A hearty welcome to “Grandma’s Wealth Wisdom” with your neighborly hosts, Brandon and Amanda Neely. This is the only podcast that helps you take charge of your cash flow and leverage your assets, simply and sustainably, the way Grandma used to.
Brandon: Hey, I'm Brandon, and welcome to Grandma's Wealth Wisdom where we help you break through to a smart, stable financial future, with the tried and true wisdom Grandma used.
Amanda: And, hey, I'm Amanda. If you're listening to this episode the day it airs, happy Valentine's Day. If you're catching it later, happy whatever day it is, and hopefully it's not tax day.
Brandon: Yeah, happy Valentine's Day, Amanda.
Amanda: Thank you.
Brandon: I agree, hopefully, no day ever is tax day. I'm not a fan of tax day really, but hopefully no day ever is tax day. [01:00.0]
Amanda: Brandon, I do have to tell you and remind you, it's patriotic to pay your taxes. You've got to do your civic duty and not complain about it.
Brandon: I do like to drive on the roads and all that fun stuff, so I guess it is important. That's fair, Amanda, but I don't want to leave a tip, really. I don't like to give them extra money. In other words, there's no one at the Internal Revenue Service who is my Valentine's. Only you are.
Amanda: Glad to hear that because I might have to make you sleep on the couch if you've got another Valentine besides me, and especially if there's someone at the Internal Revenue Service.
Brandon: I hope not. In all seriousness, there's a delicate interplay between feeling like a responsible citizen who pays my fair share in taxes and feeling like I'm paying more than I should because it's a pretty big percent of my income.
Amanda: Yeah, and I bet a lot of people feel that way, and contrary to what the title of this episode is, which we should probably say, in case people missed it, this is Episode No. 48, Taxes Going Up And What To Do About It Now. [02:14.0]
Contrary to what that title just said, no one knows for sure what's going to happen with taxes in the future. Are they going up? Are they going down? Will you be in the same tax bracket in retirement? There are so many questions to ask about taxes and no one really knows the answers.
Brandon: Even those politicians don't know. Didn't actually a new law get passed at the end of 2019 that changes things for retirement funds? It's called the Secure Act, if you want to research it. It's so hard to keep track of all of these changes.
Amanda: Yeah, and that's why this episode is going to show you a way that you don't have to be overly concerned about the future of taxes, no matter who's in office, or what then national or state deficit or debt is. There are ways to not have to be overly concerned. [03:08.3]
Brandon: But before we start, we have to give you a big disclaimer. We're not CPAs. We don't play any on TV—we don't do that—or official tax experts. We just like to look at those tax tables, and try and think through it. But there's no reason to make taxes complicated either. Today's episode tries to make taxes simple. Let us know if this is simple enough for you.
Here’s the thing to ask yourself. Taxes really come down to asking one simple question: when, over your lifetime, do you want to pay your taxes?
I'm going to say this again.
Amanda: Yeah, say it again.
Brandon: When, over your lifetime, do you want to pay your taxes? [04:00.9]
Amanda: And there are only really three buckets, three options. You can pay now, pay later, and pay never. We're going to explore each bucket and then talk a little bit about how you might decide how much of your savings and investings that you want to put into each bucket.
Brandon, start with Bucket 1. How do we pay taxes now? What does that mean?
Brandon: Bucket 1, of course, is pay now. The “pay now” bucket includes accounts you get an interest statement for every year and then have to pay taxes on the growth as it happens. So, we're going to be doing taxes now and I get these little statements on maybe my savings accounts and some other things that I'm going to have to put on my tax return or tax forums. Those examples include savings accounts, money market accounts, CDs and brokerages accounts—brokerage accounts. Not “brokerages.” Is that how you say it? What's the plural of brokerage accounts anyway? [05:09.6]
Amanda: Brokerage accounts. That's plural.
Brandon: Okay. I tried to pluralize brokerage. Anyway, the problem with these types of accounts is that the tax obligation each year cuts into your uninterrupted compounding growth. In other words, if you amass too much in this bucket, you have to dip into the bucket to pay the tax on the growth and then you lose out on the potential growth of that money you sent, so the Internal Revenue Service, so it isn't compounding sometimes.
Amanda: Yeah, so that's Bucket 1 where you could store some wealth, pay now. Bucket 2 is pay later.
Pay later includes your tax-deferred funds. You don't have to pay taxes on these funds year after year. Instead, the tax is deferred. You'll owe tax at some point in the future at your then tax rate and tax bracket. Some examples of pay later type tax deferred funds are 401(k)s, IRAs, annuities, U.S. savings bonds and gains on individual stocks held for over one year. [06:19.3]
Now don't skip this important note that really impacts Bucket 2, the “pay later” bucket. Tax laws change. No one really knows what tax rates and brackets will be in the future when you're taxed on the funds that you withdraw from a tax-deferred bucket. There are also lots of government regulations on some of these accounts regarding how much you can put in the bucket, when you can use it and so forth, and they can change those rules at any time, just like they did with the Secure Act that we mentioned earlier. Google it. We don't have time to go into all those changes now, maybe in a future episode, but we titled this episode Taxes Going Up and what you can do about it now. [07:01.2]
Now, we don't want to jump ahead to the application phase before we talk about Bucket 3, but perhaps start pondering these questions.
- Do you think taxes will go up or are they going to go down in the future?
- Would you like to have the same lifestyle in retirement that you have now, meaning the same income? And, if you have the same income, will that mean that you're likely in the same tax bracket that you are now? Because it's all based on your income. If you have X number of dollars that you get per year now and you want to have that same income in retirement, X amount, and you pull that X amount from your tax-deferred vehicles like a 401(k) or an IRA, won’t you pay the same amount of taxes? But if taxes go up, if they change the tax laws, the brackets and the rates, even if you have the same amount of income, won't you pay the even more in taxes?
