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.
Hey Ed, you like zero calorie soda?
Yeah, I actually have a vitamin water, zero vitamin water.
I love that stuff.
I like it too.
You ever have a Paycheck though with zero dollars in it?
No.
All right, so that's not so good, right?
I can see already.
I don't even think, can that be called a paycheck?
Well, that's a good question.
A no paycheck.
That's called an intern.
Ooh, you're going to rub some interns the wrong way with that one.
All right.
Well, I think even with those two examples, we can
see sometimes zero is good.
Sometimes zero, not so good.
So Ed kind of leads us into today's topic of discussion.
Zero percent, more specifically, should people aim for a zero
percent tax rate in retirement?
That sounds fantastic, and I always tell people tax free is fantastic.
You want to have zero percent, but if you do the planning, it may not
be the best course of action because you may be leaving a lot of tax
savings on the table if you only stop planning or so once you hit zero.
All right, so.
First, before we get into good, bad, and different.
How do we get to zero?
Like what, what would, what are the ways that someone can pay
zero percent tax in retirement Ed?
Assuming they have income, right?
That's what we're assuming.
Yes, we'll assume they have income.
It would be zero if they have zero income.
They don't have to file a return.
It is always an easy way to not pay taxes to have no income.
Yes.
Yeah.
See, nobody ever comes up with that strategy.
And you heard it here on the great retirement debate.
That's right.
Have no income.
There you go.
Done.
Zero taxpayer.
But you could have, you know, they have large, uh, Standard deductions
now, uh, certain income is exempt.
So you could actually end up with zero percent.
It depends on how you invest and what level of income you're in.
So maybe, like, things like municipal bonds.
Right.
0 percent taxes.
Uh, you have, let's say, Roth IRAs.
Right.
More places you can shield.
You could have a 0 percent tax rate.
Uh, could be possibly, uh, through the use of certain loans from life
insurance or even really any asset.
A loan is going to be received tax free.
Even taxable assets that are covered, say, by the standard deduction.
Yup, yup.
And then ultimately you can have up to that standard deduction
amount of income tax free per year.
Plus, for a lot of retirees, if they have minimal to no other income, their
Social Security can be tax free as well.
And even capital gains can be, uh, tax free, zero percent
in certain circumstances.
That's right.
If you're in either the 10 or the 12 percent ordinary income tax bracket,
then your long term capital gains rate is zero percent, which applies
both to your, uh, capital gains as well as to qualify dividends.
But the question is, should you stop there and think, this is great.
Right, is it great?
If you get to that point where everything is in one of those areas, and you are
paying a 0 percent tax rate, Is it good?
Generally, no.
Especially if you have a lot more built up income, say in
a retirement account, an IRA.
The key to tax planning is getting this money out at the lowest rates.
Now, zero is the lowest rate, but there are other low rates that you want to
take advantage of every year you can.
Yeah, I think you're hitting on something there, Ed, which is, you know, zero
percent may be good in theory, like it sounds great, but zero percent for that
One year might mean that you either, either you or your heirs have to pay
a lot more than zero and a lot more than they otherwise would later on.
Or you might have gotten to zero by prepaying your taxes to a
much, uh, too high degree, right?
You might have prepaid in the form of Roth conversions way too much earlier in life.
You might have prepaid in the form of, uh, or even things like municipal bond
interest, you know, municipal bonds.
Municipalities know there's a special tax rate associated with their interest.
And so a typical municipal bond will pay less in interest than a comparably
rated and duration corporate bond.
Why?
Well, because they know that there's a tax benefit attached to it.
That's what you pay.
That's right.
So to that extent, right, if you're in municipal bonds, you would
expect a lower level of interest.
And it varies from time to time, depending upon what yields are,
what market conditions are.
But oftentimes, if you're not someone who's in the highest, or at least one
of the highest tax brackets, you're usually better off taking a bond where
you have more gross interest, whereas paying a higher yield, in other words,
where you're getting more income taxable, and then exactly a taxable bond, and
then paying the income tax on it.
0 percent is great, but sometimes it's better to have, you know, a
lot of of a bigger number than it is to have all of a smaller number.
Right.
And it also depends how much you have stockpiled.
