Smart Tax Planning Strategies to Keep More of Your Retirement Income with Mike Guthrie

Most retirees are surprised to learn just how differently their income is taxed once they stop working. From Social Security to pensions, IRAs, dividends, and even rental income, retirement brings a complex new tax landscape that can catch even the most financially savvy off guard. This episode is here to help you stay ahead of the curve.

Joining SHP Financial’s Matthew Peck is returning guest and financial advisor Mike Guthrie. With over 25 years in the industry, Mike breaks down the different sources of retirement income and how each is taxed—from qualified accounts, such as 401(k)s and IRAs, to brokerage accounts, Roth IRAs, and beyond. He highlights the common pitfalls people often fall into and why proactive planning is essential to avoid unpleasant tax surprises.

By the end of this conversation, you’ll have a clearer understanding of how tax buckets work, which withholding tax strategies make sense, and how tax laws can impact everything from Social Security to capital gains. Whether you’re planning for retirement or already there, this conversation will help you navigate retirement income with more confidence, control and peace of mind.

In this podcast interview, you’ll learn:

• Why not all retirement income is taxed the same—and how to plan accordingly.
• How interest, dividends, capital gains, and Roth withdrawals differ in tax treatment.
• What you can (and can’t) withhold taxes from in retirement.
• The importance of proactive tax planning in avoiding April surprises.
• How strategies like Roth conversions, gifting, and timing Social Security can reduce your tax burden.
• Why personalized advice is critical because no two retirees face the same tax situations.

Inspiring Quotes

• “You just kind of assume folks know but then when you get that 1099 and you go do your taxes with your tax preparer, and it’s suddenly, ‘Wait a second. What’s that? Where’s that from? I never had to do that before.’” – Mike Guthrie

• “Almost every decision you make in retirement potentially could have a tax implication.” – Mike Guthrie

• “We mentioned 25-plus-year careers, those rules can change. They can change next year. In fact, they’re due to change if nothing gets done. So, again, tax laws and regulations are subject to change and you want to make sure you’re working with somebody that has a team that’s on top of that as well.” – Mike Guthrie

Interview Resources

• Royal Dutch Shell
• GlaxoSmithKline
• Boys & Girls Club of America

[INTERVIEW]

Matthew Peck: Welcome, everyone, to another edition of SHP Financial’s Retirement Roadmap Podcast. I’m your host today, Matthew Peck. We certainly hope everyone is doing well and I have a question to ask everyone too. Do you realize how much changes in retirement there are? Or to put it another way, when you think about the changes in retirement, what do you think about? Do you think about your lifestyle change? Do you think about where to travel? Do you think about spending time with family or grandkids or whatever it may be or are we going to run out of money? I mean, there are so many things that change with retirement. One thing you might not realize is that the sources of your income or how you are taxed changes in retirement.

Think of it this way, when you’re working for however many years, there’s a W-4. You fill out a form, they withhold the taxes. You claim 1-0, some random number that I still don’t really understand, even though I’ve been in this business now for myself 25, 30 years now, or at least working for a lot longer than that. But then you enter retirement. And now there’s interest on banks and there’s IRA taxes and Roth IRA and 401(k). And what about capital gains? And now your income sources are all taxed in these little bit slightly different ways. And how do you navigate that?

Well, to discuss that, we’re having our returning guest, Mike Guthrie. Love having him on, of course. He has also been in this field now for 25 years, so you’re getting a bunch of kind of middle-aged, angry old men. I don’t know what, we’re just mildly angry.

Mike Guthrie: Mildly angry, yeah.

Matthew Peck: We haven’t started to shake our fists at clouds yet.

Mike Guthrie: Not yet.

Matthew Peck: Not yet, but we’re thinking about it.

Mike Guthrie: Yeah.

Matthew Peck: Welcome back to the show, Mike.

Mike Guthrie: Thanks, Matt. Appreciate and thanks for having me back. Like you said, I think… Or this career of 25-plus years, not quite 25.

Matthew Peck: We won’t necessarily say what the plus is.

Mike Guthrie: Right. Within close to the 25 and 30. Let’s put it that way. But, yeah, I think in being in this business, and you may fall trap to this as well, is when you meet with clients, sometimes you just assume some things like, “Oh, they must know that their interest is taxed this way or what a capital gain is. Or when I start to take money out of my retirement accounts, how’s that going to be taxed?” Because, again, we’ve had those conversations with so many people and it’s part of what we do every day. But what we come to find out is that most, if not all of the clients that we meet with, have at least some questions about, “Okay. How is this going to get taxed now because I’m no longer earning that paycheck like you mentioned, and I have to generate income from my assets?”

So, what’s my tax situation going to look like? How much am I going to have to pay? What types of accounts do I pay income tax on? Which ones don’t I? And just kind of laying that out in front of people to let them know like, hey, there are different sources. You’re going to get taxed differently, but as long as you do some good planning and think about it, I’d say some degree, it becomes an advantage because you can start to say, “Okay, here’s how I’m going to pay. Can I pay less? Can I do some proactive planning so I might reduce my tax bill in the future?”

