00:00:01
welcome to the best interest podcast
00:00:04
where we believe Benjamin Franklin's
00:00:06
advice that an investment in knowledge
00:00:08
pays the best interest both in finances
00:00:11
and in your life every episode teaches
00:00:13
you personal finance and investing in
00:00:16
simple terms now here's your host Jesse
00:00:21
Kramer hello and welcome to episode 69
00:00:24
of the best interest podcast my name is
00:00:27
Jesse Kramer on today's episode later on
00:00:30
Shawn melany will be joining us Shawn is
00:00:32
a financial planner sha has a true
00:00:35
expertise in taxation and some very
00:00:37
unique opinions as well on some
00:00:39
traditional investing and personal
00:00:41
finance topics so I'm excited to bring
00:00:43
Shawn into the podcast but first let's
00:00:46
get to our review of the week Steve roll
00:00:49
wrote in and left a review on Apple
00:00:51
podcasts Steve wrote the personal
00:00:54
finance podcast you're looking for Jesse
00:00:57
gives the perfect mix of data-backed
00:00:59
analysis about personal finances and
00:01:01
conversations about how to use money and
00:01:03
finances to build a fulfilling life too
00:01:06
many podcasts only focus on the numbers
00:01:09
and the personal finance hacks but miss
00:01:11
the big picture the purpose of improving
00:01:14
personal finances and working towards
00:01:16
Financial Independence isn't to die with
00:01:18
the biggest bank account but to serve a
00:01:20
life well lived Steve thank you for
00:01:23
those kind words I'm glad the personal
00:01:25
finance podcast is hitting the right
00:01:27
tone for you that's certainly one of my
00:01:28
goals Steve drop me a note if you hear
00:01:31
this and we'll get you hooked up with
00:01:32
some cool gear from the best interest
00:01:36
okay now in honor of Shan meany joining
00:01:39
us we're going to talk a little bit
00:01:40
about taxes today this hearkens back to
00:01:43
an article that I wrote in uh April of
00:01:46
2023 a link to this article will be in
00:01:48
the show notes the article is called
00:01:50
capital gains taxes 101 I know capital
00:01:52
gains taxes how is someone going to
00:01:54
spend time talking about this on a
00:01:56
podcast it's a little bit dry but trust
00:01:58
me it's an important topic and it's it's
00:01:59
inspired by something that a reader
00:02:02
wrote in Jennifer who's a reader of the
00:02:04
best interest blog wrote in and she said
00:02:05
Jesse after a tough tax season for me
00:02:08
can you offer any advice on capital
00:02:10
gains tax planning should I set up a tax
00:02:13
withholding on my taxable accounts what
00:02:15
general framework should people use a
00:02:19
fantastic question capital gains taxes
00:02:21
are one of those things where I do think
00:02:23
you're starting to cross the boundary
00:02:25
between true DIY topics and something
00:02:29
that you might want to consider getting
00:02:31
expert help on that expert help can come
00:02:33
from a financial planner from a CPA
00:02:35
accountant maybe it's just from spending
00:02:38
a lot of time on your own dedicated to
00:02:40
this topic but capital gains tax
00:02:42
planning isn't the the more casual
00:02:44
investing or personal finance topic so
00:02:48
my recommendation if you want to go read
00:02:50
this article is to skim through some of
00:02:51
the headlines because some of you might
00:02:53
be familiar with some of these topics
00:02:54
but essentially the format of this
00:02:56
article is a bunch of headlines that
00:02:58
answer some important question questions
00:03:00
and then some details below that really
00:03:02
dive into the answer for those
00:03:04
particular questions so right now I'm
00:03:06
going to go through some of these
00:03:07
questions because they're all important
00:03:09
if capital gains are something you're
00:03:10
worried about and we'll just go through
00:03:12
the definitions and the answers one by
00:03:13
one starting with the big one what are
00:03:15
capital gains a capital gain occurs when
00:03:18
you sell an asset for more than you
00:03:20
bought it for a capital loss occurs when
00:03:22
you sell an asset for less than you
00:03:23
bought it for capital gains or Capital
00:03:26
losses become realized upon such a sale
00:03:29
till that sale the capital gain or loss
00:03:31
is considered unrealized or sometimes
00:03:34
they're called paper gains paper losses
00:03:36
so again if I bought Apple 10 years ago
00:03:39
and now my Apple stock is 10 times
00:03:42
higher in price as long as I'm still
00:03:44
holding on to it I have unrealized
00:03:46
capital gains or paper gains as soon as
00:03:49
I sell that Apple stock then it becomes
00:03:51
a realized capital gains while realize
00:03:54
capital gains are taxed and we're going
00:03:56
to get into that never forget this fact
00:03:58
capital gains are evidence that
00:04:00
something good happened you profited off
00:04:03
your investment so while paying taxes
00:04:05
isn't Fun capital gains are evidence
00:04:07
that something good has happened the
00:04:09
next big question how are capital gains
00:04:11
calculated what accounting methods are
00:04:13
used in their most simple form capital
00:04:16
gains are synonymous with profit but
00:04:19
three different accounting methods can
00:04:20
be used to calculate capital gains now
00:04:23
imagine the following scenario you buy a
00:04:25
100 shares of stock a for $100 each that
00:04:30
occurs in the year 2000 then in the Year
00:04:32
2005 you buy 100 more shares for $150
00:04:37
each and then in 2010 you buy 100 more
00:04:40
shares this time for $300 each and today
00:04:44
the price of stock a is $400 each and
00:04:47
you want to sell 50 shares to you know
00:04:50
raise some money you need to pay for
00:04:51
something so the question is what is
00:04:53
your capital gain what's your profit
00:04:55
there are three different methods for us
00:04:57
to calculate that the first one is
00:04:59
called the the first in first out method
00:05:01
and it assumes that you're selling your
00:05:03
oldest shares first so all 50 shares
00:05:06
that we sell today would come from that
00:05:08
original lot that we bought which had
00:05:11
the $100 price that price is also called
00:05:14
a cost basis that's a synonym so you
00:05:16
might hear someone say well what's the
00:05:17
cost basis of the stock well that
00:05:20
they're really asking you what price did
00:05:21
you buy it for so in the first in first
00:05:24
out accounting method we look at the
00:05:25
oldest shares which for us cost $100
00:05:29
each we're now selling them today for
00:05:31
$400 each that means that we have a $300
00:05:34
capital gain per share now we said in
00:05:37
this example that we're selling 50
00:05:39
shares so $300 per share times 50 shares
00:05:43
yields a
00:05:44
$115,000 total capital gain the next
00:05:47
method is called the specific share
00:05:49
identification method and that involves
00:05:52
as the name implies identifying which
00:05:54
specific Shares are to be sold if you
00:05:57
wanted to you could keep taxes low and
00:05:59
you might sell 50 shares from your most
00:06:02
recent 2010 purchase lot those were the
00:06:05
shares that cost $300 each when we
00:06:07
bought them $300 each we're now selling
00:06:10
them for $400 each that's a $100 capital
00:06:13
gain per share resulting in $5,000 total
00:06:16
dollars in capital gains but since I'm
00:06:19
identifying specific shares I need to
00:06:21
make sure that I'm keeping excellent
00:06:22
records or I could use the final method
00:06:25
which is called the average basis method
00:06:27
the average cost of these shares that
00:06:29
I'm talking about today if you run the
00:06:30
math on the three lots that I discussed
00:06:32
earlier the three different time periods
00:06:34
the average cost is
00:06:35
$183 and33 cents per share resulting in
00:06:39
