transcript

Speech-to-text transcription can look a little quirky. Please excuse any grammar or spelling errors.

Episode #565 - Retirement Year End Planning: Contributing to Assets

Roger: The show is a proud member of the Retirement Podcast Network. 

“I would rather have questions that can't be answered than answers that can't be questioned.”

-Richard Feynman

Welcome the show dedicated to helping you not just survive retirement, but to have the confidence because you're doing work to really lean in and rock it. Today on the show we are going to continue our series on optimizing your and tasks and look at all the different accounts that you might want to consider contributing to between now and the end of the year. 

In addition to that, we're going to answer some of your questions. We had a great meetup last week regarding Roth IRAs and the framework to think through that. We had a lot of questions. I'm going to answer some of those questions here on the show as part of our open house webinar on Roth conversions.

Last Thursday we opened up the last open enrollment for the Rock retirement club in 2024. It'll be open until November 17th. You can go to rockretirementclub.com to learn more. This is the last open enrollment for the year, at least until February. This is also the last open enrollment at the current price. We are increasing the price in 2025 so you can lock that in today if you're considering joining the Rock Retirement Club. We have assembled all of the tools that you need to build your retirement plan of record step by step, along with a cadre of expert coaches, including three retirement planners that are available in group form to answer your questions and encourage each other. One good announcement we had is in coming in 2025, we have a partnership with YNAB, a budgeting type app where we're going to create our own template to track spending in retirement so we can make sure we're living those goals. So, if you're looking to build your retirement plan of record and you want to have some wise people to walk life with, go to rockretirementclub.com.

All right, with that said, let's get to contributing to assets from a year end planning perspective.

PRACTICAL PLANNING SEGMENT

This month the theme has been to look at year end planning items in order to optimize your plan of record. We're in the optimization pillar of retirement planning. So, this means that if you want to totally ignore optimization, if you have a feasible plan of record and a resilient plan of record, you shouldn't have to optimize to make your plan sound for your life. This is just how we can enhance our journey.

 In my practice, we look at this during our fourth quarter meeting where we review a lot of these items as options. For some clients there just aren't a lot of things to look at, but we internally go through the checklist of some of the stuff we're talking about this month just to make sure that there are not any missed opportunities, typically from a tax perspective. What we're going to talk about today is contributing assets to individual accounts between now and the end of the year. There are a number of accounts that have a year-end deadline on the annual amount that you're able to contribute and we have some types that go to April 15th and we'll delineate what those are. 

The first one that we'll start off with is contributing to your 401k account. So, in 2024 you're able to contribute $23,000 as an employee contribution to a 401k or 403 if you are eligible for one. You may have been doing this throughout the year, but perhaps you just became eligible in the last quarter or so because you changed jobs or you just haven't really contributed much and now, you're in the position of being able front load this or back load this in this case and get as much in as possible. So, you have the opportunity with your November paycheck and your January paycheck to maximize the contribution. So, if you're under age 50 you can get 23,000 in and if you are over age 50 you can add on top of that a catch up provision of $7,500. The first is either a Roth or as a pretax contribution depending on your retirement plan. If you have the option to do Roth in your 401k or qualified plan, it's something to consider, especially if you make too much money to contribute to a Roth IRA because of the income limits around Roth IRAs. We'll go over that in a minute. That's number one. Just evaluate where you're at on your 401k contribution. If your intent was to max it out. Well, you got a little bit of opportunity here in a month or so in those last paychecks to get that done. I'm looking at my 2024 important numbers worksheet which we will send out in our 6-Shot Saturday email. If you're not signed up for that, you can go to sixshotsaturday.com.

The second thing we want to look at is contributing to an IRA or a Roth IRA. Now, you can do this up until April 15th, but I want to point out the backdoor Roth IRA, because that's something you might want to get done this year. In 2024, you can contribute up to $7,000, to an individual IRA or a Roth IRA. Now, that traditional IRA contribution will get reduced if you start going over certain income limits. If you're married, filing jointly, that deductibility feature starts to go away at about $123,000 and is fully gone at $143,000. If you are single, the deductibility of an IRA starts going away at 77,000 and fully goes away at $87,000. So, if you're not able to make a traditional IRA contribution of $7,000 and deduct it because you're over the income limit, you can still make a nondeductible contribution. You'll just pay tax on the amount that you're contributing to that traditional IRA. Now, in addition to that $7,000 limit, if you're over age 50, you can contribute an extra $1,000 so a total of $8,000, and it's deductible if you are within the income limits. This will be on the 2024 important numbers that we're going to be sending out all this month. 

