On this week’s episode of The Secure Retirement Podcast, April Schoen talks about the importance of tax diversification in retirement.
April discusses the three different types of retirement investments, offering examples of each type of account, how you can contribute to them, and their tax implications.
Listen as she explains:
Tax-deferred accounts
Taxable or tax as you go accounts
Tax-favored accounts or tax-free accounts
How spreading out your retirement investments can help you keep more income in your pocket
How to use Roth IRAs in retirement tax planning
Permanent life insurance as a financial tool
And more
Mentioned in this episode:
Podcast: https://johnhcurry.com/podcast
Email April Schoen, April_Schoen@yoursws.com, for a free copy of John’s new book, The Secure Retirement Method for Members of The Florida Retirement System
Email April Schoen, April_Schoen@yoursws.com to set up no-cost thirty-minute session to discuss your goals for retirement
April’s business cell: 850-544-8464
Transcript:
April Schoen: Hello, everyone. Welcome to today's webinar on tax diversification in retirement. I am hosting the webinar today. My name is April Schoen. And we're so glad that you guys could join us today. Today, we're really going to be talking about tax diversification in retirement. It's going to be all about different types of accounts, and how you can use these different accounts to have more income in retirement. Very important. Before we get started, I want to go through a couple of housekeeping items with you. If you don't have it handy, go ahead and grab a piece of paper or a notebook and a pen. We're going to go through a lot of information today. It's going to be informative, upbeat, and so make sure you've got something where you can jot down some questions you may have for us. Maybe a little to do list on things that you think like, oh, I need to look into this and take care of this. So have a piece of paper and a pen handy.
We will be recording today's webinar. And our webinars are then posted on to our website, as a podcast. So if you go to our website, which is johnhcurry.com, you're going to find lots of information there. You're going to find access to our podcast, where we do interviews with clients and people in the community about their experience, especially when it comes to retirement planning. We have recordings of our webinars that we do on all sorts of topics. And some of our webinars are us. Maybe it's John, maybe it's myself doing a presentation on a specific topic. So if you've never been to our website, I encourage you to go go check it out. There's lots of great information there.
A little bit about us. So John is has been John Curry, and I are both advisors with North Florida Financial. North Florida Financial is headquartered in Tallahassee. And we were started about 50 years ago, a little over 50 years, we just celebrated 50 years last year in 2020. We've since grown, we have over 100 advisors now. And we span anywhere from Jacksonville, Florida, which is where I'm located all the way over to Louisiana, Georgia, Alabama, and down to Tampa. We have quite a big, great geographic area now, and we help clients all across the United States. So we're not just to this one specific area. Like I said, We've been in business for about 50 years. And there are a lot of lessons that we've learned about what works and what doesn't work for people, especially when it comes to retirement planning. And one of those things is on having tax diversification.
So I'm going to walk you through that today. My plan is to kind of go through some case studies and talk about some different things. I'm mostly going to have a PowerPoint here for us today. But I might pull off of this and kind of pulled some out other information as we go to. So let's go ahead and get started on our presentation today. Before I do want to make sure that you, everyone gets to meet the team because we have such a wonderful team here to help our clients. So you've got John and myself. As I said, I am located in Jacksonville currently, although I'm from Tallahassee, and then we've got John Curry, who is also in our Tallahassee office. And we have a great team around us to help us support our clients. We've got Zac Hirschler, Audie Ritter and Jay Wolfe. And I cannot rave about them enough that we just simply could not do what we do if we didn't have these great people. They have a servant's heart, and they're very caring, and they everyday go out of their way to help our clients. And so we're very, very grateful to have them.
I do also want to make sure that you've got my contact information. I know some of you may have to get off the call early because that happens. And you know, today, hopefully we're going to wrap this up in probably about 45 minutes is where I think we'll kind of end up today. So not going to keep you here forever. When John and I did our live events, you know, back pre COVID. We would do live seminars in our office in Tallahassee. And those seminars were an hour and a half long, and we do them on topics like Social Security, Medicare, taxes, risks that you face in retirement and how to avoid them. And they, like I said, we're always an hour and a half. Don't worry, I am not going to keep you an hour and a half today. So we're going to get through this information and hopefully you find it impactful.
