financial and Insurance Services, Inc. is not owned or affiliated with HFIS, Inc., and operates independently. The contents herein are the opinion of the speaker, and should not be considered as tax or legal advice. This podcast should not be considered a solicitation for investing or advisory services. Strategies mentioned are not a recommendation to implement or purchase those products or strategies. You should contact your own advisors as to the appropriateness for your specific situation.