a capital gain of $216 and change per
00:06:43
share or a total of $10,800 Etc dollars
00:06:47
in capital gains now once that average
00:06:50
basis method is used all remaining
00:06:53
unsold shares have to get reconstituted
00:06:56
to that average cost basis since I'm
00:06:58
blending everything into one pot even
00:07:01
though I'm only selling a fraction of my
00:07:02
shares I've already done the blending
00:07:05
and now everything that I blend together
00:07:07
needs to get relabeled for lack of a
00:07:08
better term at the cost basis the
00:07:11
average cost basis of in this case $183
00:07:14
33 the average cost basis method
00:07:17
actually is generally not applicable to
00:07:19
individual stocks instead it's applied
00:07:21
to mutual fund or ETF purchases just
00:07:23
some Minor Details there the important
00:07:25
point is that there are three unique
00:07:27
accounting methods that you can use to
00:07:30
calculate your capital gains and
00:07:32
depending on your scenario and whether
00:07:33
you want to realize a lot of gains this
00:07:36
year which sometimes you do actually
00:07:37
want to realize a lot of gains in a
00:07:39
particular year other times you want to
00:07:41
realize as few gains as possible you
00:07:43
might use uh these accounting methods
00:07:45
depending on what your goals are the
00:07:47
next very important question perhaps the
00:07:49
most important question here is how are
00:07:51
capital gains taxed as you might have
00:07:54
guessed capital gains are subject to tax
00:07:56
inside of taxable accounts what's a
00:07:58
taxable account what's not a taxable
00:08:00
account to be clear there are no capital
00:08:02
gains in 401ks IRAs hsas or any other
00:08:08
qualified or tax advantaged investing
00:08:10
account capital gains don't matter there
00:08:13
capital gains only apply in taxable
00:08:16
accounts the first major consideration
00:08:18
in determining a capital gains tax is
00:08:20
the duration of holding the asset if you
00:08:23
hold an asset for less than a year
00:08:25
before selling it it generates what's
00:08:27
called a short-term cash capital gain or
00:08:30
loss if you hold the asset for more than
00:08:32
a year it generates a long-term capital
00:08:34
gain or loss short-term capital gains
00:08:36
are taxed as normal income for many
00:08:39
Americans this equates to a 12 to 24%
00:08:42
tax rate and that's usually worse that's
00:08:45
a worse tax rate than what long-term
00:08:48
capital gains are taxed long-term
00:08:50
capital gains are taxed between 0% and
00:08:54
23.8% and that depends on the Investor's
00:08:56
total income importantly capital losses
00:09:00
offset capital gains going even further
00:09:03
Capital losses can even offset some of
00:09:05
your normal income and excess Capital
00:09:07
losses can carry forward into future
00:09:09
years so as an example in a particular
00:09:12
investing year let's say your accounts
00:09:13
are down and you realize $10,000 in
00:09:16
capital losses and $5,000 in capital
00:09:19
gains so not only did the 10,000 in
00:09:23
losses completely wipe away the 5,000 in
00:09:26
gains you still have 5,000 in losses
00:09:28
left over if you want to you can offset
00:09:32
$3,000 of your income with the $5,000 in
00:09:36
losses that still means that you have
00:09:38
2,000 in losses that you you haven't
00:09:40
used yet and you can carry that forward
00:09:42
into a future year next big question
00:09:44
what assets are subject to capital gains
00:09:47
the most common assets that are subject
00:09:49
to capital gains are stocks bonds real
00:09:51
estate Vehicles things like that but
00:09:54
other reasonable capital gains assets
00:09:56
include Gem and jewelry uh digital
00:09:58
assets like crypto C currency household
00:10:00
Furnishings Gold Silver and other metals
00:10:02
coin and stamp collections even
00:10:04
something like Timber grown on your home
00:10:07
property now I'm not saying that every
00:10:09
person out there has followed these
00:10:11
strict rules as the IRS lays down if you
00:10:13
buy a necklace for $100 and then you
00:10:15
sell it 50 years later for $1,000 is the
00:10:18
average person out there going to treat
00:10:20
that as a capital gain I'd be surprised
00:10:23
but technically speaking for the sake of
00:10:25
getting things right and getting the
00:10:27
facts straight the IRS does say those
00:10:30
are capital gains next question how are
00:10:33
long-term capital gains taxes calculated
00:10:36
long-term capital gains are taxed based
00:10:38
on the tax filers taxable income not
00:10:42
just based on their capital gains alone
00:10:44
and as a reminder taxable income
00:10:46
includes many different sources
00:10:47
including wages salary commissions
00:10:49
bonuses unearned income such as canel
00:10:52
debts or government benefits and then
00:10:55
the capital gains themselves count as
00:10:57
income as do investment dividends and
00:11:00
interest so what exactly does that mean
00:11:02
or what are the capital gains brackets
00:11:03
in 2023 well I'm not going to read out
00:11:06
the specific brackets here from this
00:11:09
number to that number you get taxed at
00:11:11
0% but what I will say is that you can
00:11:13
get taxed at 0% 15% or at 20% depending
00:11:17
on your total income so what that means
00:11:20
as an example here in 2023 if we look at
00:11:23
someone who's filing say married and
00:11:26
jointly I'm being selfish here because
00:11:28
I'm fing my taxes married jointly if
00:11:31
Kelly and I were earning less than
00:11:34
$189,200
00:11:35
then any capital gains we realized this
00:11:38
year would actually get taxed at a 0%
00:11:41
rate no capital gains taxes but what
00:11:45
happens for most people not all people
00:11:47
for most people most people fall in the
00:11:49
15% capital gains tax bracket for Kelly
00:11:53
and I that's if we earn between
00:11:56
$889,000 and $500
00:11:59
$50,000 that's a really big range and a
00:12:02
lot of people fall in that range and
00:12:04
because of that reason a lot of people
00:12:05
end up paying 15% on their capital gains
00:12:08
taxes however and importantly it is
00:12:12
vital to realize especially when people
00:12:14
are thinking about retirement that you
00:12:17
can pay zero doar on your capital gains
00:12:21
now there is a misconception the the
00:12:24
taxable income versus capital gains
00:12:26
question that confuses many people and
00:12:29
some people including some so-called uh
00:12:31
personal finance experts that I've seen
00:12:32
online they mistakenly think that their
00:12:36
first $44,000 in capital gains as a
00:12:40
single filer or $889,000 as a married
00:12:44
taxpayer as a married filer they think
00:12:46
that those first chunks of money are not
00:12:48
taxed at all well that's only true if
00:12:50
someone has no other taxable income and
00:12:53
that's rarely the case right most of us
00:12:55
have some form of taxable income some of
00:12:58
your capital gains might not be taxed
00:13:00
but every dollar of taxable income that
00:13:02
you have reduces the chance that you'll
00:13:04
be in that 0% capital gains bracket
00:13:06
other forms of taxable income push
00:13:08
capital gains into higher tax brackets
00:13:11
it's commonly referred to as stacking
00:13:13
Michael kitus who's a financial planning
00:13:15
blogger he has a terrific infographic
00:13:17
that's in my article that I mentioned
00:13:19
before that's in the show note that
00:13:20
shows this stacking you take your income
00:13:24
and then you reduce some deductions from
00:13:26
that income now you have your total tax
00:13:28
able income you have to stack your
00:13:31
capital gains on top of that total
00:13:33
taxable income and now you have your
00:13:36
total income the total income number
00:13:39
might show you that some of your taxable
00:13:42
gains are taxed at 15% some of your