So I've got my contact information on the screen. My number, the best number to reach me out. This is my business cell phone. And that's 850-544-8464. Like I said, I'm in Jacksonville, but I'm from Tallahassee, so I kind of bounce back and forth from working in Jacksonville, and also in Tallahassee, so my cell phone is usually the best number to reach me at. You, of course, can always email me, which is April_Schoen@yoursws.com, that's April_Schoen@yoursws.com. Easy for me to say. Okay, a couple of things that you can email over to me or someone on the team. One, if you've got questions during the webinar, we cannot have a chat box in the webinar. So if you've got questions that come up, feel free to email those over to me, I am going to try to check that periodically during the webinar, just to see if any questions come in.
But if I don't get to your questions during the webinar, I'll make sure to get to you afterwards. You can also request a copy of today's PowerPoint, we get a lot of requests from people to get a copy of the slides. So we'll be happy to send that over to you just feel free to email and ask for a copy of the PowerPoint. You can also request a copy of John's new book, if you saw the email that I sent out yesterday. And some of you may not have if you had registered prior to yesterday. But John has a brand new book out. I've got a right here in my hand. It's called The Secure Retirement Method for Members of the Florida Retirement System. And there is an entire chapter on tax considerations in retirement. So a lot of the information we're going to cover today is in the book. And like I said, this is a brand new book, it's hot off the presses, we really haven't even announced it yet. We've just been talking about it a little bit on our webinars.
So if you would like a copy of John's new book, feel free to email, send me an email with the preferred mailing address. And we will make sure to get that out to you. We are sending these out complimentary. The hard copy of the book, we'll send that out to you free of charge. It's also available on Amazon. So if you'd rather say hey, I'd rather get a Kindle version of it, you can go right to Amazon, and I think it's like $4.99 or something like that on Amazon. So you got a couple of options for how to get a copy of John's new book. Now, his new book is for members of the Florida Retirement System. So if you're in FRS this book is definitely for you. If you're on the call today, and you're not an FRS, you may be thinking, well, I don't need this book, because I'm not in the Florida Retirement System. There's really two chapters in the book that goes through the pension plan for FRS and goes into DROP.
Okay, so it's two chapters that are really specifically for members of the Florida Retirement System. Everything else applies to anyone. Okay, tax considerations in retirement. When should you retire? When should you start taking social security? What about Medicare? What about required minimum distribution? Those are all issues that have had impact to everyone. So good, good information. Even if you're not in FRS. Another option to for sending an email would be if after today's call, you would like to set up a 25 to 30 minute Focus Session. A phone appointment for you and I just speak 25-30 minutes talk about what your goals and concerns are. And again, when we're doing first calls with someone there, those are also free of charge. There's no cost for our first meeting.
Let's roll up our sleeves and get to work. So today we're going to talk about different types of retirement investment accounts, how they're taxed. So there's really three different tax statuses of accounts that we talked about. Tax deferred, taxable and tax favored. We're going to talk about those. We're gonna talk about tax planning strategies, and then how to use Roth IRAs and permanent life insurance for tax planning. So we're going to walk through a case study on what that looks like. I do have a couple of disclosures for you. First and foremost, I am not a CPA, and I am not a tax attorney. So I do not give tax or legal advice. I do not make out to be like I said a CPA or a tax attorney. So what I'd recommend as we're going through things today, if you've got specific questions on your situation, you should always consult your tax and legal adviser.
So again, today we're going to talk about the importance of tax diversification and retirement. And really the main thing here is how do you maintain your retirement savings, while paying less in income taxes. We don't want to have less income in retirement, right? We want the same or more income in retirement. But what we really want when it comes to taxes is how do we pay less taxes? So, because what does that mean, if you pay less taxes, it means you have more disposable income, more money in your pocket for you and your family. Now, while we know that there will always be taxes, it's hard to know what the changes and the tax rates may be, and how they could impact your retirement planning. Okay, and then on this call today, you know, we had over 85 people signed up for the webinar today. And I imagine that we have a wide range of people on the call.
