Retirement Roadmap

The Tax-Free Retirement Blueprint

• Mark Fricks • Season 3 • Episode 26

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We tackle the often-overlooked issue of retirement tax liability and explore strategies to create tax-free income streams for a potentially more secure financial future.

• Understanding the "mortgage" on qualified plans (401(k)s, IRAs) where the IRS owns an unknown percentage of your savings
• The current "tax sale" has been extended but will eventually end with rates likely rising dramatically
• Strategic Roth IRA conversions can move money from tax-deferred to tax-free status during this window of opportunity 
• "Super Roth" life insurance policies offer tax-free income, death benefits, and potential long-term care coverage
• Tax location matters as much as asset allocation - having the right balance of tax-free, tax-deferred, and taxable accounts
• The tax snowball effect in retirement impacts Social Security taxation, Medicare premiums, and available deductions
• Some retirees can achieve a 0% tax bracket by properly structuring their retirement income sources

Visit masterplanretire.com to access our retirement checklists, podcasts, and schedule a complimentary consultation. Call 770-980-9262 to speak with someone directly about your retirement planning needs.

Have a topic or question you'd like Mark and Evan to address in a future episode? Email us at info@masterplanretire.com or call 770-980-9262.

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Catch all episodes of our podcast at https://www.masterplanyourretirement.com/resources/episodes
Listen to Mark Fricks on Saturdays at 12:00 p.m. on XTRA 106.3FM WFOM.
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Purchase Mark's Book, The Road Less Traveled: Turning Your Retire

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Visit masterplanretire.com to access our retirement checklists, podcasts, and schedule a complimentary consultation.
Call 770-980-9262 to speak directly with someone about your retirement planning needs.

https://masterplanretire.com/

Catch all episodes of our podcast at https://www.masterplanyourretirement.com/resources/episodes

Listen to Mark Fricks on Saturdays at 12:00 p.m. on XTRA 106.3 FM WFOM.
Sign up for one of our upcoming events at https://www.masterplanyourretirement.com/events

Purchase Mark’s book, The Road Less Traveled: Turning Your Retirement Worries Into an Excursion of a Lifetime, on Amazon: https://a.co/d/4fx94Al

Advisory services offered through MasterPlan Retirement Consultants, Inc., a Registered Investment Advisor in the state of Georgia. Insurance, tax and commodities services offered through Fricks and Associates, Inc. dba MasterPlan Retirement Consultants. The aforementioned are affiliated companies.

Speaker 1

What is your retirement tax liability? Hey folks, welcome. Thank you for joining us. Welcome to Retirement Roadmap with MasterPlan Retirement Consultants. My name is Evan and with me, as always, retirement planner Mark Fricks. On today's show we're going to discuss taxes in retirement and how. None of us really know how much money is within our qualified plans, how much of it actually belongs to us. We're going to consider the pros and cons of life insurance and Roth IRAs for tax-free retirement income and whether or not one can be in a 0% tax bracket. Mark. That sounds pretty alluring as far as a zero percent tax bracket. But let me ask you this first there's something that we say quite often, and that is that taxes are currently on sale, and we do know recently, with the passing of the OBBB one big bill how?

Speaker 1

many B's are in there that the sale has been extended for a short time.

Speaker 2

Yeah, excellent point. We've not had the top rate be above 39.5% since the, I think, 1919. I remember correctly right around that time. Ever since then, the top rate has always been higher than that. But ever since the mid-80s, uh, ronald reagan got together with congress, uh, gave some, got some and was able to get that top rate into the mid-30s, and ever since then it's not been above 39 and a half.

Speaker 2

That may sound like a lot, but of course that's if you're at the top income level.

Speaker 2

But even in between, uh, especially the 2017, uh big bill tax cuts, all the middle brackets have been lowered as well, and the big exemption that single and married couples get as well all adds to what they say was approximately a 22% tax cut in 2017.

