0:00:00 - Speaker 1
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Security is offered through registered representatives of Cambridge Investment Research Inc. A broker-dealer member, finra, sipc Advisory Services through Cambridge Investment Research Advisors Inc. A registered investment advisor. Cambridge and Greenway Wealth Advisory are not affiliated.

0:00:20 - Speaker 2
It's time to dive into some insider secrets of investing and retirement planning. To make your retirement as smart and as elegant as possible. This is Money Chic with Sherry Rash.

0:00:31 - Speaker 3
Hey everybody, welcome into another edition of the podcast. This is Money Chic Women in Retirement, with Sherry Rash and myself talking investing, finance and retirement and taxes. But don't get, don't click off just yet. Tax consequences, frozen cons of some of the various account types that are out there, just kind of give us a little education and information on some of these things, and Sherry is going to hang out with me, as always. What's going on, sherry, how you doing?

0:00:54 - Speaker 4
I'm doing great trying to not make tax consequences too boring today. I think we'll make it exciting. I think we'll be fine yeah well, you know what.

0:01:03 - Speaker 3
We all know it right. It's that thing we got to do. We got to pay our taxes and so on and so forth. But there are frozen cons to the various types of accounts and often people think about income buckets. We all hear about different kinds of buckets and ladder strategies and this, that and the other, but there is some things to be considered and said for having a tax strategy as well. You know tax buckets, if you will.

0:01:26 - Speaker 4
So you don't have control over where what tax rates are going to be when you retire or what they're going to be next year in general, but you can kind of have some control over how you pay them or when you pay them and whether you pay taxes now on certain accounts or tax later. So, although death and taxes are two things that are inevitable in life, we have a little bit of leeway with taxes and what we can do with them. Absolutely yeah.

0:01:57 - Speaker 3
And so people get confused on them, because there are multiple kinds of accounts out there and you're like, okay, well, you know, are they all the same? How does it affect me? You know what do I care? You know at the end of the day, and maybe you don't want to spend, that's not your big focus, but you should be working with someone who can help you and advise you as to the best ways to do some of these things, because that is typically at the end of the day, where you know we can make a real dent in our retirement savings is by being as tax efficient as possible. So, with that said, give us the explanation for, and just as simple as way you want to make it. However, but let's start with tax deferred accounts. I think most people are comfortable with this by now. Sherry, we understand 401ks and IRAs, but just in case there's some folks that don't, what is a tax deferred account?

0:02:44 - Speaker 4
Tax deferred account is so when you think of a tax deferred at your 401k, your 403b, your IRA, your individual retirement account, and that's money that you are socking away and saving and you're not yet paying taxes on that. So you're putting away that money, it's growing, it's invested. You're not paying taxes on the growth and you only start paying taxes when you make a withdrawal from those accounts.

0:03:14 - Speaker 3
Right, and so that's what most of us do, right? We think, hey, woohoo, I don't have to pay the money now, I'll just deal with that later and we kick the can down the proverbial road right.

0:03:25 - Speaker 1
And.

0:03:25 - Speaker 3
I'll just deal with it later on. What a no big deal. And that'll be easier for me to do, and that's what most of us do, and that's the traditional setup. And then if we don't do this well, actually we have to do this because at some point you know, sherry, uncle Sam they get tired of waiting. And this is what's going on right now. If you think about some of the things that's happening in legislation and things are going back and forth, look at it this way there's $30 trillion in debt right now national debt. There's $40 trillion sitting in IRAs and different retirement accounts. That is an interesting eye candy, if you will, for the government, right? So this is why changes in taxes conversations are being had, because they want some of this money. So if you keep kicking this can down the road, you're going to have a pretty big tax bill at some point, right?

0:04:09 - Speaker 4
Exactly. I mean, the government is essentially allowing you to have this money that you're saving and they're allowing you to have it grow tax deferred all of these years. But then, in that same regard, if they're allowing you to do this, there's going to be some rules and they're going to require certain things of you at a point in time, and one of those is required minimum distributions. So right now, if you're at least age 70, if you're 72 and older, you have to take distributions from your IRAs, your retirement, your tax deferred accounts each year. And that's some people view that as a negative, because they may not need the amount of money that they are being required to take out. And it's based on your age and how much you have in your account, the amount that you have to withdraw from these accounts each year. So some people view that as a negative.

I have to take this money out of the account and the reason why you do is, to your point, because the government now wants the tax bill that you've been deferring all of these years. You now have to pay taxes on that money and letting and, like you said, most people just sock away as much as they can into these retirement accounts and they think about taxes. They don't want to think about taxes. Oh, I'll deal with it later. But then the problem is that you have a large lump sum of money that you haven't yet paid taxes on. So your $1 million or your $500,000 that you have in your IRA is not worth a million dollars or $500,000 because you haven't paid taxes on that money yet. So that's something to be aware of is, although you think you're retiring with all of this money, a third of it is going to have to go to taxes.