So we may have some people who are already retired, wondering, hey, how can I systematically and automatically reduce taxes over time. We may have some people who are close to retirement, maybe they're three to five years from retirement, and they've got questions about retirement, income and taxes. And then we may have people who are decades from retirement. So I want you to know that what we're going to go through today can help you, no matter which one of those categories you're in, either you're retired, you're close to retirement, or you're even decades from retirement. These strategies we were going to go through today could be helpful for you. So as I said, we don't know the tax rates are going to be in the future. Especially if someone's on the call, you're like me, I'm 37. So if you think about me retiring at age 65, I have no idea what taxes are going to be almost 30 years from now, it's just impossible for me to predict.
So that's why I'm a big believer in tax diversification. Because when we have a wide variety of investment accounts, and different types of taxable accounts, it gives us options, it gives us flexibility, and it can allow us to actually pay less in income taxes, when we start to draw money from those for retirement. Which means more disposable retirement income for you and for your family. We're going to get into now and talk about these three different types of accounts, the tax deferred, the tax favored accounts, and we're gonna walk through each of these, and we're gonna talk about how you contribute, what are some examples of these accounts? And what does it mean when you get to retirement. So by far, the most common approach to retirement planning, is that we see as advisors is using a tax deferred account, like a 401k, a 403b, or a 457 plan.
I want you to think here, like traditional retirement accounts, okay, or traditional IRA, for example, these are what we find to be the most common. I'm not saying it's the most tax efficient, it's just the most common approach that we see as advisors. So let's talk about what is a tax deferred account, there's actually two different types. The first one we're going to talk about is the most common, and that is one that is contributions are made with pre tax dollars. So you put money in today, you haven't paid tax on it, it's going to grow tax deferred, you don't pay any money while it's growing. But then when you go to take money out of this account in the future, every dollar is taxed and it's taxed at the highest marginal rate. Okay, at that time, whatever your highest marginal rate, when you make the withdrawal is what that money is going to be taxed at. Here are some examples of these tax deferred accounts that are made with pre tax dollars. 401k plans, 403b, 457, traditional IRAs.
These are all examples of a pre tax tax deferred vehicle. And again, the main thing here, it's great if you don't pay tax today, and it's great that it grows tax deferred, but the problem that you're going to run into with these is that every dollar that comes out is taxable. So what can seem like the best place to put $1 when we're saving money can be the worst place to take $1 when we're withdrawing money from our retirement accounts, or investment accounts. And we're going to talk more about that in a little bit. Okay, there are also as I mentioned tax deferred accounts, where you contribute with after tax dollars. So you pay the tax today, you put the money in this account, it's going to grow tax deferred, so you don't pay any taxes while it's growing. But then when you go to take money out in the future, the gains are what is taxed, okay, the gains become taxable, and they usually come out the gains usually come out first as these accounts.
The example for this account would be a non deductible traditional IRA, and also a non qualified annuity. Those are examples of tax deferred accounts. Now let's look at tax favored and taxable. So taxable accounts. I call these tax as you go, these are just most people will, you may think of them as just an investment account, right? It's not in a retirement account, you've got an investment account, this is considered taxable the tax as you go, because these are accounts you get a 1099 on every year. Okay, so these accounts you contribute with after tax dollars, pay the tax today, and you've put the money in the account or in the investment. And then you may have to pay tax on it while it's growing. So for example, if you have interest payments that come in, dividend payments that come in, and you sort of realize capital gains, all of those create taxable events to you. Also, depending on how it's invested, I'll give you an example. If you're in mutual funds, you may have a high degree of taxation in your mutual fund. Because of all the turnover that's happening in mutual funds.
All the buying and selling that's happening, that the the investment manager is doing inside that fun, can actually cause you to have a taxable event. So let me give you some examples of these. I kind of laugh at the first two right now. But examples of taxable accounts, money market funds and CD. Okay, so it's kind of funny because interest rates are so low right now, right? Incredibly low, we're almost having to pay the bank to hold our money for us. But if you do have money in a money market, if you have money in CDs, you're earning an interest on that money. And then guess what, you get a 1099 at the end of the year. And so not only do you get a little bit of interest but you got to pay tax on. Almost like adding insult to injury. Jay and I had a meeting with a client earlier this week, he has a very good liquidity. Has about $200,000 in a savings account at a bank. Supposed to be a high earning savings account. So we asked them, I said, okay, what were you earning on this account? And he said, oh, the bank even said it's embarrassing. .37 to .5% is the rate of return he's now getting on this high earning savings accounts.
