Think you’ll pay less in taxes when you retire? Think again. Discover why tax diversification might be the secret to keeping more of your money in retirement—and why most people get it wrong.
In this episode, April Schoen unravels the surprisingly complex world of taxes in retirement and reveals actionable strategies for tax-efficient retirement planning.
You’ll discover…
A common retirement tax mistake that could cost you thousands
Why your retirement income might be higher—and more taxable—than you expect
Three critical types of investment accounts and how they each impact your future tax bill
The power of Roth IRAs and cash value life insurance as overlooked tax planning tools
What one simple analogy can teach you about planning for a tax-smart retirement
Mentioned in this episode:
Contact the office: 850-562-3000
Transcript:
April Schoen: Hi and welcome. My name is April Schoen, and I'm glad you're here today, as we're going to talk about a super fun topic, taxes. Now, before we get started, I wanted to turn my camera on for a minute, just so you could see that I'm a real person. In today's day and age, when we have AI everything, I wanted you to know that I'm not some robot stuck behind a camera just reading off tax codes to you.
And in a little bit, I'm gonna go off camera so that you can focus on the material and don't have to worry about, you know, what's my facial expression saying as I'm going through, talking about tax planning and trying to explain taxes in plain English, because that's what I'm going to do today. And today, we're going to be diving into tax diversification in retirement. What is that? Why does it matter? And how do you achieve that in your own financial plan?
There's a lot of noise out there right now about taxes, about retirement planning, and I want to make this simple for you. I want to make it actionable, so you're going to know exactly what applies to you and how to start using that in your own plan. And I want to talk for a minute about why is this so important? Why is tax planning so important? And I want to use an analogy.
So let's say that you wanted to buy a house in three years, but in the next three years, you don't think about it, you don't look into it, you don't care what your credit looks like. You don't see how much you need for a down payment or figure out how to finance it. You don't look at any of it. Well, guess what? In three years from now, you're not buying that house. Because you're not going to be ready to do that. There are things that you needed to do along the way to make it easier for you.
So, imagine the other side of that is if you are proactive about it, and what a difference it would make. What if, in the next three years, you started meeting with realtors and mortgage brokers and you started just gathering information, and so you started looking into, hey, what sort of neighborhood do I want to live in? What sort of house do I want to live in? What's the price range for those houses?
What's gonna be the best way for me to finance it? If you did that, if we were proactive about that in our own financial situations, think about all the difference that that would make for you. Unfortunately, when it comes to taxes, we see people making decisions in a vacuum, without thinking about everything, without taking everything into account. We're so guilty, I am too, we're so guilty of letting the tax tail wag the economic dog. I'm gonna say that again.
We are so guilty of letting the tax tail wag the economic dog. Meaning we're so focused on reducing taxes today that we don't take into account how much we're going to have to pay in taxes later. And we actually end up doing some reverse tax planning, which is not what you want. Reverse tax planning says, I defer taxes today at a lower rate to only pay higher taxes later. Nobody wants to do that.
That's not what they say come January 1 of 2025, you would like to do this year is I'd like to pay taxes today at a lower rate, just so in a few years I got to pay more. That's not what we want when we think about tax planning. But we can be guilty of that, of being so focused on the here and now and not thinking about how the taxes are going to impact us when we get to retirement. I work with a lot of people who are retiring from the state of Florida, and taxes can be a big issue.
Because think about it for a second. If you retire from the state of Florida and you have your pension. Your pension is fully taxable. Social Security, most of it's going to be taxable. If you've got income coming in from deferred comp or from DROP, all of that's going to be taxable. So you're already going to have a lot of pre-tax retirement income coming in that can push you into those higher brackets. Not to mention when you hit 73 and you have to start taking your required minimum distributions.
So you have to start taking money out of those retirement accounts, whether you want to or not. And so that is why this is so important that we start talking about this today. So I just want to say I'm glad you're here. I commend you for taking some time out of your day to learn about taxes. I know it's not the most fun thing ever. I'll tell you, I had a lot of coffee getting ready for this, so I'm going to try to make it as exciting as possible as we can today.
So I'm gonna go ahead and share my screen and then, yeah, let's, let's roll up our sleeves and get to work. Perfect, perfect. So, yeah, as I mentioned earlier, what we're really going to focus in on today is tax diversification in retirement. I really think about that as you know, how do we make your retirement income better? How do we learn how to pay less in taxes so that our income feels like more? Even if we have the same income or we're paying less in taxes, that's going to be more money in our pocket to spend.