Matthew Peck: Well, let me go back to that point that you make about the trap that I think, and I absolutely fall in that trap too, about assuming that clients know. Because whether it’s meeting someone for the first time or even after two, three, four, five years of working with them, it’s really hard on the financial advisor because we sit and we’ll talk to doctors and we’ll talk to attorneys and we’ll talk to software engineers, I mean, brilliant, smart men and women that will come and sit down in front of us and it’s just almost like, of course, like this is a very smart person that’s sitting across from us. This very smart person must know what the difference between an IRA is and a Roth IRA is. They must know what an RMD, Required Minimum Distributions, are and all things that we take for granted.

And I absolutely have fallen into that trap so many times. And I think when you came with the idea of the podcast to say, “Hey, no, we should really sort of go back a little bit and really lay the foundation for all of our listeners,” I thought it was a great idea because of the fact of we talk about the changes in budgets. We talk about investment changes and things along those lines when people enter retirement and planning for all of that. But I like the idea of really talking about all the different sources of income upon retirement, how each one of them is taxed, and then the choices that you have on how to manage it. Because the other thing I’ll offer up too, as we go through this topic, is there really isn’t a silver bullet either, right?

Well, maybe there are no silver bullets in life but there’s certainly no silver bullet as to the proper way of structuring your different income sources. But you need to be aware of, depending on how you end up structuring that sort of the undercurrent of taxes is going to play a very, very big role in that decision. So, Mike, let’s start off from the top. Like, when you sit down with the client and this is the topic, where do you start with him or her? And let’s go from there.

Mike Guthrie: Yeah. I think it’s just from a high-level point of view, Matt, when we start to think about the different types of accounts that you have and where that income or taxable income is coming from, there’s a handful of sources, right? And like you said before, the answer I say a lot is, “It depends on the person sitting across from me.” But from a basic standpoint, when we think of the accounts that we have when we head into retirement, the taxes you pay on those different sources of income, you could be paying different types of income tax on those, so kind of from the most basic thing when we think about the type of accounts you have. So, one thing that you’re definitely going to pay taxes on is interest, so interest payments.

And really those are things like bank accounts, US treasuries, corporate bonds, municipal bonds. But even within those categories, taxes are different. So, for example, you got a bank account, your checking account, savings account. High-yield savings accounts are very popular now and for good reason. But any interest payments off of those that are paid, you’re paying both federal and state income tax. Now, again, let’s assume because most of our clients are living in a state that pays taxes so let’s just assume you’re living in a state that requires you to pay income tax. This might not fall to everybody in New Hampshire or different states. There are ones out there, but let’s just assume you’re paying a state income tax. Okay?

So, bank interest, right, your checking, savings, high yield, you’re going to pay federal and state income tax. On US treasuries, right? Another thing that’s become a little bit more popular lately because the rates have been pretty good. You’re taxed ordinary income from a federal level but not state. Okay. Right. So, one of those things. How about corporate bonds? Corporate bonds doesn’t matter. You’re paying federal and state income, ordinary income tax rate. Municipals, which is something that’s popular as well, particularly for some of our higher net worth clients. Municipals, and I say generally speaking, there is no federal income tax because there are some instances where you may have to pay some federal income tax.

So, I don’t want to say blanket, you never pay federal income tax and municipals. But again, that’s another one of those ‘it depends’ scenarios. But for most cases, you’re not going to pay federal income tax.

Matthew Peck: And just to pause there a little bit, I mean, I think because you alluded to it a little bit but I really want to emphasize how, well, the importance of this podcast, why we’re doing it now is because over the past, call it, 2012 until 2022, I mean, for a past decade, interest rates were basically zero. So, I think a lot of advisors, I’m sorry, a lot of advisors, I think a lot of clients were sort of lulled to sleep to say, “Wait a second, where’s this 1099 or where’s this interest income coming from? I haven’t seen interest income up from my CDs in a decade.”

Mike Guthrie: Right, because you weren’t getting any.

Matthew Peck: Yeah. Right, exactly. But now rates 4.5%, 5% even on money market rates, and who knows how long they’ll last of course. But right now, it’s a very apt topic because I think people are getting a little surprised and shocked when they get those 1099s from all these sources because of how high the rates are.

Mike Guthrie: Sure, yeah. And again, it’s one of those situations where you just kind of assume folks know but then when you get that 1099 and you go do your taxes with your tax preparer, and it’s suddenly, “Wait a second. What’s that? Where’s that from? I never had to do that before.” Because now you’re getting 5% on it so you’re potentially earning some real income on it.

Matthew Peck: Absolutely.

