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Hi, I'm Ed Slott and I'm Jeff Levine.

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And we're two guys who just love
to talk about retirement and taxes.

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Look, our mission is simple to educate
you, the saver, so that you can make

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better decisions because better decisions
on the whole lead to better outcomes.

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And here's how we're going to do that.

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Each week, Jeff and I will debate
the pros and the cons of a particular

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retirement strategy or topic.

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With the goal of helping you keep
more of your hard earned money.

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At the end of each debate, there's
going to be one clear winner.

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You, a more informed saver who
can hopefully apply the merits of

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each side of the debate to your
own personal situation to decide

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what's best for you and your family.

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So here we go.

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Welcome to the Great Retirement Debate.

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Hey Ed, you like zero calorie soda?

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Yeah, I actually have a vitamin
water, zero vitamin water.

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I love that stuff.

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I like it too.

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You ever have a Paycheck
though with zero dollars in it?

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No.

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All right, so that's not so good, right?

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I can see already.

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I don't even think, can
that be called a paycheck?

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Well, that's a good question.

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A no paycheck.

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That's called an intern.

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Ooh, you're going to rub some
interns the wrong way with that one.

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All right.

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Well, I think even with
those two examples, we can

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see sometimes zero is good.

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Sometimes zero, not so good.

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So Ed kind of leads us into
today's topic of discussion.

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Zero percent, more specifically,
should people aim for a zero

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percent tax rate in retirement?

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That sounds fantastic, and I always
tell people tax free is fantastic.

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You want to have zero percent, but
if you do the planning, it may not

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be the best course of action because
you may be leaving a lot of tax

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savings on the table if you only stop
planning or so once you hit zero.

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All right, so.

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First, before we get into
good, bad, and different.

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How do we get to zero?

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Like what, what would, what are
the ways that someone can pay

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zero percent tax in retirement Ed?

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Assuming they have income, right?

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That's what we're assuming.

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Yes, we'll assume they have income.

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It would be zero if they have zero income.

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They don't have to file a return.

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It is always an easy way to not
pay taxes to have no income.

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Yes.

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Yeah.

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See, nobody ever comes
up with that strategy.

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And you heard it here on
the great retirement debate.

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That's right.

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Have no income.

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There you go.

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Done.

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Zero taxpayer.

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But you could have, you know, they
have large, uh, Standard deductions

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now, uh, certain income is exempt.

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So you could actually
end up with zero percent.

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It depends on how you invest and
what level of income you're in.

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So maybe, like, things
like municipal bonds.

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Right.

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0 percent taxes.

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Uh, you have, let's say, Roth IRAs.

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Right.

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More places you can shield.

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You could have a 0 percent tax rate.

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Uh, could be possibly, uh, through
the use of certain loans from life

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insurance or even really any asset.

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A loan is going to be received tax free.

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Even taxable assets that are covered,
say, by the standard deduction.

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Yup, yup.

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And then ultimately you can have
up to that standard deduction

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amount of income tax free per year.

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Plus, for a lot of retirees, if they
have minimal to no other income, their

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Social Security can be tax free as well.

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And even capital gains can
be, uh, tax free, zero percent

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in certain circumstances.

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That's right.

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If you're in either the 10 or the 12
percent ordinary income tax bracket,

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then your long term capital gains
rate is zero percent, which applies

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both to your, uh, capital gains
as well as to qualify dividends.

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But the question is, should you
stop there and think, this is great.

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Right, is it great?

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If you get to that point where everything
is in one of those areas, and you are

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paying a 0 percent tax rate, Is it good?

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Generally, no.

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Especially if you have a lot
more built up income, say in

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a retirement account, an IRA.

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The key to tax planning is getting
this money out at the lowest rates.

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Now, zero is the lowest rate, but there
are other low rates that you want to

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take advantage of every year you can.