Speaker 2

2017. And so we as planners have been doing over the last, you know, seven years, eight years, have been shooting for the end of 2025 as our goal of let's see how much we can get converted, because when you do a conversion, you're going to pay taxes at your current rate. So we've really been on kind of a speeding train to get to reach that date and that's been extended. Well, kind of a big surprise, because you know the way the election went and the way Congress went, and so we at least have another four to five years of lower taxes and, as we've talked about in past shows and you may jump back on this again but they are going to be higher. It's the only way they can go. Just, I think two episodes ago we talked about that, yeah, and so we have this window that has been extended. Take advantage of it.

America's Deferred Tax Problem

Speaker 1

Yeah, I would say you know we will talk about the fact that taxes are going up. Go back and look at our previous episode Like Mark said, it was a couple episodes ago on the one big beautiful bill. We'll talk a little bit about how we are kicking that tax can down the road a little bit. That's the bad part, and by not handling it now, it's just going to be bigger when it's time to face the music.

Speaker 2

That actually makes it more important to do things now anyway, a hundred percent. If it's going to be that much worse in five years because we've kicked that can, it's even more critical.

Speaker 1

All right, we've got national debt. We know we're at $37 trillion, which was last week when it hit $37 trillion. Our social safety net, Social Security, Medicare things are at risk. Taxes have to increase because our spending far outweighs what we're bringing in.

Speaker 2

Taxes have to increase in the future. Well, economists tell us there's no way that just cutting spending will do it, because we, our what do you call them? Our have to budget items, mandatory spending. Mandatory spending is what we're bringing in now that doesn't count anything else, including most of our defense, and so you cannot get our debt down by just cutting spending Impossible.

Speaker 2

It takes both a cut in spending and a rise in taxes, and it's not going to happen on the wealthy, I can tell you. There's no way. The wealthy are always going to find a way, unless you come in with a national sales tax or whatever the other tax is called, where everybody pays no deductions, no exceptions. The wealthy find a way to get around it, and so it's the middle class, and that's who we're talking to today. The burden's going to fall on you and your heirs, and so let's do something about it now yeah, and it makes an entirely different impact in retirement because America has a deferred tax problem exactly so many years we have all saved in these pre tax accounts 401 accounts, 401k, 403b, thrift savings plan.

Speaker 2

All of these are before tax, which means, hey, no taxes when you put it in, no taxes when it grows. But guess what, when you take it out, it is 100% taxable at your rate. Then what is your rate then? Can you tell me what your rates could be in five years, 10 years? No, you can't, of course not. And so why not break free of the IRS by getting more of that money tax-free, so that, no matter what they do, it is tax-free regardless?

Speaker 1

Absolutely Qualified savings vehicles, another way that we like to put it. They have a mortgage on them and unfortunately that's a mortgage that you don't know the terms on. You don't know what your tax burden is going to be.

Speaker 2

Well, as you've heard me in class I love to say. I want you to picture in your mind how much you have in your pre-tax accounts Again, your 401ks, iras, things like that. Now I want you to subtract a number and it's the amount of taxes you owe on it. The problem is you don't know what that number is because it depends on when you take it out, over what period of time you take it out all of that kind of stuff. So that mortgage could be 20% of that account, 30%, 40%, and again your heirs, your kids and grandkids are going to be paying taxes. On the balance, you leave them as well. So this is a critical conversation we have it with every one of our clients. If your firm is not doing true tax planning, if you're not using someone CPAs typically don't. They do tax preparation, typically not a lot of looking forward. So you really need a retirement consultant that looks at that, along with all the other things we look at as well.

Tax-Free Retirement Income Options

Speaker 1

Right. Tax-free retirement income Okay, that's key. While many people focus on an investment mix, tax location is often overlooked. Retirement taxes can exceed healthcare costs, but keep in mind, even if it exceeds healthcare costs, you still have healthcare costs coming in retirement as well. That's just a couple of the areas we have to look out for. So having tax-free income stream, like from a Roth IRA, life insurance that can help preserve your retirement lifestyle, also help the longevity of your money. Make sure it lasts your lifetime and maybe even more when you pull retirement income. Excuse me, where you pull retirement income from makes all the difference in the world and can affect your tax bracket. And, as we've mentioned before, most Americans have saved for their entire careers in these tax deferred vehicles. Meaning when you pull that income for retirement, you're paying the full amount of tax at your full bracket and every time you pull from one of those, it adds to your tax bracket Well, and we work.