0:05:59 - Speaker 3
Right or more, depending on what the tax rates are at that time. Exactly yeah.

0:06:04 - Speaker 4
And that's something we have no control over. So we're in a low tax environment right now. It's going to change, and what could your tax rate be when you retire? Yeah even it could be even higher.

0:06:17 - Speaker 3
So that's the traditional right. That's the thing we think of the most. You know the tax deferred accounts and obviously that's why the Roth and that's our number two here the tax free account we're going to talk about that. That's why it has been very popular, especially even the last several years, and may stay so up. And you know like people are. I talk with advisors all over the country and people are calling in like crazy asking about doing some conversions and things of that nature because they are worried that the tax rate could possibly pass and be raised as soon as next year. Right now, taxes may not sunset until what? 2025, I think. But either way, that's what's got people concerned. So, with that said, talk to me about the tax free account, the Roth IRA and some of the pros and cons there.

0:07:01 - Speaker 4
So with the Roth IRA it's again a vehicle to save for retirement. You're paying the taxes on your contributions today, so you're funding it with after-tax dollars, and for some people that may not be attractive because they may like the idea of a 401k or a tax-deferred account that reduces their taxable income today. So some folks don't like the idea of having to pay the tax now because they're just thinking about today and this tax year. But then what happens is when you fund your Roth with after-tax dollars, it then grows tax-deferred and then, assuming you follow the rules the some rules that are in place with the Roth IRA you then can take that withdrawal tax-free, and Roth IRAs also do not have the required minimum distribution. So Roth IRAs are a very powerful tool that you can use to help potentially reduce your tax burden and have more tax-free income in retirement.

0:08:09 - Speaker 3
And then, if you're talking about some of the cons for the Roth, there's income limitations, right, that's usually the big one for most people is that you have to check and see what's going on there, because and they actually have changed the numbers on that through the years too, so it used to actually could only be, I think, up to 100,000. You could put in one total, but then they move those numbers around and they may do it again, but typically there's income limitations, so that's something that may be an issue for some people, which you may not, you may make too much, basically, right.

0:08:39 - Speaker 4
Exactly, yeah, you could make too much money and not be able to participate in a Roth IRA, which is certainly a bummer for many people that want to participate but just can't.

0:08:50 - Speaker 3
Yeah, and there's a thing called the Backdoor Roth and that's actually potentially on the chopping block with some of this a new conversation with some of these tax. This is a lot of the fighting that we're seeing right now over this tax proposal from the new administration series. Some of the interesting stuff in there is that all the headlines and the conversation is around well, don't worry, it's only really targeting the ultra-wealthy but there are little things, like most bills, that don't get the headlines that could affect you, and there are some things in there that could affect retirees. So it's worth learning a little bit more about it and I'm sure we'll do a podcast on that, as if and when it does pass as I write now because it's not passed, they're just fighting over it, but it's just something to be aware of. So there's some things you're thinking about doing there, but we'll stay on topic for today and talk pros and cons of these types of tax accounts or taxable accounts. What is an after-tax brokerage account and what are some pros and cons of these things?

0:09:44 - Speaker 4
An after-tax brokerage account is an investment account that you contribute after-tax dollars to, but then you pay the taxes on your earnings each year. So, depending on how well your account does or how it's traded, you could be paying taxes on the earnings of these accounts. So that could be looked at as a con to many people if they don't want to have to pay taxes on earnings or trades each year. But also, these accounts could also have dividends, distributions, income from the investments that you're also paying taxes on. So you need to keep an eye on if your investments are generating dividends or distributions. Are you using those dividends?

If you are not, you may want to look to another type of investment to have in those brokerage accounts, because you may be paying taxes unnecessarily. But with after-tax brokerage accounts you have flexibility. You can invest as much as you'd like, you have the ability to have a wide variety of investment vehicles and then, the better your account does, you just may have a larger tax bill for that year or, conversely, if there are losses, you may be able to take the losses as well.

0:11:07 - Speaker 3
You know, I always think about how people sometimes will be like oh, are you a glass half empty or half full kind of person? Oh, I won the lottery. Oh, I have to pay taxes on that, right. And it's like well yeah, but you won the lottery. So which way do you look at it? So some people will say oh, my taxable account, my whatever made, I did pretty well, I was doing some things I did pretty well. And then it's like oh, it's a bummer, I got to pay the taxes.

0:11:33 - Speaker 4
It's not a bad problem.

0:11:36 - Speaker 3
Exactly. So how do you want to view it? Now, talking about a bad problem, let's go to this next one here. What are some tax consequences, or tax pros and cons, I suppose, if any, to CD? I can't find much to talk about right now with CDs, you know.

0:11:52 - Speaker 4
I got a pro. You know what you're going to have when the CD matures and it's not going to be. But the con is it's not going to be much.