And that's really what we want to go through today. And I got a couple of questions for you as we get into that. The first thing is, will your income in retirement be higher or lower than it is today? I'm gonna say that again. Will your income in retirement be higher or lower than it is today? So a lot of people that I meet in my practice will say, oh, I'm gonna be in a lower tax bracket when I'm in retirement, because that's what we're told. That's what we've been taught.
But I will tell you that I don't find that to be true. That for a lot of people, that's not the case. For most of my clients, their taxes, their income and their taxes is the same or higher in retirement. Again, think about what I said a few minutes ago. If you've got a pension, you've got Social Security, you're taking income out of deferred comp, out of DROP, out of that 401k, this all starts adding up to your taxable income and can push you into higher brackets.
So, the first thing when we think about having some tax diversification in retirement, the first question we have to answer is, will your income in retirement be higher or lower than it is today? That is actually going to help you when it comes to tax planning. That's going to help you know what type of accounts should you be putting your money into today? And if you're not sure, if I ask that question, like, if I don't know, then I will tell you that's an area that we can help you in.
We can help you look at your own financial situation to see, hey, what if the tax landscape looks like today, and what is it going to look like for me in retirement? Another question, will tax rates be higher or lower than they are today? Will tax rates be higher or lower than they are today? I don't know. You know, this is when I wish I had my crystal ball, and I could tell you exactly what was going to happen. That would make my job a lot easier if I had that crystal ball.
What I can tell you is that we are in historically low tax rates today. If we go back and look at tax history, we are in historically low tax rates today. And if you've been following what's happening with the national debt, it's hard to imagine that tax rates would be lower. It's hard to imagine that they're going to be lower than what they are today. I would venture to say that they're going to be where they are for, you know, we assume they're going to be kind of where they are for the foreseeable future, and then definitely can see those increasing.
But that's the thing that we don't know. And that's where this diversification comes in, because we have to be able to adapt. If tax rates zoom back up to 50%, how will you handle that? Are you prepared to handle tax rates zooming back up to 50%? Most people aren't. What if tax rates do go down? So we gotta be flexible. We've gotta be able to adapt as those tax rates change. Here's what we're gonna go through and talk about today.
Different types of investments and how they're taxed. I'm going to spend a good bit of time on this, because there's a lot of confusion on this part, different types of investment accounts that you have available to you, and how they're taxed. Both while you're saving into them and when you go to take money out in retirement. We're going to talk about the impact of taxes. Now, we all know the impact of taxes.
I met with a client yesterday, and she's retired, and she's 73, so she's having to pull money out of her IRAs. And she's like, oof, how is this going to impact my taxes? I said, yeah, this is all going to be taxable income to you at your highest marginal rate. And if you don't know about something called IRMA. This is when your income can impact your Medicare premiums. And she's going to be in that situation.
She was pretty borderline before she had to start taking money out for RMDs, and now those RMDs are pushing her over that limit, and so she's going to have to start paying more for Medicare. So you might want to jot that down, if that's something that you're not familiar with, is IRMA. Income Related Adjusted Monthly Amount, something along those lines. And you can look at, there are some charts, so you can see what your income bracket falls into, and if you'll be impacted by those IRMA brackets.
And then we're going to talk about how do we actually get this tax diversification? A lot of people we meet with have all of their savings in retirement accounts. It's not that that's a bad thing. There's nothing wrong with the 401k. There's nothing wrong with an IRA or deferred comp or a 403b, but we just have to understand how that's going to impact us tax-wise. Okay? And we're also gonna look at a short case study.
So we're going to look at how do we have the same income, but it spends, like more, because we're going to have higher after-tax income. And we're going to talk about how this is going to give you flexibility, so you can have more control over when and how to take income in retirement. Also having tax diversification, it's not just about income for you, although that's very important. That's really going to be the basis of what we're talking about today. But having this tax diversification actually allows you to have more tax-efficient options for your beneficiaries. I talk about this a lot with clients.
When we look at all the different financial aspects they have in their world. And let's say they've got savings, and they've got non-retirement investments and life insurance, and they've got retirement accounts, and we talk through this. Which one is going to be the best for you to spend over your lifetime? And then what's the best assets to leave behind? And if we do it properly, if we plan it properly, we can achieve both things. We can achieve better outcomes for us, and we can also achieve better outcomes for our beneficiaries.
