Tax Planning Strategies to Save Money in Retirement with Derek Gregoire and Matthew Peck – Ep 045

[EPISODE]

Derek Gregoire: Welcome everyone to another edition of the SHP Retirement Road Map, brought to you, of course, by SHP Financial. I’m your host, Derek Gregoire, joined by my partner, Matthew Peck. And today, we’re going in deep into the tax world of financial planning. We’ve talked about many different aspects on this show. And I think when you think about planning, in general, or investments or having a financial planner, retiring, everyone’s always like, “Well, I need to save up X amount of dollars. If I have a million dollars, I can retire. If I have $3 million, I can retire,” or whatever that number is for you. But there’s so much more than just a number that comes into retirement planning.

And one of the things we’re going to get into today is if you’re listening and you’re in an IRA and 401(k), specifically, either one 403(b), you’re going to want to listen to some potential tax planning strategies that might be able to save you some money in retirement. We’re going to talk about a lot of other areas as well. But before we go any further, Matt, welcome to the show. Everything good?

Matthew Peck: Oh, everything’s great. Certainly, looking forward to talking about taxes. I know that, generally, people, they shy away from it because no one likes taxes, no one likes April 15th. But no, I mean, you have to embrace tax planning because that’s the way you win.

Derek Gregoire: I actually do. It sounds so corny, but I get excited talking about it because I feel like it’s one of those areas that has the most value that you can help folks with in a financial plan. Like Matt said this for years as a CFP, he’s like, the stock market, we’ve done a great job here. Our portfolio team led by Matt, we have CFAs. He’s done a great job of managing our clients’ portfolios, but we can’t tell you exactly what the portfolio is going to do year to year because the market changes. It’s cyclical. It goes up, it goes down, go sideways. There’s political events, there’s catastrophes, there’s health events like COVID, there’s wars. Things pop up, we can’t control. But like you say, the tax code is a known known, like right now we know where, if you make X amount of dollars, you’re in this bracket. And if you go to the next level, at a certain point, you’re in that bracket.

Matthew Peck: Well, and only that to the idea that, and this isn’t always the case, but just the fact that as, throughout our career, a majority of CPAs or a lot of the CPAs that we work with are still very backwards looking. They don’t necessarily– they’re always focused on ways of saving taxes that particular year, which we are, too, don’t get me wrong. But we’re also very forward looking in regards to tax planning, which we also talk a lot about on our TV and our shows and whatnot. But just more that idea that I think combining the planning with the preparing, right, and having CPAs that we can rely on and that the clients can rely on just allows for us to take advantage of those known knowns, right? Not just behind, not after the fact, not just that April 15th where, oh, have you made an IRA contribution? Like, yeah, that’s important, of course, but more about, okay, what needs to get done by year end to make sure it happens in that tax year because those tax brackets might not be where they are next year, the following year, or so forth.

Derek Gregoire: Well, Matt, think about your IRA and 401(k) is a joint ownership plan between you and the IRS. Let’s face it, right? Because if you have a million-dollar 401(k) and you cash it in tomorrow, today, you keep million dollars?

Matthew Peck: No.

Derek Gregoire: Sure, you’re not. You probably owe $400,000 between Massachusetts and the feds, somewhere in that range, especially if you do it all at once, you’re going to put yourself in a high tax bracket. And so, imagine, you think you have a million-dollar 401(k), but you only own 600 of it.

Matthew Peck: Well, that’s the part two, I mean, I know, let’s just say on average 20%, right? Let’s say your average is 15% for feds and 5% here in Massachusetts, 20%. So, at first, 20% doesn’t sound like that’s a lot. It’s like, oh, 20%, well, I’m keeping 80. But when we’re processing withdrawals for people, I just think in terms, okay, client needs $40,000. They’re taking out 50. I mean, that’s $10,000 in one week or one little click of a button that the client gets 40 and the IRS and Massachusetts gets 10, and that’s just $10,000, just boom, just like that based on a $50,000 withdrawal. I know, I’ve been in this business for 20 years. It still blows my mind as to how much you actually need to take out gross in order to net what you need.

