On this week’s episode of the Secure Retirement Podcast, we dive into the third episode in our series on the Florida Retirement System. Today we talk about an important topic that many people choose to avoid— factors to consider while thinking about tax deferral. We also ask the important questions you need answers to before making your final decision.
“We're looking for opportunities to minimize tax. We want to avoid the tax, not evade the tax, because the difference between tax avoidance and tax evasion is about 10 years in prison”, says John.
We chat about taxes and their impact on your retirement, as well as:
Questions to ask when deferring your taxes
A brief history of income tax
How a change in administration could affect your retirement
Whether or not income tax is really voluntary tax
And more
Listen now…
Mentioned in this episode:
Transcript
Steve Gordon: Welcome to John Curry's Secure Retirement Podcast. I am your host, Steve Gordon., and I'm here interviewing Mr. Curry on our ongoing series of episodes for members of the Florida Retirement System. So if you're a member of the Florida Retirement System, you definitely want to tune in to all of these.
This is episode three. And if you missed the first two, you can go back and find those at johnhcurry.com or you can subscribe in your favorite podcast player, whether that's Apple Podcasts, Google Podcasts, Spotify, Stitcher, you can find it all there. And today, we're going to, I think, dive into an important topic and one that lots of people like to avoid. Before we get there, Mr. Curry, welcome.
John Curry: Glad to see you again. Steve. Thank you for playing host.
Steve: Yeah, this is fun. I tell you, I'm learning a lot myself. And I'm not a member of the Florida Retirement System. I think that's, you know, if you are listening to this and you're not a member, you will find, I think, a wealth of information here that actually will apply to you. Today's episode especially. So, John, today, we are talking about taxes.
There is an awful lot of talk about taxes, these days in the news about should they be raised, are they going to be lowered? Who knows? I don't think any of us can predict what will happen in the political winds. And that's not really what we're here to talk about. We're really going to focus on taxes as they impact your retirement because as you've told me again, and again, they have a big impact.
John: They do.
Steve: So specifically, should you pay your taxes today or should you defer them into the future?
John: Well, that depends. So here's a question for you. When you retire, Steve, will you be in the same tax bracket as today? Higher or lower?
Steve: I gotta tell you, I'm really aiming to be in a higher one.
You May Not Realize, but You Want to Be in a High Tax Bracket
John: Very good. Good answer. correct answer. I'll have people come to me and say my goal is to be in the lower tax bracket when I retire. I say you don't need me. They go why? If that's your goal to be in a lower tax bracket, that means you have less income. That's not what I focus on. My job is to help you retire with as much income as possible, preferably at least what you were earning before you retire, not less.
Why would you want to have more time in front of you, free time, but not have the money to enjoy it? Is that your idea of retirement? And it puzzles people because they've been taught, okay, when you're retired, you'll get about 50% of what you're getting with your pension plus social security. So you need to prepare yourself to settle for about 70% overall. I go, why? Why would you start there? Why don't we start with 100% or better? And if you can't get that, then settle.
But why would you start there? And that's where the conversation starts. And then I'll ask, answer the question about the taxes. Tell me what your income will be when you retire. Tell me what the tax brackets will be. Have you looked at tax history? Nobody does. I don't do it much anymore but when I would do ongoing classes for CPAs continuing education, I would say Who can tell me what the top marginal tax bracket has been throughout our history of income taxes.
Nobody ever got it right. They'd say 70%. The top bracket was 94%. And a little tax history. When I was getting my master's degree in financial services, we had one entire course, not a class, the entire course, just on the history of our income tax. Very fascinating. Tough course, but it was fascinating. 1913 was when we had the first illegal income tax in our country with the passage of the 16th amendment. Do you know what the top bracket was in 1913?
Steve: I have no idea.
John: 7%. Seven. And to get there, you had to earn $500,000 a year in 1913. So we were told, they were told, we weren't alive, that the press said headlines temporary tax. And it was. It was 7% for three years. In year four, they raised it to 15%. Why? Well, they needed more money to finance with things like World War One. Tax rates went up. It was crazy.
Then you're in a great depression, tax rates for 25%. If you go back and look at, and this is data from IRS, this is not something I made up. You go to IRS website and see the history of the taxes, the brackets. So I find it interesting when people talk about let's go tax the high-income people, the wealthy people. If you look at the same charts I see, yeah, the tax rates went up higher for those folks but guess what, the tax rates came up for everybody. Everybody. Maybe not as severe but they still came up.
And even though Ronald Reagan in the 80s pounded congress to drop the top bracket from 50%, down to 28, that was helpful. However, just because the tax rates dropped to 28% does not mean that we paid less in tax. Most of us did not pay less tax. Why? Because they were controlling the levers, they dropped the tax bracket but they took away deductions. They took away the interest you could deduct on your car loans before, department stores, credit cards, all that was deductible in the past.