So let's get into this today. And as I said, I'm going to start with talking about the different types of investment accounts that we have and how they're taxed. So as we kind of get into this, I'm going to go ahead, I'm going to turn my camera off, like I said. I just wanted to make sure you knew I'm a real person, and not just some AI robot behind the screen. And let's get into this today.
So I've got a couple of disclosures for you first, before we get started. And the main thing to note here is, I am not a CPA, and I'm not a tax attorney. I'm a financial advisor. I've been doing this for, I've been in the financial services industry for about 15 years now. I work with a lot of clients in helping them through this. But one thing I'm not is a CPA, and I'm not a tax attorney. So make sure that, as you are making notes and going through this, you really want to make sure that you get some good tax advice and some legal advice so that you don't have a big tax mistake.
So as I mentioned earlier, about what are tax rates going to be in the future? So, when we think about using different types of investment accounts, this is how we can have tax diversification. Easy for me to say, right? So, using different types of investment accounts can help you achieve tax diversification. It can give you more spendable income in retirement. Isn't that what we want? And there are really three types of accounts that we think of.
Tax deferred, tax favored, and taxable. And while we know there will always be taxes, again, we may not know and be able to foresee those changes in tax rates. So that's why tax diversification is so important, because when we use a wide range of investment options in retirement planning, you might be able to pay less in taxes. As you start to take money from these different accounts, and if they're taxed differently, this can lead to you having more disposable retirement income for you and your family.
So let's start, we're going to go through first and we're going to want this first category, which is tax-deferred accounts. These are the most common approach we see to retirement planning. It doesn't mean it gives you the best outcome. It just means that we see this to be the most common approach. So the first thing we think of is tax-deferred accounts with pre-tax contributions. And I know that's a mouthful, so I'm going to give you some examples. This would be like a traditional IRA, a 401k, a 403b, deferred comp, and defined benefit plans.
These are accounts that we put money into today that we don't pay taxes on. So I contribute to my 401k, you know, I put in 3% my company puts in 3% and you know, if I'm doing that all in a pre tax, not a Roth, then that money goes in today that I haven't paid taxes on, so I get a tax deduction for that, not taxed on that income. It's going to grow tax-deferred. So I don't pay taxes while it's growing.
But when I go to take money out in the future, when I go to take money out in retirement, I am taxed on every dollar, every single dollar that comes out, and I am taxed at my highest marginal bracket. So I mentioned the client yesterday, who's got Social Security and a pension. She actually has two pensions. Her husband passed away. She's got her pension, her husband's pension, and then her Social Security.
So she already has a good baseline for retirement income, and then when she goes to take out these required minimum distributions that gets added on top of her income, and then she has to pay taxes on that at her highest marginal rate. You also have to follow IRS guidelines, and there are a lot of them. There's a lot of IRS red tape. Let me just tell you a few. Okay, so you put money in these accounts, you can't touch them until you're 59 and a half.
Some plans allow you to touch them at 55, but you know, a lot of plans, you can't touch them until you're 59 and a half, or you have penalties. Not only do you have taxes, but you have penalties. And then you can only put a certain amount of money per year into these accounts. They may have income limits. If you make over a certain amount, you can't put any money in at all. And then you're also going to have what's called required minimum distributions.
So that means at some point in the future, you're going to have to start pulling money out, whether you need it or want it, and you have to follow the IRS's guidelines, or they tax, or they penalize you for it. And you go outside of any of those rules, and there's penalties. If you take it out early, if you don't take it out when you're supposed to, if you put in too much, if you make too much. These are all things that you can then have penalties.
So again, nothing wrong with these accounts. We just have to understand how they work, and we have to understand how they're going to work when we get into retirement and we start taking money out of them. They're the most common approach that we see to retirement, but it doesn't mean it's the best. And it's the most common because it's systematic and automatic. Most of these are employer-sponsored plans. So it's your 401k, 403b, 457. These are plans that we checked a box on, and they started taking money out of our paycheck and putting it into the account, and they started doing it systematically and automatically. We didn't even look at it.
It didn't even hit our bank accounts. We didn't have to make a decision. It just did it for us, and this is why they're so successful, not because they're the best, because it made it easy, because it made it systematic, because it made it automatic. The other type of account that we talk about are tax tax-favored. So those are tax-deferred. We have tax-favored accounts. So let's walk through how these work. These are funded with after-tax dollars.