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Yeah, I think you're hitting on something
there, Ed, which is, you know, zero

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percent may be good in theory, like it
sounds great, but zero percent for that

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One year might mean that you either,
either you or your heirs have to pay

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a lot more than zero and a lot more
than they otherwise would later on.

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Or you might have gotten to zero
by prepaying your taxes to a

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much, uh, too high degree, right?

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You might have prepaid in the form of Roth
conversions way too much earlier in life.

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You might have prepaid in the form of,
uh, or even things like municipal bond

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interest, you know, municipal bonds.

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Municipalities know there's a special
tax rate associated with their interest.

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And so a typical municipal bond will
pay less in interest than a comparably

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rated and duration corporate bond.

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Why?

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Well, because they know that there's
a tax benefit attached to it.

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That's what you pay.

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That's right.

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So to that extent, right, if you're
in municipal bonds, you would

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expect a lower level of interest.

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And it varies from time to time,
depending upon what yields are,

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what market conditions are.

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But oftentimes, if you're not someone
who's in the highest, or at least one

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of the highest tax brackets, you're
usually better off taking a bond where

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you have more gross interest, whereas
paying a higher yield, in other words,

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where you're getting more income taxable,
and then exactly a taxable bond, and

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then paying the income tax on it.

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0 percent is great, but sometimes
it's better to have, you know, a

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lot of of a bigger number than it
is to have all of a smaller number.

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Right.

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And it also depends how
much you have stockpiled.

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Because if you're only putting a little
in at a time, that means the rest of

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your assets are growing and growing.

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And if they're in taxable accounts,
like an IRA, for example, the taxes

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are going to, are going to explode.

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Yeah.

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I mean, so let's talk about why this
is even a question to begin with,

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because I think it's fair that there
are, there are some people who really

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believe that this is the best way to go.

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Right, where, uh, you know, either
for their own accounts or either

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even professionals out there who, um,
who support the idea that retirees

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should aim towards having a 0%, uh,
you know, tax rate in retirement.

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And the thought behind it effectively
is if you have a 0 percent retirement,

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you have some predictability
over what your taxes look like.

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It's all yours.

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Uh, you don't have to worry anymore
about, you know, what will this happen?

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What will that happen?

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There's a, there's a, a
peace of mind and it's fair.

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Like we, it.

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You know, but that's generally
you're looking at one year.

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Well, but even, even if you want, right,
if you want to get to the extreme, right?

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How do you get to 0 percent forever?

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Well, if you had, you might
have a million dollars in your

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401k, convert it all today.

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You never have to worry about
taxes on it in the future, right?

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You get down to 0%.

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So the, the.

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The challenge I have, again, with,
with that philosophy, um, you know,

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and I, I totally agree that we should
take into consideration people's,

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uh, comfort levels with things and,
you know, what makes them feel good.

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It's okay.

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Sometimes it's okay to do things that
aren't the best dollars and cents

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wise, if it makes you feel comfortable.

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But it's also fair to say that
we should be careful about doing

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things that are blatantly, uh, not
in our financial best interest.

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Long term.

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Yeah.

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Long term.

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Exactly.

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And to the beneficiaries.

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Sure.

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Yeah.

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If that's important to you.

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Yeah.

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Sometimes people say, well, I'm
going to leave my kids Roth money.

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It'll be the best thing for them.

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Well, maybe, but maybe they would have
been better off getting traditional

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IRA money plus a lot more money in
your bank account because they're

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in a lower tax rate than you.

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Right.

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Right?

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Ultimately, that 0 percent tax rate.

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The question is, how much did it
cost you to get there already, or how

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much would it cost you in the future
by not using up today's low rates?

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I guess a different way to say
this would be, a low income tax

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year is a terrible thing thing to
waste from a planning perspective.

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Tell me, uh, I've heard it before,
but I like when you say it.

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Tell me what you say to a, an accountant
who's so proud of themselves, Jeff, I

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got my clients a zero percent tax rate.