00:13:45
capital gains might get taxed at 0% your
00:13:48
normal income that you earned is likely
00:13:50
going to be subject to federal income
00:13:52
taxes as well 10% 12% 22% Etc through
00:13:56
this graphic which I do recommend that
00:13:57
you guys go take a look at how someone's
00:13:59
income Stacks below their capital gains
00:14:03
and that ends up pushing some of their
00:14:04
capital gains into the 15% tax bracket I
00:14:08
know that was probably a little bit
00:14:09
complicated to listen to which is why I
00:14:12
encourage you guys to take a look at
00:14:13
some of the visuals on the best interest
00:14:14
blog just to make a little bit more
00:14:16
sense of it next big question when are
00:14:19
capital gains taxes due now you all know
00:14:22
that normal income is withheld from your
00:14:25
paycheck to make estimated tax payments
00:14:27
throughout the year that's why every two
00:14:29
weeks when you get paid or every month
00:14:30
or whatever it is you don't get all of
00:14:32
your money they withhold taxes from you
00:14:34
capital gains are a bit different and
00:14:36
one of Jennifer's questions that
00:14:38
inspired this article that inspired this
00:14:39
podcast had to do with withholding
00:14:42
capital gains taxes if that's something
00:14:43
that she should do we'll cover that idea
00:14:45
below now nevertheless you should
00:14:47
consider making capital gains tax
00:14:49
payments on a quarterly basis using what
00:14:52
are called estimated tax payments in
00:14:54
other words if you are realizing capital
00:14:56
gains throughout the year you should not
00:14:59
you should not simply wait for the end
00:15:01
of the year to make a large lump sum
00:15:04
capital gains tax payments instead you
00:15:06
should use estimated tax payments if the
00:15:09
following two scenarios are true first
00:15:11
scenario that you'll owe capital gains
00:15:14
tax of at least $1,000 this year and the
00:15:17
second scenario is if your current
00:15:19
year's tax withholding is less than 90%
00:15:23
of what you owe for this year or less
00:15:26
than 100% of what you owed last last
00:15:28
year now that logic might not quite make
00:15:32
sense the way I described it or just the
00:15:34
way the IRS Awards it you almost need an
00:15:36
example to understand what's going on
00:15:38
there tax code usually is confusing like
00:15:40
that and an example this example
00:15:42
specifically will clear that language up
00:15:45
so let's say last year John and jimie
00:15:47
they earned
00:15:48
$160,000 and you can plug that in and
00:15:50
realize that they paid
00:15:53
$2,736 in federal taxes now this year
00:15:56
their combined salary is1 $70,000 and
00:16:00
they're on Pace for a federal
00:16:01
withholding of
00:16:04
22936 in February John and Jamie sell
00:16:07
some assets and they realize $50,000 in
00:16:10
long-term capital gains these capital
00:16:13
gains all fall in the 15% capital gains
00:16:16
bracket incurring a tax bill for them of
00:16:20
$7,500 and the question is should John
00:16:22
and Jamie make estimated quarterly
00:16:24
payments on that capital gains bill so
00:16:27
we have to go back and answer those two
00:16:28
questions that we rhetorically asked
00:16:30
ourselves before the first question do
00:16:32
they owe capital gains of at least
00:16:34
$1,000 yes they do they owe 7500 so we
00:16:38
know that the first answer is yes and
00:16:40
then the second question was it's really
00:16:42
a two-part question it's an or question
00:16:45
is their current year withholding less
00:16:47
than 100% of what they owed last year
00:16:50
well their current year withholding is
00:16:53
22,900 and last year they only owed
00:16:56
20,000 in change so their current year
00:16:58
withholding is more than what they owed
00:17:00
last year so on question 2a the answer
00:17:03
is no but then question 2B is there
00:17:06
current year withholding less than 90%
00:17:10
of what they'll owe this year ah yes it
00:17:12
is because what they'll owe this year is
00:17:15
22,000 in change based on just their
00:17:17
income plus another 7500 for the capital
00:17:20
gains but they're only withholding the
00:17:22
22,000 and change they're withholding
00:17:25
about 75% of what they owe which is
00:17:28
under the 90% threshold because they're
00:17:31
under that threshold and they'll owe
00:17:32
more than $1,000 John and Jamie should
00:17:35
be making estimated quarterly tax
00:17:37
payments those payments are due on April
00:17:40
15th June 15th September 15th and then
00:17:43
January 15th and yes if you think about
00:17:46
what I just said those four payment
00:17:48
dates are not evenly spaced throughout
00:17:50
the year I have no idea why I'm sure has
00:17:52
something to do with the IRS and and tax
00:17:54
season and that but again it's due in
00:17:56
April June September and January the
00:17:59
next question and this comes directly
00:18:01
from Jennifer's original question can I
00:18:03
set up withholding for capital gains now
00:18:06
withholding is a concept from the income
00:18:07
tax world when a final tax bill is
00:18:10
predictable based on income the capital
00:18:12
gains World though is not so clear will
00:18:14
there for example will there be more
00:18:16
gains later in the year or will there be
00:18:19
Capital losses that can offset some of
00:18:21
those gains will you even owe capital
00:18:23
gains or will you fall into a 0% capital
00:18:26
gains bracket for all those reasons for
00:18:28
those questions and the answers to those
00:18:30
questions there is no withholding for
00:18:33
capital gains purposes instead many
00:18:35
investors elect to create a DIY
00:18:38
withholding account to ensure they
00:18:40
maintain enough cash to fully cover
00:18:43
their capital gains tax burden at the
00:18:45
end of the year next what is the net
00:18:48
investment income tax or the nii tax the
00:18:52
nii is a relatively recent tax that
00:18:55
effectively acts as additional capital
00:18:58
gains tax at a 3.8% rate the nii tax
00:19:02
that applies to investment income above
00:19:05
$200,000 if you're filing taxes as a
00:19:08
single person or above $250,000 if
00:19:11
you're filing taxes jointly so those
00:19:13
thresholds mean that nii applies to a
00:19:16
portion of the 15% capital gains bracket
00:19:19
and to all of the 20% capital gains
00:19:21
bracket so that means effectively there
00:19:24
will be times where a certain investor
00:19:27
might realize capital gain and not only
00:19:29
do they have to pay the 15% for the
00:19:31
traditional capital gains tax bracket
00:19:33
they also have to pay an additional 3.8%
00:19:36
for the nii tax and that effectively
00:19:39
means that there are four capital gains
00:19:41
tax brackets 0% 15%
00:19:45
18.8 which includes the nii and then
00:19:49
23.8 which is 20% plus the 3.8 from the
00:19:52
nii a common question a very common
00:19:54
question how should I minimize or avoid
00:19:57
capital gains taxes
00:19:58
I'll keep these tips very brief we can
00:20:00
always go into more details in a later
00:20:02
episode if any of you guys have
00:20:03
questions first one take advantage of
00:20:06
tax deferred investing accounts 401ks
00:20:08
IRAs Etc invest for the long term avoid
00:20:12
short-term capital gains tax rates
00:20:15
number three try to offset capital gains
00:20:17
with capital losses four utilize tax
00:20:20
loss harvesting and carryover losses
00:20:22
into future years five utilize tax gain
00:20:25
harvesting in lwi income years take
00:20:28
advantage of some of those 0% brackets
00:20:30
when you can number six use the best
00:20:33
capital gains accounting method for your
00:20:36
situation number seven wait to die
00:20:39
seriously and I'll explain that
00:20:40
afterwards number eight asset location
00:20:43
place your high tax investments in
00:20:46