That's why they're not called really tax-free, because you have to pay the tax sometime, and we pay the tax today. So remember how I said we are historically in low tax brackets today, low tax brackets today. So this is why tax-favored accounts can be a good option, because let me go ahead and pay taxes today at a lower rate, so that then as it grows, it grows tax-free. So I have to pay tax today, and then as long as everything is structured properly, I don't pay taxes again. It grows tax-free. I can take money out of them tax-free.
So this is why we call them tax-favored. Examples of these accounts, municipal bonds. Now we're in Florida. I'm in Florida. Florida doesn't have a state income tax, so I'll tell you, we don't use a lot of muni bonds, but that is an option for you. Roth IRAs, 529 plans are mostly for college savings. One thing I have on here is HSAs. Those are health savings accounts more for medical expenses, and you're only eligible for those if you have a high deductible plan, so I didn't include that here. And then you've also got cash value life insurance.
And all of these are tax-free when it's structured properly. So we're going to get into more detail on those, how they work, how you put money in, how you take money out. And so we're going to talk a little bit more about those in a little bit. But those are tax-favored. Then you have taxable accounts. I call these tax as you go. Examples would be money market funds, CDs, mutual funds, stocks, bonds, real estate rentals. These are things that we don't put in, like a pre-tax vehicle.
You could think of these as like brokerage accounts or a non-retirement investment account. But we call these tax as you go. They're funded with after-tax dollars, just like the tax-favored are, but what's going to happen with these is you generally will get a 1099 every year, and where you have to pay taxes on any sort of income that comes in. So that interest you earn on those CDs, it's taxable. So CDs have been very popular in the last few years because interest rates are so high.
They're just not super popular come tax time, because you realize, okay, great, I got four or 5% but now I have to pay taxes on all of that. You know, if you've got stocks, bonds, mutual funds, ETFs, you may find that you've got a tax impact on those too, because even if you're not taking money out of them, because as interest comes into the account, dividends come into the account, any sort of like realized capital gains, these are things that we have to pay taxes on along the way.
But you do have a lot of flexibility, some flexibility and choice here. One thing I like about taxable accounts is you don't have as much IRS red tape. There's no income limits, there's no contribution limits, there's no required minimum distributions, there's no early withdrawal penalties. So you actually have a lot more flexibility and control with these accounts. And the other benefit is when you go to take money out in retirement, it's not all going to be taxable, because you've been paying a little bit of taxes along the way.
So when you go to take money out, you're going to have part that's going to be taxable and part that's going to be tax-free. So it can help you when looking at your tax planning and saying income planning, so hey, here's the income that I'm going to have coming in retirement, these different accounts it's coming from. If we think about those three accounts we just talked about, maybe I've got some coming from tax-deferred, so I know all of that's taxable. Maybe I have some coming from tax-favored because there's no taxes.
And then maybe there's some from the taxable account, because that's partially taxable. And this is an area in which we help clients. First, figuring out where are you today, and looking at how much do you have in these three areas. Taxable, tax-favored, tax-deferred. How much do you currently have in these three different buckets? And then we can also kind of play what if and like, fast forward you to retirement and say, what is it going to look like when you get in retirement? And this is going to help you think through, what should I be doing today.
If I'm saving into these different accounts, or maybe, you know, I'm only saving into one and not the others, do I need to continue the path that I'm down, or do I need to make some changes? And so that's something we help clients with. We actually put this information together in a super easy pie chart for you to see, so you can see how much is in tax-deferred, tax-favored and then partially taxable, so you can make decisions around that.
Now let's get into some tax planning strategies. And this is going to go back to some of those questions that I asked in the beginning. So when I asked, is your income going to be higher or lower and are tax rates going to be higher or lower, this is going to help you do tax planning. So let's talk about some tax planning strategies if you think you're going to have higher taxes in retirement. So, what are some options? Let's just talk about what that means.
So if your income is going to be higher than it is today, if we think tax rates are going to be higher than they are today, then these are some strategies that you want to pay attention to. You want to contribute more to tax-favored. That's where you get the income comes out tax-free as long as it's structured properly. So some examples of that would be Roth IRAs, cash value life insurance. You pay taxes today, and this is so you can enjoy that tax-free income in retirement.
So the accounts you choose for your retirement income that's going to depend on where you think your tax rate is going to be when you're retired. So if you think your tax rate in retirement is going to be higher today, either because tax rates go up or because your income will be higher, then you should put more into these tax-favored accounts. This way you're again, you're paying taxes today, and then you get to enjoy that tax-free income in retirement.