0:12:00 - Speaker 3
Yeah, right there. Yeah, the pro is like guess you could say it's safe, the con is yeah the con is what certificates of disappointment? Is what they're referred to most of the time now versus the old way. I was just doing a podcast show the other day with a guy who had done some research, some old school stuff and we were talking about he had gone with his dad and got a CD in. I think he said 1981. And he said it was 18%.

0:12:28 - Speaker 4
I was going to guess 17. Yeah, oh, nice, nice.

0:12:31 - Speaker 3
Yeah, it was 18%, and so he was telling this interesting story about that and it's like, you know, it just seems like, well, it is a lifetime ago, right, it was 40,. You know, 40 years ago, but still, you know, and now we're like, you know one, you know 1.2 on a on a good day, on a very, very good day.

Yeah, exactly, so not really much to say about CDs. Are there any tax? You know, I guess, from a tax situation is that treated like income and it matures. Do we just pay taxes on it?

0:12:59 - Speaker 4
Exactly.

0:13:00 - Speaker 3
Okay, so nothing too fancy there.

0:13:02 - Speaker 4
Nothing fancy, pretty straightforward Okay.

0:13:04 - Speaker 3
How about this last one here, Sherry, Life insurance? Well, I don't know that. We think about life insurance from a taxable conversation. We think about life insurance is well life insurance, so are there some taxes?

0:13:15 - Speaker 4
Yeah, you usually think about life insurance and not the best light right, because in order to really get anything from it, someone has to pass away right.

0:13:26 - Speaker 1
Right.

0:13:26 - Speaker 4
So the death benefit of life insurance is tax free, so that's definitely a pro. You know, it's funny talking about life insurance with clients, because especially term insurance because they may say, well, I'm paying for something and I'm not going to get anything out of it, or I'm paying for nothing. And I have to remind them that if you bought a 20 year term and you paid for nothing, meaning you didn't die, you're probably the winner. That's probably a good thing, Right, right?

I would be happy to pay for nothing for in that that situation. But life insurance proceeds are tax free and there are different life insurance vehicles that you can actually accumulate cash value inside and borrow from it, which when you borrow from it, you're borrowing from the policy, so that's also tax-free. So that could be a strategy that advisors implement with clients as far as their tax planning strategies.

0:14:26 - Speaker 3
Alright, so again, life insurance, cds, taxable accounts, tax-free accounts, tax-affirmed accounts, yada, yada, yada. Right, we try to make this not too boring, but there are pros and cons to all of this and I think at the end of the day, the conversation really becomes do you have a strategy to be as tax-efficient as possible? We think often about having a strategy for our income and what we're going to need in retirement, but maybe we don't put as much focus on this because we get trapped in that tax. I guess prep right, we get focused on well, it's the annual April-I-O the government thing versus the long-term ramifications of what this could mean in retirement.

0:15:03 - Speaker 4
Right, I have to pay my taxes. It's just something I have to do. But when you look at a household and the income pre-tax income that a household generates, and then you look at their expenses, the taxes are the largest expense a household has.

So, if you have some ways to reduce it or have a strategy around it, it's well worth exploring. So when I'm working with my clients, we're coming up with diversification and ways to have generate income in retirement and different buckets, as you mentioned in the beginning. But having a strategy around your taxes and diversifying the way you pay taxes is also really, really important to consider. So don't fall into the trap of thinking, well, it's just something I have to do or something I have no control over. Yes, everyone pays taxes and it is what it is.

You're going to do it, but sometimes there are strategies in place that can help reduce it, which is not a bad thing at all.

0:16:02 - Speaker 3
Absolutely, and at the end of the day, it's about having a strategy, and so that's why we do the podcast is to share some hopefully useful nuggets of information with you here on Money Chic Women and Retirement with Sherri. So if you've got questions, reach out to her. You should always do that anyway. Before you take any action on something you hear on any show not just ours, others as well Always reach out with a qualified professional like Sherri. She is a financial advisor and a money coach at Greenway Wealth Advisory and you can find her online at GreenwayWealthAdvisorycom Pretty easy.

And so, at GreenwayWealthAdvisorycom, subscribe to the podcast on Apple, google, spotify, iheartstitcher, whatever platform you like to use. And while you're at it, you can find all that, by the way, at the website. Make it easy for you. But while you're there, you could find out if you are Money Chic and take the Money Chic quiz online as well. So we'll put that in a show notes, as we usually do as well. So, sherri, thanks for hanging out and explaining this to us. I think we did a pretty good job overall. I think you know we've talked about some pros and cons and I think we kept it pretty succinct.

0:16:58 - Speaker 4
I think so I think we did great I think so too.

0:17:01 - Speaker 3
So we'll be back in a couple of weeks here for well closer to a Halloween edition, because we're in October now. So Sherri and I will be back. We'll talk with you next time here on Money, chic Woman and Retirement with Sherri Rash.

0:17:29 - Speaker 1
Thank you.