qualified accounts place your low tax
00:20:48
investments in taxable accounts number
00:20:51
nine use high gains assets for donations
00:20:55
when you have an asset that has a large
00:20:57
unrealized capital gain you can donate
00:21:00
it to charity the charity gets the full
00:21:02
value of the appreciated asset and you
00:21:05
pay no capital gains taxes and you
00:21:08
actually get a tax deduction for making
00:21:10
the donation or number 10 you can use
00:21:13
high gains assets or highly appreciated
00:21:15
assets as loan collateral many brokerage
00:21:18
firms offer loans against shares
00:21:20
providing cash liquidity without selling
00:21:22
the underlying Assets Now earlier I
00:21:25
mentioned that you can wait to die to
00:21:27
avoid capital gain gains taxes what did
00:21:28
I mean there well under current tax law
00:21:31
federal tax law if you die and you leave
00:21:34
highly appreciated assets to your heirs
00:21:37
no capital gains tax will be paid on the
00:21:39
transfer not by your estate or Not by
00:21:42
your heirs and not only that but your
00:21:44
heirs will receive the assets at a
00:21:46
stepped up basis now what does that mean
00:21:49
let's go through an example let's say
00:21:50
you bought Apple stock in the year 2000
00:21:52
when it was less than $1 per share well
00:21:55
today it's close to $200 per share if
00:21:58
you sold today that huge gain from $1 to
00:22:01
almost $200 that gain would be subject
00:22:04
to capital gains taxes if you sold it
00:22:08
but if you died today and you left those
00:22:11
shares to your heirs your heirs inherit
00:22:14
the Apple shares from you they inherit
00:22:16
them at the stepped up $200 cost basis
00:22:20
if they sold those shares tomorrow the
00:22:23
day after you die there would be no
00:22:25
gains for them and therefore no tax the
00:22:28
IRS would look at those shares and
00:22:29
saywell you inherited them at $200
00:22:32
you're selling them at $200 no capital
00:22:34
gains for that reason capital gains tax
00:22:36
planning is especially important in
00:22:38
retirement and older years should you
00:22:41
sell your assets today and incur capital
00:22:43
gains taxes or if you're old enough
00:22:46
should you just wait to die and pass
00:22:48
those shares on to your heirs now
00:22:50
granted this area of the tax code
00:22:53
clearly is hotly debated I mean after
00:22:55
all it's essentially tax avoidance in a
00:22:58
way it's perfectly legal don't get me
00:22:59
wrong but it's tax avoidance and it's
00:23:02
tax avoidance in a way that is
00:23:04
benefiting people who have highly
00:23:05
appreciated stocks what else can you say
00:23:07
generally those people are more well off
00:23:09
I mean they literally have assets that
00:23:11
are making them rich and they get to
00:23:13
avoid taxes on them so it's a hotly
00:23:15
debated Topic in general capital gains
00:23:18
taxes that is you know taxes on Capital
00:23:21
those rates are significantly lower than
00:23:23
income taxes and income tax that's a tax
00:23:26
on labor and that really is the Crux of
00:23:29
the debate should a tax on Capital be
00:23:32
less than a tax on labor after all every
00:23:35
person out there has ability to put
00:23:37
their labor to work and to earn income
00:23:39
but we're taxing that higher than we tax
00:23:42
capital gains so that was your long but
00:23:45
hopefully reasonably detailed primer on
00:23:48
capital gains taxes if I missed anything
00:23:50
big shoot me a message Jesse bestin
00:23:53
interest. blog but in lie of that we're
00:23:55
going to bring on Sha meany to the show
00:23:58
Shawn elany aka the FI tax guy that's
00:24:02
Financial Independence fi the FI Tax Guy
00:24:05
Sean is a financial planner and the
00:24:07
president of meany financial and tax
00:24:10
Incorporated which offers fiduciary fee
00:24:12
only and advice only financial planning
00:24:14
the overlap of investing in taxation is
00:24:18
it's wide it's deep and it's complex
00:24:20
Sean frequently writes about these
00:24:22
topics his blog fitx guy.com recently
00:24:26
won a plutus award which is kind of like
00:24:28
the Oscars who won a plutus award for
00:24:31
best tax focused content and and
00:24:33
rightfully so with that let's bring
00:24:35
Shawn onto the
00:24:42
podcast Sean thanks for being here on
00:24:45
the best interest podcast I thought we
00:24:47
could start today with the famous Roth
00:24:49
versus traditional debate and I'm hoping
00:24:52
maybe you can ground us a little bit in
00:24:54
that conversation but then obviously I I
00:24:56
want to hear your personal opinion on
00:24:59
the topic absolutely Mr Kramer great to
00:25:02
be here so Jesse I think the first thing
00:25:04
we have to lay out is this having
00:25:07
retirement savings particularly tax
00:25:09
advantage retirement savings is a very
00:25:11
good thing for one's financial future
00:25:13
regardless of their future goals their
00:25:15
future objectives right let's not go
00:25:18
crazy on this Roth vers traditional
00:25:20
right if we're building up tax advantage
00:25:22
retirement wealth we are helping
00:25:23
ourselves regardless of future outcomes
00:25:25
and that's great planning so that's the
00:25:28
first basic thing now that said this
00:25:30
Roth vers traditional debate matters
00:25:33
because our taxes are one of our biggest
00:25:35
expenses and if there are ways we can
00:25:37
reduce those I think it very much
00:25:39
matters now traditional retirement
00:25:41
account savings has sort of come in for
00:25:43
some criticism lately you know folks are
00:25:45
worried oh no in retirement you're going
00:25:47
to pay all these taxes having a
00:25:49
traditional 401K traditional IRA that's
00:25:52
a ticking Time Bomb you've got the
00:25:54
government they're a 40 or 30% partner
00:25:57
that's stinks well let's step back okay
00:26:00
we do a traditional 401K at work right
00:26:03
we deduct into that and so many of the
00:26:06
audience maybe faces a marginal rate
00:26:08
today of say 22% Federal 24% Federal
00:26:12
maybe 32% could be more right but I'm
00:26:14
talking about sort of the medium middle
00:26:16
the medium of that bell curve for sure
00:26:18
22 24 32 you put into the 401K and you
00:26:21
put say $10,000 you get $2,400 at 24%
00:26:26
rate immediate benefit today and that's
00:26:28
a today benefit that's not a speculative
00:26:30
future benefit so that's pretty good M
00:26:32
all right well we have to think about
00:26:34
what actually happens in retirement so
00:26:37
in retirement when we're not working
00:26:39
anymore we tend to show artificially low
00:26:42
taxable income we're not impoverished
00:26:45
but if you just start populating a form
00:26:47
1040 you're going to find the numbers
00:26:50
just aren't that high you're going to
00:26:51
have some interest income some dividend
00:26:53
income most Americans don't have a ton
00:26:55
of that stuff and we're we've been in
00:26:58
low yield environments anyway so they
00:27:00
don't tend to generate a ton of that
00:27:02
stuff and particularly before we collect
00:27:04
Social Security but even when we're
00:27:05
collecting Social Security our tax
00:27:08
return looks artificially low so we
00:27:09
start taking that money out of the 401K
00:27:11
or traditional IRA to spend it right all
00:27:14
we're doing is spending we're not doing
00:27:15
tax planning well we have a large
00:27:17
standard deduction so some of that money
00:27:19
might get taxed at a 0% rate because
00:27:21
it's taxed against the standard
00:27:23
deduction all right well that's pretty
00:27:25
good but that's a small amount well then
00:27:27
some of it goes against the 10% bracket
00:27:29
the 12% bracket maybe into the 22%
00:27:32
bracket and so what happens is we want
00:27:35
to think about the effective rate on
00:27:38
those withdrawals and I have some blog
00:27:40
posts I can send them to you Jesse if