I think all of us can agree that that's not not hiring as what we're used to seeing on these types of accounts. So you've got money market funds, you got CDs, I will say here that there are strategies and things that we can do when it comes to money market funds and CDs to put you in a better position. So if that's you that just kind of rang a bell, and you said, oh, that's me, I'm kind of having the same issue where I've got money in CDs or money market, it's not earning a lot, what can I do with this, we do have some strategies we can talk about. I'm not going to get into those today, cuz I want to make sure I stay on, stay on my time with our webinar. But just jot that down to something you'd like to discuss with someone on the team. Other types of taxable accounts, you've got mutual funds. We talked about those earlier. Stocks, bonds, and real estate rentals. You know, with bonds, we're having the same issue right now with bonds because of low interest rates. So with with bonds, we really see two things that are happening right now. One very low interest rates.
So bonds don't have a high yield, they don't have a high interest like they used to. And then we also have higher risk right now with bonds, because as interest rates go up, which right now probably won't be for another year or so. But when those interest rates do start to go back up and start climbing up, the value of our bonds will go down. So same, same thing here, I'll say if if you are sitting there saying hey, ding, ding, ding, that to me, this is something I've been thinking about too. Wondering about what bonds I have in my portfolio, then I would suggest you jot that back down. And let's talk about it on our 25 to 30 minute phone call. Because again, there are things you can do right now, to put you in a better position than where you may be in some of those categories.
Let's now switch gears. We kind of went through taxable accounts. Let's talk about tax favored, because this is where we're going to spend the majority of our presentation our time together today is talking about tax favored accounts. So I also call these tax free. These are accounts where you make contributions with after tax dollars, right? I pay the tax today for the money in the account. It grows tax free, you don't pay any tax while it's growing. And then you can pull the money out tax free as well. Okay, so this is really where going to talk about some planning strategies. Here are some examples of tax favored accounts. You've got municipal bonds, you've got Roth IRAs, 529 plans, cash value life insurance. I would also add HSAs to the list, which would be a health savings account. We're not going to go into too much detail about HSAs today, we do cover that a lot when we're talking about like our, we're going through Medicare, but if you do have an HSA, or you're eligible for an HSA, HSA, which is a health savings account, jot that down.
And let's talk about that too, because there are some unique things you can do with an HSA to help provide you with a tax free income later. Now let's get into some tax planning strategies. So the accounts you choose to use for your retirement income will be that will depend on where do you think your tax rate will be when you retire? Okay. And there's a couple of considerations that we've got to think about when we're thinking about what will our taxes be in retirement? Two things. One, what's your income gonna look like in retirement? Is it going to be higher or lower, or the same as it is today? So again, what is your income going to look like in retirement? Is it going to be higher or lower or the same? Now, you may be saying, April, I don't know what my retirement income is going to look like. So a couple things, I would say, if you are on the call, and you are 10 to 15 years or less from retirement, we should look at doing what's called a retirement rehearsal. If you're about 10 to 15 years from retirement, we can really kind of pull together and look at a retirement income plan for you and kind of start pulling together what your retirement income streams are going to look like.
And give you a baseline for that. If you're more than about 15 years from retirement, we can still do a baseline, it's just a little harder to kind of get those numbers. But there's definitely some things that we can do to say, hey, if you stay on the path you're on, this is what it looks like. And then we can kind of tweak it from there. So first of all, if you say I don't know, my retirement income is going to be, then that's the first thing we need to figure out. What will your retirement, what will your income be in retirement? The second question is, what will tax rates be when you retire? So right now, in 2021, we the tax rates that we have today are set to expire in 2025. The Trump tax cuts are set to expire in 2025. So I can tell you this, if nothing changes, if Congress doesn't make any changes between now and 2025, tax rates are going to go up. So we already know that. The other thing I want you to think about is what do you think will happen with tax rates in the future? Do you think that Congress will make a change before 2025? And raise taxes? I'm sure you know, right now, with COVID. And the pandemic, our government is spending a lot of money because our economy needs them to spend that money right now, to keep our economy up. Right.