Speaker 2

Of course, a lot of our clients are federal workers. We're trained in that, we're certified in that, and so a lot of them have great pensions. A lot of them have military, prior military time as well. So some of these couples have four pensions plus two Social Securities, maybe some VA disability. And what they say to me is they say we're not going to have to touch our thrust savings plan, we're not going to have to touch our IRA. I'm like, yeah, you will, between the ages of 73 and 75, the government is going to force you to take money out of these accounts. So if you leave them alone to grow for 10, 15 years by not touching them, you're going to be digging deep. I've had people take required minimum distributions of $50,000, $75,000 a year, $100,000 a year, on top of whatever other money is coming in, including pensions and social security. Again, 15 years from now, what's your?

Speaker 1

tax rate. It's tremendous, whether they need it or not.

Speaker 2

It doesn't matter.

Speaker 1

At that age it R&Ds whether you need it or not. And that's the thing. No one gets by unscathed unless you are pulling from a tax-free income source. That's the only way to get out of it. But that means you have to suffer a little before in order to go the rest of your retirement in a tax-free environment.

Speaker 2

A little bit of pain now to avoid a whole lot of pain later for you and your heirs.

Speaker 1

Yeah, and without getting too much into it. There's a tax snowball that happens in your retirement income. We already mentioned. If you're pulling from an IRA or 401k or tax deferred, you're paying taxes on that. It's adding to your taxes. Your social security, the taxation of your social security is tied to how much income you bring in that year, which includes RMDs Absolutely. Which includes RMDs, your Medicare payments for Irma. That's affected by how much you make. Medicare. Part B goes up if you take too much money out Absolutely. Now, with the big beautiful bill, there are deductions that you can make at the end of the year to help with Social Security at age 65. That's affected by income as well. You can make too much money to get that deduction and there's a phase out of that as well. We discussed that in a previous episode.

Speaker 2

And the deduction goes away in 2028 as well. So it's only good for about three more years. Three to four.

Speaker 1

But yeah, the tax implication is just spiderweb to multiple things and you have to know how to navigate those, and one of the best ways is to lower your tax burden, and so we're going to talk about how to do that. One of those vehicles is the basic Roth IRA.

Speaker 2

I tell you what the Roth besides the HSA, which is the health savings account, which is limited to certain people that work. But the Roth is, I think, the most powerful tool, right next to the properly designed life insurance policy, that there is available to us, which is why I think it may not be with us forever. But what's nice is is whatever you get into the Roth now is going to be grandfathered in. There's no way they're going to come back and say, oh, all that Roth money you saved and converted, we're going to tax it too. There is no way that can happen. So let's get that money into the Roths now, because it could change. And again, we have a five-year window. I do not believe at all that the current administration, the current Congress, is going to do anything to touch the Roth. So how much can we get into it? So just a very simple explanation.

Speaker 2

The IRA and the Roth are kind of opposite ends. So we've talked about the IRA, the 401k being a. You get a tax deduction going in. It does grow tax deferred that's powerful but it comes out 100% taxable. The Roth is no tax deduction going in. Okay, you give up this year's tax deduction, but gross tax deferred again powerful comes out 100% tax free, no matter your income level, no matter your marital status, no matter your age.

Speaker 2

And what's nice is we have the unlimited capability currently to convert from an IRA into a Roth. I mean, in other words, you can convert a million bucks tomorrow if you want to. I wouldn't, I wouldn't. We'll discuss why. I always jump in with that. You beat me to it, so I would not do that. Be more strategic than that. But there is not a limit. You can be whatever age. You can be age 25. If you've got money in an IRA, you can go ahead and convert it. Now Some of our clients' kids we're doing it with them now. We're teaching them the importance of Roth money and so unlimited amount of money you can convert.