00:27:41
you want to throw them in the show notes
00:27:43
if you're so inclined I've gone through
00:27:45
the math on those examples and it turns
00:27:48
out in retirement even relatively
00:27:50
affluent people tend to have effective
00:27:53
tax rates in the teens right and it
00:27:56
could even be lower so why would I
00:27:58
forego a traditional 401k contribution
00:28:01
at work where I could get 24 cents on
00:28:03
the dollar today in order to avoid a tax
00:28:06
that's going to be 10% 15% something
00:28:10
like that in the future that doesn't
00:28:13
strike me is really sound tax planning
00:28:15
and what it means is this it means
00:28:17
traditional 401K contributions really
00:28:20
can be very good and very powerful that
00:28:22
said we we don't always avoid Roth far
00:28:25
from it so I'll give you two reasons we
00:28:27
would do wrong right one of those
00:28:29
reasons is maybe at home so you know I
00:28:32
was talking about 401ks that's a
00:28:33
workplace retirement plan well at home
00:28:36
we have something called an IRA we have
00:28:37
the traditional flavor and we have the
00:28:39
Roth flavor for those of us who are
00:28:41
covered at work by a 401k or other
00:28:44
workplace plan it's going to be very
00:28:46
difficult based on lowincome limits to
00:28:48
deduct into a traditional IRA and so
00:28:51
what that means is at home our option
00:28:53
might be a non-deductible traditional
00:28:55
IRA which I'm not too fond of by itself
00:28:57
self because we don't get that nice
00:28:58
juicy tax benefit up front or Roth IRA
00:29:02
or maybe something called a backd door
00:29:03
Roth which I'm sure many of the
00:29:04
listeners are very familiar with so at
00:29:07
work when we put it into our traditional
00:29:09
401k or our Roth 401k I should say we're
00:29:12
giving up a tax deduction because that's
00:29:14
a dollar that can't go into the
00:29:15
traditional 401K the opposite is true at
00:29:18
home if we put money at home into a Roth
00:29:21
IRA we're probably not giving up a tax
00:29:23
deduction because we couldn't have
00:29:25
deducted into the traditional IR
00:29:28
so I like this I sometimes refer to it
00:29:30
as dynamic duo planning let's do a lot
00:29:32
of traditional deductible 401K at work
00:29:35
and do Roth IRA at home right so we're
00:29:38
setting up some taxfree savings for our
00:29:40
future that could help us in the future
00:29:42
control our tax rate in the future and
00:29:44
we're setting up these traditional 401ks
00:29:47
that in the future might be lightly
00:29:48
taxed so that's one time I like the Roth
00:29:51
instead of the traditional atome Roth
00:29:54
IRA when we can't deduct into a
00:29:56
traditional IRA the second time is WTH
00:29:59
conversions right so maybe we get early
00:30:00
retired or even conventionally retired
00:30:02
and our incomes artificially low and we
00:30:05
don't need the money today to live off
00:30:07
of maybe we do some of these Ross
00:30:08
conversions we affirmatively tax that
00:30:10
money we take it from a traditional IRA
00:30:12
or traditional 41k and move it to a Roth
00:30:15
IRA usually and we're affirmatively
00:30:17
paying tax what we're doing is we're
00:30:20
picking the time we pay tax because we
00:30:22
looked at our tax return we said oh boy
00:30:24
that looks artificially low in terms of
00:30:25
my income I might as well fill up
00:30:27
against the standard deduction maybe
00:30:29
fill up some income against the 10%
00:30:30
bracket or 12% bracket so yeah
00:30:33
traditional versus Roth has some Nuance
00:30:35
but I think out there in the world
00:30:37
there's a little too much fear about
00:30:39
future taxes on retirees I've done the
00:30:42
math and it turns out most of the time
00:30:45
retirees are relatively lightly taxed
00:30:47
and that's true even if we increase
00:30:49
taxes in the future on retirees I love
00:30:52
where you started this thought process
00:30:53
Sean which is not missing the forest for
00:30:56
the trees in that hey if we're talking
00:30:59
if we're debating between two ways of
00:31:01
tax advantage retirement savings it can
00:31:04
be a fun debate to have it can be an
00:31:05
important debate to have but at the end
00:31:07
of the day we're talking about tax
00:31:08
advantage retirement savings it's a
00:31:10
great thing to take advantage of these
00:31:12
tax advantage retirement savings so I
00:31:14
like that we grounded ourselves there I
00:31:16
also really like the fact that this is
00:31:18
such a nuanced conversation and we have
00:31:21
to look at things like an individual's
00:31:23
future effective tax rate comparing that
00:31:26
to today marginal tax rate to understand
00:31:29
if traditional or rth makes sense for
00:31:31
them and and then we get to the
00:31:33
conclusion which is that for most people
00:31:35
traditional contributions make a lot of
00:31:37
sense because they can save at a high
00:31:39
rate today you know I I could save say
00:31:42
24 cents on the dollar for
00:31:44
$10,000 and then in the future when I
00:31:48
take that money out as a distribution
00:31:49
from my IRA that $10,000 if you will
00:31:52
will be spread across many tax brackets
00:31:55
not all in the 24% bracket but rather
00:31:57
filling up my standard deduction my 10%
00:32:00
my 12% and thus I'm saving money today
00:32:03
and probably going to not have to pay as
00:32:05
much tax in the future hence traditional
00:32:08
makes sense I love the way we grounded
00:32:10
that conversation it is very nuanced and
00:32:13
that actually helps me transition to
00:32:15
another Nuance question for you we had a
00:32:17
brief back and forth before about 529
00:32:19
education plans I know you've got some
00:32:22
interesting thoughts there what are your
00:32:23
Nuance thoughts on the 529s yeah so on
00:32:25
the 529s I tend to be nowhere near as
00:32:28
fond of them as other folks in the
00:32:31
personal finance space and I've got
00:32:33
three reasons for that the first is the
00:32:36
way I approach it is I believe the 529
00:32:39
in so many cases puts a tactic over the
00:32:42
goals so we have to think about you know
00:32:44
Mom and Dad are in their late 20s early
00:32:46
30s just had their first child great on
00:32:50
the way home from the baptism you'll get
00:32:52
a relative in your ear saying you got to
00:32:54
do a 529 you got to do a 529 you got to
00:32:56
do a 52 9 well has anybody asked the
00:32:59
question how are Mom and Dad's finances
00:33:02
the biggest way the best way you can
00:33:04
create Financial pain for your child in
00:33:07
their adulthood is for Mom and Dad to
00:33:10
not have sufficient Financial Resources
00:33:13
right saving for Mom and Dad has so many
00:33:17
benefits for junior so why aren't we
00:33:20
stepping back and saying well wait a
00:33:21
minute what's the profile of somebody
00:33:23
potentially contributing to a 529 oh
00:33:26
it's Mom and Dad and their late 20s
00:33:28
early 30s mid-30s late 30s and yeah
00:33:31
they've saved up maybe $250,000 for
00:33:33
their retirement great they're making
00:33:36
maybe low six figures great that's all
00:33:38
fantastic but that doesn't scream to me
00:33:41
okay you're now in a position to prepay
00:33:45
an expense that your child may or may
00:33:47
not have in 18 years right that's not a
00:33:51
person who has the affluence and the
00:33:53
financial capability to do that in my
00:33:56
opinion that's a person that should be
00:33:58
saving for their own financial future
00:34:01
all right and I think when we say 529
00:34:04
529
00:34:05
529 we're prioritizing a tactic over a
00:34:08
goal so that's the first objection I
00:34:10
have to the 529 in many cases second
00:34:14
case is the second objection I have is
00:34:16
this I like money that could serve
00:34:18
multiple Masters so let's think about
00:34:20