And so however, that money is going to have to get paid from somewhere. And I'm just going to be honest with you, we're probably going to be paying for that for decades. So this is another thing you got to think about the current landscape of the environment that we're in right now. Does that mean that tax rates will be higher in the future? And I believe it does. So two things when we're thinking about tax planning strategies. What will my income be in retirement? And will my taxes be in retirement? So if you think that you're going to have higher taxes in retirement, then what you want to do is you want to contribute more to tax favored account, like that Roth IRA, like that cash value life insurance, you want to pay the tax today, so that you can have tax free income later.
Okay. I, some people, when we go through this, and we're looking at analysis, and we're doing the planning, we find that they're actually doing what's called reverse tax planning, where they put money in a tax deferred vehicle vehicle today. So they don't pay taxes today, to defer in the future and pay higher taxes in the future. We call that reverse tax planning. And another comment on this too, about your income and retirement. You know, I always said earlier, will your income be higher or lower or the same? As an advisor, I can tell you that most people their income is the same if not higher in retirement. I can also tell you, I have never had one person come to me and say, hey, April, you know want I really want retirement. I want my income to be lower. I want to have less income in retirement. Because let's think about retirement for a few minutes. What are you going to be doing in retirement? When everyday is a Saturday and a Sunday?
Right when you're retired everyday feels like the weekend. And what do we do now on the weekend? We spend more money, we go out to eat, we go golfing, we go shopping, we go to the spa. We tend to spend more money on the weekends. And so we find that people do the same thing in retirement because they have more time on their hands. So again, I, you know, we're going to talk about what happens if you're, if your taxes are lower in retirement, you've got less income in retirement. But one, I do not find that to be true for most people, and nor do people want that. They want to have the same income, if not higher, in retirement. If you but again, on the other hand, if you did think that your tax rate will be lower in retirement, then you should favor tax deferred vehicles like that 401k, 403b, or 457 plan. You're willing to take that chance, right to say, hey, I'm gonna, I'm gonna take this chance on tax rates, and that's because I think my tax rates be lower than it is today. So I'm going to use these accounts and take advantage of the current tax deductions they offer.
So I'm going to put money in, I don't pay tax on it, it's going to grow tax deferred, and then I'm going to pay taxes on those withdrawals in the future. So again, that's something you want to look at, if you think that your taxes will be lower in retirement. So let's take a closer look at these three different types of accounts, taxable tax deferred and tax favored. And let's talk about how they are taxed. So as you can see, the only type of account in this group where the owner receives a 1099 is that taxable account. Tax as you go. That's because those accounts again, generally have the owner pay some sort of tax on the proceeds, you know, think interest payments, dividends, capital gains. You can also see here that with tax, the vert account, owners will pay ordinary income taxes on the gain, but they do benefit from the tax deferral. And then tax favored accounts on our hand other hand are generally not taxable, you benefit not only from the deferral on the taxes as it grows, but then you also benefit from having tax free income when you go to pull money from those accounts in the future.
So when most people think of retirement plans, they think of a 401k plan, or you think of that 403b or that 457 plan. But as you can see here, there are lots of alternatives for different types of accounts for retirement savings. CDs, mutual funds, municipal bonds, IRAs, which both regular IRAs, traditional IRAs and Roth IRAs. And there's also cash value life insurance. And we want to look at when we're thinking about where are we going to save our money. And this is one thing that John and I spend a lot of time with our clients on is having a cash flow discussion. So a cash flow discussion includes, how much are you saving on an annual basis back onto your balance sheet? How much should you be saving? And are you saving? And where should you be saving it at? Where's the most beneficial for you to have your money going back on your balance sheet? Where can your money be working at its highest and best use on your balance sheet? And we can actually run different scenarios and kind of play what if.
Okay, what if you put it here? What if you put it there? What if you did part to a Roth and part to your 401k to get the match and parts of this permanent life insurance? What does that really look like and mean to you both now and in the future. And we can run those different scenarios. It's kind of fun for me to do that I can, I'll be honest, I'll kind of geek out on a little bit for you. So I'll try not to do that for you guys today. Alright, so let's kind of keep going here and talk about these two retirement savings alternatives that are usually overlooked. Okay, and that's going to be the Roth IRA, and then the cash value life insurance. So let's get we're going to look at those two as a scenario for what it looks like for retirement. Let's talk about first the impact of taxes. So as I mentioned earlier, tax diversification means that your money is mixed throughout multiple strategies of accounts.