Mike Guthrie: But just to touch too on the munis as well, because we mentioned that generally speaking, you’re not getting taxed federally. However, from a state-by-state basis, it typically depends on what type of municipal bond you own. So, for example, a lot of our clients, most of our clients are in the state of Massachusetts. So, if you own a municipal bond issued by a municipality or another participating organization in the state of Massachusetts that qualifies as municipal income, you do not have to pay Massachusetts income either. So, a Massachusetts municipal bond for a resident of Massachusetts, it’s federal and state-exempt.

However, if you’re that same client and you own a municipal bond from, I don’t know, Illinois, you will be required to pay state income tax on that. So, important as well. Not just all municipal bonds are kind of blanket coverage in terms of their tax treatment. It depends on where you live, what type of bond you own where there might be some potential income tax related to that. Another one that’s popular too now is dividends. And not only are we assuming, by the way, Matt, that this is somebody who lives in a state that has income tax. We’re also assuming that the accounts we’re talking about right now are what we call nonqualified or non-retirement accounts, so standard brokerage or mutual fund, stocks, those types of things in a taxable account.

Matthew Peck: Right. And just to pause too, it’s funny you mentioned the word like brokerage. I sometimes struggle with that term, like, how do I describe. Because qualified versus non-qualified, it is just so hard to kind of wrap your mind around. So, I sometimes call them like after-tax accounts or post-tax accounts. I think the most common term is brokerage accounts. But it’s like any stock, bond, mutual fund that is not in an IRA or a 401(k) falls under non-qualified accounts. So, I just want to kind of clarify that. You did, but I just want to go again because it’s such a hard… Sometimes people just assume that, okay, or how to differentiate. That’s all.

Mike Guthrie: For sure. Yeah. So, again, 401(k)s, 403(b)s, IRAs, those are qualified. Everything else is non-qualified. So, if it’s in a non-qualified or a kind of always-tax type of account, dividends from stocks that you might own are taxed as well. But like I said before, it depends. What type of dividend is being paid? So, there’s two ways. There’s what’s called a qualified dividend and a non-qualified dividend. So, the next question is, well, how do you tell the difference? Well, in most cases, a qualified dividend is something that’s paid by a company that’s domiciled inside the United States. So, let’s just say, for example, you own shares of IBM, and that pays a dividend. It depends. Now, that will be qualified. However, you may still be subject to tax on the dividend depending on how long you’ve owned it.

Matthew Peck: Seriously?

Mike Guthrie: I know, right? It’s all these different things. So, for example, you’ve owned IBM for years. You’re getting your dividend. It’s a qualified dividend, right? And that is a lower tax rate federally. There’s no benefit in the state. So, a qualified dividend can get you a lower rate federally as long as you’ve owned it long enough. However, if you bought it, say, last week and the dividend pays tomorrow, you get no qualified status. So, you pay federal and state as an ordinary income tax. Non-qualified is typically international stocks that pay a dividend. So, the qualified nature of it is they’re a US-based company, you’re a US citizen, and then depending on if you get that qualified status or not is really around how long you’ve owned it.

Matthew Peck: Okay. So, we have qualified, which is talk about the wording, right? We have qualified accounts and non-qualified accounts, and now we have qualified dividends and non-qualified dividends. However, we’re talking about the non-qualified and qualified dividends are all in your non-qualified dollars. Everyone got that straight? Hopefully, there’s no quiz at the end here. That’s why we do this for a living but my goodness, that’s a lot to…

Mike Guthrie: Yeah, it’s a lot to kind of handle and think about where you just went from kind of normally paying your taxes through your paycheck or kind of standard things to now. Okay. Now, I have to really start thinking about almost every decision you make in retirement potentially could have a tax implication.

Matthew Peck: Sorry. Let me go back to the brokerage accounts though, on the qualified dividends and the non-qualified dividends. And maybe I’m jumping ahead, but so if I have stock in IBM, let’s assume for a moment, I didn’t buy it yesterday. I’ve owned IBM forever. And then I have a stock in Royal Dutch Shell, I think Shell, the oil company, or trying to think of another, GlaxoSmithKline is another international company. How are those two taxed differently?

Mike Guthrie: Yeah. So, in the qualified, so the IBM for example, in this case, the dividend is taxed at a lower rate federally. Now, if you own the international, the non-qualified company, it’s taxed to ordinary income.

Matthew Peck: Ordinary income, okay.

Mike Guthrie: So, you potentially get a tax break federally. I’m a qualified, IBM in this case, stock owning that dividend.

Matthew Peck: Got it. Okay. Alright, excellent.

Mike Guthrie: So, now we move over to, again, from non-retirement accounts to retirement accounts. Any distribution you’re taking from those types of accounts. So, your IRAs, your 401(k)s, your 403(b)s, your 457s, thrift plan is going to be taxed as ordinary income. This is a thing we run into quite often because most of the folks that we meet with who are approaching or very near retirement have a bulk of, if not all of their assets, in some sort of retirement, excuse me, workplace retirement plan that has been growing tax-deferred. So, you funded it with dollars that were not taxed. And then at some point when you take it out, you will be taxed as ordinary income.