Because if you're only putting a little in at a time, that means the rest of
your assets are growing and growing.
And if they're in taxable accounts, like an IRA, for example, the taxes
are going to, are going to explode.
Yeah.
I mean, so let's talk about why this is even a question to begin with,
because I think it's fair that there are, there are some people who really
believe that this is the best way to go.
Right, where, uh, you know, either for their own accounts or either
even professionals out there who, um, who support the idea that retirees
should aim towards having a 0%, uh, you know, tax rate in retirement.
And the thought behind it effectively is if you have a 0 percent retirement,
you have some predictability over what your taxes look like.
It's all yours.
Uh, you don't have to worry anymore about, you know, what will this happen?
What will that happen?
There's a, there's a, a peace of mind and it's fair.
Like we, it.
You know, but that's generally you're looking at one year.
Well, but even, even if you want, right, if you want to get to the extreme, right?
How do you get to 0 percent forever?
Well, if you had, you might have a million dollars in your
401k, convert it all today.
You never have to worry about taxes on it in the future, right?
You get down to 0%.
So the, the.
The challenge I have, again, with, with that philosophy, um, you know,
and I, I totally agree that we should take into consideration people's,
uh, comfort levels with things and, you know, what makes them feel good.
It's okay.
Sometimes it's okay to do things that aren't the best dollars and cents
wise, if it makes you feel comfortable.
But it's also fair to say that we should be careful about doing
things that are blatantly, uh, not in our financial best interest.
Long term.
Yeah.
Long term.
Exactly.
And to the beneficiaries.
Sure.
Yeah.
If that's important to you.
Yeah.
Sometimes people say, well, I'm going to leave my kids Roth money.
It'll be the best thing for them.
Well, maybe, but maybe they would have been better off getting traditional
IRA money plus a lot more money in your bank account because they're
in a lower tax rate than you.
Right.
Right?
Ultimately, that 0 percent tax rate.
The question is, how much did it cost you to get there already, or how
much would it cost you in the future by not using up today's low rates?
I guess a different way to say this would be, a low income tax
year is a terrible thing thing to waste from a planning perspective.
Tell me, uh, I've heard it before, but I like when you say it.
Tell me what you say to a, an accountant who's so proud of themselves, Jeff, I
got my clients a zero percent tax rate.
How do you like that?
I'm so sorry for the bad advice.
That's really what it comes down to.
And what do they say?
What?
Yeah.
You know.
I'm a hero.
Unfortunately, and look, you're a CPA, Ed.
I know.
You're a CPA.
It, it, it pains, I know both of us to say that, you know, many
of, uh, many persons of our ilk.
So to speak are too focused on the here and now they're looking at today's tax
return and saying How do we keep that number lower when really what the focus
should be on is how to keep the total amount of taxes That someone pays over
their lifetime as low as possible, which often means spreading out out income
and paying at least a little bit, but you know, some amount, but hopefully
a little bit in each year rather than nothing in some but an outsized tax
bill in other years to get it there.
The outsized tax bill is the big surprise and that could be the big
hit and it could be at a higher rate.
It will be at a higher rate, Even if rates don't go up, because it'll push you
into a higher bracket for that one year.
Because you only get one crack at the apple, rather than use, where you
said, you know, you spread it over many years, that's the way to do it.
I think we, uh, we all, we all understand what you're saying, Ed,
which is, you know, effectively, if you have these opportunities, you
want a little bit each, look, I'll give you another analogy, Ed, right?
You're supposed to eat 2, 000 or 2, 500 calories in a day.
That's a standard thing, right?
You want it all in one meal or you want it spread out throughout the day, right?
Right.
It'd be very difficult to eat all that.
You know, I thought you were gonna go.
I get it only on Saturday night.
You know, I'm gonna take, you know, I don't know, 20, 000 calories on Saturday.
There you go.
You could take it to an extreme, right?
Yeah, yeah, you need to spread it out.
And, and, uh, Ultimately, right, by, um, by, by doing that on the tax return, you
know, we have a progressive tax system.
That's really why this, this matters.
Right.
If we had a flat tax system, as is the case in some other areas of the
world, and even some states have a flat tax, then it wouldn't matter as much
because effectively, whether you took the income today or you took it in the
future, you'd be paying the same rate.