This strategy provides you with flexibility and choice when determining how much you'll be taxed during your retirement. So here's an example of how this might play out. We're gonna look at two scenarios. The top scenario shows you what would happen if you take 100% of $100,000 out of a 401k, after age 59 and a half. And what would happen if you took half of that from the 401k and half of it from a tax favored asset, like a Roth IRA, or the cash value life insurance. So as you can see, when you take out 100% from the 401k, if you're in a 32% tax bracket, you would pay $32,000 in taxes and that would leave you with a net withdrawal of $68,000. But when you take half of the cash from the 401k, and half from a tax favored asset, like the Roth IRA, like the whole life policy, let's look and see what happened, you pay $16,000 less in taxes, which means you got a total withdrawal of $84,000. Again, meaning more money, disposable income in your pocket. So going from $68,000 to $84,000 in net income, that's a 23% gain.
That's how impactful taxes can be on your retirement income. That's why we're having this webinar today. Because it can make a big difference. And this sometimes the things that we've got sort of thinking about, the earlier we can think about them, the better it is, sometimes I meet with people who are getting ready to retire, and they have all of their money in traditional retirement accounts. And so again, while that's not inherently bad, it just means they don't have this option. Rather, they don't have the option to take also some income from a tax favored asset. That's why this is so important. So we're gonna look at both of these strategies in more detail. Let's first talk about the Roth IRA. We've talked about this a lot with clients, we get a lot of questions about Roth IRAs. So I want to make sure that we go through this with you. Okay, so Roth IRAs, you contribute today with after tax dollars, gains are not taxed when the account is growing. And income is tax free, as long as it's structured properly, we're gonna talk more about that in a few minutes. There's a wide range of investment vehicles. You can basically have at anything from just sitting in cash you know in a Roth IRA to being completely invested. You've got lots of options there for you.
And so lots of options, when you're going to talk about what kind of investments to have it in. You have no required minimum distribution. So if you're not familiar with that, what that means if you have money in a traditional retirement account, an IRA 401k, a 403b, or 457, the IRS tells you today that at age 72, you have to start taking money out of the account, whether you want it or not. So that's called a required minimum distribution. And those are guidelines put out by the IRS that you have to follow on traditional retirement accounts. But on a Roth IRA, there are no RMDs. So you're you don't have to follow those IRS guidelines. And this also passes tax free to beneficiaries, which again, traditional retirement accounts do not.
Very different for how people inherit traditional IRAs. Whether you're a spouse or non fowl, there's a whole nother topic of discussion. Maybe I'll set up to do a webinar and talk just about kind of distribution planning strategies as well. So Roth IRAs go tax free to beneficiaries. So how do you get started with a Roth, you really have a couple of choices, you could start up a Roth IRA, which means you contribute to a Roth, there are contribution limits, you can do $6000 per year, if you're under 50, or $7000 per year, if you're over age 50. There are income limits, to be able to contribute to an IRA, or Roth IRA, excuse me. So if you make over a certain amount, the IRS will not let you contribute to a Roth IRA. There are also certain limitations on when you can make withdrawals and for what if you're under 59 and a half.
So before you start up a Roth IRA, you want to make sure that you understand all of these options and what it means for you. You may have a Roth option through your employer, there's a lot of employers now that offer a Roth 401k. So check with your employer and see if you have any Roth options available to you. And then the other option is if you have a traditional IRA, you can convert that to a Roth IRA. So let's talk about that and what that means. So you could do a Roth conversion, let's say you've got an a traditional IRA. Let's say you have $100,000, in that traditional IRA. You could rip the band aid off and convert the full $100,000 in one year. That means that $100,000 in that traditional IRA would be added to your current income, and you'd pay taxes this year on that conversion.
So again, $100,000 you convert from an IRA to a Roth, it gets considered as income for this year and you pay your highest marginal bracket on that income. But then the account is considered a Roth IRA. So all gains will be tax free, and withdrawals will be tax free as well in the future. Again, as long as it's structured properly. You could also do a partial conversion. So let's say you didn't want to convert, you want to rip the band aid off and do a full $100,000, you could do $25,000 per year for the next four years or so, until you've converted the full IRA. That's also an option for you. So when you're going to do if you're looking at doing a conversion, there's a couple of key things you want to think about. One is how will you pay the taxes, you really have two choices on how to pay the taxes, you can pay the taxes out of pocket, so you can say, again, in this example, convert the full $100,000.