Now, we could do a whole separate podcast on that but essentially what this is saying is every time you take a dollar out of one of those accounts, it’s being taxed as ordinary income. So, again, you take out, “Hey, I need $15,000 for expenses this month, whatever it might be. I’m going to take it out of my IRA, my traditional IRA.” That $15,000 is taxed at whatever tax rate you’re in, federally and state local if you pay those types of taxes. Pension income, another one of these things, right? It depends. So, most private pensions are taxed as ordinary income. In the state of Massachusetts, if it’s a government pension like you work for the state or the Department of Defense or whoever you might work with, there is no Massachusetts state income tax on that. In federal, there is no federal income.

Fewer and fewer folks have a pension. But again, you might potentially be taxed on your pension. And here’s the one that people really love, Social Security. You’re paying with it with dollars that you’re being taxed on. And it’s potential. It depends that sometimes your Social Security benefit might be taxed as well.

Matthew Peck: Which I believe is up to 85% of, again, depending on your income level and things like that. But I think for most folks, it’s knowing that of the amount that Social Security, let’s say, you have $1,000 coming in from Social Security per month, $850 of it or 85% of a thousand is what gets added to this taxable income, this interest or distribution income, this kind of bucket. Because I think it’s how you’re organizing. That’s how I’m trying to keep it straight in my own mind, Mike, is that these are all the different things that can get taxed, but it’s almost like when they account, they almost get slotted into these different buckets. And let me just kind of pause. I mean, is that a good way of explaining it to clients to say, “Okay, hey, this money falls into this category, this money falls into this category”?

Mike Guthrie: For sure.

Matthew Peck: Okay.

Mike Guthrie: Yeah, 100%. And I think the tax of a Social Security, so if your only source of income in retirement is Social Security, you’re not going to get taxed on it. It’s those other sources of income that most people in retirement have, taking money out of your IRAs, all the other things we just listed, dividends, interest rate, all those sorts of things kind of all get piled together at the end when you do your taxes. And then it determines if potentially your Social Security benefit is taxed.

Matthew Peck: Now, are there any distributions that are tax-free?

Mike Guthrie: Yes.

Matthew Peck: All right. I’m leading the witness here. Okay. Yeah.

Mike Guthrie: Yeah. So, again, on your retirement accounts, if you’re fortunate that you’ve been contributing to, or you’ve been able to contribute to a workplace Roth retirement account, so Roth IRAs and Roth 401(k)s or 403(b)s that any distributions you take from those will not incur a tax and will in fact be tax-free because it was funded with after-tax dollars. So, that money grows tax-free. You never have to pay taxes on it again. And importantly, if it’s important to you, anybody who inherits that money is not going to pay taxes on it again.

Matthew Peck: Okay. All right. Excellent. Now, did I miss anything? I definitely wanted to sneak Roth in there because we talk a lot about Roth conversions with clients and some of the other tax planning ideas that we’ll talk about later if we have time. But are there any other buckets that we should let people be aware of? Because we have like this interest income, IRA distributions, whether it’s federal bonds and different things, corporate bonds, that’s all falling into this sort of interest income bucket. Then we have Roth, which is great. Any other buckets to consider? Because I want to get to like how do you withhold?

Mike Guthrie: Yeah, for sure.

Matthew Peck: How do you manage all of that? But what other buckets should people be aware of?

Mike Guthrie: Yeah. I think there are probably really a couple more that are most kind of common. So, number one is capital gains. So, if you’re holding a stock inside your retirement account, you buy it for $1,000 and you sell it for $2,000, there is no capital gain. It’s only when you take that money out that you pay income tax on it. If it’s in your non-retirement accounts and you buy a stock for $1,000, a year from now you sell it for $2,000, the gain that $1,000 is what you pay taxes on in the form of a capital gain. Now, there’s also nuance to that. If you have to hold onto that stock for a year in order for it to be considered long-term capital gain, and that’s a more favorable rate. If you held it for six months and sold it for the same situation, $1,000, you sold it for $2,000, you pay a short-term capital gain on the amount that you earned, and that’s taxed as ordinary income.

Matthew Peck: Okay. So, it’s almost like from what you sell in these brokerage after-tax, non-qualified accounts, whatever the cap gain is, if it’s less than a year, it gets slotted into that interest income bucket. More than a year, it kind of goes into its own bucket of capital gains.

Mike Guthrie: Yeah. You just get a more favorable rate, for sure.

Matthew Peck: Okay. Yeah.

Mike Guthrie: The other two, again, it doesn’t really impact everybody, but some folks, for sure. Rental income, you’re taxed on the net amount. So, you own a rental property and you charge $25,000 a year of rent and you’ve got $19,000 worth of expenses. You can write those expenses off and then the difference, in this case, $6,000 would be considered taxable income. Inheritance tax as well. But again, that’s one of those that’s kind of a little bit more high-level. It might be worth a separate podcast, but keep in mind if you do stand to inherit some money down the road, there could be some potential tax implications on that.

