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The following is a transcript of Episode #41 of the Retire Happy podcast with Roger Gainer.
All episodes of the podcast can be found at Apple Podcasts, Google Podcast, and Spotify.
Roger: See at the end of the day, Clark, there\’s only three things that can happen to taxes in the future, right? They can go up, they can go down, or they can stay the same. That\’s it. There\’s no other outcome. So you have to ask yourself, what\’s the most likely thing to happen?
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 progress you toward your financial goals. So in this episode, Roger and I discuss taxes, specifically what you anticipate with changes in tax laws this year and beyond. We also talk about how to best prepare yourself before you file. We also uncover what studying our economic history may tell us and how hindsight can help predict what\’s to come in the future. For more content like this, head on over to gainerfinancial.com. Enjoy the show.
Roger, how are you doing? Well. You know, that, you know, during these days my wife and I, we have what we call the prime directive and that\’s to get through it and stay alive.
Clark: That is a good goal.
Roger: And I\’m doing both of those very successfully at this point.
Clark: Good to hear. Okay. Well, Roger, we\’ve got a good topic today, taxes, and this is something we\’ve sort of dipped our toe in a little bit, but we\’ve not really jumped into this. And I\’ve heard you say a phrase before. I\’m just gonna start by saying this and then I want you to take it from there, but regarding taxes, ignore them at your own risk. What does that mean?
Roger: Well, yeah, taxes. If you neglect or ignore taxes, it\’s at your own risk. So we know that taxes are going up. The law as it currently stands, says the taxes will increase in 2026 so that the current Tax Act that was passed in December of 2017 and we\’ve talked about this, our long-term listeners know that we\’ve talked about this before. And that legislation, as far as individual taxpayers are concerned, does sunset at the end of 2025. So we only got a few years left of the current low tax rates.
But when that tax cut came, we saw a pretty sharp increase of about a trillion dollars in the national debt because the Republican-controlled Congress cut taxes and increased spending simultaneously. And the hope was that economic expansion would be stimulated so that there would be more growth in our economy and more net taxes would be collected in Washington to pay for that increase in spending. That has not materialized, that had not materialized even before COVID hit.
Now, since COVID hit, we have been in a shrinking economy, we had a little bit of rally, you know, and recovery in the late summer and fall. But for example, last week, the jobs report indicated another million jobs have gone away in our economy, a million jobs.
Clark: It\’s hard to imagine.
Roger: It\’s a pretty big number. And right now there are about 11 million fewer people working than there were last February, just a year ago, not even a year ago. So, you know, for those people, they\’re in a severe recession, we have more people needing food assistance, and they\’re what we call food insecure than ever before. And what that means is there\’s less economic activity. And so the money that is being earned, see normally, this would be the time to cut taxes, but we can\’t because we already cut them when times were good.
Now, this, I\’m not trying to make a political statement to anybody. I\’m just talking about economics, and stimulus, and growth cycles because this stuff is not new. It\’s been going on for hundreds and hundreds of years, the boom bust cycle. Any of our listeners that would like to read some great historical economics books, doesn\’t that sound exciting? This stuff I find exciting, but for most of our listeners, probably not so much, but there\’s lots of reference material that I can point you to that documents this cycle that\’s been going on, as long as, even before we have been a country.
So we know that right now we have the second-lowest tax rates in the modern history in terms of income taxes. We\’ve only had federal income taxes since 1913 and the lowest tax rates in all this time was in the 1920s. And, you know, there\’s the Roaring Twenties. We had tax rates in the 20%, mid-20% range, and we know how the \’20s ended. It didn\’t end well. And by the late 1930s, the top tax bracket was up to 90-plus percent. That\’s pretty sharp from say the mid-20s up to 90%.
There are some really strong parallels. I won\’t get too deep in the woods so I don\’t bore everybody today to now and the 1920s. We know that the 1930s were a tough time. We had to get our economic footing, reform a lot of excesses and inefficiencies in how we did business and regulated businesses. How the stock market worked, how banking worked. There was tremendous amount of change in our economic system in the 1930s.
