Taxes might be daunting, but mastering them can mean thousands more for your golden years!
In this essential episode, April Schoen dives deep into tax strategies specifically designed for Florida Retirement System (FRS) members. Discover how expert tax planning could unlock more wealth and flexibility than you ever imagined for your retirement.
You’ll discover:
Why tax planning is the key to more after-tax income in your retirement.
How different types of accounts—tax-deferred, taxable, and tax-free—impact your taxes.
Real-life case studies showing the transformative power of Roth conversions.
The surprising impact of Medicare premiums and how your income influences them.
Secrets to leveraging cash value life insurance for tax-free withdrawals and loans.
Mentioned in this episode:
Transcript:
April Schoen: Welcome back to The Secure Retirement Method. My name is April Schoen, and I am a financial advisor that has helped hundreds of clients over the last 10 years get not only just to retirement but through retirement. And I've really been helping individuals and families achieve their financial goals by making sure that they can enjoy their retirement the way they want to, with confidence.
And today, we're going to be tackling an important topic for FRS members, and that's going to be about tax planning. Now listen, I know taxes do not sound very fun, do not sound very exciting, but this is super important. And the reason that it's important is because if you get tax planning done right, it can mean more income in retirement.
What I mean by that is having your income come from different types of accounts, like tax-deferred, taxable, tax-free, you can actually have more control over your taxes, pay less, which is going to mean that you're going to have more money in your pocket for you to spend and enjoy in retirement. Who doesn't want that? And as an FRS member, you face very unique challenges because you have a lot of taxable income coming in from your pension, Social Security, DROP payouts, deferred comp.
So the key is really to build tax-free and partially taxable buckets along the way, to give yourself more flexibility. And that's what we're going to talk about today. So let's dive in. So here's what we're going to cover today. We're going to talk about why tax planning matters for FRS members. We're going to discuss why this is so important for you and why this is going to make a big impact. Understanding the tax landscape.
I'm going to walk you through the different types of accounts and how they're taxed. Common tax challenges for FRS members, we're going to explore the unique challenges that you face. Tax diversification strategies. I'm going to share some actual strategies to help you manage your taxes effectively. Case studies. We're going to look at some real examples and how tax planning has made a big difference for others.
And then finally, I'm going to summarize what I've learned, what you've learned, and share how you could take action. So why tax planning matters. Tax planning is a critical part of your overall financial planning strategy. It really impacts your financial future, and here's why. First, effective tax planning leads to more after-tax income in retirement, which means more money you get to enjoy. It's going to give you more control over your taxes.
So instead of letting the tax tail wag the economic dog, you're going to have a proactive plan. You're going to know exactly when you're going to take income from which accounts. You're going to know how that's going to impact you, not just in the short term, but also in the long term. It's going to help you have less taxes. Means more income in your pocket for you to spend in retirement.
And as a reminder, I said earlier, as an FRS member, you face a lot of challenges, you're going to have high taxable income from pensions DROP payouts, and deferred comp. And so the goal, really, the goal of tax planning, is to build tax-free and partially taxable income sources so you can minimize taxes and maximize retirement income.
So let's start by understanding the tax landscape. Let's talk about the three different types of accounts and how they impact your taxes. So the first account we're going to talk about is tax deferred. These are by far the most common accounts we see used for retirement planning. Again, it's the most common. Doesn't mean it's the most effective, it doesn't mean it's the best. It's just the one that we see used as often. And these types of accounts are like your traditional retirement accounts. IRAs, 401Ks, 457 plans, 403Bs.
And these types of accounts, how they work is you put money in today that you have not paid taxes on, so you get, like a tax break today, if you will. But then these and these accounts grow tax-deferred, so you're not you don't pay taxes while they're growing. But when you do go to take money out in the future, in retirement, that money comes back to you. Every dollar that comes out is taxable at your highest marginal income rate.
So think about this for a second. I've got my Social Security, I've got my pension, so I've already got, like, a baseline for retirement income, and all of that is taxable income. And then I start taking money out of deferred comp, or I start taking money out of my DROP, and now that gets added on top of Social Security, that gets added on top of my pension, and that's going to start to push me into higher tax brackets, and that means I'm going to be paying more in taxes.
So those are those tax-deferred vehicles. Now you also have taxable or partially taxable. A lot of times we think of these as brokerage accounts, but I want you to think like a non-retirement account. These are probably ones they're going to like, hold up stocks and bonds, cash, CDs, that kind of thing. And you're going to make taxes on dividends, interest, capital gains. But capital gains are taxed at a more favorable rate.
So I was just talking with a client of mine the other day, and we were talking about this very same thing, about where she should be saving money. Should she be saving money in her IRA, her retirement account, and then versus a taxable account, or partially taxable account, and looking at the tax brackets, and then difference in income. Now she already has this, again, this baseline of retirement income because of she's getting her pension.
Her husband has passed away, but she's getting her husband's pension and she has Social Security coming in. So when we were looking at the differences between taxable and non-taxable accounts, the difference was pretty drastic. It actually like, took her from like a 24% bracket to a 15% bracket when we looked at accounts that were more that tax-deferred and are taxed as ordinary income versus assets that are going to have that long-term capital gains rate.