But in our system, if you have a million dollars of income today, you'll pay
more than if you had 100, 000 of income.
Each year over 10 years.
Yes.
I always tell people the same exact thing.
Exactly.
That you'll always pay less tax the more years you spread it out.
All right.
So conceptually, if we agree that going to a 0 percent tax rate is is is not the
best and or is not the aim that people should be, you know, not not what people
should be aiming for in retirement.
And we're saying that you should try and spread it out.
How do you like what?
What's one or two things that listeners should keep in mind
as they're trying to spread out.
Like how do you actually do that in, in, in reality?
Well, you have to do a projection and this is best done.
For example, with Roth conversions, this is best done probably November,
December, after you have a good idea of what your income is.
The reason I said with Roth conversions, because no longer
can you undo a Roth conversion.
So I have people, I, I tell people to think about it, but don't, don't, Pull
the trigger on a Roth conversion until maybe first week in December when you,
when you know better what it's going to cost after you get your capital
gain distributions and all of that, maybe bonuses, things that come in.
So you're better off, uh, doing it at that point.
And then you have a better idea what that conversion is going to cost by
knowing how much of each lower graduated brackets, that's, uh, what you talked
about, the per, the per Progressive tax system, their graduated rates, you
get a certain amount of each bracket.
You, I think you said it earlier, you never want to waste a bracket.
I agree with that because you don't get it back again.
If you only used, I don't know, 80 percent or just a part, forget about
the percentage, a part of the 22 percent bracket or the 24 percent
bracket, you left the rest on the table.
You never get credit for that in a future year.
You want to start using those brackets each year.
So the more income you can throw in to max out whatever bracket you
feel comfortable with, I think given these rates, uh, 12 percent, 22, 24
percent, you could have hundreds of thousands of income, taxable income,
and still be in a 24 percent bracket.
Yeah, the way I like to think about it and explain it, and it's, This is much more
at a 10, 000 foot view at a micro level.
You may have to manage a little bit more specifically, but you basically
want to look at your entire life, right?
And you want your income to be as flat as possible over all the years.
Like if you want to plot this on a chart, right?
With, with ups and downs, well, some years your, your income is higher
cause you've got a better year in business or some years are higher
because interest rates are higher and you've got more interest from the bank
or some years are, are higher because you had, uh, You know, um, some bonus
that wanna spike and operations.
Yeah.
Right?
Sure.
But you want to take the other savings that you have and sort of mix it into
those years and, and spot low points, if you will, and fill it in so that
there are no more low points, so that your income looks as flat as possible.
over your entire lifetime.
Now, obviously, you've got to work at inflation and things like that, but
that's, that's generally the idea.
You want your income to be smooth.
You don't want large peaks some years and large valleys in the other, because
when you see that, if you look at a, you know, if you were to plot your income
over the course of your lifetime, Any large value you have and large peak you
have is probably an opportunity where had you equalized that income more over
those two years or series of years, you would have paid cumulatively less tax.
And again, this is an oversimplification tax rates change over time.
There are certain things like Medicare Part B premiums, which
only matter after a certain point.
And only, you know, if you go over 1, Then you're over the cliff.
So if you've gone over 1, you might as well go over by 50, 000
because it can't hurt you anymore.
But as a general statement, smoothing out income over lifetime helps
to create that lowest lifetime tax bill, which has tax planners.
We value more than anything else, right?
So back to your 0%, you might get a 0%, but at some point it's going
to be the top rate, 37 percent or whatever the future top rate is.
And that will wipe away all the prior year's savings.
Yeah.
So ultimately I think we agree at 0 percent sounds nice, but the reality
is for most individuals who are healthy earners, who accumulate significant
amount of assets, 0 percent is not something you should strive for.
Instead, focus on that lowest lifetime tax bill.
Use up low rates while you have them, and take advantage of today's low
tax rate environment while you can.
That's right.
And inflation, because that expands the brackets each year.
Absolutely.
All right.
That's all the time we have for today.
Ed, great discussion as always.
We'll see you next time on the Great Retirement Debate.
Jeffrey Levi is Chief Planning Officer for Buckingham Wealth Partners.
This podcast is for informational and educational purposes only, and should
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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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