Matthew Peck: And so, even before we get into my next big question, which is withholding and how you manage that, and the difference between withholding while working versus withholding in retirement, in regards to different buckets, so it’s just all those tax forms, right? So, it’s just on in these 1099s that clients will get in February, March, et cetera, in preparation. So, put it another way, Mike, it’s like if a client’s looking to say, “Hey, how much fell into this bucket or that bucket?” I know it all kind of bleeds into their 1040s. But I guess what’s the best way for them to kind of sort it out themselves as to how the bucket gets sort of filled?

Mike Guthrie: Yeah. I mean, not to sound self-serving, but maybe to work with a financial advisor to kind of help you do that. Because, again, if it’s not kind of in your wheelhouse and the work you’ve been doing for your whole life, a couple of mistakes, its nuance can dramatically impact not just your tax bracket but what you’re paying for Medicare premiums and all those different things. So, I think, again, if you’re just trying to do it on your own, the best way to kind of bucket things out, I would think, is kind of retirement accounts and non-retirement. And then it can kind of lead you down the path, “Okay. If I’m taking out of here, I know it’s all ordinary income, so if it’s out of my retirement account.” Or if it’s from another account, maybe there’s some nuance around how that tax is paid.

Matthew Peck: Well, and I think it goes back to the importance of tax planning, right? We certainly mentioned, as I’m very proud of, about the five areas of planning that we do, income, investment, tax, healthcare, legacy planning, and it’s all tax plan. I mean, so tax is obviously one of those five areas and extremely important in what we do. And I bring that up because as confusing as all of this is, right, and can be at times, and sometimes eyes can gloss over is that it’s known that this is established. You can plan for this type of information. You can plan for what it is. Or put another way, there shouldn’t be any surprises with tax planning. If it’s done properly, then every April there shouldn’t be too much of a shock with what the bill is owed if you have proper tax planning working with professionals like ourselves, CPAs, et cetera, right?

But if you are getting shocked each April, especially if you’re a recent retiree, then, yeah, you might want to pick up the phone, whether it’s us or another qualified financial advisor, CPA, et cetera, because this is, again, as confusing as it is. It is set in stone until laws get passed by Congress, right? So, you can really wrap your head around this information as much as possible, of course, but just know the fact that good planners are out there that can sort through all of this and make sure that there aren’t those surprises coming because there’s going to be surprises in the market. I guarantee you. There’s going to be surprises in your health and there’s going to be other surprises. But when it comes to planning or tax planning, there’s a much less surprise there because it’s so set in stone. It’s confusing as it is. It’s etched in stone and all this fine print, but it is set in stone until congress changes.

All right, Mike, so let’s transition, right? Okay, so here are all these different buckets, and one of the biggest differences that I mentioned before during the little intro was the fact that while you’re working, you are just doing withholdings and it’s a much easier situation to manage because here’s your working income. And really, that’s about it. And then you would do that whatever W-4, W-9 form and away you go. But now, it’s a completely different situation, like many things are in retirement. So, how do you navigate the withholding world and some of the advice that you give to clients and what do we do here?

Mike Guthrie: Yeah, because I think to your point, Matt, like, when you’re potential, let’s say, you’ve been working at the same place for 35 years. You filled out your W-4 35 years ago and probably haven’t thought about it since, right? Your employer withholds the taxes, sends the right amount to the state, the right amount to the federal government based on that form you filled out. And you never really think about it unless things change and maybe you go in and do it, but most folks just do that one time and just kind of let it roll, right? You don’t really think about it.

Now, if you’re a self-employed, you’re rolling your eyes right now because you understand all those different things and how that works. But for the majority of the people we work with, most, if not all, have had some form of W-4 income like that. But when you retire and you’re no longer getting those paychecks from an employer, now suddenly, you’re in charge of that “kind of withholding” and how you’re going to pay those taxes. So, when you want to start to think about how I’m going to pay my taxes, now that you know where the potential sources of taxable income is coming from, how am I going to pay these taxes? You really have kind of two options, right? One, and you might argue, it’s the more favorable way, but again, it depends, is withholding, and we’ll talk about what that’ll look like. And the other is estimated payments. Okay? So, you do have the ability to make estimated quarterly payments potentially to the federal government and state of what you think your taxable income will be. Okay?

Now, withholding, as I mentioned before, is, I don’t know if preferable is the right word, but it’s just easier, right? But not all sources of income allow you to withhold. So, what sources of income will allow you to withhold taxes, like you did with your W-4, for example? So, you can withhold Social Security or you can set it up to be withheld, right? Your pension income, in most cases, you can set that up to be withheld as well. So, any taxes potential that you pay on that could be withheld. Retirement accounts, so if you’re taking, whether it’s required distribution or you’re just taking money that you need to help supplement your income, you can also do withholding on that. Okay? Annuities is another one that potentially can do as well. As odd as it sounds, thrift savings accounts, you cannot withhold tax. I don’t know why.

