Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just love to talk about retirement and taxes.
Look, our mission is simple to educate you, the saver, so that you can make
better decisions because better decisions on the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debate the pros and the cons of a particular
retirement strategy or topic.
With the goal of helping you keep more of your hard earned money.
At the end of each debate There's going to be one clear winner You a more
informed saver who can hopefully apply the merits of each side of the debate
to your own personal situation To decide what's best for you and your family.
So here we go.
Welcome to the Great Retirement Debate All right, Ed welcome back.
We're back for season three of the great retirement debate That's right.
So what are we kicking it off with?
We've got an interesting topic today.
One for discussion.
We're going to talk about what's the single biggest mistake retirees
make besides retiring besides that.
So you know what?
That is a fair point.
Like maybe retiring is indeed a mistake for some people, but all
right, let's, let's, let's get out.
Let's get right to it.
Ed, we got.
You know, Season 3, let's get right into the meat.
What's, in your opinion, the single biggest mistake that retirees make?
Well, I had three, but if I had to pick one, paying too much in taxes.
I'm shocked.
Shocked, I tell you.
Look at the, look at the sense of shock on my face.
All right.
So, paying too much in taxes.
What are the other two, out of curiosity?
Well, uh, beneficiary forms and rollover mistakes.
Okay.
All right.
What would you have picked?
Uh, overconfidence.
Overconfidence.
I'll unwrap that later.
I'm gonna leave, I'm gonna leave our listeners on the edge of their seat
for a little bit while we unpack taxes.
So taxes, you say, are the single biggest mistake overpaying taxes in retirement.
Give us some more.
Because we're trained.
With RMDs, they keep pushing the age back.
Now it's 73.
Just keep putting it off and putting it off.
But, the account doesn't stop growing, all of a sudden you've, you're putting
it off, you're putting it off, and the account is growing, and I'm
worried about future higher taxes if Congress ever does anything about it.
I've been saying that for years, and they've never done anything about it.
Well, they've helped grow it.
create more of a problem by lowering taxes even more right but i don't think taxes
will ever be lower so the biggest mistake is not using up all the brackets leaving
money on the table in the 12 22 24 low percent brackets because they just want
to take the bare minimum when they're At RMD age, say at age 73, and not doing
anything before that, even though they may be retired, because they don't have to.
Yeah, I certainly agree that Congress has, has given everybody what they call a
break, but it's not really a break, right?
If people push off those RMDs, it could create a larger problem.
You know, your comments there reminded me of two things I'm fond of saying.
One is, Your goal shouldn't be to create the lowest tax bill in any one year,
but to create the lowest lifetime tax.
That's the winner of the game, right?
And actually with retirement accounts, sometimes we have to go
beyond the lowest lifetime tax bill.
Sometimes it's the lowest multi generational tax bill because that tax
liability on like a brokerage account doesn't go away when someone dies, right?
It goes to the beneficiary.
The other thing it reminded me of is, uh, when we're looking at
individuals, right, and they're so happy they paid no tax, right?
Like, oh, I paid no taxes here.
Yeah, it means you didn't use any of the brackets.
That's right.
When I, when I meet someone not, and look, there are a lot of people in this country
who are, who are working, who, uh, because of the way our tax system works, they,
they don't earn enough to pay any tax.
And that's fine.
Like that's one set of individuals, but there are a lot of other people with,
uh, Substantial wealth who still look to try and pay as little as possible.
And when I meet one of those individuals who looks to me and says,
Hey, I paid almost no tax last year.
You know, they're, they're thinking like, Oh, that's a CPA.
He's gonna be so proud of me.
I look and say, I'm so sorry.
You got some bad advice.
Yeah, right.
Why would you do that?
Uh, you're right.
Like, it's all about timing, right?
And we should sometimes bringing forward some income paying
sooner rather than later.
Means helping to create that lowest lifetime tax bill.
Yeah, they leave so much money on the table overall Like you said not only
during lifetime But then you have the ten years to beneficiaries who may be in
their own highest earning years and the last thing they want is a big tax bill
Given they're getting an inheritance.
No one's crying the blues for them, right?
Like it's a, I always think about that.
The beneficiary, I call it like crisis planning.
Cause the beneficiaries got the money.
Like, what do you do now?
But I always have to remind myself, like if you run into the office going,
I just inherited a million dollars.
What do I, it's like, it's not the world's biggest crisis, but you're right.
Taxes are a big play.
What are some other areas with beyond, let's say just the
retirement account distributions.
What are some other areas where you typically find.
You know, retirees overpaying in taxes.
Well, they don't do Roth conversions ahead of time.
When they could have, and you can still do it after RMD age,
required minimum distributions at age 73, but they cost more then
because you can't convert the RMD.
So, they miss out on those great years in their 60s where they should be sort
of dollar cost averaging or whatever you want to call it into a Roth a little at
a time to use the brackets every year.
Yeah, and of course, any of those conversions done at 62
or earlier would also avoid any of those Medicare surcharges.
A lot of people, once they reach 65, they go on Medicare, and Medicare, because
our system is very complicated, and people like you and I need jobs, Ed.
It looks back two years at your income.
So if you are converting when you're 63, that can actually impact your
Medicare premiums when you're 65, which a lot of people don't consider.
So effectively, converting before 63 gets you out of that, no
matter how high your income is.
Right, but people don't look at that.
You know, the Medicare surcharge item is one of the really tricky
planning items for two reasons.
The Medicare charges don't show up on your tax return, off the tax return,
and the other item, very hard to plan with the two year look back.