money that goes into a 529 that is going
00:34:22
to only be for higher education
00:34:25
generally speaking you can get some for
00:34:26
high school but let's put that to the
00:34:28
side generally speaking that's only
00:34:29
going to be for education for your child
00:34:32
or potentially a younger sibling we
00:34:34
could change the beneficiary a little
00:34:35
bit we are locking up that money in a
00:34:38
way we don't when we do traditional
00:34:40
401ks traditional IRAs Roth IRAs even
00:34:43
health savings accounts are actually
00:34:44
very accessible beyond their purported
00:34:47
locking right but when we put that money
00:34:49
in the 529 that money now serves one and
00:34:52
only one master generally speaking
00:34:54
versus what if Mom and Dad say you know
00:34:56
what I'm just going to save in a taxable
00:34:58
brokerage account and I will mentally
00:35:00
segregate it as being for Junior's
00:35:02
college education but in 10 15 18 years
00:35:06
we're going to know a lot more we're
00:35:07
going to know how are Mom and Dad doing
00:35:08
in their own Financial life is Junior
00:35:10
even going to college is Junior on a
00:35:13
scholarship right and at that time that
00:35:15
money can serve Junior's college
00:35:18
education but it also can replace the
00:35:20
roof maybe half of it goes for Mom and
00:35:22
Dad's retirement and half of it goes for
00:35:24
Junior's college education I like having
00:35:27
that money where it's not locked up and
00:35:29
it could serve multiple Masters the
00:35:31
second we put in the 529 we're severely
00:35:33
limiting what it can serve without
00:35:35
paying ordinary income tax on earnings
00:35:37
plus a 10% penalty so that's the second
00:35:40
objection the third objection I have is
00:35:42
the tax break is not all that good what
00:35:44
the tax break essentially is it's a tax
00:35:47
break on investment income right that's
00:35:50
what you're saving when you're putting
00:35:51
in the 529 let's put aside the state tax
00:35:53
benefits which tend to be very modest in
00:35:55
Most states not all States or some
00:35:57
states where oh boy that actually could
00:35:59
be in the right fact pattern we could do
00:36:01
some things particularly when the child
00:36:03
is much closer to college age but from a
00:36:06
federal perspective and you got to
00:36:07
remember too a bunch of the folks in the
00:36:08
audience live in Texas and Florida and
00:36:11
no income tax St state tax benefit but
00:36:14
even for those who live in states with
00:36:16
state income taxes outside of maybe a
00:36:19
little deduction or credit on the way in
00:36:20
and that tends to be very limited on the
00:36:23
state side federally all we're saving is
00:36:26
taxes interest dividend and capital
00:36:28
gains income and we happen to be living
00:36:30
in an era that Visa the last century
00:36:34
tends to be very favorable tax-wise in
00:36:37
terms of qualified dividend income rates
00:36:40
long-term capital gains rates even
00:36:42
ordinary income rates on non-qualified
00:36:45
dividends interest income this tends to
00:36:47
be actually a very friendly time in
00:36:49
terms of income taxes on investment
00:36:52
income let's think about you know I
00:36:54
actually have a infant goddaughter right
00:36:56
now
00:36:57
and let's say her parents wanted to put
00:36:59
$110,000 into a529 today for her College
00:37:03
well let's compare that to a taxable
00:37:05
brokerage account even if that taxable
00:37:07
brokerage account yielded 5% which it
00:37:10
might not in today's environment that's
00:37:11
$500 a taxable income and the tax on
00:37:15
that federally might be let's just use
00:37:18
25% round number which if it's qualified
00:37:21
dividend income that's too high but
00:37:23
they've saved
00:37:24
$125 this year and I get it there'll be
00:37:27
more Savings in the future if they just
00:37:29
have that in the taxable brokerage
00:37:31
account now that can that can replace
00:37:32
the H you know the roof you know if the
00:37:34
roof blows off that can do so many
00:37:36
different things and it could even
00:37:37
support the daughter in different ways
00:37:39
so I just don't see the tax benefit
00:37:41
being that good and oh by the way if the
00:37:43
money isn't used for qualified education
00:37:45
expenses we're going to have ordinary
00:37:47
income on the income which might have
00:37:49
been qualified dividends if a taxable
00:37:51
account plus a 10% withdrawal penalty so
00:37:54
for those reasons I just think think the
00:37:57
529 solves for a problem that's not much
00:37:59
of a problem and we have Alternatives
00:38:01
available that can still fund College
00:38:03
I'm not saying don't pay for Junior's
00:38:04
College I'm just saying remain flexible
00:38:06
for your own financial future that last
00:38:08
point I'm glad you rehashed that again
00:38:10
because you you did make it clear
00:38:11
earlier but it is worth pointing out
00:38:13
that there's a difference between saying
00:38:15
don't use a 529 versus don't save for
00:38:19
your kids college you're not saying the
00:38:20
second one you're saying H 529 the juice
00:38:23
might not be worth to squeeze and I
00:38:25
think especially one thing I've talked
00:38:27
about before and on the best interest
00:38:29
with clients wherever is kind of the
00:38:31
cardinal sin of 529s is when you enter
00:38:34
that overfunding scenario where yes
00:38:37
somehow someway you've got a hundred
00:38:40
grand worth of college expenses and
00:38:42
you've got 200 Grand in the 529 and
00:38:44
you're looking at yourself you go boy I
00:38:46
really want that 100 Grand difference
00:38:48
back and and there's no good way that
00:38:50
you can claw it back out if you can't
00:38:52
beat them join them that was a excellent
00:38:54
excellent arguments you laid out there
00:38:55
Sean no go ahead I know you've got more
00:38:57
thoughts well and Jesse you know on the
00:38:59
overfunding so now right what happens is
00:39:02
shiny objects and personal finance
00:39:04
people who follow personal finance love
00:39:06
shiny objects so Congress added this
00:39:09
bailout technique where we can move
00:39:11
$35,000 from a 529 to the beneficiaries
00:39:15
Roth IRA and so now I'm hearing like
00:39:17
this is the greatest thing since sliced
00:39:18
bread think about if you do the 35,000
00:39:21
into the beneficiaries 529 by the time
00:39:24
they turn 90 years old they're going to
00:39:26
have 1 2 billion in a Roth IRA I'm
00:39:28
exaggerating but not by much all right
00:39:31
so let's think about that for a second
00:39:32
I'm not opposed to Mom and Dad funding
00:39:35
Junior's Roth IRA when junior is in
00:39:38
their 20s and helping them build up
00:39:40
wealth here's the thing they don't need
00:39:42
an overfunded 529 to do that they need
00:39:45
to balance in their checking account to
00:39:47
do that right they don't need this hokey
00:39:49
thing with a 15year limit and a fiveyear
00:39:51
limit all this hokey stuff an overfunded
00:39:54
situation is not a great place to be
00:39:55
look if they've got a younger sibling
00:39:57
great maybe we change the beneficiary
00:39:59
and we address the overfunding that way
00:40:01
look I'm happy that yeah if there's some
00:40:03
listeners out there they've got a
00:40:05
daughter who's a junior in college and
00:40:07
we're a little overfunded great this
00:40:09
Roth IRA thing absolutely could be a
00:40:11
tool to be used but I don't see it as in
00:40:14
any way as something to be planned into
00:40:17
here's a quick ad and then we'll get
00:40:19
back to the show one of the more common
00:40:21
questions I hear is Jesse what do you
00:40:23
like and use books blogs podcasts Banks
00:40:26
and brokerage firms what are your
00:40:29
recommendations so to answer that
00:40:31
question I put together a web page you
00:40:33
can check it out at bestter interest.