Speaker 2

We do, as we'll probably talk about more. We do look at your current tax bracket. So let's look at this year. What is your tax bracket? If you're working, what have you made? Have you gotten any big bonuses? If you're 59 and a half or older, have you taken money out of an IRA? So where are you at on an income level so that we can strategically say, okay, I'm willing to go to this bracket, maybe a little bit above it, but that's as far as I'm willing to go as a client. I'm speaking as a client so we could pay this tax. Next year. We'll look at it again and and, and this really comes down to how much the client's willing to suffer that's right this particular year.

Speaker 2

It also depends again on how close you are to 65 and going on Part B because we have to look at that too Is that going to raise your premium, you know? The other thing is nice is if somebody is planning on working to age 70, they're not going to take Part B. If they work with a company big enough that you do not have to take on Part B as long as you have group health, that's right. That's another open window. So there's so many little pieces that come together that so many advisors and people that call themselves planners have no clue about. And I'm not cutting anybody, I'm just saying there's a lot of folks that don't know this stuff, and so you know, I've been doing this 35 years, so it's amazing what you learn and how you, just as you're working with these hundreds of clients we work with you, look at what can go wrong and how to make the right decision. So one thing, one great thing for you to look at folks is our website.

Speaker 2

Masterplanretirecom is a treasure trove of information. It has checklists about retirement what should you make sure you do before you retire. It has a survivor checklist. That sounds a little weird, but you know, if you lose a parent or a loved one or a spouse, what do you do the first week? What do you do the first month? There's so many things that could be missed that will mess you up or mess up something in the estate probate process. We have all of these radio shows on there as podcasts. We have all these radio shows and episodes on there as YouTube where you can actually see us. If that's a good or a bad thing, that's up to you, but that's episodes on there as YouTube where you can actually see us. Okay, if that's a good or a bad thing, that's up to you, but that's all on there. So there's so many things. So I would visit masterplanretirecom, bookmark it.

Speaker 2

But also there's a little green button. It says schedule a meeting. Why would you want to schedule a meeting? We have a complimentary set of two meetings, where the first one is we chat, we talk about your goals, your desires, your dreams, your worries, your concerns and what could go wrong. And then we run a series of reports for you still complimentary we organize your stuff, we set up a financial statement and we show you what's going to happen in retirement with your money Good days, bad days, good things happening, bad things happening. Is your money going to last and what are some ideas about how that could be fixed?

Speaker 2

Also, we do have a phone number right those are still around right 770-980-9262. And I believe it's option two, if I remember correctly. I never call it, so don't ask me. So I'm pretty sure it's option two, but you can also listen to the little voicemail saying for this, push this number here. But anyway, that will get you a person that will talk to you and get you on our calendar as well. We do reserve spaces for folks that listen to these episodes and go to our classes. By the way, we have classes listed on the website too. So enough about that. But masterplanretirecom Absolutely.

The "Super Roth" Life Insurance Strategy

Speaker 1

So today we're talking a lot more about conversions than we are contributions. But there is an important conversation to be had about your Roth or IRA contributions, 401k contributions. That in itself is also a bit of a balancing act and it depends again entirely on the individual situation on what kind of a balance. But in general, the more money that you can get into that Roth and contribute every year, the better. But we're talking specifically now about people who are working towards retirement and, as most of Americans, who have put away in these giant tax deferred vehicles and 401ks on the traditional side. But that being said, try to put more away in the Roth if you are able to Obviously get your match at your 401k, if you can. But the more you can put into your Roth, the better.