Matthew Peck: Right, right.

Mike Guthrie: Maybe they just figure you work for the government and we’re not going to– it’s just too much hassle to figure out how much to send each state potentially where you live, so you can’t withhold on that. But those are the things that you could potentially set up to withhold taxes that you don’t necessarily have to worry about. However, you can’t do it with everything, right? So, you can’t withhold income on your interest payments or your dividends or your capital gains. There’s no withholding there. So, you do want to make sure that if the bulk of your income is being withheld, that you also keep in mind that there are sources that you can’t, so when your tax bill does come, you may be required to either pay more or maybe get a refund, but there are other sources. Okay?

The other way potentially is to pay estimated. Hey, I think based on the last handful of years, here’s what my estimated tax bill will be. And you can send a check or wire or you can even pay off the credit card your taxes, I don’t know if I would do that unless you really want the points, right, to pay your taxes on a quarterly basis, for example. However, if you forget to make your estimated payment, no one’s going to come knocking at your door. But when you do go to pay it and say, “Oh, man, I missed second and third quarter payment, I’ll just pay it all at once in the fourth quarter,” you’ve been accruing interest on those missed quarterly payments, right? At a rate right now, I think it’s around 8%.

Matthew Peck: Wow.

Mike Guthrie: Right. So, if you’re paying estimated, make sure you’re paying at the time that’s been designated for you. But even if you’re making estimated payments, there is the potential that you’ve underpaid. So, again, you may pay penalties in the form of interest by not paying enough. So, again, withholding, if you’re able to do the majority of your tax planning in retirement through withholding, that’s probably the easiest way to look at it. But if you are doing estimates, make sure you’re paying enough, that you’re not potentially subject to any penalties down the road.

Matthew Peck: Okay, so interestingly enough, if I go kind of back to the bucket analogy, it’s almost like, okay, X amount of dollars falls into this interest income based on the income tax brackets, which are progressive, et cetera, et cetera. Then we have this capital gain bucket, some of this tax-free money, which thankfully, in the tax-free money and the Roth money, we don’t need to worry about any type of withholdings. I’d also add health savings accounts as long as it’s used for qualified medical expenses.

So, all this income then gets split into these three buckets, but then also, within these buckets, they sort of get split into, okay, how much? Can I withhold from IRAs? Yes, I can withhold, but interest income, even though it’s in the same exact tax bucket, there are not withholding options that are there.

Mike Guthrie: Correct, yeah.

Matthew Peck: And this is just a great example of, again, how that’s different from retirement planning or working to retirement and that shift and that mindset shift and why it is so complicated? Why we do what we do every day, right? Because also, too, what I get a kick out of is the different philosophies that people have when it comes to setting this up where I have certain clients that are literally, “I do not want to give an interest-free loan to the federal government,” and come April, they want to pay. They want to be under. Now, knowing that there are those underpayment penalties that you mentioned, some philosophies are, okay, I want to literally underpay within reason so that the IRS doesn’t get this interest-free loan on my money.

Then we have other people on the other end of the spectrum that just say, no, I like to almost overpay because they like that refund. It sort of serves as a savings account for them to say, you know what? I’d rather withhold more because I don’t want that big surprise or I don’t want that, to have to pay a bill come April that I wasn’t expecting. I mean, do you see people on that? I mean, when it comes to that spectrum, I mean, do people fall under one category or the other category? Do you advise people in either way?

Mike Guthrie: Yeah, I mean, I think to the point we’ve made a little bit along the way here is that there’s no right or wrong answer. So, it all comes down to the person sitting across the table from you. What makes the most sense for you in your particular situation? And how it affects your plan? Not just Mr. and Mrs. Smith, you’re 68 years old, you’re both retired, and what does every other 68-year-old look like and how they do it? No, it’s very specific to the person across the table because, again, some people have 95% of their money in a tax deferred account, like a workplace retirement plan.

There’s some people that come in, it’s 95% is in that brokerage or non-qualified account. So, their situation is dramatically different. They have the same amount of money to live on in retirement, but how is that stuff going to be taxed? So, again, it’s an individual personalized conversation that is part of the planning that we do with clients to make sure that, hey, based on your situation, we know the rules of the road. We can help you navigate those rules and we can get a better understanding of how you, Mr. and Mrs. Client, are going to have to pay your taxes or take your distributions that is significantly different from the person who’s coming in right after you, who’s the same age and has the same amount of money, right? So, everyone’s a little bit different.