Let's say you make too much money for this to be deductible. Why would you still contribute to a traditional IRA, especially in 2024, since you're not going to get the tax deduction? Well, it would grow tax deferred, so that's nice. But if you were planning on making a Roth IRA contribution and not a traditional contribution, there might be a reason to do a nondeductible IRA contribution first, because Roth contributions, which are $7,000 with $1,000, catch up if you're over age 50, those can go away as well. If you are single and you make over $140,000 a year, your ability to even contribute to a Roth IRA begins to go away and will totally go away if you make over 161,000. If you're married, if your modified adjusted gross income is at 230,000 or more, you may not be able to make a Roth IRA contribution. So that's where the backdoor Roth contribution comes in, where you contribute an after tax contribution to your traditional IRA and then you immediately convert that traditional IRA to a Roth account and it ends up being a tax neutral thing. We've covered backdoor Roths before and we'll try to put a link in 6-Shot Saturday to some shows where we've answered that a little bit more in depth. But this is one reason why I bring this up, even though we have until April 15th from a deadline perspective because if you're trying to do a backdoor Roth conversion, it would probably be good to get it this year so you can do another one next year.

The next account you might consider contributing to is your health savings account. Now, you only qualify for a health savings account if you have a high deductible health care plan. This is going to be prior to Medicare typically and it will be designated as HSA compliant typically. If you have an HSA compliant plan now, you have until April 15th to contribute to the HSA for this year. But if you want to get it done before the end of the year, then you can go ahead and do that. Just don't miss it if that's your plan, if you're going to wait till April 15th. 

In 2024, for individuals, you can contribute $5,100 to a health savings account. That's a tax deductible contribution that will grow tax free and come out tax free, assuming it's coming out for qualified medical expenses. If you have a high deductible family plan, then your contribution limit for 2024 is $9,200 for families. Now, if you're over 55, the catch up provision, which is different than IRAs and Roths which are at 50, if you're 55 or over, you get $1,000 catch up in the HSA contribution. So, it's good to get that done in the year that you are making the contribution. It'd be 2024, but you do have until April 15th to get that done.

All right. Another thing that you might consider contributing to, and that is a donor advised fund or any type of charity, any donations you make in the calendar year 2024 may help you in taxes. You want to make sure if you have any charitable contributions that you get them done well before the end of the year. A donor advised fund is essentially a charity that you can contribute money to and then disperse what individual charity it goes to. It's like a pool of money that can grow and then each year you can contribute all or some of your portions to specific charities. It's a way of getting a tax deduction or getting the money into a charitable fund this year without having to go choose a charity. 

Now, with a donor advised fund, if you plan on making charitable contributions, a couple things to think about, consider doing highly appreciated stock. So, let's say you bought Nvidia, you know, an AI chip stock and it's gone up a zillion percent and you have a huge amount of capital gain. Let's say you put 5,000 into it, now it's worth $100,000. Well, if you have $100,000 of it, and let's say that's your charitable intent for this year. You can contribute cash. You could sell the Nvidia, take the $100,000 and give it to the donor advised fund and then you're going to have a capital gain on selling the Nvidia stock in this example, or you could contribute the highly appreciated asset directly to the donor advised fund. In this case it would be Nvidia stock, and by doing that you avoid all of the capital gains taxes related to the transaction. So, that's number one. If you're going to contribute money to a charity, whether it's your local charity or church, or whether it's a donor advised fund, don't just give cash, consider giving highly appreciated assets so you can get that tax liability off of your balance sheet. 

Second, if you are going to make charitable contributions to get impact from them, you will need to itemize your tax return, meaning you'll have to have enough deductions that are above the standard deduction you get as an individual or as a family. That would mean that from a planning perspective, when you're making contributions to charities, you would want to batch those. 