Everything from how mutual funds are regulated to how stock trades are executed to legal responsibilities of banks and capital requirements, all kinds of things changed in the 1930s to put us back on strong settings. And again, there\’s a lot of history here. I study this history and if anybody would like to know where we undid all of that good that we did in the \’30s, again, give me a call. I\’m happy to have a conversation. I love talking about this stuff as you can tell.
Clark: Well, you understand the past and you know, there\’s that quote, if you don\’t understand the past, you might repeat it or something like that.
Roger: Oh, yes. \”Those that ignore the past are doomed to repeat it.\” I\’d say that that is more accurate now than ever. We\’re seeing it. We\’re seeing it politically. We\’re seeing it economically. We\’re seeing it socially. And there\’s lots of parallels to not that many decades ago and then even earlier in our collective history.
Clark: So I know there\’s a lot, there\’s a lot of things that you\’ve seen in the past. And there are a lot of parallels. I\’m curious when you do think about where we\’re at right now, you said we\’re at the second-lowest tax rates ever. In these next years, what does that translate to you with retirement? Where do you start with all this?
Roger: Well, you know, people are like, \”Well, but look, the stock market\’s going up.\” And we did a podcast not that long ago about how there\’s two reasons the stock market goes up. One is economic growth, which we don\’t have and the other is feeding a lot of money into the system, which we do have. And I\’ve been reading some very startling reports here in the last month or two, about how previously, when we\’ve expanded the money supply, the way we have here, not just this past year, but in the past several years, how much more returns we get in the stock market generally.
So our rate of return on this investment is pretty mediocre by historical standards. And we have a tremendous number of companies that they\’re starting to call ghost companies or zombie companies. And these are companies that don\’t make enough money to service their debt, but the Fed is propping them up by buying their debt and then saying, \”You don\’t have to pay us for now. We\’ll let you accrue the interest owed so you don\’t go bankrupt.\” The idea is to protect jobs.
But once the Fed stops holding these businesses up, they will go out of business. They\’re in dying industries, capital intensive industries. A lot of companies have taken on excessive debt. We\’re not gonna get into that. Maybe in a future podcast, we\’ll revisit that topic, but today we really wanna focus on taxes. But in order to do that, we have to look at what\’s likely.
See at the end of the day, Clark, there\’s only three things that can happen to taxes in the future, right? They can go up, they can go down, or they can stay the same, that\’s it. There\’s no other outcomes. So you have to ask yourself, what\’s the most likely thing to happen, and do you think they\’ll go down further from here? My guess is not anytime soon. I just don\’t see how we can afford it.
We have seen in the last 12 months, the national debt, the counted national debt. And again, we had another podcast on this. You can go to the website and check it out. But the accumulated national debt in the last 11 months has gone from $21 trillion to almost $28 trillion. That\’s a massive expansion of the national debt. And we\’re probably gonna see another package passed here in the new administration because things are really, really bad and the idea is to have a large enough stimulus package targeted to the right places.
We\’ve seen a lot of waste where we haven\’t gotten strong economic impact from the previous $3 trillion of stimulus. And that\’s why the economy frankly, is still hurting pretty badly. And now we\’ve got this snowball effect of pensions, of state and local governments being in bad financial shape. We could start seeing…you know, just here locally, they\’ve announced salary cuts for civil servants and the likelihood of layoffs and teachers, governments, you know, governments are probably the largest employer in our country.
You know, the federal government employs millions and millions of people. So what happens when somebody loses their job? They start to pull benefits. They get unemployment insurance, they might get food stamps, they might get housing subsidies. They might get all kinds of things, financial aid, if they have a child going to college, all kinds of stuff.
So, you know, we\’re looking at this expansion and a potential acceleration of the expansion of government spending at the same time tax collections are reduced, and there\’s only so much out there that you can borrow to make up the difference. So there\’s a pretty good chance that, you know, we\’ve heard the new administration talking about potentially increasing taxes for people making more than $400,000 a year, about eliminating capital gains tax breaks. Capital gains are in a different tax bracket, really a different tax code than the money we earned from our work or from our businesses.