The other thing I'm going to say about tax-free income is I can tell you when I'm talking with clients in retirement, and we're talking about, hey, like the client I talked to yesterday is putting in a new porch, front porch. And so she's like, hey, where should I pull this from to pay for it? And so we looked at all her options she had available to her. And one thing I find is that when people have money in those tax-deferred accounts, even though the money's there, even though it's available to them, even though that money is designed to provide them an income in retirement, the taxes cause people to think twice about taking the money out.
So even though they have it there, they're like, oh, gosh, I don't want to take it out because I don't want to pay the taxes. So it almost locks it up in jail. Locks it up in prison, because you just don't want to have to pay the taxes, or because you know, you have to take out so much more because of the taxes to even do what you want to do. So that's where those tax-favored accounts come in.
And people say, hey, I need some money to go take a trip, or I'm gonna go take some money out to, I need a new car. We're gonna remodel the house, like, whatever it is. If they're like, oh, this isn't gonna impact me from a tax standpoint, they're much more likely to actually do that. You're much more likely to actually take that money out to do those things. Now, what if, on the other hand, you think that your tax rates are going to be lower in retirement, so tax planning strategies for lower taxes in retirement.
So, how do I have lower taxes in retirement than I do today? Well, my income could be lower or tax rates go down. So I would not plan on tax rates going down. I think we could plan more for them either staying where they are going up. But then you really need to look at your retirement income to see will your income be lower in retirement? That is not true for most of my clients. But yes, we obviously have clients where that's the case.
I have a client who has been in higher education her whole life, but she doesn't have a pension plan, so everything is in a, 403b equivalent. She is going to have less income in retirement than she does today. So these are the strategies that apply to her. And what we want to do is we actually want to contribute more to those tax-deferred accounts. So if my income is going to be lower, my tax rates are going to be lower, then today, I want to contribute more of those tax-deferred accounts.
That's traditional IRAs, employer-sponsored retirement accounts, 401ks, 403bs, 457s. All those workplace plans, because I want to take advantage of the tax deduction today. If my taxes are going to be less in the future, then how do I lower my taxes today? So I can defer. This is when it's good to defer. And so I take advantage of the tax deduction today, and then I'm going to pay taxes on taking that money out in the future. Now this is not again one size fits all. You can see how this has to be individualized.
And I can't just blanketly say everybody should do this, because everyone's situation is different. So this is when we want to do some tax planning so we can understand where we are today, and what is this going to start to look like for us in retirement. And then we want to be able to adapt and make changes as we go. All right, so let's kind of get into this a little bit more in detail, and go through and talk about these different types of retirement plans and retirement accounts.
And I want to talk about some alternatives. So, most people think of retirement plans. They think of that employer-sponsored plan. Some people think of a 401k, you know, if you're with like the state, county, education, some sort of nonprofit, like a hospital, then you might have a 403b or 457 plan. And that's again, this is why it's the most common, because what we think of when it comes to retirement plans, but there are a lot of alternatives. CDs, mutual funds, muni bonds, IRAs, Roth IRAs, and cash value life insurance.
There are a lot of choices that we have. And there are two strategies that I find that are overlooked, which we're going to talk more about today, which are Roth IRAs, and then permanent life insurance, like whole life insurance. And so we're going to go into how both of those work and the tax implications and how they might apply to your situation. But before we get there, I want to look at the impact of taxes and why this can be so impactful.
So again, tax diversification means that your money is in different types of accounts. So this strategy gives you flexibility and choice in determining how you're going to be taxed in retirement. So let me give you an example of how this might play out. So let's say that one client is going to take out $100,000 from their 401k, and they're after age 59 and a half. So don't worry about any penalties.
What would the tax impact be? Now we're assuming that this person is in a 32% tax bracket. It doesn't really matter what the tax bracket is. It works on all brackets, but let's just say 32. This means they've already got a good income coming in, probably from let's say, two Social Securities, two pensions, what have you. And if they take out 100,000 from the 401k, then, and they're in the 32% bracket, they're gonna pay 32,000 in taxes, and that's gonna leave them with 68,000 left as net income, cash flow for them to spend.
And then let's compare that with another option of saying, what if they took half out of the 401k, so 50,000 on the 401k, and then 50,000 out of a tax-favored asset. That could be a Roth IRA, that could be cash value life insurance. So now half, which is going to be 50,000 is taxed at 32% and the other 50,000 there's no taxes. So we get the same cash flow 100,000 out, but we only pay 16,000 in taxes, not 32,000. That's a huge difference. Huge difference.