Derek Gregoire: Well, I’ll take it one step further. And I think if you’re listening, pay attention to this part because this could be frightening. If you have same thing, you need $40,000 maybe in today’s world, and obviously, we don’t know what bracket you’re in. But like Matt said, maybe you need to take out 50 to pay Massachusetts and the feds 10 and then you keep 40. Now, let’s say we go by, you don’t do any tax planning. You just kind of, all right, I’ll just take my minimum distributions when I’m 73 or 74 or 75, whatever the age is when you retire, when you get to that point. And let’s just say tax rates have gone up, right, which they’re slated to go up as of 2025, 2026. It’s like in Congress that it’s going to be higher.

Matthew Peck: Correct.

Derek Gregoire: And with all the national debt and spending, there’s a lot of people on both parties that think that taxes will be even higher. So, let’s fast forward a couple of years, right? Now, let’s say to get that same $40,000, let’s say you need to take out $55,000, right? So, that’s your lifestyle hasn’t changed. You’re still getting the same $40,000. You probably need more than that because of inflation. That extra $5,000 in taxes is almost like losing more money in the market every year because taxes went up. And so, everyone’s so focused on portfolios, dollars and cents, making money, losing money. I’m telling you, if you’re looking into retirement or if you’re in retirement and you are not looking at taxes as part of your overall plan, you are missing a huge opportunity that could potentially save you thousands of dollars in retirement.

And again, the average person that we see that comes to our office, let’s say they have $1 million, $2 million, $3 million, the average person has never had a conversation about proactive tax planning other than just meeting with their CPA every year and filing your basic returns. True tax planning looks like you said, it looks in the front window of the driver’s seat, looking forward into the horizon on what can we do to change things. Doing regular tax filing looks in the rearview mirror of what happened in reacting to that.

So, I want to say that since we built this company out in 2003 and how we’ve run the company is to give our clients and these folks what they deserve, which is an investment plan is important. We need a good, solid, sound investment plan, right? We need an income plan to make sure you have income coming for retirement. We look at health care strategies, estate planning strategies. And what we’re talking about today is world number three, which is tax planning. And it’s one of the most misunderused, was that even a word, misunderused? Most underutilized strategies of retirement planning. You can tell I’m not an English major. Went to finance, thankfully. But basically, that’s an underutilized strategy, and I think a lot of people listening, like, what does that even mean? We’re going to get into different worlds of tax planning.

The other way you can get educated is to get our guide. We have a white paper that we built out for you that’s designed to take you through the five worlds of retirement planning and specifically today, taxes, some of the different tax planning opportunities that might benefit you. To get that guide, it’s super simple. Go to SHPGuides.com, that’s SHPGuides.com, and you can download it right there.

Matthew Peck: Dude, I want to bring up or go back to two points that you sort of made there. First is the idea of the five worlds, of making sure you have a good investment income tax planning, which as I said, we’re going to spend a lot of time today on, health care planning and legacy planning. Okay. So, let me bring legacy planning back to another point that you made about brackets, about tax brackets, right, where okay, here are the brackets today, where are they going to go after 2025 and potentially even further up based on our current fiscal situation?

Okay, well, tax brackets are going to go up potentially for your own, personally speaking, but also too, when it comes to legacy planning and tax planning and why we’re so proactive when it comes to IRAs and 403(b)s and 401(k)s is because let’s say you passed away relatively prematurely, 70, 75, and now your kids are inheriting all of those IRA dollars. Well, now, it’s no longer your tax bracket, it’s their tax bracket. So, let me just play this a little bit forward.