Matthew Peck: Well, and let’s go back to the capital gains taxation. And I really want to emphasize that because this one triggers me only because I had a, back to us in the very, very beginning too, very, very smart guy, great client, I mean, just brilliant guy, worked in the software industry for years, right? And we ended up having a little bit of an issue because we were raising, we were doing sort of tax planning, saying like, hey, it’s actually better to pay capital gains tax because that’s more of a flat tax. And whereas income tax is more progressive. And it gets more and more as you take out more. We said, you know what? We’re going to kind of this year, because sometimes we go back and forth, I mean, we talk about how very unique it is and there’s no silver bullet. Everyone’s situation is different and everyone’s sort of tax planning is different.

But in his situation, we ended up raising to try to keep his taxes down, which we were going with the after-tax accounts, the brokerage accounts to kind of raise taxes. And I assumed wrongly, and this is absolutely shame on me that he was aware that, oh, we need to pay quarterlies or we couldn’t withhold. He was under the understanding that, oh, yes, we were raising it from after tax, everything was good, but that we were withholding from the brokerage account when we weren’t. And it’s like, oh, my gosh, he didn’t realize that. Hence, why we’re doing this podcast right now is that we really want to make sure, because I want people to know that capital gains isn’t just selling stocks, it’s selling property, I mean. So, just explain people how do you manage the after-tax accounts, knowing that okay, if there’s going to be gains, and yes, it’s tax favorable, but knowing there’s no withholding, what do we do there?

Mike Guthrie: Yeah. So, I mean, I think it’s just having that conversation to make sure that the client has a good understanding. When this happens, it’s a taxable event. We’re not able to withhold taxes for you. It’s just not an asset that we can do that with. So, do we need to make sure that hey, we have enough kind of dry powder come tax time that you’re not required to sell something again, maybe incur taxes to pay your tax bill from the previous year? So, hey, we’re selling it for a thousand-dollar gain. We know based on your tax bracket, maybe well, 50 bucks, just for example’s sake. So, let’s make sure we have that money kind of separated out potentially that when you go down the road that there’s a pool of money that you can get your tax dollars from to make those payments as opposed to being surprised when that bill comes and saying, oh, where am I going to get this? I got to write a check. Where’s it going to come from?

Matthew Peck: Well, and I think that’s extremely important with property. I mean, I was explaining a situation with the client and generating income, because we were doing sort of Roth conversions on the side. But if you’re selling a big property, I mean, think of it that, right? Think and imagine a client sells a home, obviously have really appreciated in Massachusetts. And so, let’s say you bought it for 500 grand and now you sold it for 1.5, now there are capital gain exemptions and primary residence exemptions and things along those lines. But let’s say a client literally buys it for 500, sells it for 1.5, now there’s roughly a million dollars’ worth of gain. And let’s just say that I’m just going to do a swap, because, yeah, homes have appreciated, but guess what? Properties have appreciated too, so I’m not going to gain anything from this sale. I’m just going to take my 1.5 and put it right to a new property. Well, that client might have anywhere from a million to $500,000 worth of gain and if they poured all of that money right back into a new property, they’re going to have some surprise again, some…

Mike Guthrie: Right. They’re going to be forced to sell something somewhere else to help pay that bill, for sure. So, again, all that planning is of utmost importance, particularly when you’ve gone from how you’ve been doing it while you’re working to now, it’s almost all on you, right, to make sure that those things are taken care of.

Matthew Peck: Well, and I guess, and last but not least, any kind of final thoughts when it comes to things to look at, things to either be aware of? That was my big thing was the property one because, again, a lot people are just buying and selling, just swapping. Any other strategy? I know we mentioned Roth conversions, of course, but any other strategies to help manage this, what seems to be like a pretty big task or complicated at least?

Mike Guthrie: Yeah. So, I mean, there’s obviously a difference between tax preparation that you do with A CPA or your tax professional and tax planning, which is a lot of what the work that we do with our clients. So, things like Roth conversions, can I get money out of my tax deferred account, my IRA, my 401(k) into a Roth account, pay some taxes up front, and then get that money growing tax free? So, at some point down the road, when you need that money to supplement your income, you’re not going to pay taxes on it. The answer is sure, right?

Most people, if not all people can do a Roth conversion. And really, we think about just the market volatility in the last month or so, six weeks, great opportunities to do things like that, right? Because maybe your portfolio’s down and that doesn’t feel good, but if you can proactively make that conversion, now when the market rallies, instead of it growing tax deferred on the comeback, now it’s growing tax free, right? So, those little nuancing things as well.

You can gift, right? So, if you’re in the position where you have enough money saved up, several million dollars, whatever that amount might be, and you know you’re probably not going to ever use it, you can gift it to your children, really, to anybody. And there’s rules around that in terms of how much you could potentially give. But if you’re not going to need it and you want to reduce your potential taxable estate down the road, gifting is a great option to do it too. Not only to individuals and family members, but also like charitable giving, right? So, if you want to give money, you’re charitably inclined, to your church, to the Boys & Girls Club, whatever your charity might be, you can do that. A little bit different rules around gifting to a family member or a friend for that matter. It comes down to itemization of taxes and the standard deduction, all those different things. But if you can give enough money to the charitable organization, say, you want to donate $25,000, and you say, let’s donate that over the next five years, it may be more advantageous to give the full 25 in one year as opposed to $5,000 over five years because then you could potentially get the deduction on your taxes.