And again, like I said, you might be thinking, Well, April, you know, I'm not in the 32% tax bracket, and I get that, but it works no matter what bracket you're in. If you're in a 22% bracket, then think about that. So you would pay your 22% on half, and then the other half would not be taxable, and it would still reduce your taxes by half. It still cuts the taxes down in half. This is why it makes such a big difference. It's the same cash flow.
This is what we want. We don't have the same income, if not more, but we want to pay less in taxes. How can we have the best of both worlds? So now we're going to do a deep dive into these tax-favored accounts, Roth IRAs, and then cash value life insurance. So the first thing I want to talk about is a Roth IRA, like, what is it? Again, we call it that tax-favored account. So you contribute with after-tax dollars. So I put money in today I have to pay taxes on.
As it's growing, I'm not taxed while it's growing. It grows tax-deferred. There are no taxes while it's growing. I don't get a 1099, or anything like that. And then when I go to take money out in the future, I can get that money back tax-free when it's structured properly. April, what does that mean? Well, I'm going to show you in a minute what it means to be structured properly. They call it a qualified withdrawal from a Roth IRA, if you want to know the technical term.
But yes, withdrawals are income tax-free when structured properly. Sometimes I get questions from clients, well, what is it? What is it in? And you can have a Roth IRA in any kind of investment vehicle. Wide range of investment vehicles. Sometimes I see people have Roth IRAs and the money's just sitting in cash. Now I don't normally recommend that for a Roth IRA, because if we get tax-free growth and tax-free income, we want it growing.
But yeah, you've got all the options available to you, like you would in a normal retirement account. There are no required minimum distributions. This is when I say, under current tax law, could that change, absolutely but right now, Roth IRAs, you can let that grow for as long as you want. There's no required minimum distributions. And we usually in retirement income planning with Roth will position that to actually be a growth bucket, unless we're trying to meet some income and tax-specific guidelines or goals, we'll look at the Roth IRAs being in that growth bucket.
Because sometimes we call this the tax-free inflation hedge. I'm gonna say that again, tax-free inflation hedge, because if it can grow tax-free, I could take it out tax-free, that's really going to help me when I need more income later. So that's really where we like to position that Roth IRA to be a growth bucket. And then also it goes income tax-free to beneficiaries. So this is also a good asset to leave behind, much better than the tax-deferred accounts.
I know I'm not going to have time to go into it, but they have a lot of restrictions for what happens when that money goes to beneficiaries. So those aren't always the best to leave behind where like a Roth IRA would be. So how do you fund a Roth account? I keep saying Roth IRA, but there's also Roth accounts. But so how do you fund one? How do I get one? Right? You can contribute to a Roth IRA.
Now you have to have earned income to contribute. So if you're already retired and you're not working in any capacity, you cannot contribute to a Roth. You could do a Roth conversion, but you can't contribute. So just know that you have to have earned income. There are also income limits and contribution limits. So they only let you put in a certain amount, and if you make over a certain amount of money, you can't put money in. Now, there are some workarounds to the income limits. We call it a back-door Roth.
Again, I'm not going to have time to go into that today, but if you think that is your situation, that you make too much to put money into a Roth then reach out, and we'll walk through how the backdoor Roth works. You can contribute to a Roth retirement account through your employer, if they have one available. Not everybody does. I do have a Roth option in my 401k, my husband has a Roth option in his.
So for us, when we're saving for retirement, all of that's going into Roths, but not everybody has that. So just make sure you want to check and see if that's something that would be available to you. And then you can also do a conversion. So you could take a pre-tax retirement account, like a 401k or IRA, and then you can convert that to a Roth, which we're going to talk about next. So Roth IRA conversions.
This is when you convert pre-tax retirement accounts to the Roth. So in the year that you do the conversion, whatever amount that you convert is considered taxable income. So if you converted 50,000 this year, that 50,000 is considered taxable income. So there are a couple of things you want to ask. How are you going to pay the tax? Are you going to have the account pay the tax? Are you going to pay it out of pocket? When do you need to take income from this account? That's a very important question.
When do you need to take income from this account? And then how much if you were going to take income, how much you take out? And then how is this account going to be invested? But the when do you need to take income and how much this is going to help you decide if you should even do a Roth conversion. Because if I'm paying all the tax today, then I really want to make sure that I've got time to grow.