So, a good example, let's go back to the example that I shared. Maybe you don't want to give $100,000 to a charity this year. Maybe you really want to do 1/5 of that. Well, by frontloading your charitable gift this year and pre giving into a donor advised fund or directly to a charity, five years of giving, that's going to help you out much more from a tax perspective. We have a couple cases right now where we're coupling charitable contributions in this case directly to donor advised funds along with Roth conversions to help manage the tax liability. So, consider that before the end of the year. 

Also, before the end of the year, if you are over 75 and a half and you are working to manage your required minimum distributions and you're charitably inclined, you want to make sure you get your qualified charitable distribution. In going from your IRA directly to the charity, that will offset your required minimum distribution now or in the future. By getting money going directly from your IRA to a charity now, you're able to do that once you're 70 and a half, so that's the age bracket that you can start doing qualified charitable distributions, and in 2024 you can do up to $105,000. 

Now, a lot of this stuff may be, Roger. Nah, I've hit all this stuff. That's fine. Or you've thought of this and now I'm okay. That is okay. But it's good to review a list in a systematic way because we might forget about something if we're not organized in how we review these end of year items.

I'll use the example of a donor advised fund in that we were going through a review and it was only by having a checklist did we even remember, oh yeah, we have this donor advised fund and then we had a conversation to explore it because it wasn't on the radar. That became a strategy, but if we hadn't gone through our checklist, it might not have come up and we might have missed a planning opportunity. So, it's just a good habit to get into.

The last one I'll talk about here today is 529 education plans. So, if you have a 529 set up for a child or a grandchild, or you're considering it, you could set one up today and contribute your annual gift limit that you can give to anybody in any given year. In 2024 that's $18,000. So, if you have a grandchild and you want to contribute to a 529, you can get one set up before the end of the year and get that tax exclusion amount of $18,000 into a 529. If you're married and you want to get more money into a 529, you can double that to $36,000, because each of you and your spouse could give the $18,000 exclusion. Simple things you can do. 

There are more advanced strategies to get more money there that we don't have to talk about today. Real quickly, let me go back to the standard deduction because I didn't really tell you what that was. So, in 2024, a single person has a standard deduction of $14,600, meaning if you don't have deductible contributions like a donor or a charitable contribution, above $14,600, you're going to use a standard deduction so you're not going to get the benefit of your $5,000 charitable contribution. If you are married, it goes to $29,200. So, if you make a charitable contribution of $5,000 or $10,000 and that plus your other normal deductions when you calculate your taxes don’t get above that 29,200. You're not really getting any tax benefit from the charitable contributions. That's one reason why you might want to consider batching them. 

Another account you might want to consider contributing to is your after tax investment account. Maybe you've gone through your checklist, you've done the tax game as much as you can in Roths and 401ks and 529 and whatever else and now you have excess money left over that doesn't need to go to an emergency fund or an income floor. 

This is a situation I was in recently, so I moved money over to my taxable brokerage account and I'm investing it. The reason I want to bring this up is because if you're investing in it, you want to make sure that you're careful not to buy a tax liability unintentionally. What I mean by that, if you are buying a traditional open end mutual fund, and the way you'll know it's an open end mutual fund is it'll have a symbol of five letters, SGIIX as an example. Those open end mutual funds issue dividends and capital gains generally in November and December so you have to be careful about that. You can go to the website of the fund that you're considering buying and see if they've already issued their dividends and capital gains that they've realized for this year or if they have an estimate of forecast of what they're going to be. You can do that directly at their website because what could happen is if you don't do that, you could buy ABC mutual fund today because you had excess money to contribute and then the next day they could issue the capital gains and dividend liability for its shareholders and you would have a taxable event in the year for whatever capital gains and distributions they realized this year, even though you only own the fund for a day. You have to be careful about this, this time of year. 

Now if you are buying Exchange traded funds, ETFs, you're probably okay on this because they're much more tax efficient in their construction than the traditional open end mutual fund. Most of us are buying ETFs nowadays but still see a lot of open end funds and I still use a few in my practice actually. You'll know it's an exchange traded fund if it has a three letter symbol. So, an example would be SPY, an ETF trust for the S&P 500, and it trades on the New York exchange. Just one little wrinkle you want to be aware of. 