Speaker 2

Yeah, most folks I wouldn't say most folks now realize that there is a Roth portion in their 401k at work, in their thrift savings plan, at their government job, wherever it may be. Most of them now have a Roth opportunity or choice. So I would start choosing to put more into the Roth side versus the traditional side. Be careful If you're putting in 10% into traditional. If you suddenly start putting all 10% into the Roth, your paycheck is going to go down because you're not getting a tax deduction, so kind of trickle into it. Start off with maybe 2% of the Roth and 8% into traditional, with a goal of reaching all the money that's going in into the Roth, because the match, if you're getting one, is still going into the traditional. But I tell you what 20 years from now, when you retire, you will look us up and think us okay, if you do what we're telling you to do, you can also, in addition to your 401k at work or whatever work plan you have, do your own Roth outside of that, which I prefer Once you've reached the match, I prefer a personal Roth because it can be so much more strategically and actively managed.

Speaker 2

So we're pursuing a better return with less risk scenario and you also have the world to choose from. Not just the 30 mutual funds in your 401k, not just the five funds in your Thrift Savings Plan. We've got I don't know 100 million things. We can put it in Literally when you talk about the number of stocks and bonds and mutual funds and ETFs and precious metals and rental houses and all these things you can put into a personally owned Roth. Just an opportunity there. So do as Evan said start the process of putting more of your hard-earned money into the Roth part of whatever you're investing in.

Speaker 1

So we've talked about the Roth. Now I want to talk about what we like to refer to as the super Roth, and this is a specially designed life insurance policy. It's not something you just walk in and get off of the shelf. You have to make sure you work with a financial professional who knows how to set it up correctly.

Speaker 2

And a fiduciary.

Speaker 1

And a fiduciary, absolutely. But essentially you have a death benefit like you would on any other policy Three-legged stool, as we like to say. You've got a death benefit, you've got cash value within the policy that can come out tax-free if you need tax-free income, like a Roth. And then also you can put a rider on there, a long-term care rider, which only pays out if you use it and you only pay for it if you use it. But that can start to draw on the death benefit while you're still alive if you have a long-term care need. That's why we call it the three-legged stool. But we can convert into that essentially just like we would convert money into a Roth. You. But we can convert into that essentially just like we would convert money into a Roth. You would withdraw from your IRA and you can pay a premium for five, ten years and then be done and let that thing grow.

Speaker 2

Yeah, I'm kind of a sweet spot for the ones. We've been doing this for 10, 12 years now, actually 15 years now. So instead of converting into a Roth, we basically withdraw a certain amount of money and this is all planned. And so let's say we're going to do they have a $40,000 IRA, we're going to do 5% a year, so that's 20,000. Pay the taxes on that and put that 18,000, 17,000 into this specially designed life insurance policy. And what we do, as you know, evan, we minimize the death benefit so that the cost of the death benefit are minimized, so that most of the money goes into the cash value. That's the primary. I want you to enjoy it while you're alive. So that tax-free money inside of that, that super Roth, but it still comes with a sizable death benefit. So if you pass away early, if you have a spouse, you can take care of them. If you have taxes due at passing, if you want to make sure your kids get something tax-free instead of an IRA that's taxable, right, convert it into one of these. And, like you said, the long-term care, the death benefit. It can be used for long-term care, but we also only do it for typically I think I may have said this, five years. Because when you quit paying into it after those five years the fees drop by about two-thirds. So it really grows after that. So until then it's just a little bit of growth. After those five years we're done funding it. Then from that point on we can do regular Roth conversions. But now you've got another asset class, you've got something that's got a death benefit, a long-term care benefit and a Roth benefit all tied into one.

Speaker 2

These are powerful tools. I don't know 75%, 80% of our clients have at least one. Typically they have two or three. So just another conversion vehicle. And what's nice about the life policy is they can go back and change the Roth. But if you have a life policy, that's a contract. It cannot be broken. So no matter what kind of laws so we call it legislative proof there's no way that now could they change the. You know, could you buy one in five years and laws change absolutely. But life policies have been around for 160, 175 years the way they're designed now, and so you lock in that contract. It cannot be changed. So that's another positive yeah.