And then I want that $100,000, to be in a Roth growing for my future. And I've got money over here and a CD or money market or savings account, there's not earning a lot of interest. And so I'm going to use that to pay the taxes. You can also let the account pay the taxes. So when you do the conversion, the company that has the IRA, they can do the conversion, and they can send part, let's say again, $100,000, let's say you ended up sending, I don't know, let's say you did 20%. And so $20,000 goes to the IRS for the conversion, and your $80,000 remains in the Roth, and that grows for you. So you do have some options for how to pay the taxes. I can tell you, when I've done these, run these scenarios, for people, it's usually in your best interest if you can pay it out of pocket and let the full account grow for the future, especially when we're really trying to take advantage of the tax benefit these tax favored benefits of the Roth. So it's helpful to have more in the Roth, be converted and grow for your future.
One other thing you want to think about too, if you're thinking about doing a Roth conversion, is when are you going to need to tap into this account. We asked this question all the time, when do you need this money? Do you want to take it for income? Do you plan on taking like just large withdrawals and draw the account down? What's the overall plan for this account? Because I can tell you is that you're going to need to tap into it quickly. I would say within the next maybe three to five years, you'd want to run the calculations. But it may not make sense to do the conversion, if you're going to need to tap into it quickly. But we can help you with that too. We can run both scenarios that here's what it looks like if you leave it as a traditional IRA. And here's what it looks like if you do a conversion. Because unfortunately, with these things, there's not a rule of thumb, right? It's not a one size fits all, it depends on your overall situation. What are your other income sources? When are you need to tap into this account? What's your liquidity, lots of things to consider when you're talking about doing that Roth conversion.
Now let's look at cash value life insurance, and how that plays in with your overall plan. So earlier we mentioned you know life insurance, Roth IRAs can be overlooked as a retirement savings vehicle, you're probably familiar with the primary purpose that life insurance serves, which is to protect someone's family or protect someone's benefit in the event of the death of the insured. So this is what we refer to as the death benefit. But a permanent life insurance policy also has other living benefits. The policy owner can access policy cash value for a range of financial purposes, which includes supplemental retirement income. In fact just earlier today, I was on a client meeting at 10am this morning, before our webinar, and that's what we were discussing. He has two life insurance policies was with us. And we were talking about what if in the future, he keeps the one to provide a death benefit for his family, and the other has built cash value.
And we talked about him structuring an income from that policy that if again, if structured properly, can come back to him tax free. So that's one of the ways that this is why the cash value life insurance can be seen as a very versatile tool in your overall financial plan to help families create and enhance your wealth. Life Insurance is viewed as a benefit for society. It causes a societal, it creates a benefit, it's beneficial for society. So as a result of that it has significant tax benefits that do not apply to other financial instruments. And so that includes having the tax free death benefit and includes having the tax deferred buildup of cash value. So with the class or your life insurance, you have the death benefit, you have this cash value that's growing tax deferred, and you can ask us the policy values that cash value on a tax favored asset on a tax favored basis. And as we mentioned earlier, you there are live benefit as well to this to these types of policies. So of course, you've got the death benefit, right?
This allows for insurance protection for the family, it can be viewed as a comprehensive portfolio asset, right? We consider it to be a non correlated asset, because it's not tied to the stock market. So the cash values in your life insurance, they don't go down with the market, you know, so like, last year, last March, during the pandemic, when the S&P was down 30 to 35%. The values of your whole life policy were not down, right. And so if that's what we consider to be a non correlated asset, there are guarantees inside the policy which helps to grow. There's also a policy dividend, which now the dividends are not guaranteed, but depending on the company that you use, they have a good track record, right, that's one thing you want to look at is their dividend history. Okay, and then again, it offers you liquidity, you don't have any sort of, you don't have to have worry about those guidelines or stipulations by the IRS, right? There's no IRS guidelines on all, you got to wait till 59 and a half or 72, you have to start pulling money out. You don't have to worry about anything with these types of policies. So there's no requirement distribution, no having to wait till 59 and a half as well.