Now remember, all of this stuff is in the optimized pillar, so you don't have to do any of this stuff. You can just go through a quick checklist no, no, no, no, no, no, and then be done with it and go on with your life. But for those of you that have some optimization inclination as well as opportunity, they can mean real dollars in your pocket.

All right, with that said, let's get on to answer some of your Roth questions that came up during our ROTH meetup last Thursday. 

LISTENER QUESTIONS

By the way, Monday was Veterans Day. At the end of the show, I'm going to share and I'll probably do this for some weeks because I have 51 missions that my grandfather flew in a B17 in World War II. He flew for the 342nd Bomber Squad of the 97th Bomb Group in the 5th Wing of the 15th Air Force stationed in Italy starting in about 1944 May. So, I'm going to share some of his missions because I have a logbook where he does a very brief log of every mission that he flew. I'm going to share the first mission at the end of this episode and I may share some more just to honor him and to honor all of you that served our country. Thank you so much. God bless you.

REID HAS SOME CONCERNS ABOUT IRMAA 2026 IN REGARD TO ROTH CONVERSIONS

Let's get to some Roth questions that came about mainly from the meetup we had on how to think through Roth conversions in a logical way. First one is from Reid. 

“My question is regarding IRMA brackets. I'm trying to determine a Roth conversion for 2024, but I am concerned about the effect of IRMAA in 2026. But the IRMAA 2026 brackets are not known. 

How do I handle this conundrum? “

It's a great question, Reid. Let's get everybody up to speed. IRMAA is a Medicare surcharge that can come into play if you have a modified adjusted gross income above certain levels. The reason Reid is thinking about his 2026 impact to the Medicare surcharge in 2024 is because I'm guessing Reid is 63 or over. The year that you get the surcharge assessed, which is essentially paying extra for Medicare, they're going to look at your tax return two years prior. So, the 24 tax return is going to impact the 2026 tax year.

IRMAA is a surcharge you get if you make too much money under what's modified adjusted gross income. Again, the important numbers worksheet that you're getting all month, we'll have this listed on there. But if you make over $206,000 as a married couple or $103,000 as an individual, you're going to pay more money for part B and part D, Medicare. The amount that you're going to pay for that first bracket is $69.90 a month more for Part B and $12.90 a month more for part D and that will happen in the year that you hit that bracket. With Reid, if he does a Roth conversion this year, 2024, then in 2026, if he's over that first bracket, he's going to have that extra expense for the entire year because the IRS is going to look at his 2024 tax return. It's tiered up like brackets, meaning that there are different brackets that the more money you make, the higher your surcharge on part B and part D could be. Unlike the tax code, the tax brackets are a cliff, if you're $1 over, you go to the next bracket. That's what Reid is concerned about.

We know what the 24 brackets are, but I don't know what 26 is going to be and Reid, there's no answer to this conundrum. We will have the range of income will increase index to inflation. I don't know the exact index that they use. So, the income threshold should go higher because that will get indexed to inflation. 

Now, the amount of the surcharge we don't have clarity on, so you have to go with what you got. What we do in our practice is that we take the brackets this year and use that for our Roth conversion planning. That means we're using lower income thresholds to hit these surcharges because in theory, it'll index and go higher. But that gives us some margin of error because we don't want to inadvertently go over by a dollar because it can have a bigger impact. Then on the surcharge, there's no clarity so there's not much we can do about it.

DAVID’S QUESTION ABOUT PROJECTED REQUIRED MINIMUM DISTRIBUTIONS FOR ROTH CONVERSIONS

Our next question comes from David related to how we talk about projected required minimum distributions. David thanked us for the meetup and said the team has charisma and authenticity. 

“Trust is so important, and the RRC culture is outstanding.” 

Thank you, David. 

Then he says, “I do have one question, but I'm not expecting a personal reply.”

I told David I'd just reply on the show. 

“Like many of your peers, the chart you used does not show portfolio withdrawals prior to required minimum distributions.”