They took it away. It was phased out. So when people start talking about well, the tax law says this or this. I'm not a tax attorney, I'm not a CPA. I do have a Master's of Science in financial services, but I read and study this stuff, but I don't hold myself as being a tax expert. But I do enjoy reading it, studying it, understanding it and teaching it as much as I can. But I am convinced that if we really understood what's happening to us, there'd be another revolution and we'd say no, no. Another Boston Tea Party. I'm not paying that tax. And by the way, do you know that your income tax is called a voluntary tax, by the way? Does it feel voluntary?
Steve: Last I checked, it wasn't voluntary.
John: It's interesting. So I say all that to set the stage for, answer your question. Should you defer? Should you defer? And it comes down to a lot of factors. What will your tax bracket be? What does the tax law allow you to deduct or not deduct? The new tax law, they came into play a couple years ago, made big changes because now the first $24,000 of income for married couples is not taxed because of the standard deduction being doubled. So that is set to sunset in 2025, that could go away.
Every time you have a change in administrations or parties for sure, you'll hear a lot of arguing and bickering about tax rates. And people ask me every day that I see clients, what will my taxes be in the future? I have no idea, nor do you. Nor do you. I said however, I hope that with the planning we did during the maximum tax bracket and we're looking for opportunities to minimize the tax, avoid the tax, just don't evade the tax because the difference between tax avoidance and tax evasion is about 10 years in prison. So let us not evade, let's just avoid.
Steve: That's right. So I know folks who are in the Florida Retirement System, and frankly, folks who are planning for retirement in any way, have some options. There are plans where you can defer your compensation, you can defer tax payments, all of that. Walk us through what some of the options are and what people need to be thinking about.
Choosing the Best Option For You
John: Well, the most basic one is something called a 457 deferred comp, deferred compensation plan. Most state employees are familiar with it and will use it. So the question becomes do I set aside money for retirement, where it's coming out of my paycheck automatically, you cannot write a check and mail it in. It has to be a payroll reduction is where the law says. So I can have $100, $500 come out of that and be invested. And the state of Florida has different companies that they've chosen to be sponsors of the deferred compensation plan.
So the employee can do that. And then when they come out of that plan in retirement, every dollar they take out is taxed. Now let's talk about the different plans that are out there for all of us. So, members of the Florida Retirement System, state deferred comp for most of them. There are exceptions. People who are in a school system and the university system and community colleges have something called a 403B plan, tax-deferred annuity. Now it's called tax-deferred arrangement because it's not just annuities anymore. You can also use mutual funds. So those are the two that you see in the school system and in the state government.
Or people on the street out there, I call them civilians, like us, they can have 401K's and IRA, or if you're self-employed, some type of SEP plan, simplified employee pension plan. So any of those same guidelines, you put the money in today, you pay no tax on that contribution until you take it out. And people think that's a big deal. great deal. Well, it is if you are in a lower tax bracket when you retire. If you retire and all of a sudden you're in the same bracket or higher, maybe that was not the best strategy. Maybe you'd been better off taking the money, pay tax on it and do something else with it. Was there something else? You could have a Roth IRA.
I'm surprised at the number of people who don't use Roth IRAs. Their mindset is, well, I'd rather save the taxes. And I have news for you, you're not saving taxes, you are deferring the tax. And I'm guilty of it myself. Yeah, I put a lot of money in my 401Ks, but I made sure I have a Roth IRA and also have life insurance that builds cash I can use in the future. So I paid the tax, bought the insurance because it allows me to do other things in retirement that if I don't have insurance, I can't do.
Steve: So John, what are the other key issues people need to be thinking about when it comes to these tax issues?
Figure Out When You Want to Start Receiving Retirement Income
John: There's a bunch of them, but I'll just cover a couple of right now. First one is when will you want the income? The law, federal law requires now that you have to take a required minimum distribution at age 72. The old law said 70 and a half. They just changed with the Secure Act at the end of 2019. So let's suppose Well, I'll be 68 in December, so let's suppose I retire, pretend I'm in the Florida Retirement System and I've got a quarter of a million dollars in my deferred comp account.
When do I want to take income? Maybe I take income immediately, maybe I defer it to 72, and then take it. But the laws are very clear on this. If I have deferred comp and an IRA, I have to take it from both. If I have four IRAs, I can take my distributions from one if I want to let the others continue to grow.
But if I have a 403B, 457, and an IRA, then if I leave them in that status, I have to take money from all. That may not be the best way to do it. We may want to have some money, some accounts giving you income today and others growing as much as possible. And that comes down to when you need the money, when you're willing to pay tax on it. You know, how are you structuring your money? Are you leaving it behind primarily for family members or you gonna spend it all yourself during your lifetime?