So again, big difference for our 24% tax rate to 15% tax rate. And that's really why we're talking about how important this is today. That's a great example why it's so important for us to look at this. The other types of accounts that you have are tax-free accounts. This could be like Roth IRAs, cash-value life insurance, municipal bonds. And what happens with these accounts is we pay tax today.
We put money in these accounts, they grow tax-deferred, so you don't pay taxes while they're growing. And then when you go to take out taxes, income in the future, rather, it all comes back to you tax-free. And again, if we have high income already coming in from other sources in retirement, it's important that we have some diversification and so that we're building these taxable tax-free buckets so that we've got more control over our taxes in retirement.
Now, some of the common challenges that we see from a tax perspective for FRS members is having that high taxable income from pensions, DROP, and deferred comp. Again, this already can push you into higher tax brackets, and then when we've got higher taxes, guess what also happens? Our Medicare premiums go up. A lot of people don't know that, but there's something called an IRMA income charge. It's called the income related monthly adjusted amount.
And basically what that means is, the more income that you make, the higher your Medicare premiums are. So it's not just the tax that I paid today, but it's how is it going to have this impact, also on Medicare? Social Security taxation. Depending how much taxable income you have, is going to determine how much of your Social Security benefit is considered taxable income.
Again, this is why it's so important. And also lack of flexibility. When most of your income comes in from taxable accounts, it's hard to control your tax bracket in retirement. Especially when we start thinking about required minimum distributions. Those are where those tax-deferred accounts, I think IRAs deferred comp, 403B something along those lines. And those accounts, you have to start pulling money out of them when you're 73 according to today's tax law, whether you want to or not.
So I can't tell you how many clients I have that get into retirement. They've got Social Security, they've got their pensions, and that's enough to satisfy their income in retirement. They get to 73 now they have to start pulling money out of their retirement accounts, even if they don't need it. Pay all that tax. Pushes them up into a higher tax bracket. It increases their Medicare premiums.
And so because they don't have the flexibility, because all of their money has been in those pre-tax, tax-deferred retirement vehicles. Where, if we've got some more flexibility, maybe you don't even have required minimum distributions at all. Maybe you've got more control over when you tap into your retirement accounts and when you don't.
So let's go through and talk about some tax diversification strategies, and how can you start to diversify your income sources to manage those taxes. Well, the first thing that you can do is you can look at a Roth conversion. So a Roth conversion is when you take pre-tax retirement accounts and you convert that to a Roth IRA. So you convert funds from tax-deferred accounts to Roth, and this is going to reduce those future RMDs.
This is going to provide tax-free income later as well. I'm going to talk more about Roth conversions in a few minutes. Having a taxable account bucket. Again, using these taxable accounts allows you to take advantage of lower capital gains rates. Again, back to my client that I talked about earlier, looking at where she currently was and thinking about ok, in a 24% bracket, do I want money coming out at a 24% tax bracket or 15? That's a big jump.
So looking at another reason that she can do that is because she has taxable accounts. Because she has a non-retirement account that she's built and saved over the years. You could also have cash value life insurance, where you can, if done properly, take tax-free loans and withdrawals. So diversifying your income across all these sources gives you more control over your taxable income in retirement.
So I love when I'm working with a client and we actually have all three of these buckets, tax-deferred, taxable, and tax-free, because we have different levers that we can pull. And we can say, hey, we really want to stay and, you know, in this tax bracket. And we only want to fill the bucket up so far, to take money, maybe out of our taxable accounts, and then we want to start really diversifying, to take out as tax-free or partially taxable, so that we have that diversity there.
So that we're proactively, we're intentionally working on our taxable income. I want to have the most income in retirement. I just want to make sure that I'm doing it in the most tax-efficient way possible. So let's go through, I want to talk about too, I want to give you some ideas, some case studies, and I want to look at some real-life examples. So the first thing I want to look at is a Roth conversion. So client retires at 62 and they've got retirement income coming in from their pension and their Social Security and their pension and Social Security is enough income to support their lifestyle in retirement.
And we'll go through how we work with clients. We do what's called a retirement rehearsal. This is where we take a look at all your retirement income sources. We fast forward you to retirement, say, hey, what is this income really going to look like in retirement? And we look at income, we look at taxes, we look at expenses and lifestyle to see, do we have a surplus? Do we have a deficit? Do we need to bridge the gap for income? What's going to be the best choices and options for each individual client?
So in this case, taking their pension, taking their Social Security, and they went through and did a spending plan for retirement, not a budget. I'm not a believer in a budget, but I do like having a spending plan so that we're being intentional and know we want to spend our money. And so they're in a great position because that pension and Social Security is going to be enough for their lifestyle.
So this means what they've got in their DROP and in their deferred comp, they can let grow for the future. And they've got about $250,000 between DROP and deferred comp. And remember, they're 62 so based on current tax law, they can let that grow until 73, but we know at 73 they have to start taking money out of that for RMDs, required minimum distributions. So what we did is we helped them convert these accounts to a Roth but we didn't just do it all at once.