On the webinar, which we have a replay for, I believe it's in our free resource section, If not, it will be there sooner. I used a chart showing, okay, if someone has $2 million today and they're age 63 and we assume a 5% growth rate, what the projected required minimum distribution would be at age 75, and it would grow by 5% a year. The reason I showed that is in a good Roth conversion process, you want to understand what your future RMDs could be, because then you can get an estimate of what tax brackets you might go into. That might save you some money by doing Roth conversions today because you lower those RMDs. 

David correctly points out, in the example I used, I assumed zero withdrawals from age 63 to 65, so they weren't taking money out because they needed the money to spend on life. Whereas if they were taking money out, say in 64, 65, or any time in that timeframe, all of those qualified withdrawals throughout the years would reduce the required minimum distribution. David has a really good point here, because in reality, you do want to map out what you think you're going to be needing from your IRA and factor those withdrawals in there. In the spreadsheet that I use, which is included in the club, it has a place to enter those withdrawals before minimum distributions required. What I had replied to him, and I will say here is for teaching purposes, we just wanted to show, hey, you need to pay attention to this so you don't get surprised. Permanently in a higher tax bracket because you've been not taking money out of an IRA in the spreadsheet it has, where you can take money out on a systematic basis or on a bespoke basis, year by year and map out what that might be to see if you really have an RMD problem or not. You're 100% correct there. It was simplicity in my example because we had limited amount of time and I was trying to teach the framework and I was just using it as an example now. 

David said, 

“You have too much character to suggest anything farcical. But I do question if peers less concerned with ethics use similar charts to scare people into using their Service. I may be missing the point entirely. It wouldn't be the first time. Just ask my family on that.”

David. I don't know, because if you use a traditional just calculator to calculate the required minimum distribution, it doesn't give you that option to do those withdrawals beforehand. I think it's more of a simplifying assumption than it is a nefarious intention. Now, I can't speak for everybody, but you're correct. It does come into play and should be factored in.

JOE ASKS ABOUT TAX BRACKETS AND ROTH CONVERSIONS

Our next question comes from Joe.

“I get it that it makes sense to convert if you are in the 0, 10 or 12% tax bracket early in retirement and you'll be in the 22 or 24% bracket later once your income streams are turned on. But if one is going to be in, say, in the 24% tax bracket throughout retirement, does converting just to lower the unneeded RMDs make sense when those can be offset by qualified charitable distributions?”

Yes, they can definitely be offset by qualified charitable distributions. It would decrease the need or the inclination to do Roth conversions. If you know you're going to be in a higher tax bracket regardless, well, that's going to be more of a check in the box if it might not be as important to you. So, I don't disagree with that. Joe. 

Where it might be problematic or some things you might want to consider, Joe, is if you are married, the assumption is typically that we're always in the joint brackets. Likely if you're married, one of you is going to be alive alone, which means that you are going to be in the single brackets, which could move you up the tax bracket scale quicker. As an example, let me look at my chart here. If you are married and you're in the 24% tax bracket, well, that bracket in 2024, $201,051 to $363,900. So, if you had $250,000 in income, you would be in the 24% bracket. If you were married, if you had that same income and you were single, you would be in the 35% tax bracket. That single tax bracket is going to get you up a lot quicker. One thing you do want to consider is what's the longevity of both of us? Are we both healthy? Do we have anything that is an issue related to our longevity and will one of us be in a single bracket for a longer period of time? 

Then two is how we feel about simplicity and prepaying taxes. One thing about doing Roth conversions is it's like prepaying a mortgage. You're just pre-paying the taxes and the taxes are going to be applied on today's dollars, so you're not allowing that tax liability to increase in the future. Another thing that comes into play is whether or not you have a lot of after tax assets to handle paying the taxes, which makes paying the tax now more appealing because it’s a known variable. Great thought. 

Let's get to one more question, and maybe we'll do a few more next week because we have a lot of questions.

DENISE SAYS THAT THE MORE SHE READS ABOUT ROTH CONVERSIONS, THE MORE CONFUSED SHE GETS

Always questions on Roth. 

Denise says, 

“The more I read about Roth conversions and the five year rule, the more confused I get. I understand that being 59 and a half will make all the difference. 