So, let’s just say you had a very, very successful life. You saved about $2 million into your IRAs and you had two kids and they did very, very well. You took care of college and all of that stuff. And now, they’re CEOs, whatever that may be. And now, they’re earning 500 grand a year or above. Well, that means their tax bracket is 40%, 45%, could be as high as 50% when you add in all the other surcharges. So now, when that IRA as a legacy now goes to the kids, now that IRA money is being taxed at a 50% bracket or potentially a 50% bracket based on the income tax brackets of who’s inheriting the money, right?

So, it’s just because you use a great word which is jointly owned. Well, you could tell that your IRAs, sometimes it might be only, you have 80% ownership and the IRS has 20%. Will it change the brackets? Now, it might be 75/25. And if it goes to kids and they’re highly successful, now, it might be a true jointly owned, where it’s 50/50. As the brackets move up, that’s how much ownership they have or the tax man versus how much ownership you have.

Derek Gregoire: Well, and also, Matt, you look at the brackets in terms of like where they are right now. The top federal bracket gets close to 50% when you add all the surcharges and the feds and mass and this and that. But the top tax bracket federally right now is 37%. That’s the lowest it’s been in a long time. It’s been as high as, I think, in the 90s, at one point back in 50 years ago or so.

And also, if your children inherit the money and let’s say they inherit an IRA, well back in the day, they could just take out a small required minimum distribution, which is maybe 3% or 4%, 5% of the value, which basically made the taxes kind of be drawn out over time instead of being hit all at once. Now, they have 10 years to get it out. So, let’s say you forget about it, on year 10, everything comes out. If you have no income, if you have a decent sized IRA, that’s going to put you probably into the top bracket even if you have no other income. So, there’s a whole other strategy that has to be built out for them. And it’s not the most tax efficient strategy because it has to come out over 10 years no matter what.

Matthew Peck: Well, and back to how you mentioned the tax planning is built on much more solid ground. A lot of what you just mentioned about the fact that IRAs, you can no longer stretch them over your lifetime, now you can only stretch them over 10 years is because of the SECURE Act 2.0. Now, there was a SECURE Act 1.0 that was passed back in 2019. And then there was another act passed. So, I pointed out because two things, (a) it’s changing, but then (b) it allows for us then to plan on what new acts of Congress come or get passed, which then, as I said, we could take that information with our CPAs, get the team together, and then really learn or adjust and adapt the traditional strategies, which I’m sure we’ll get into today to what the new Congress and the new tax laws are. So, it’s always this sort of like given the take about, all right, what are the traditional tax planning strategies? And then how are they now being impacted by the updated congressional acts or updated tax law?

Derek Gregoire: Well, let’s say, and now, obviously, there’s a lot of bad news we’re talking about in terms of taxes, I’m not trying to get everyone upset or depressed about the tax code in their 401(k)s.

Matthew Peck: No, it’s fun. This is fun.

Derek Gregoire: Well, here’s the good news, there are potentially some tax planning strategies that could benefit you. And that’s what we’re trying to get into here in terms of like obviously, we’ve heard terms like tax loss harvesting, Roth conversions, but Roth conversions is one of the areas we should look into and we do look into for our clients and that you should really consider. I will, however, say this is one thing you don’t want to just take on or do without doing full due diligence on your plan because when we’re dealing with our clients and if we’re helping you, it’s like we mentioned this before, but all these worlds of planning are co-mingled and they all affect each other. Meaning, we talked about the five worlds of our road map – income, investments, taxes, health care, and estate planning.

Well, the income plan that you generate to cover your income in retirement, you need to know the tax ramifications, right? Because if you need $50,000 to cover your bills out of your portfolio, that might be 60 or 70 that have to be taken out first before we pay the taxes and then get you to 50. And right now, when you’re looking at the tax brackets, I think there’s a window of opportunity for maybe the next three, four years, three years that might not exist, right? Meaning, if we know taxes are slated to go up in 2025, with our clients, we look at their situation and say, okay, right now, let’s say you’re in the 12% bracket federally, who knows? Everyone’s different. Could be 22%, could be 24%.