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How do you like that?

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I'm so sorry for the bad advice.

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That's really what it comes down to.

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And what do they say?

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What?

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Yeah.

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You know.

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I'm a hero.

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Unfortunately, and look, you're a CPA, Ed.

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I know.

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You're a CPA.

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It, it, it pains, I know both of
us to say that, you know, many

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of, uh, many persons of our ilk.

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So to speak are too focused on the here
and now they're looking at today's tax

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return and saying How do we keep that
number lower when really what the focus

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should be on is how to keep the total
amount of taxes That someone pays over

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their lifetime as low as possible, which
often means spreading out out income

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and paying at least a little bit, but
you know, some amount, but hopefully

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a little bit in each year rather than
nothing in some but an outsized tax

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bill in other years to get it there.

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The outsized tax bill is the big
surprise and that could be the big

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hit and it could be at a higher rate.

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It will be at a higher rate, Even if
rates don't go up, because it'll push you

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into a higher bracket for that one year.

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Because you only get one crack at
the apple, rather than use, where you

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said, you know, you spread it over
many years, that's the way to do it.

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I think we, uh, we all, we all
understand what you're saying, Ed,

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which is, you know, effectively, if
you have these opportunities, you

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want a little bit each, look, I'll
give you another analogy, Ed, right?

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You're supposed to eat 2, 000
or 2, 500 calories in a day.

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That's a standard thing, right?

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You want it all in one meal or you want
it spread out throughout the day, right?

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Right.

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It'd be very difficult to eat all that.

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You know, I thought you were gonna go.

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I get it only on Saturday night.

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You know, I'm gonna take, you know, I
don't know, 20, 000 calories on Saturday.

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There you go.

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You could take it to an extreme, right?

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Yeah, yeah, you need to spread it out.

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And, and, uh, Ultimately, right, by, um,
by, by doing that on the tax return, you

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know, we have a progressive tax system.

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That's really why this, this matters.

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Right.

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If we had a flat tax system, as is
the case in some other areas of the

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world, and even some states have a flat
tax, then it wouldn't matter as much

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because effectively, whether you took
the income today or you took it in the

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future, you'd be paying the same rate.

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But in our system, if you have a million
dollars of income today, you'll pay

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more than if you had 100, 000 of income.

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Each year over 10 years.

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Yes.

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I always tell people the same exact thing.

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Exactly.

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That you'll always pay less tax
the more years you spread it out.

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All right.

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So conceptually, if we agree that going
to a 0 percent tax rate is is is not the

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best and or is not the aim that people
should be, you know, not not what people

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should be aiming for in retirement.

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And we're saying that you
should try and spread it out.

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How do you like what?

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What's one or two things that
listeners should keep in mind

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as they're trying to spread out.

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Like how do you actually
do that in, in, in reality?

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Well, you have to do a
projection and this is best done.

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For example, with Roth conversions,
this is best done probably November,

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December, after you have a good
idea of what your income is.

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The reason I said with Roth
conversions, because no longer

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can you undo a Roth conversion.

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So I have people, I, I tell people to
think about it, but don't, don't, Pull

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the trigger on a Roth conversion until
maybe first week in December when you,

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when you know better what it's going
to cost after you get your capital

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gain distributions and all of that,
maybe bonuses, things that come in.

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So you're better off, uh,
doing it at that point.

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And then you have a better idea what
that conversion is going to cost by

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knowing how much of each lower graduated
brackets, that's, uh, what you talked

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about, the per, the per Progressive
tax system, their graduated rates, you

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get a certain amount of each bracket.

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You, I think you said it earlier,
you never want to waste a bracket.

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I agree with that because
you don't get it back again.

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If you only used, I don't know, 80
percent or just a part, forget about

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the percentage, a part of the 22
percent bracket or the 24 percent

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bracket, you left the rest on the table.

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You never get credit for
that in a future year.

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You want to start using
those brackets each year.