That I've got time to make up the taxes that I'm paying today. Now Roth IRAs have what's called a five-year rule. This is going to impact how distributions are taxed. So short answer is, is, if you've had the Roth for five years and you're over 59 and a half, then every dollar that comes out comes out tax-free. Let me say that again. If you've had the Roth IRA for more than five years and you're over 59 and a half, then every dollar that comes out is a qualified distribution and you don't pay any taxes on that.
If you do not fit into those two rules, so you haven't had it for five years, or you're under 59 and a half, know there may be some taxes or penalties to pay. Okay, so that's the big thing on the five-year rule. Contributions are always income tax-free. So if I put money in my Roth, let's say I put 7000 into my Roth today, I'm 41. If I go to take it out, I took out my contributions. I don't pay taxes because I've already paid taxes on it, right?
So comes back to me tax-free. And then converted funds are tax-free as well, but on the converted funds, if you haven't had it for five years and you're under 59 and a half, you can have penalties to pay on the converted amount. So again, you may not pay federal income taxes, but they may charge you the 10% penalty. So you want to pay attention to that part.
If you're taking money out of the Roth and you haven't had it for five years and you're under 59 and a half, because that's when you can trigger taxes and penalties. So again, if you're over 59 and a half, and you had the account for five years, and it comes out tax and penalty free. If not, you really want to make sure that you work with a professional to understand how that is going to impact you from a tax standpoint.
Now let's switch gears. I've gone through the Roths. I want to talk about the cash value life insurance, and then we're going to keep going from there. So earlier, I mentioned a couple things we see overlooked. Roth IRAs, and then the cash value life insurance as a savings vehicle. And you may be like, I didn't realize it was a savings vehicle. How does that work? So you're probably familiar with the primary purpose of life insurance, and that is to financially protect families and businesses in the event of the death of the insured.
That's what we call is the policy's death benefit. But permanent life insurance also has what's called, we call them living benefits. These are things that I can benefit from while I'm living so I can access the cash values for a range of financial purposes. That could be to supplement retirement income. That could be just to take more income out of my retirement accounts, because I have the life insurance to come into the family tax-free.
So it can be this versatile financial tool that can help you create and increase your retirement income. So again, you might be familiar with some of the benefits, which is the tax-free portion, the income tax-free death benefit. So again, the death benefit comes in tax-free to the family or whoever is named as a beneficiary. You have tax deferred build up of the cash value inside the policy. So as you're paying in, as dividends are credited to the policy, you've got cash value that's building, and you're not paying taxes while it's growing.
And then you have access to the cash values on a tax-favored basis. You can do a loan, you can do a withdrawal. There are different ways for you to access the cash, and again, as long as you structure that properly, you can do so on a tax-favored basis. So a couple of the benefits here. You've got the death benefit, which, again, allows for that lifetime insurance protection. We think of it, you can think of the cash value as a portfolio asset.
So the cash value can be part of a comprehensive portfolio asset in your in your plan. We think of it as a non-correlated asset. Meaning the cash value inside the policy is not in the stock market. It never has a bad day. So like all this market volatility that we've been feeling this year, I know you're feeling it because I am, my clients are right. All this market volatility that we're feeling, guess what? My cash values and my life insurance are not down. They're actually up.
So that's why we call it that non-correlated asset, because it's not in the stock market. You can have guarantees. This can be contractually guaranteed growth on the cash value. You can also have dividends. Now, dividends, of course, are not guaranteed. You really want to pay attention to what company you use, so that you use a company that's got a good history of dividends. But you've got dividends that can go back into the policy to help grow the cash, help grow the death benefit.
You can take the dividends as income, so it's a way that you can supplement your retirement income is using the dividends. You've got other living benefits, some of this we talked about, where you can access the cash anytime without a penalty. There's no required minimum distributions. There's no time where the IRS is going to force you start taking money out of this. If you've got loans, you don't have to repay them. You can leave them outstanding, and then what happens when you pass away is the loan gets paid first, and then they pay the remaining death benefit to your family. There can be creditor protection.
Now this is going to depend on states, which state you're in, so in Florida, we have great creditor protection and lawsuit protection. And so in Florida, your cash values are fully protected from creditors and from lawsuits. So it can give you definitely some more of that control where that other accounts, even like the Roth IRA, can't provide you. It gives you more benefits and can give you more control about when you take money out and how to use it as well.