And then, depending on the state, you could also have creditor protection. For example, in Florida, we do have creditor protection on the cash values of the life insurance policies. So let's kind of wrap up from today. So here's the thing. So today, we've talked about using different types of investment accounts to help you achieve tax diversification. And what does that mean? That means that you get to have flexibility, you get to have control and choice about where you take income from in the future, where is it going to come from? And how will it be taxed?
Now, of course, there are some accounts like those traditional retirement accounts, you do have to follow IRS guidelines and rules on those for required minimum distributions. But we'll make sure to walk you through all of that. The big key takeaway from today that I hope you that you hope you have is to see how having investments and retirement accounts and different types of accounts, from a tax status, have those tax deferred accounts, have tax favored, have taxable, how they can actually help you in retirement to have more income in retirement by having that tax free income. I love this quote, by Ben Franklin that says, In this world, nothing can be said to be certain, except death and taxes. Isn't that the truth? So we know it's important. And again, while we don't know what the tax rates are going to be for sure, in the future, we can definitely do some things now to put you in a better position so that you do have control, and you're not painted in a corner. That's the last thing I want for you. I want to make sure all of my clients, you're not painted in a corner that you do not have. You're not painted in the corner, and you've got multiple exit strategies.
So as we wrap up for today, I want to make sure again, you've got my contact information, or and say thank you for joining me today as we go through taxes. I know it's not always the most fun topic to talk about. But we try to make it a little more interesting for you. And so again, my contact information you can call me, or you can send me an email at April_Schoen@yoursws.com. You can send me an email for a couple of things. One, if you have a specific question about something in the webinar, I went over today, feel free to email me about that. You can request a copy of the PowerPoint. I know we went through a lot. I was going through it kind of quickly. So if you'd like a copy of the PowerPoint, you can ask us for that. You can request a copy of John's new book, which is The Secure Retirement Method for Members of the Florida Retirement System.
And you can also request to schedule your 25 to 30 minute phone appointment to discuss maybe some of those things you jotted down. Something you've got a question about. Maybe some concerns you have when it comes to what does retirement income going to look like for you? What tax is going to look like for you in retirement? You know, maybe when we talked about those CDs and money markets and bonds, maybe that was something like a little bell was going off and said hey, I need to I need to look at this too. So those are just some things that we can kind of cover in our 25 to 30 minute phone appointment. And as I said in our first meeting, there's no cost for that. It's really just a chance for us to get to know each other a little bit, to you know, I can learn more about you and what you're trying to accomplish. I can share with you what we do and how we help clients. And usually by the end of that call, we'll know we'll know if it makes sense to move forward or not, and do kind of some more in detail planning. So I want to say again, thank you, to everyone for joining us today. I hope you enjoyed it. I hope you've got some nuggets out of it that can help you and then feel free to let us know how we can further help and serve. You have just have a great day and then I'll talk to you all soon.
Voiceover: If you'd like to know more about John Curry's services, you can request a complimentary information package by visiting johnhcurry.com/podcast again that is johnhcurry.com/podcast or you can call his office at 850-562-3000 again that is 850-562-3000. John H Curry chartered life underwriter, chartered financial consultant, accredited estate planner, masters in science and financial services, certified in long term care, registered representative and financial advisor Park Avenue Securities LLC. Securities, products and services and advisory services are offered through Park Avenue securities a registered broker dealer and investment advisor. Park Avenue Securities is a wholly owned subsidiary of Guardian, North Florida Financial Corporation is not an affiliate or subsidiary of Park Avenue securities. Park Avenue Securities is a member of FINRA and SIPC. This material is intended for general public use by providing this material we are not undertaking to provide investment advice or any specific individual or situation or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. All investments contain risk and may lose value. Past performance is not a guarantee of future results. Guardian, its subsidiaries, agents or employees do not provide legal tax or accounting advice. Please consult with your attorney, accountant and/or tax advisor for advice concerning your particular circumstances. Not affiliated with the Florida Retirement System. The Living Balance Sheet and the Living Balance Sheet logo are registered service marks of The Guardian Life Insurance Company of America New York, New York Copyright 2005 to 2020. This podcast is for informational purposes only. Guest speakers and their firms are not affiliated with or endorsed by Park Avenue Securities or Guardian and opinions stated are their own.
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