So there\’s a number of places where we could really see direct tax increases. And then there\’s other places where we can see what I would call stealth.
Clark: Stealth tax. Like what does that mean?
Roger: Okay, well, I\’ve talked about this for years for retirees. You know, we can thank Ronald Reagan for putting through way back then by largest tax increase on retired folks in the history of our tax system, because what he did, you know, everybody thinks Ronald Reagan cut taxes, but he actually raised taxes 11 times. And many of those tax increases were really stealth tax increases. And we\’ve all kind of learned since then, Congress has learned how to do these kinds of indirect tax increases and that, so they don\’t have to call them taxes.
So what Ronald Reagan did was he eliminated most of the stuff we used to be able to deduct on our tax return. So, you know, before the Tax Reform Act of 1986, you could go out and buy a property depreciated in 19 years and use some of that depreciation against the money I earned from my job instead of just against the income from things like real estate, okay?
Or you used to be able to deduct interest you paid on your credit cards because that\’s income to a bank. The idea was the bank was gonna pay taxes on that income, therefore it\’s deductible to me. I shouldn\’t have to pay tax on that money because basically, I transferred my income to the person charging me interest, but we can\’t deduct that interest anymore, not since 1986. For listeners that are old enough, you might remember that this time of the year from now through early April, the newspaper was just filled with tax shelter advertisements.
You can buy. Gosh, I remember we used to be able to, there were programs developing cattle. I remember one particular program developing these super cows. They were bigger. They produced more milk. They produced more meat and you invested in a cow and got tax benefits. Oil and gas, you used to be able to, there were lots of programs where you put up 10% and then they borrowed 90%. The idea was once they drill the wells, the income, can you hear that?
Clark: I can hear it.
Roger: That\’s to get everybody\’s attention about how important tax increases are to consider.
Clark: Exactly.
Roger: I\’ve talked with my, you know, I\’m a retirement planner and I have explained this to clients really for decades. How, when you go into retirement, even if taxes stay the same, you end up paying more, your effective tax rate. The amount you actually pay in taxes goes up because you lose your deductions. So you don\’t have business deductions. You can\’t deduct your children anymore. Many people work hard to pay off their mortgage. And so those are the things that offset taxes, and where are most people saving their money? In IRAs and 401(k)s. And those are all taxes, regular, old income, ordinary income.
So when you go to pull that money I saved for retirement, it really matters what the tax rate is as to how much of that am I gonna ultimately get to spend. So if tax rates go up by just 20% and I don\’t mean 20% overall, if you\’re in a 30% tax bracket, they go up by 6%. That\’s a 20% increase. It means that it\’s like the market correcting by 20%, right? You\’ll have 20% less money to spend. And that\’s the problem.
So for decades, we\’ve tried to have clients getting to retirement to be diversified under the tax code. There are ways to create tax-free income, just a quick spoiler alert, municipal bonds are probably the worst way to do that for a whole bunch of reasons. And if anybody wants to know, I\’m happy to tell them, but municipal bonds can actually lead to tax increases of some of these stealth taxes.
So what\’s a stealth tax? These days when you retire, when you get to age 65, you can get on Medicare. And when you get on Medicare, there\’s a part A and a part B. Everybody gets part A. When you sign up for part B, there is a charge and that money, you get a bill every month because you have to, you\’re buying an insurance policy. Well, until a few years back, everybody paid the same amount. And then they added a graduated what they call surcharge. So for next year, the base rate is $148 in change a month.
That can go all the way up to almost $500 a month per Medicare recipient. So if it\’s a husband and wife, that\’s almost, that\’s like $700 a month tax. Well, $700 a month, that\’s another $8,400 a year in what amounts to a tax.
Clark: That adds up real quick.
Roger: Oh, it certainly does. And there\’s other things that are what we call means tested. If you make more money, you pay a higher premium for those. Now they don\’t call it a tax. It\’s a fee or a surcharge, or, you know, there\’s lots of… Here in California, they become very, very good at that because we have what they call Proposition 13, which freezes our property tax on our homes and severely restricts the amount that can go up.