So, maybe, it surrounds strategies around collecting your Social Security. When do I start taking that? If I wait and pull from other accounts, is my taxable income potentially lower? Or if I take it sooner and I use that to supplement my income and wait on my retirement accounts to pull money out of, again, it’s all nuanced and it’s definitely specific to the individual we’re talking to, but there are certainly ways that we help our clients kind of mitigate or at least get their hands around their tax situation, so the plan’s in place. So, there are no surprises, right? Hey, we can’t avoid paying taxes. You are going to take money out. You got to live your lifestyle. You want to do the things you want to do. Unfortunately, that’s going to require you potentially to sell something or to withdraw things out of accounts where you’re going to have to pay taxes. But if you can do it in a smart way, in a planned out way, then there’s no surprises because the last thing we want as advisors who work with clients is somebody to call us, when they did their taxes on April 1st and say, hey, I’ve got a $15,000 bill. Where the heck did this come from?

Matthew Peck: Right.

Mike Guthrie: And you go back through your notes and hopefully, for us, we explained that when it happened, but a lot of the folks we work with who have either done it themselves or worked with another advisor potentially have just been kind of blindsided because they just didn’t know, now that I’m not working, how this is going to impact my taxes.

Matthew Peck: Which is a great point. And I’ll kind of pivot there and sort of wrap things up because and I think, certainly give enough people or enough information to kind of little bit of a popsicle headache, but in a good way though. I mean, because it goes back to how much things change from when you’re working to when you’re retired. It goes back to all the things that you now need to manage yourself, that you now need to consider, right? Because I mean, we didn’t even talk about in budgets and how much we’re going to spend, we didn’t talk about how we’re going to invest the money to generate the income.

But a major component to those decisions and to that planning is understanding this landscape, understanding what’s going to fall into the taxable income, 100% income tax, such as IRA distributions, non-qualified dividends. I’m like, I’m sorry, I was going to say interest income falls into the income tax category, which within certain areas, you can withhold and not withhold. What falls is the capital gains territory. And I love telling the story about how to use kind of Benjamin Franklin’s term of death and taxes. The only two certainty is that taxes to me, it’s sort of managing in the sense that the bite is less, right?

So, is it better to pay capital gains taxes versus income taxes, right? Because one’s a flat tax and one is more progressive. Or is it better to gift or is it better to subject yourself to state taxes? I mean, understanding just the high level and kind of like the trade-offs and then you get to this lower level, but these are decisions that people need to then eventually make themselves. The employer, you don’t have an HR department anymore, right? And I love this as an example of how complicated, but at the same point manageable. It can be, because we do have the rules of the road. So, Mike, thanks again for showing the rules of the road. The map is a little, little confusing. Oh. but you have a…

Mike Guthrie: One point on that.

Matthew Peck: Yeah.

Mike Guthrie: The rules of the road today.

Matthew Peck: Yes, true.

Mike Guthrie: Right? And again…

Matthew Peck: At the recording of this podcast, correct.

Mike Guthrie: So, again, we mentioned 25-plus-year careers, those rules can change, right? They can change next year. In fact, they’re due to change if nothing gets done, right? So, again, tax laws and regulations are subject to change and you want to make sure you’re working with somebody that has a team that’s on top of that as well.

Matthew Peck: Well, it’s funny, too, because I think about when I’ll meet people for the first time and they say, well, I handle my own investments. And when I get that, when I meet people for the first time, it’s like, I’m not sure of why I would hire a financial advisor. I completely understand why people would enjoy the buying and selling of stocks. I used to joke around when I was first getting into it, it’s like, fantasy football or following sports, right? It’s like, suddenly, your favorite player is now your favorite company or your favorite CEO. I mean, it really is.

So, I never begrudge people when they say that, oh, I’m not sure why I’d hire an advisor. I mean, I enjoy this, I enjoy following this. I’m pretty sure you don’t enjoy this stuff, right? Unless you really, really like punishment, I’m not sure if you like this stuff. And so, I think it’s a great example of the need that is there, especially in retirement. Again, that’s why the other reason, too, I mean, yes, we work with people that are 40 years old and 45 years old, et cetera, and there’s important considerations there. But upon retirement, it just really amps up and really becomes– because these are major decisions that need to be made and you can manage this.

And with the help of SHP or another qualified professional, CPAs, that’s what we’re here for. So, hopefully, you found this enjoyable and certainly, getting an idea of how complex it can be, but again, how manageable it can be. So, thanks so much for your time. Mike, thanks again for joining us. I know you’re here in the past. And we’ll definitely have you back here again. Thank you all for listening and lending us your ears. And for everyone else there, have a great day and be well.

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