We did a phased Roth conversion, where we did about $50,000 per year, obviously, that last year was a little bit more, but about $50,000 per year, so that we could spread it out and not have too big of a tax hit all at one time. And what happened with this as a result is one, we were able to convert all of their pre-tax to a Roth. Again, doing it over five years, so that we reduced the taxable income, but then the impact for them is no required minimum distributions. So now it gets to grow tax-free.
They're not paying any taxes while it's growing. They're not going to be forced to start taking money out of it at 73. So they can pick and choose when they start to take income from this account. When they do take income, it's all going to come back to them tax-free, because it's now in the Roth, and guess what? What if they don't need it? What if with their pension and their social securities and their COLAs, what if they're just fine and they don't actually tap into it? Well, now what happens is this account goes to their kids tax-free.
So it's part of their legacy plan. Not only does it help them, but it also contributes to their legacy plan. What's also going to happen is they're now going to have reduced taxable income over their lifetime. Now, honestly, they've got higher taxes in these years when we're converting it, but we have a plan for how to pay for the taxes, but they're going to have reduced taxable income over their lifetime.
So that's going to save on taxes, and it's going to save on Medicare premiums. So it's going to have significant savings on taxes, Medicare premiums. It gives them more control and more flexibility with their retirement plan.
Now another example I want to give is for cash value life insurance because this can also provide tax-free income and retirement for income or unexpected expenses. So I want to give you just a couple of examples. So one of my clients, they did a kitchen remodel a few years ago, and what they decided to do was to do a loan from their cash value life insurance. They said, April, we want to have a way to pay for the renovations, but we want to pay ourselves back.
We plan to pay ourselves back. So we just want to do a loan, and then we're going to do a payment plan to get that paid off. And again, that's a loan. So it comes to them, tax-free. Another client of mine had some major dental work done. It wasn't quite $10,000 but it was pretty substantial, close to $10,000 and we looked at several different options for where to take the money from, from the dental work.
We looked at the cash value, and said, hey, do we want to do a loan? Do we want to do a withdrawal? And he wanted to do a withdrawal. He said, you know, April, I spent my whole life paying off debt and getting out of debt. I don't want to have a loan. I don't want to go back in debt at this stage of my life.
So we just did a withdrawal from his life insurance policy, and it reduced his death benefit slightly, but it wasn't a huge reduction. But that money came back to him tax-free, and he was able to pay for that dental work. So great examples of using that cash value for things that they needed or they wanted when they were in retirement. I also have clients who have used the cash value to just increase their income in retirement.
They get to retirement or at some point and say, I don't really need the death benefit as much anymore, or it's not as important to me as it once was. Instead, what's important to me now is living the life that I want to live. And so we look at structuring the cash value where it comes back to them as tax-free as possible, not all tax-free, but as tax efficient as we can structure it.
But have that income start coming back to them out of this policy to increase their income, but also do it in a tax efficient way. And so what happens with that is we can then have, like very little to no tax impact. We get to keep our retirement funds, we get to keep our investments, our retirement accounts, without having to disrupt our plans.
And then we also get to continue to have that financial flexibility, because we have these different buckets that we can tap into when and if we need it. And again, that's why it's just again, so important, of why we don't want to have everything in those tax-deferred vehicles, because even if we're in retirement it can still feel like they're locked up in prison because of the taxes.
Can't tell you how many people tell me that they don't want to pull money out because of the tax that they have to pay when they need money for something. Maybe they need to buy a new car, put a new roof on the house. They want to take a trip and pay for it for their family. Or there are all these things that we need to do and want to do in our lives.
And I mean, tell you, from my experience, having all that money in the retirement accounts, it it makes you not want to tap into it because of the taxes. So being able to have a plan for these other things in a more tax-efficient way is only going to help you in retirement. So as we've gone through today, we've talked about a couple of different things. We talked about tax diversification, how that helps you have more after-tax income in retirement, which means more money in your pocket.
And we've also talked about the importance of balancing income sources from taxable, tax-deferred, and tax-free sources. So if you're ready to take this next step in your retirement planning, you're curious, like, hey, I'm not sure where I stand or what should I be focused on next, especially as it relates to looking at these different types of accounts, I would recommend that you schedule a time for a complimentary consultation with me.
This is where we're gonna review your current situation. We'll talk about some of the strategies that we've talked about today to see where you are and see what's gonna make the most sense for you. And the best way to do that is you can schedule a consultation. You can go to our website, which is curryschoenfinancial.com. Again, that's curryschoenfinancial.com to book an appointment.
I also encourage you to join our upcoming webinar on tax diversification for more insights. We're going to be going into all of this in more detail, so if you don't have that on the calendar, just send us an email and we'll make sure that you're all signed up for the webinar. Thanks for joining me today. Tax planning is really a powerful tool to help you maximize your income and enjoy retirement. So let's work together to make it happen so you can enjoy the retirement you deserve. Bye now. See you next time.
Voiceover: 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.
7492364.1, expires January 2027.