But we know, okay, 12% changes to 22% at a certain level. And let’s say your income right now is at a certain point where you are not filling up that entire bracket. Well, we know 12% is slated to go to 15% in a couple of years, if not higher. So, the idea is, let’s say we looked at your plan and we realize there’s $40,000 of wiggle room that you have between your income now in the top of your current bracket. Well, would it make sense to say, okay, Uncle Sam owns a part of that IRA 401(k)? If I grow the portfolio, he’s just going to own– people think, oh, if I do a Roth conversion, I’m going to have less money. That’s not true because if you have a million dollars and he owns 20%, he owns $200,000. If you grow it to $2 million, he owns $400,000. So, it’s like you’re growing Uncle Sam’s money as well. So, we always say if we can buy Uncle Sam on the cheap, in a mathematical way that’s done properly with due diligence, then we say, okay, let’s fill up, let’s pay the taxes on $30,000 or $40,000 of your 401(k) IRA now where we know it’s maybe 12% or whatever that bracket is before we go into the next bracket.

Once you do a Roth conversion, the downside is you pay the taxes now, right? But I’d rather pay Uncle Sam where I know my business partners’ bio is X. So, if I buy Uncle Sam on an X, I know once it’s in a Roth IRA, that grows tax free for the rest of my life. Even if, let’s say you live 20 years and then you pass away, your kids have 10 more years to pull it out and they would want to wait probably to the end of the 10th year because when they cash it out, it’s fully tax free so they can get that tax-free growth. There’s nothing better if you look at the three. We’ll go through the tax triangle. But having money in tax-free investments is, to me, the best way. And everyone talks about diversification within a financial plan. Tax diversification, so money is not all pretax. All 401(k) IRA is equally as important.

Matthew Peck: No, I love the fact that you came back to tax diversification because I use that not every day, but very, very much in the sense of having people understand that there are different tax buckets to kind of have money allocated in, some with different goals, I might add as well, where Roth IRA money since it’s tax free. And I would also add it’s not subject to required minimum distributions. So, once you do this conversion, the money that’s in your Roth money never has to come back out. Obviously, you can if you want to, but there’s no involuntary. You’re never forced to take money out of it if you don’t want to, right?

And so, again, creating those different buckets, using it for different goals depending on it. I think the other thing I want to make sure just on a broader level, that people understand that there are– when I talk about tax planning with people too, that taxes are a three-headed monster. You have income tax, which is exactly what we’re talking about right now. And that’s where the Roth conversions and managing RMDs and having plans for IRAs, 401(k)s, etc., are because that’s all subject to income tax.

Then you have what’s called capital gains tax. Now, that is if you sell a property, buy a stock, sell a stock, etc., so you sell an asset not within an IRA but that’s capital gains tax, short-term gains, long-term gains, so forth and so on. And then finally, you have estate or death tax, which is okay, what happens when you pass away, how much is going to be subject to federal and/or estate or state death tax? So, everything we’re talking about here on the Roth conversions, we talk about a lot because by far, I think the biggest– I mean, again, not scientific here, but I mean, a majority of our clients have a majority of their assets in IRAs. So, we spend so much time talking about Roth conversions and managing that amount of money because as you were saying, Derek, we want to buy out Uncle Sam at the best possible time.

And then secondly, we want any recovery. Because you were saying, too, about if you grill your asset for $1 million or $2 million, yeah, we want to do that. We want to let the markets do that. But we want that $1 million to $2 million growth or recovery, whatever you want to call it, happening in the Roth money because that’s tax free to the individual and, as you were saying, tax free for 10 years to the kids. So, tax free is a great bucket to have money in, let me put it that way.

Derek Gregoire: Think about in retirement, too, if you have different tax buckets, you can kind of play the game a little bit where I say, okay, I’m only going to take this much out of my IRA to get to this bracket, but then the rest can come out of an after tax or a tax-free account or a Roth. So, I’m not jumping into higher brackets and still meeting my needs from an income standpoint. So, as you’re listening, I’m sure this is a lot. This is a lot of information. And hopefully, it’s useful. I know sometimes, it’s a lot of data, but I think the main thing is to make sure we want to make sure since we’ve started the company in 2003 and our headquarters are here in Plymouth, that we’re bringing good value to the South Shore.