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So the more income you can throw
in to max out whatever bracket you

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feel comfortable with, I think given
these rates, uh, 12 percent, 22, 24

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percent, you could have hundreds of
thousands of income, taxable income,

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and still be in a 24 percent bracket.

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Yeah, the way I like to think about it and
explain it, and it's, This is much more

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at a 10, 000 foot view at a micro level.

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You may have to manage a little bit
more specifically, but you basically

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want to look at your entire life, right?

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And you want your income to be as
flat as possible over all the years.

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Like if you want to plot
this on a chart, right?

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With, with ups and downs, well, some
years your, your income is higher

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cause you've got a better year in
business or some years are higher

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because interest rates are higher and
you've got more interest from the bank

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or some years are, are higher because
you had, uh, You know, um, some bonus

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that wanna spike and operations.

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Yeah.

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Right?

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Sure.

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But you want to take the other savings
that you have and sort of mix it into

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those years and, and spot low points,
if you will, and fill it in so that

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there are no more low points, so that
your income looks as flat as possible.

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over your entire lifetime.

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Now, obviously, you've got to work at
inflation and things like that, but

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that's, that's generally the idea.

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You want your income to be smooth.

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You don't want large peaks some years
and large valleys in the other, because

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when you see that, if you look at a, you
know, if you were to plot your income

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over the course of your lifetime, Any
large value you have and large peak you

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have is probably an opportunity where
had you equalized that income more over

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those two years or series of years, you
would have paid cumulatively less tax.

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And again, this is an oversimplification
tax rates change over time.

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There are certain things like
Medicare Part B premiums, which

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only matter after a certain point.

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And only, you know, if you go over
1, Then you're over the cliff.

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So if you've gone over 1, you
might as well go over by 50, 000

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because it can't hurt you anymore.

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But as a general statement, smoothing
out income over lifetime helps

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to create that lowest lifetime
tax bill, which has tax planners.

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We value more than anything else, right?

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00:13:59,185 --> 00:14:04,724
So back to your 0%, you might get
a 0%, but at some point it's going

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to be the top rate, 37 percent or
whatever the future top rate is.

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And that will wipe away all
the prior year's savings.

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Yeah.

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So ultimately I think we agree at 0
percent sounds nice, but the reality

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is for most individuals who are healthy
earners, who accumulate significant

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amount of assets, 0 percent is not
something you should strive for.

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00:14:26,289 --> 00:14:29,120
Instead, focus on that
lowest lifetime tax bill.

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00:14:29,289 --> 00:14:33,249
Use up low rates while you have them,
and take advantage of today's low

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tax rate environment while you can.

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00:14:34,979 --> 00:14:35,509
That's right.

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And inflation, because that
expands the brackets each year.

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Absolutely.

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00:14:40,069 --> 00:14:40,479
All right.

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That's all the time we have for today.

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00:14:41,890 --> 00:14:43,409
Ed, great discussion as always.

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We'll see you next time on
the Great Retirement Debate.

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Jeffrey Levi is Chief Planning Officer
for Buckingham Wealth Partners.

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00:14:49,574 --> 00:14:52,784
This podcast is for informational and
educational purposes only, and should

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00:14:52,784 --> 00:14:56,055
not be construed as specific investment
accounting, legal, or tax advice.

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00:14:56,114 --> 00:14:58,994
Certain information mentioned may
be based on third party information

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00:14:58,994 --> 00:15:01,874
which may become outdated or
otherwise superseded without notice.

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00:15:01,904 --> 00:15:05,144
Third party information is deemed
to be reliable, but its accuracy and

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00:15:05,144 --> 00:15:06,555
completeness cannot be guaranteed.

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00:15:06,704 --> 00:15:09,704
The topic discussed in corresponding
arguments are those of the speakers

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00:15:09,884 --> 00:15:12,675
and may not accurately reflect
those of Buckingham Wealth partners.