But the key for people, especially in the Florida Retirement System, is to coordinate all savings and investments with whatever pension option you chose. It's very important to do that. And you and I have talked about this from time to time, I believe in talking about the good, the bad, and the ugly with anything we're doing. What does that mean? Too many times people will tell us what's good about something, they never tell us what's bad. And I always like to ask the question, Well, tell me what's ugly about it.
They go What? Okay, don't just give me the good stuff. Tell me everything. So if you work with me, you're gonna hear it all. The good, the bad and the ugly. I call that the Clint Eastwood method. Remember, the movie, The Good, the Bad and the Ugly? But I think it's just important to understand that if we look back at our tax history and when the tax rates went up, it was because Congress was spending a lot of money on various presidential administrations work.
And money had to be collected in the form of taxes to pay for that stuff. If you look at what's happening in our environment today, I don't see how any reasonable person, any reasonable person could say that our tax rates won't go up. I believe during my lifetime, I will see tax rates back to 50% if not higher. Maybe 70% because there's a lot of pressure to collect more. At some point, tax rates have to go up because the members of Congress are not willing to make some of the tough decisions that had to be made because they're worried about not getting reelected.
Steve: You know, as folks are looking at their different options and are in different plans, is there anything in particular, they need to know about the difference between, for example, 457 and 403B and all these other things? Or are those not as critical?
John: I think they're critical if you happen to have a choice of having both. I find some people who had 457 plans and 403B. It really comes down to the company of choice that's offering those plans. When I meet with people ask those questions, tell me what you're trying to accomplish. Are you looking for growth at all costs? Are you looking for what I like to call a moderate growth? Are you looking for absolute guarantees? What are you trying to find?
And because I'm not licensed with these particular companies, I can't give specific advice on those particular plans because securities regulators are pretty tough on advising on something that you don't have the right to be doing. So I don't do that. But what I can do as a blanket, big picture is look at everything with you and say look, see, this might not be just right for you. Why don't we call your other guy and find out? Or you call if you want to. But if you're under my care and I'm doing the planning, I'll help you with it.
Steve: Very good. Well, John, any, any other issues folks need to be aware of? Any final thoughts before we wrap this one up?
Keep an Eye Out for Changes in the System
John: I'll tell you what I thought about doing one time then decided not to because the rules changed so much, I thought about getting into contribution limits and various rules. I think I'll just leave that out, Steve, because by the time someone hears this, the law may have changed. You know, the rules change. They're changing constantly.
And for those people who say, well, not for me because I'm in state government, there was a major change back in July of 2011 to your pension plan. And if you haven't gone and looked at the plan summary document, I'd recommend you do that. Pay attention to it and go to their website occasionally at the Florida Retirement System and just see what's going on. See what the legislature is up to.
Steve: Very good. And if somebody is curious about that and just wants sort of have their hand held through it, will you do that for them?
John: Absolutely. And I would encourage people to start. Just, if you're not sure, just start with a telephone call. We have telephone appointments. 20, 30 minutes with someone, find out if there's a fit and then we'll sit down together. Sometimes that's face to face. Sometimes it's over the computer online meeting with a telephone call. But absolutely. I enjoy having conversations with people. You know, I tell people I grew up in a state employee family, you know, my dad worked for the state and my granddad worked for the state. So if I can help people, especially FRS, I love doing it.
Steve: That's fantastic. Well, John, I know we're, the next episode we're doing here in this series is maybe one of the most important ones. We're going to talk about what age to retire. And so I'm hoping you're gonna tell me that I can retire at age 50 because that'll be my next birthday. Probably not going to tell me that, but I'm hoping.
And I think everybody else listening is probably wondering, well, when can I retire? So we're going to talk a little bit, folks, about how to approach that decision and some of the factors that go into, or ought to go into your thinking there. And I think that'll be Fantastic. John, for folks that have listened to this and have some questions, how can they get ahold of you directly?
John: Well, they can call my office at 850-562-3000. 850-562-3000. Or visit my website at johnhcurry.com. That's johnhcurry.com.
Steve: Very good. And, folks, if you're looking for the other episodes in this series, go to johnhcurry.com, click on the podcast link and you'll find them there. And you can also find them in your favorite podcast app. Be sure to go in that app and give the podcast a five-star rating. I know John would be happy about that and it'll help some other people find these episodes. And we hope that there'll be valuable both for you and for folks that you know. So stay tuned for next time. We're gonna talk about what age you're able to retire.
John: Plus they'll be other stuff in there too.
Steve: Awesome.
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 at Park Avenue Securities LLC.
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