We do have offices in Woburn and Hyannis, but this is the area where our home base is. And we want to make sure that you have the ability to retire and basically live the retirement you’ve dreamed of, right? And so, I think, at the end of the day, we have developed a quiz that I think it’s worth taking it, like a retirement readiness quiz is the best way to put it. And it’s a few different questions that you can answer in about 5 or 10 minutes. I think it’s multiple choice. And yeah, you’re nervous, but it does give you a printout of what some areas you might need help in because when we talk about tax planning, I’m telling you the average person that comes to us for the first time doesn’t have any of this done. So, if you’re listening and say, hey, I want to get some planning done and this sounds great, I need some help here, but I’ve never done this. I don’t want to feel like I don’t know what I’m talking about, trust me, no one else does either when they come into our office. Most people don’t, I should say. We want to make sure that you have a plan and we look at this as one of your planning options. So, to take the quiz, super simple, you go to SHPQuiz.com and you can get the answers. It’ll print a report for you at the end. Again, that’s SHPQuiz.com.

So, flipping over, Matt, I always talk about the tax triangle. I think it’s important to know. And tax triangle is almost like, obviously, you have three different areas. You have the after-tax bucket, right? We call it after tax, meaning like it’s money you’ve already paid taxes on. It’s in your bank account, brokerage account. And most of the gain is there, either interest or capital gains, right?

Matthew Peck: Correct.

Derek Gregoire: Your principle is not taxed, but you’re paying interest in capital gains. Think of that as on the left quadrant of a triangle. On the bottom right quadrant– it’s not a quadrant. It’s a triangle. So, you know what I mean? On the bottom right third…

Matthew Peck: There it is.

Derek Gregoire: Yep. You have the pretax bucket and that’s all your IRAs, 401(k)s that has never been taxed. You got the benefit. Uncle Sam, today, when you put money in, we’ll give you a deduction. But for the rest of your life, all the growth withdrawals, everything is fully taxable. That’s never been taxed. Every dollar that comes out is taxed and that’s taxed at whatever your bracket is at that point. Going to the top third of the triangle, you have the tax-free bucket. Now, that’s ultimately where, in a perfect world, you have everything because that’s the best. Tax free is if you need to take out $50,000 out of your portfolio, you just take out $50,000.

Matthew Peck: Yeah, I’ll just say that because we were talking about the withdrawals earlier and it’s just anytime we send money from a Roth, it’s like, oh, do it, but no, there’s no withholding taxes. No, what you ask for is exactly what you get, that’s it.

Derek Gregoire: Exactly. So, think of the bottom two thirds of a triangle, right? Ideally, you want the after tax in the pretax money. You want those flowing up to the top third to tax free as much as possible, right? And every plan is different. But to get to the after tax to tax free, there’s things like Roth contributions, making contributions to a Roth. If you’re working, sometimes you can make 401(k) Roth contributions, right? And each one, the 401(k) does not have income limits, the Roth IRA contributions do. But sometimes people aren’t even contributing to Roth. If you can put $14,000 a year for 10 years, that’s another 140 that you can move from an after tax to a never tax bucket.

Matthew Peck: Well, that’s the thing too. Whether it’s Roth contributions or Roth 401(k), on the 401(k) front, make sure you know what your employer is sponsoring and what’s available there, and then offer your Roth contributions, obviously, again, as income limits on the Roth contributions, just separate from the 401(k). There’s a lot here, I apologize for all the jargon, but it’s more so, just make sure you’re taking advantage of it.