00:40:35
blog reccommendations again that's
00:40:38
bestter interest. blog reccommendations
00:40:42
to check out how I'm improving my
00:40:44
financial life I like the fact that
00:40:46
we're focusing here on good tax planning
00:40:49
advice and it's funny you use the word
00:40:51
they shiny object I think a lot of times
00:40:54
in this personal finance financial
00:40:55
planning you know investment space
00:40:58
investing is the shiny object the idea
00:41:00
of turning $1 into $10 over a decade I
00:41:03
mean that's cool tax planning advice is
00:41:06
not necessarily the shiny object and yet
00:41:08
it's very valuable so I was just curious
00:41:10
do you have any quantifiable examples
00:41:12
where person a did all of these things
00:41:15
wrong from a tax planning point of view
00:41:17
and it cost them X dollar or where maybe
00:41:20
they did everything right and it saved
00:41:22
them why dollars or if I'm not asking
00:41:24
the wrong question maybe what what is
00:41:26
the right question I should be asking I
00:41:28
will say this can be very impactful for
00:41:30
a number of reasons right so that
00:41:32
example with the traditional 401k and we
00:41:35
can get 24 32 cents on the dollar today
00:41:38
and then pay 10 cents on the dollar 12
00:41:40
cents 14 16 18 cents on the dollar
00:41:43
tomorrow well that's setting up a Delta
00:41:45
spread of 10% or more so we're sort of
00:41:49
printing money off the government that's
00:41:51
pretty good and I think that also says
00:41:53
look what you ought to do is not focus
00:41:55
on getting deductions this year and oh I
00:41:57
Sav $6,000 on my taxes this year it's
00:42:00
about reducing total lifetime taxing
00:42:03
Taxation and the way you do that I think
00:42:05
is a lot largely through these
00:42:07
retirement accounts we take deductions
00:42:08
at work maybe we put some money in a
00:42:10
Roth at home and we really are saving
00:42:13
some money I'll give you one example
00:42:15
though this is a quirky example it deals
00:42:17
with employer stock in a workplace
00:42:20
retirement plan they call it net
00:42:21
unrealized
00:42:22
appreciation this was a person who was
00:42:25
able to take advantage of that strategy
00:42:28
and you you basically get the gain
00:42:30
inside the employer stock inside the
00:42:33
401K can or other workplace plan can
00:42:36
come out into a taxable account not even
00:42:39
an IRA and then they could live off that
00:42:42
and if they can keep their income below
00:42:43
the 12% bracket they set up what I was
00:42:46
referring to as a capital gains Ira you
00:42:48
take the money out yes you have a
00:42:50
capital gain tax on it when you take it
00:42:52
out but if you keep your income low
00:42:54
enough that could be a 0% tax so all of
00:42:57
a sudden they had money that they
00:42:58
deducted into a a 401k or other
00:43:00
workplace retirement plan and now
00:43:02
they're going to withdraw it at a 0%
00:43:03
rate so it could be that impactful
00:43:06
that's just one example and look
00:43:08
employer stock is something you gota be
00:43:10
real careful with right the flip of that
00:43:12
is the Enron situation you put all this
00:43:14
employer stock in your 401k and then the
00:43:16
company collapses you lose your job and
00:43:19
your balance sheet value your income
00:43:20
statement and your balance sheet takes a
00:43:22
hit so not something I'd be looking to
00:43:24
do but there are people who have
00:43:25
something like that where boy if you do
00:43:27
the right plan it can be so impactful
00:43:29
but even for the folks who hey I've got
00:43:31
a 401K with Diversified Investments if I
00:43:34
play my cards right I can set up some
00:43:36
real Delta some real Arbitrage where I'm
00:43:38
deducting higher then I'm reincluded an
00:43:40
income and it's hard to quantify that
00:43:43
but that could be in terms of cents on
00:43:45
the dollar that could be some real money
00:43:47
where hey maybe that's 10 cents on the
00:43:49
dollar that I'm printing off the
00:43:50
government right I'm saving helping my
00:43:53
financial future and ultimately the
00:43:55
government is subsidizing this that's
00:43:57
pretty good and over long periods of
00:43:59
time we're talking about saving and
00:44:01
investing five and six and seven figures
00:44:03
worth of money potentially so if you are
00:44:06
saving five or 10 or 15 cents on the
00:44:08
dollar multiplied by a big dollar amount
00:44:11
you can just back of the envelope to
00:44:12
some interesting savings right there
00:44:15
yeah and some of this is tax insurance
00:44:17
and it's part of the reason say I like a
00:44:18
Roth IRA at home versus say a 529 right
00:44:21
our investment Horizon and our tax risk
00:44:24
Horizon are our 529 our College savings
00:44:27
is 10 years 20 years right so Junior
00:44:30
eventually is going to graduate college
00:44:31
and we're done with it versus hey you
00:44:34
know what if you're a worker in your 30s
00:44:35
or 40s today you could make your 90s
00:44:38
right so your risk in terms of well
00:44:41
taxes could change well you've got 50
00:44:44
years where taxes could change against
00:44:46
you so that's why that's part of the
00:44:47
reason I like a Roth IRA say more than a
00:44:50
529 the Roth IRA provides tax insurance
00:44:53
for so much longer of a period of time
00:44:55
yeah and and when I listen to you
00:44:57
describe these nuanced Corner cases Sean
00:45:00
and so here I I work with five cfps and
00:45:04
three CPAs and sometimes when I hear
00:45:06
them talking about some of the teag
00:45:08
scenarios they're dealing with it can be
00:45:10
a complicated subject you just mentioned
00:45:12
that some of the people listening here
00:45:14
some of the stuff maybe it's like
00:45:15
workplace stock option plans you know it
00:45:17
gets a little complex and yet a lot of
00:45:20
our listeners they are thinking about
00:45:21
maybe some DIY tactics that they can
00:45:24
Implement possibly before the end of
00:45:26
this year so here we are we're recording
00:45:28
on November 14th 2023 what are some of
00:45:31
the lowest hanging fruit that diyers out
00:45:34
there can do in the next few weeks in
00:45:37
the next month or maybe before the April
00:45:39
15th tax deadline in 2024 to make sure
00:45:42
they take advantage of the 2023 tax year
00:45:46
yeah I I think Jesse the first thing is
00:45:47
these retirement savings and health
00:45:49
savings accounts right where hey you
00:45:51
know what maybe I haven't been attentive
00:45:52
to this maybe there's an opportunity to
00:45:54
still contribute to these things maybe I
00:45:56
amp up my contributions before year end
00:45:59
now on an IRA and HSA you can actually
00:46:01
wait until the following year April 15th
00:46:04
tends to be the deadline you just have
00:46:05
to code it correctly right so if you're
00:46:07
sitting there in March of 2024 you want
00:46:09
to make an IRA or Roth IRA contribution
00:46:11
for 2023 just make sure you code it
00:46:14
correctly as being for 2023 because
00:46:16
otherwise the institution is going to
00:46:17
treat it as being for 2024 one thing
00:46:20
that exists out there there are folks
00:46:24
with appreciated stock position
00:46:25
positions right so this happens because
00:46:27
maybe I have an employer like you were
00:46:29
saying stock option plan or other plan
00:46:32
where I just accumulate stock on my own
00:46:34
employer or maybe there's somebody out
00:46:36
there who 15 years ago bought Google
00:46:38
stock or Apple stock or something like
00:46:41
that I think JL Collins refers to these
00:46:43
as the cats and dogs of our portfolio
00:46:45
and maybe we got a big built-in capital
00:46:47
gain in that stock so we don't want to
00:46:49
sell it but maybe we want to diversify
00:46:51
right we just like diversification no
00:46:53
offense to that particular company right
00:46:55
but we just like diversification so we
00:46:58
could do some things there something
00:46:59
called tax gain harvesting if our income
00:47:01
is relatively low we could sell and
00:47:03
reinvest at a 0% long-term capital gains
00:47:06
rate the other thing is the donor advise
00:47:08
fund right so many of us have charitable
00:47:10
intentions and hey you know what why not
00:47:14
set aside some money where that money
00:47:16
will eventually over time in a way I
00:47:19
control go to charity right but I don't
00:47:21
want to give it all the charity right
00:47:23
now and I'd like a tax deduction right
00:47:25
now so the donor advise fund is a great
00:47:28
tool to facilitate that and that can be
00:47:30
DIY right so what you do is you see hey
00:47:33
you know what I'm sitting on XYZ stock
00:47:36
it's got this big capital gain I don't
00:47:38
want to pay capital gains tax on that so
00:47:40
I just open up a donor advise fund and
00:47:42
do a inine transfer of those shares into
00:47:46
the donor advise fund and that achieves
00:47:48
two big things and even a third small
00:47:50
thing right one is it excuses that
00:47:53
capital gain from tax for all human
00:47:55
history so that's really cool two it
00:47:57
gets me a nice juicy tax deduction this