So we kind of go through, and again, talked about using these different types of accounts so that you can have tax diversification, so that you can have more income in retirement because you're paying less in taxes. We want to have the same cash flow, same income, pay less in taxes. And so no matter where you are, if you think you can wait longer or not, if you have to be proactive with your money.
You have to be proactive with the decisions you're making, so that you can know your choices. We find a lot of people make decisions based on feelings, and we want you to make decisions based on facts. Based on knowing all your options, and so that you can make an educated decision. So if you've got your money going to these different accounts, you can know if that's the right decision and choice for you.
And so as we're going through this, if you've got questions about some of this, you're thinking, April, I'm not sure how this applies to my situation, I would recommend that you schedule time for us to do a 30-minute focus session. And what we're going to go through is we can talk through these strategies that we went through today, and we can see if are they a good fit for you, right, or for your situation, which one is better? And it's incredibly important that you don't make these decisions without seeking professional advice.
So that you don't make a big mistake and have a tax issue. These are great strategies for people to implement, but you've got to make sure it's right for you, because, as I said earlier, it's not one size fits all. We have to know which way you should go. So what I'd recommend with this focus session, 30 30-minute call, and what we do is we're going to get clarity on your goals and concerns. We're going to talk about what opportunities are available to you.
Is it one of the strategies we talked about already? We're going to talk about, what are some action steps, what are some specific things that you should be thinking about between now and retirement. And I don't know if we're the right fit for you, because we're not the right fit for everyone, but I can tell you, after a 30-minute call, we can both determine if it makes sense for us to continue to work together in some capacity. And I'll be happy to share with you, like how we work with clients, how we help them, and how we work with them as well.
So there's a couple ways that you can schedule this call. You can go to our website, curryschoenfinancial.com/call. Or you just go to our website, you're going to see a button that says, schedule a call, and it'll take you to my calendar so you can pick a time that works for you for a 30 minute call. You can also call our office, 850-562-3000. You can talk with Luke or Leslie, tell them that you heard my talk on taxes in retirement, and you'd like to schedule a time for a focus session, and they'll pull up the calendar and be able to help you pick a time that's going to work for both of us. And again, that phone number is 850-562-3000.
Well, thank you again for joining us today. I'm glad that you took time out of your busy schedule to focus on the super fun topic like taxes. Hope you enjoyed it, hope you got some good kind of tidbits to take away from it. And then let us know if you've got questions specifically on some of those items, you can always shoot me an email, and I'll try to get back to you as soon as possible. And then I look forward to seeing you on the next call. Bye now.
Voiceover: The primary purpose of life insurance is the death benefit. Life insurance is intended to provide death benefit protection for an individual's entire life. With whole life insurance the payment of the required guaranteed premiums, you'll receive a guaranteed death benefit and guaranteed cash values inside the policy. Guarantees are based on the claims paying ability of the issuing insurance company. Dividends are not guaranteed and are declared annually by the issuing insurance company's board of Directors. Any loans or withdrawals reduce the death benefits and cash values and affect the policy's dividends and guarantees. Whole life insurance should be considered for its long term value. Early cash value accumulation and early payment of dividends depends on the policy type and or policy design and the cash value accumulation is offset by insurance and company expenses.
This promotional. Information is not approved or endorsed by the Florida Retirement System or the Division of Retirement. Neither Guardian nor its affiliates are associated with the Florida Retirement System or the Division of Retirement. This material is intended for general public use. By providing this content, Park Avenue Securities, LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation or to otherwise act in a fiduciary capacity. If you'd like additional information about our services, visit our website at curryschoenfinancial.com, or you can call our office at 850-562-3000. Again, that number is 850-562-3000. This podcast is for informational purposes only. Guest speakers and their firms are not affiliated with or endorsed by Park Avenue Securities, Guardian, or North Florida Financial, and opinions stated are their own. April and John are registered representatives and financial advisors of Park Avenue Securities, LLC. Address, 1700 Summit Lake Drive, Suite 200, Tallahassee, Florida, 32317. Phone number, 850-562-9075. Securities, products, and advisory services offered through Park Avenue Securities, member of FINRA and SIPC. April is a financial representative of the Guardian Life Insurance Company of America, New York, New York. Park Avenue Securities is a wholly owned subsidiary of Guardian. North Florida Financial is not an affiliate or subsidiary of Park Avenue Securities or Guardian.
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