Speaker 1

And I like what you said about paying that off in five, eight, maybe even ten years. Um, it's like planting a, a shade tree. Uh, as you like to say, you plant now and so that when retirement arrives or when you need it in the future, when we're in a higher tax environment, then give a nice big shade, blossoms, really blossoms.

Achieving the 0% Tax Bracket

Speaker 1

Absolutely, absolutely so. Roths are obviously simpler and easier to begin your tax-free accumulation. But those who are eligible, those who a life insurance product might work for them for accumulation can be an extremely powerful tool, and you know we mentioned the fact that it's the three-legged stool. But there are also other powerful things you can do with it. I really like the bank yourself concept and you can pull loans out of a life insurance plan that doesn't come out of the cash value. The cash value remains there. You just have a loan on the death benefit. So we do recommend paying that loan off, but if you don't, the consequences is that your death benefit when you pass away is lower. Whatever that loan amount was, but a tax-free loan, your cash value is still growing. That's a powerful tool as well.

Speaker 2

Yeah, why not borrow it from yourself? So you take, like you said, the cash value is still in there, earning whatever it's earning. These typically earn an average of around 5.5% to 7.5%. You're paying maybe 3% for the loan, so you're still clearing 4%. You're using your own money. Then I recommend making yourself. Let's say you bought a car with that tax-free money. Make car payments to yourself, because then it kind of doubles your return. Money is still in there, but now you're stacking money on top of your cash value. So that's actually when they work the best.

Speaker 2

Once every five years, go buy a new car or take a European vacation. Pay it back over the next five years. You're paying yourself back. Bank on yourself, google it. It's a great concept. I would not use some of the concepts that bank on yourself uses. I think we're more advanced than that. Now and again, be very careful. If you just walk in and say, hey, I want a life insurance policy that has a good cash value, they'll sell you one, but it needs to fit into what you're doing and it needs to be set up correctly. So be very careful with that.

Speaker 1

And, like you said, we have a lot of clients all of our clients we have a tax strategy for, but there are varying degrees of aggression or what they actually need for their retirement. We do have a handful of clients who are trying to get to that revered 0% tax bracket and all of that really takes to get there is making sure that your income is coming from tax-free resources and you have to rip the Band-Aid off or be a little bit more aggressive in the early years to get to that point. But it is possible. Your Social Security if you could bring in as much money as you want, there's no limit. As long as it's coming from a tax-free vehicle, your tax bracket can still be at zero, your Social Security would not be taxable.

Closing and Contact Information

Speaker 2

Right Now those laws again could change. But even if my social security was 100% taxable if that's the only thing taxable, I'll take that Okay. But right now, if all of your income that's taxable is social security, you are under the threshold of taxation of social security. So you're paying a zero tax rate in retirement and you know we're talking about living on a fixed income. If taxes go up, your fixed income has dropped. It's all about what ends up in your pocket. So that's why this is so critical. And then you add inflation on top of that. You could very well have a serious problem in 20 years.

Speaker 1

Absolutely Well, that's it for us today. Folks, remember to check out our website masterplanretirecom to schedule your complimentary consultation.

Speaker 2

You know time flies when you talk about paying no taxes. I tell you what Hope to see you again soon. Remember the initial consultation complimentary, but until we see each other again, plan well and prosper. Take care. This was Retirement Roadmap Radio with Mark Fricks of Master Plan Retirement Consultants. To schedule a complimentary consultation, go to masterplanretirecom or call 770-980-9262. Thanks for listening and remember plan well and prosper.

Speaker 3

All matters discussed during this show are for informational purposes only. Each individual situation may vary and the opinions expressed here may not apply to everyone. Materials presented are believed to be from reliable sources and no representations can be made as to its accuracy. All ideas and information should be discussed in detail with one of our qualified representatives prior to implementation. Advisory services offered by Master Plan Retirement Consultants. A registered investment advisor in the state of Georgia, mark Frick's and Master Plan Retirement Consultants are not affiliated with or endorsed by the Social Security Administration or any other government agency.