So if you look at your property tax bill, my property tax bill is almost half of what I pay every year are these little fees, and add-ons, and increased surcharges for services, school parcel taxes, bond issues. The water department has a surtax that we pay because they can\’t get more out of the property taxes. And you look at our property taxes versus other parts of the country of clients back East that can\’t sell their houses because the property tax is so high.
So, you know, maybe the income tax didn\’t go up, but the property tax went up, you know. And so you really need to look at that big picture. If I can give any strong piece of advice to our listeners, it\’s you have to take a big picture view. And I find every new client that I ever talk to, I ask what they use their tax preparer or their tax counsel for and virtually all of them tell me, \”To prepare my taxes.\” I said, \”Do you ever sit down and do tax planning?\” And very, very few do.
There are certainly less than 10% of people I\’ve ever asked that question to sit down with their tax advisor and do tax planning. And usually, the tax planning is, you know, today, next year, maybe two or three years from now. And that\’s about it. They\’re not looking at the long-term impact. So you\’re sitting there. It\’s March. You sit down with your tax preparer. You say, \”Boy, oh, boy, that\’s a lot of tax it looks like I\’m gonna pay this year. What can I do?\” And they say, \’\’Well, put more money into your IRA. Put more money in your SEP. Open a 401(k), fund your profit sharing.\’\’
And while that deals and relieves the immediate pressure, it creates a deferred liability. So what\’s really happening when you put money in an IRA? Uncle Sam\’s lending you money. So the money you would have paid Uncle Sam in taxes, they\’ve lent you. You don\’t have to give it to Uncle Sam right now. It\’s basically a loan and you\’re gonna have to pay that loan back later. But weird thing about that loan is you don\’t know when they\’re gonna ask you to pay it back. Currently, it\’s age 72, but that just went up. It used to be 70.5, but now it could go down and you don\’t know what the interest rate\’s gonna be, right? Now, if I made you that offer, Clark, how much money would you like to borrow if I\’ll tell you what the interest rate\’s gonna be when I ask you to pay it back.
Clark: Oh, oh, yeah, that\’s gonna be quite different.
Roger: You wouldn\’t borrow money from me, would you? But that\’s what\’s going on when you put money into a regular IRA or a normal 401(k), where you put those pre-tax dollars in. Now, there\’s a place for those planning tools and it\’s to navigate a larger tax picture. But when you look, you know, especially generations, like my daughter and my son, Gen X, Gen Y, Millennials, they\’ve gonna have to grapple with this giant deficit.
And so when my clients refer their kids to me, this is the first thing we talk about is how are you gonna protect yourself from this avalanche of debt that\’s probably coming down the pipe at you? How do you protect yourself? Okay. And that\’s what I want people to think about here in 2021. Don\’t look at this year\’s taxes. Don\’t look at next year\’s taxes. Look at 10 or 15 years from now, those taxes. I can\’t tell you what they\’re gonna be, but I sure can tell you they\’re gonna be different than they are today.
Congress will never give up fiddling with the tax code because, let\’s face it, that\’s the number one reason they get campaign contributions, right? Is taxes. If we had a flat tax, a whole lot of campaign contributions would dry up because they wouldn\’t be looking for those kinds of favors.
Clark: There a lot of options. There\’s a lot of routes to take with all this.
Roger: There\’s a lot of ways to go. Exactly. And, you know, again, we use logic, we can\’t know for sure what taxes are gonna look like in 15 years. But if we\’re diversified, if you have money in these different tax pots, the ordinary income from your 401(k) or pension, capital gains, you know, assuming we still have capital gains preferences in the future, tax-free money. There are several places that you can create tax-free money for yourself.
And we even have a little mini class that we do for clients that explain that hierarchy of, you know, the most attractive money out there. Number one is free-money. Number two is tax-free money. Number three is capital gains tax money. Number four, which is a subset actually of the real number three, which is tax-deferred money, and then finally ordinary income. And, you know, we wanna get as much of that free money and tax-free money as we possibly can into our plans.