So what are some other areas behind, let's, let's move away from
retirement accounts for a second.
Anything else, because, you know, I know you're not sitting down doing returns for
a lot of people anymore, but you spent decades, you know, preparing returns for
folks, most of them in retirement, or at least many of them in retirement, What
were some other mistakes that you saw that typically led individuals in retirement
to pay more tax than they should?
Not keeping track of basis.
What I mean, non deductible contributions for years.
Some people made non deductible contributions, and even before the law
changed many years ago, had rollovers of after tax funds from company plans.
They had What we call basis already tax money that they're not filing form 8606.
That's a form you file to take credit for money you already paid tax on.
So if you're just paying full tax on your distribution, in essence,
for part of that, you're paying tax twice on the same money.
Absolutely.
You know, and I look at it, I think.
Another area, if we shift away from retirement accounts for a second,
a lot of people find themselves in that 0 percent long term capital
gains bracket when they retire.
Because it takes a lot of income now to, to, to be out of that, right?
If we look at, let's say, a married couple and they're in
retirement, they're probably over 65.
So not only are they getting the standard deduction, they're getting
the quote unquote additional standard deductions, which even today means
they have well over a thirty-thousand dollar standard deduction.
The 0 percent long term capital gains bracket is up to the 12 percent
ordinary income tax rate, which today is about 95, 000 for married couples.
So you put those two things together.
What you find is a married couple, even if they have $125,000 of income
in retirement, if they just take the standard deduction, they're still
right at the top of that 0 percent long term capital gains bracket.
And most retirees don't have $125,000 of income a year.
Which means they're below that 0 percent threshold.
For people listening, what I'm trying to get at here is if you're in a
0 percent long term capital gains bracket, you can sell your appreciated
stocks and your brokerage account.
Uh, and you might say, but Jeff, they've gone up in value.
I like them that they've appreciated.
That's why I like them so much.
Fine.
Then sell them and then.
Wait, you know a day or so and buy them right back If you sell at the zero
percent long term capital gains bracket, you're paying zero percent All right.
I want to get back to the over over confidence because you left them hanging.
Okay, but before that Just a warning on that 0 percent capital gains rate.
Many people see it on the tax tables but don't get it because our
tax system works in a funny way.
Ordinary income gets taxed first and eats into that.
That's right.
So many people look at that and say, How come I didn't get the 0%?
Yeah, so if you're thinking about, Hey, does this apply to me?
What you really want to do is take all of your regular income, the amount of your
social security that's taxable, your IRA distributions, your interest and whatnot.
And then on top of that, Uh, you want to layer in how much in, in
long term capital gains and, uh, qualified dividends do I have?
And if total, those dollars are, for a married couple this year in 2024,
below about $125,000, you can look specifically at your own standard
deduction, et cetera, if you're over 65 or under 65, but about $125,000, if the
total amount of that income is below, then those long term capital gains
and qualified dividends will be at 0%.
And worst case scenario, 15%.
Not the worst thing in the world.
Not the worst thing in the world, indeed.
Alright, overconfidence, um, hanging on.
I'm confident that I'm going to get there, but you did mention two other things.
So I want to make sure that we don't leave listeners hanging on that.
You mentioned beneficiary forms.
I'll do it quickly and we'll cover it on another episode.
People don't check beneficiary forms.
All right, so do that.
Worst mistakes ever.
That'll be a separate, separate one.
All right.
Wrong people get the money.
Uh, I'll tease you for a future episode.
We just had a case where an ex girlfriend got over a million dollars
and he broke up with her in 1989.
All right?
I'll leave you hanging on that one.
And rollover mistakes.
People don't know how to move money from one IRA to another and
a lot of times it's the fault of the advisor or the institution
where they just get bad advice.
Oh, overconfidence.
Alright, overconfidence.
So, to me, overconfidence is probably the single biggest risk
retirees face because there's so much you can be overconfident about.
You can be overconfident about, you know, When you're going to retire, if we look at
the research, people think they are often going to work longer than they will, so
they factor in, you know, too many years of earnings, and then they get to that
point, and they go, I guess I can't work anymore, or we're in another scenario
where they're overconfident that the market will do really, really well, right?
They say, Oh, my goodness, the market, it's just going to continue going this
good forever, or they're overconfident that the market will not do well.
Right.
And they say it's just never gonna be the same.
It's not like it was when I was a kid.
There's so many things.
The reality is None of us have any real clue what's going to happen in the future.
So, for me, retirees who continuously monitor their plans, retirees who
are open to the fact that they don't control everything, they can control
their reactions to things, and they can, uh, Uh, they can continuously monitor
things like interest rates and inflation and their spending and their health
and make constant course corrections.
Those are the individuals, I think, who do best of all, but anytime
you're overconfident in any area, it seems to always come back
and smack you in the face later.
Well, except for Roth IRAs.
I'm overconfident.
That's the best single account to own.
And with that
With that, you, so, all right, well, With that, I was trying to end the program.
Oh, well, all right, well, all right, I guess we're at
the end of our program then.
I was, uh, I was not as confident as you that we had reached
the end of our program today.
So, thank you all for joining us for yet another episode of
The Great Retirement Debate.
Ed, Always fun.
Okay.
Uh, I look forward to having our next discussion soon.
Yep.
Jeffrey Levine is Chief Planning Officer for Buckingham Wealth Partners.
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not be construed as specific investment, accounting, legal, or tax advice.
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which may become outdated or otherwise superseded without notice.
Third party information is deemed to be reliable but its accuracy and
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and may not accurately reflect those of Buckingham Wealth partners.