That's something to think about in terms of when you're putting money into Bucket 2. [08:02.6]
Grandma always said, “Eat your vegetables. Look both ways before crossing the road. And never risk your financial future on elements of the market you can’t control.” That Grandma, always good for some tried-and-true advice. And although some of her wisdom seems to have skipped a generation, you don't have to be left behind.
Download “Grandma's Top Tips for an Independent Financial Future” absolutely free, when you visit Grandma’sWealthWisdom.com. Don't wait. Get Grandma's best tips today.
Brandon: There's one final note about Bucket 2. If you believe taxes could go up in the future and feel like taxes are akin to a root canal, we'd invite you to consider if you'd continue to defer that root canal and put more money into Bucket 2, the tax-deferred bucket. Won't the pain from taxes later on hurt worse, just like delaying a root canal. I mean, seriously. [09:07.1]
Amanda: Yeah, Brandon, you're bringing up all kinds of traumatic dental procedures that I've had, teeth extracted and even getting dental implants, and I even had some teeth removed in junior high and had to be a cheerleader that night at a game—yes, I'm a former cheerleader. My apologies—but I'm glad that those dental procedures are in my past and hopefully not in my future. But, for my sake, let's stop thinking about teeth and move on to Bucket 3.
Brandon: First, why are you apologizing about being a cheerleader? I don't know.
Amanda: Oh my gosh, I'm not like a cheerleader.
Brandon: So, Bucket No. 3: what about the “pay never” option? Wouldn't it be great if we could find a way to pull most, if not all, of our income from this category? Honestly, this is really hard to make happen, but there are certain types of income on which you are not required to pay income tax under the current tax law.
Here's a sampling of examples. The income from Roth IRAs, if you qualify, of course. There are death benefits of life insurance if somebody dies and they give you a death benefit. And income received as a living benefit from a cash-value life insurance policy. That's another way. That's, of course, properly structured like Grandma's strategy is.
Amanda: Yeah, and one important note here—when you put money into Bucket 3, you're still paying income tax on the money before it goes into this bucket. But the idea is that you don't have to pay taxes on the growth or on those funds that you put in ever again. It's sort of you pay the tax now and you never have to worry about taxes again, at least again under current law.
Brandon: So, why would Bucket 3 be a good idea? Let's just say we know of people who are pulling over $100,000 in annual income from Bucket 3 each year and still getting full social security benefits that they don't have to pay taxes on either. This bucket can have a lot of additional power on the other parts of your financial picture with those other two buckets. [11:33.0]
Amanda: Okay, to recap, you might guess that the most important question to ask yourself about these three buckets is this: how much do you want in each bucket? Now, we're making a big assumption. We're assuming that you're setting money aside for the long-term future, and if you are doing that, we know there's only three places to put it.
How much do you want to put in Bucket 1 where you have to pay taxes year after year? How much do you want to put in Bucket 2 where you pay taxes down the road when you would draw those funds? And how much do you want to go and get the taxes out of the way, put it into Bucket 3 and never have to worry about taxes again? [12:12.6]
Each of these buckets plays an important role in each person's life, potentially. But you have to ask your question: how much do you want in each bucket?
Brandon: Now, most accountants, including ours and tax professionals, look to reduce bucket number one, how much you pay in taxes now. They want to reduce that now. You want to be able to find someone to help you look at reducing your tax obligations over your lifetime, not just now. Now is important, but also throughout your whole life, and what the impact of the future is, how it will impact even the present.
Amanda: Yeah, and Brandon and I actually love exploring this with people. Remember we're not CPAs. We don't play them on TV. But we do love playing with math and exploring different scenarios, How would this impact your future, and how would that? And we would consider it an honor to help you think through those things. [13:06.7]
Brandon: Here’s an example. We have a client who believed her income taxes will go up in a few years. In fact, she was moving from a state with no income taxes to a state with high income taxes, so she had a pretty good reason to be concerned. We helped her think through a strategy to save over six figures in taxes.
I'm going to say that again. We helped her think through a strategy to save over six figures in taxes, possibly more if the federal taxes go up by a pivotally 1 percent in the future, so that number of six figures is probably going to be a lot higher if taxes go up.
Amanda: Yeah, and your lifetime tax strategy might not be that dramatic or maybe it could. The way to find out is to start by getting the wealth journal that we’ve created for this episode at Grandma'sWealthWisdom.com/48, and that link will be in the show notes as well. [14:12.3]
But the idea there is a simple PDF to help you take the insight that you just got about taxes and turn it into action, tangible steps that you can take to improve your financial journey. It just asks you some questions, gives you some space to journal about those questions, and take again the information that you just received and figure out what to do about it, because information alone is not worth much. It's what you do with information that matters.
Brandon: So true. If you want to hear more about this fun topic of taxes, we have other episodes about it, so go to our archives, and there we have a history of taxes and their possible future. The title is We've Got a War to Pay For. Again, it's in the archives and the link will be in the show notes. It's actually pretty interesting, at least as interesting as a conversation about taxes could be, but it affects every one of us. [15:14.9]
Amanda: Yeah, and while you're looking for that episode, be sure to hit subscribe on your podcast app because you're not going to want to miss the next episode, where we're going to talk about three crucial steps to make sure your money can change as your life changes. Change is the only constant in life, but how do you navigate your wealth strategies when your season of life changes? We're going to explore that topic in the next episode.
Brandon: Until next time, keep building your wealth, simply and sustainably, so you can break through to a smart, stable financial future.
The topics presented in this podcast are for general information only and not for the purposes of providing legal, accounting or investment advice. On such matters, please consult a professional who knows your specific situation.
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