00:47:59
year if I can get it done in time right
00:48:01
so that's really nice and then three the
00:48:03
money can sit in my donor revise fund
00:48:06
for a number of years there's no
00:48:07
deadline on when it has to go to
00:48:08
Charities but over time I'll just Dole
00:48:10
it out to my favorite Charities and it
00:48:13
can make a little income usually the
00:48:14
donor Revis funds might give you like a
00:48:16
dozen mutual funds you can invest that
00:48:18
money in that money can grow that money
00:48:20
can actually make some money inside the
00:48:22
donor Revis fund and eventually go to
00:48:24
charity but you're not taxed on so it's
00:48:26
another little mini TX shelter there too
00:48:28
so I think the the donor advise fund you
00:48:31
know for those of us with big built-in
00:48:33
gain positions and individual equities
00:48:35
for the most part you shouldn't be given
00:48:37
to charity with your checkbook or your
00:48:38
credit card anymore give to charity with
00:48:40
your appreciated stock don't sell it
00:48:42
first but give it give to charity
00:48:44
through your appr or through Gifts of
00:48:46
your appreciated stock fantastic and and
00:48:49
I had one more thought for you Sean one
00:48:51
more kind of big question and it has to
00:48:53
do with year end just not this year end
00:48:55
it has to do with what you and I know is
00:48:57
happening at the end of 2025 about two
00:48:59
years away or at least what's currently
00:49:01
planned for the end of 2025 so I haven't
00:49:05
yet spoiled what exactly is gonna happen
00:49:07
and I kind of want to put it on you can
00:49:09
you explain to our listeners in in a
00:49:10
quick nutshell what is going to happen
00:49:12
at the end of 2025 and then I I almost I
00:49:15
want to go through some of the basics
00:49:16
who needs to worry about it what should
00:49:18
they be worried about what can or should
00:49:21
they be doing now to prepare for this
00:49:23
big change yeah so if we look at the
00:49:26
Internal Revenue code there are um
00:49:28
certain favorable tax Provisions right
00:49:30
the high standard deduction 12% tax
00:49:33
bracket something called the qualified
00:49:35
business income I've written about right
00:49:37
the estate tax exemption which is very
00:49:39
high right now scheduled to be almost
00:49:41
haved I believe in 2026 so if you look
00:49:44
at the way they write the tax laws
00:49:46
sometimes what they'll do is they'll cut
00:49:47
taxes but they'll say oh that's a
00:49:48
temporary tax cut the reason they do
00:49:51
that is because it's scored it's the
00:49:53
minations of how Congress scored these
00:49:56
tax bills so yeah if we just look at the
00:49:59
Internal Revenue code which governs tax
00:50:01
in this country we're going to see oh
00:50:03
boy in the year 2026 all these taxes are
00:50:06
going up and to my mind if I were a
00:50:09
betting man and look all free
00:50:11
predictions guaranteed wrong or your
00:50:13
money back but if I was a betting man I
00:50:16
would say look I think Congress in the
00:50:19
year 20125 is going to extend these tax
00:50:21
breaks uh okay so when I approach
00:50:24
planning I say look Congress has the
00:50:26
incentive to extend these tax breaks
00:50:28
politically for example retirees would
00:50:31
be hit pretty hard if these tax breaks
00:50:33
are not extended and retirees tend to
00:50:36
vote right so Congress has every
00:50:37
incentive in 2025 to extend them now if
00:50:40
you disagree with my take then when you
00:50:43
were doing say your yearend Roth
00:50:45
conversion say you're early retired
00:50:47
right now what you might want to do is
00:50:49
do more year-end Roth conversions right
00:50:51
now if you disagree with my take because
00:50:52
you say well boy you know in 23 24 and
00:50:56
25 I'm going have a lower tax bracket
00:50:58
but in 26 it's going to go back up and
00:51:00
so that's going to be a worst time to do
00:51:02
Roth conversions so you know I think you
00:51:04
have to do your own assessment look
00:51:06
Jesse we're not here to give Financial
00:51:08
or investment or tax advice to any
00:51:10
individual out there we're here to
00:51:12
provide educational knowledge but I
00:51:14
think if you say if you take my Approach
00:51:16
you say oh I'm not too worried about
00:51:18
that then yeah you proceed as you
00:51:21
normally would if you say hey you know
00:51:23
what I don't think Shan mlen is right on
00:51:25
this one one I think these taxes are
00:51:26
going up well boy then I might want to
00:51:29
do some more Roth conversions before
00:51:30
year end now let me say though if you're
00:51:32
in your high working years the taxable
00:51:34
Roth conversion is probably not the
00:51:36
thing to be doing right you don't want
00:51:38
to be creating taxable income in your
00:51:40
highest earning years generally speaking
00:51:42
I like it tax changes are scheduled to
00:51:44
happen the jury is still out as to
00:51:46
whether they'll happen on time or or at
00:51:49
all and then as always on an individual
00:51:52
basis these are the kind of questions
00:51:54
that we can provide blanket information
00:51:56
on like well if you know your tax
00:51:58
bracket's going up it might make sense
00:51:59
to move income into current years as
00:52:02
opposed to postp pointing it out to
00:52:03
Future years but even then it's it
00:52:05
almost gets back to one of our earlier
00:52:06
topics Sean what we're talking about
00:52:08
here is something that is scheduled to
00:52:10
occur over the next three years is my
00:52:13
math right there I think it is over the
00:52:15
next three years let's say based on the
00:52:16
current schedule Proper tags planning
00:52:18
isn't necessarily a three-year exercise
00:52:21
we we should think about it in decades
00:52:23
at a time if we can and that gets back
00:52:25
to this whole conversation about
00:52:27
financial planning is is a long-term
00:52:29
game and you're thinking about dollars
00:52:30
today dollars tomorrow and and dollars
00:52:32
for the rest of your life and if you're
00:52:34
only zoomed in on the current 2023 tax
00:52:37
year or 2023 through 2026 that might not
00:52:40
be uh a big enough story I think that's
00:52:43
right Jesse right I think the most
00:52:45
impactful Financial Planning in terms of
00:52:48
tax planning is that planning that aims
00:52:51
to reduce total lifetime tax I think
00:52:54
that's the lens at which you have to
00:52:55
look at it not necessarily hey I got
00:52:58
this great juicy tax deduction this year
00:53:00
maybe you know in some cases that can be
00:53:02
true maybe it's a great donor revised
00:53:03
fund contribution at the end of this
00:53:05
year maybe that is the right answer in
00:53:06
your particular case who knows but I
00:53:09
think what the most impactful planning
00:53:10
is doing is it's increasing our chances
00:53:13
of financial success regardless of
00:53:16
future outcomes so what we're trying to
00:53:18
do is just identify those behaviors and
00:53:20
tactics that increase our chances of
00:53:23
success regardless of future outcomes
00:53:25
and that is really a lifetime exercise
00:53:28
not necessarily A this year this year
00:53:31
this year I got to get that deduction
00:53:33
this year exercise I think everybody
00:53:35
needs to press the rewind button once or
00:53:37
twice and listen to that 30 to 45
00:53:39
seconds all over again because that clip
00:53:41
right there Sean was perfectly said very
00:53:44
much perfectly said now Sean I know
00:53:46
you're you're writing you've appeared on
00:53:48
other podcasts before you're on some
00:53:50
social media Outlets I assume some of
00:53:52
our listeners are going want to reach
00:53:53
out to you they're going to want to
00:53:54
start following some of your not
00:53:56
necessarily individual advice but smart
00:53:58
general conversations that you have how
00:54:00
can people find you thanks so much Jesse
00:54:02
so folks can find me on my blog FX
00:54:06
guy.com I'm on Twitter at Shan money and
00:54:10
tax and then I've got a small YouTube
00:54:12
channel sha malany videos awesome we
00:54:15
will throw those links into the show
00:54:17
notes sha malany the F Tax Guy thanks
00:54:21
for coming on the best interest podcast
00:54:23
Jesse thanks so much for having me
00:54:24
really enjoy this
00:54:27
conversation thanks for tuning in to
00:54:29
this episode of the best interest
00:54:30
podcast if you have a question for Jesse
00:54:32
to answer on a future episode send him
00:54:35
an email at Jesse bestter interest. blog
00:54:38
again that's Jesse bestter interest.
00:54:41
blog did you enjoy the show subscribe
00:54:44
rate and review the podcast wherever you
00:54:46
listen this helps others find the show
00:54:49
and invest in knowledge themselves and
00:54:51
we really appreciate it we'll catch you
00:54:53
on the next episode of the best interest
00:54:58
podcast the best interest podcast is a
00:55:01
personal podcast meant for education and
00:55:03
entertainment it should not be taken as
00:55:05
Financial advice and is not prescriptive
00:55:07
of your financial situation