Derek Gregoire: Yeah. So, that’s on one side, we’re trying to flow as much of the after-tax moneys up to tax free. On the other side, the other right third of the triangle we’re trying to get how do we get money from the pretax to tax free? That’s through conversions. So, the idea is during through a well-thought-out plan, over time, it’s not done all at once, unfortunately, but through a well-thought-out plan, we try to get as much as we can within reason from the bottom two buckets, bottom two sides of the triangle to the top, which is tax free. And everyone’s different on how much we can get to there. But if you have even a portion of your retirement in a few years, whereas right now you have nothing, you have to start somewhere.

Matthew Peck: Right. I mean, two things. First, I just want to point out because we allow a lot of questions on contributions, on going from your post tax and to your tax-free account. There are income limits and there are contribution limits. Conversions are unlimited. So, you can do $1 million, $2 million all at once to do a conversion. Exactly. However, so it’s unlimited in that amount, but it is not the most efficient way to do it because it’s like how much taxes do you want to pay?

And Derek, as you were saying, the idea of okay, doing it over time methodically and appropriately, and so, it’s like if you implement it properly, if you take the right steps and measure how much you can do each individual year and take each year individually too, right? I mean, every usage situation changes. Maybe you sold a property, maybe there was an inheritance. Obviously, your income situation is going to change year by year, but if you slowly but surely tax diversify, slowly but surely move from pretax to tax free, you’re creating that tax diversification. You’re adding more money into those buckets. There is a lot different tax buckets.

And then any of that recovery, like we were saying earlier, happens within the tax-free bucket. And just to bring in a broader level, that’s why investment planning and tax planning and income planning all work together. So, I just love that idea. But I just really want to clarify contributions versus conversions. Contributions are limited. Conversions unlimited, except for you just have to be tax efficient with them.

Derek Gregoire: Yeah. Are you surprised, Matt? We have some folks that come into our office and it’s neat because a lot of times, they’ll come into office for the first time and they’ll have $2 million and they’ll be all in 401(k)s and IRAs. And then there’s $40,000 in the bank. So, there’s very little diversification. And this is common. The neat part about it is I’ve just seen clients go through the last three, four, or five years. I’m using short term. We been doing this for over 20 years, but seeing them now have like $300,000, $400,000 in a Roth, some money impost tax. We’re building some tax diversification in their plan. So, when they get to retirement, it’s not just every dollar is taxable and we have no other flexibility. And that’s what I love seeing.

So, I think the major point of the show is obviously, I would recommend having a tax analysis done on your situation. We’re not CPAs. We work with a lot of CPAs, but I think this is just really forward-looking planning, especially if you have IRAs and 401(k)s, There’s other strategies we haven’t even talked about like tax loss harvesting, other tax codes. I think it’s 702, if I remember right.

Matthew Peck: Oh, there’s the 77T, the Massachusetts estate tax.

Derek Gregoire: Yeah. There’s so many other things we haven’t even got into, but the main thing is, I think a tax analysis, if you’re listening, you say, I want to know how much taxes am I going to pay on my IRA and 401(k) and are there ways to alleviate it, right? Sometimes, the savings can be really significant over your lifetime. So, I would recommend when you come in to a visit here, if you come into Plymouth office, first, we’re just going to get some basic information from you, and then we’ll take that information and sit down with our team and share the strategies that are best suited for your specific plan, your specific situation. There’s no cost to do so, obviously. We just want to make sure that folks are taking it as seriously as we are. If you want to come in and take advantage of that analysis, the number to do so, super easy, call 508-276-4109. Again, that’s 508-276-4109. Or you can also book a visit and get a ton of information online at SHPFinancial.com.

Matt, thanks for the information. For everyone listening, I hope that was informative around tax planning. We have a lot more to get into in the future around health care planning, estate planning, and more, and we’ll probably have special guests along the way to help bring the most value we can. So, thank you so much for listening. Have a great rest of your week, weekend, and whatever you have planned ahead. And we look forward to talking to you next week right here on the Retirement Road Map, brought to you by SHP Financial.