What I'm confused is in regard to waiting five years to withdraw gains on Roth conversions after I'm 59 and a half. For example, if I convert $10,000 and I gain 10% in the first year after the conversion, would I have to pay taxes on the thousand dollars of gains unless I wait five years? Will each conversion have its own five year rule even after I'm 59 and a half?”

So, Denise, the way that it would work is that each conversion would have its own five year clock. Even after 59 and a half. If you haven't had money in a Roth for at least five years, the golden rule is if you're over 59 and a half and you've had at least $1 in a Roth IRA, then any money you take out of an IRA is not going to be subject to any tax and you don't have to track any of the conversions that you do. So, the 59 and a half is over one threshold. Then having a Roth IRA open and funded is another. So, once you've had a dollar in a Roth for at least five years and you hit 59 and a half, you don't have to think about any of this stuff. This is going to be the case, at least in my experience, for 99% of the people. 

Here's an example for me. I'll use myself as an example. I have IRA money and I have 401k money. In my 401k, I have Roth assets, so I can't contribute to a Roth IRA. So, what I did this year, I'm 57, I did a Roth conversion of $300. So, I established a Roth IRA, and I converted $300. I just did this last month so it counts at the beginning of 2024. The reason I did that is because I want to get that clock started on the five year rule. Like the cobbler who is so busy thinking about everybody else, he forgets to put his own shoes on. I should have done this some years ago. I just never got around to it. 

So, what does that mean for me? I have a Roth IRA that started in 2024. Let's assume I did some conversions. Once I hit 59 and a half, I'm 57 today. If I were to take money out of my Roth IRA, the first money that's going to come out is my contributions. I'll use your example, $10,000. So, the first $1,000 I take out is my contributions. The second thousand after that would be gains. I'm going to be taxed on that. However, once my Roth account ages to where that first dollar in 2024 has been there five years, then I don't have to think about it ever again.

Ignore all of this money stuff and go live a great life. With that said, let's get to a smart sprint.

TODAY’S SMART SPRINT SEGMENT

On your marks, get set, and we're off to set a little baby step you could take in the next seven days to not just rock retirement, but rock life. 

All right, in the next seven days, if you don't want to worry about optimizing any of this money stuff, ignore everything I'm about to say and go live a great life. As long as you have a plan of record in place that you feel confident in, just ignore this stuff. If you want to try to do some optimization, grab the important numbers worksheet. We'll have it in 6-Shot Saturday. Grab the worksheet of what things to consider before the end of the year. We've shared that in prior 6-Shot Saturdays. We'll share it in this 6-Shot Saturday too and just spend Saturday morning with coffee and just go through the list really quickly. It may just be, check, no, no, no, no, no, no, I'm cool. Or you may find one or two things that you pursue a little bit more. That's all you have got to do.

IN HONOR OF VETERANS DAY

With that said, let's hear the first mission from my grandfather in honor of Veterans Day, I'm going to share some of the missions my grandfather flew to thank all the veterans that created an amazing country that I and you get to live in. So, here's the first page. 

These are relatively brief. He wrote missions that I have flown with the 342nd Bomb Squadron of the 97th Bomb Group in the 5th Wing of the 15th Air Force stationed in Italy, Amidola Air Base. Type of ship, B-17G. 

All right, mission, and I'm just reading this verbatim. 

“Mission number one, May 25, 1944. Ship number 516, sortie number one. Target. Today we bombed repair shops in Lyons, France. Target demolished. No flak over target. On way up. One engine failed and could not be feathered. Number two also went out, and we flew over Nice, the shortest way back to our base. Got a heavy barrage of flak and two Messerschmitts 901s attacked us. I got my souvenir from the Jerry's in the form of a 20 millimeter bullet through the upper part of my leg while being hit. The rest of the crew managed to send both attackers away smoking. Landed at Calvi Field and was taken to the hospital. Carried 12500 pound bombs.”

That is the first mission from my grandfather, and he got shot the first mission. I am blessed to have his purple Heart. So next week we will read missions number two and three because he puts some of these together. 

Monday's passed. You have a veteran in your life. Give them a shout out. Just give them a fist bump. We're blessed to have people that serve our country.






The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All, performance reference is historical and does not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax or financial advisor before making any decisions.