Clark: Right. Well, this, I think is a smart place to mention your tool, your free tool, that can help someone look at all of the routes. But it starts though with someone\’s individual interests.
Roger: It really does.
Clark: The Thought Organizer, let\’s talk about the Thought Organizer, what it is and why someone should check that out.
Roger: Well, you know, early in the year is always a great time to pull out that Thought Organizer and take stock of where you\’re at, what your concerns are. Certainly, over the last 12 months, we\’ve seen an awful lot of changes to our world, economically, socially, etc. And you know, we\’re still in this very significant period of reorganization in the United States.
You know, whatever you filled out the Thought Organizer two years ago, you may fill it out a little differently today. So it\’s not a bad exercise to go download that off our website at www.gainer.financial.com. It\’s right at the bottom of the first page. If you have a small screen, you got to scroll down. You can download that and don\’t fill it out online. I have a lot of people that fill it out online and they go, \”It all disappeared. What happened?\”
You have to download the form. It is a fillable form and fill that out. If you\’ve got a significant other spouse or partner, do it with them, have each of you do it so you know where each of you is coming from, because one of you might be afraid of something that didn\’t bother you at all two or three years ago. You know, it wasn\’t even on your radar screen, and now you\’re listening to the news or you\’re seeing what\’s happening, you go, \”Wow, I\’m really worried about this.\” Well, get in touch with that because then you can make adjustments. It\’s always the earlier you make adjustments, the easier it is, the more options you have instead of getting forced into a corner at the last minute.
I\’ll give you a quick example. I had a client retired last year, middle of the year. We looked at her income to date, year to date. And she was at about 65% of what she had been earning the last several years. So even though she has plenty of money in the bank, we\’ve set up a really solid income plan for her. And she\’s never gonna run out of money. She\’s always gonna be able to keep up with inflation even if inflation comes roaring back.
We have her positioned very well for kind of a stress-free retirement. And she\’s just a happy, happy person. But when we did a little year-end tax planning, I said, \’\’Why don\’t you pull $40,000 out of your, the money we\’re leaving in your 401(k)?\’\’ And she said, \’\’Well, I\’ll have to pay taxes.\” I said, \”Yes, but whenever you pull that money out, you\’re gonna have to pay taxes. So let\’s look at, if you let it stay in and continue to grow tax-deferred, when you do pull it out, if it\’s 2026 or later, you\’re gonna pay this much more in taxes. So you now have room to pull this income out of, you know, this taxable distribution out of your 401(k) and you won\’t push you into another tax bracket. You\’ll get to take advantage of today\’s low tax rates.\’\’
So stuff like that, a Roth conversion of your IRAs, so that you can develop those long-term tax-free assets, stuff like that. And we have different calculators and tools to help evaluate whether that stuff makes sense. So by completing the Thought Organizer and just updating yourself on where you\’re at with yourself, and then we can look into the bigger picture.
Clark: That\’s good.
Roger: So that\’s what I\’d be doing with the Thought Organizer today.
Clark: That\’s great, Roger, as always, thank you so much. Of course, someone can go to gainerfinancial.com. They can get that Thought Organizer, gonna get all of our podcasts, all the conversations. There\’s a lot of unknown right now. So let\’s learn from the past so we don\’t repeat it, right?
Roger: Right. And a note to our listeners, if you do go to the website and you click on the blog podcast tab, on the right-hand side of the page, we\’ve organized these by topics. So instead of having to dig through years and years of these things, instead of digging through 40 other programs, you can just go, if you were interested in taxes, if you\’re looking at real estate, if you\’re thinking about what do I need to do for retirement income? How should I finance my house? You know, what type of mortgage is best for me? Those kinds of things, it\’s all there. So always good to talk to you, Clark.
Clark: Always good.
Roger: Take care.
Clark: Roger L. Gainer, RICP ChFC, California insurance license #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 & Insurance Services, Inc. is not owned by or affiliated with HFIS, Inc. and operates independently.
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