Tax Free Retirement - Heafner Financial Solutions

Tax Free Retirement
Take Control of Your Money
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What is your plan for an income tax-free retirement?
First, it's important to appreciate what paying
income tax for the rest of your life means​.
Taxes are rising! America’s $19 Trillion of debt
will rise because… Interest rates are rising. A 1%
rise in interest rates will add $2 Trillion to our
National debt, and more each year as the interest
cost compounds. America has unfunded
obligations to pay for Social Security, Medicare,
Medicaid and federal employees’ pensions
exceeding $127 Trillion. ​In other words, we owe
the American people​ ​$127 Trillion that we don’t
have.
There are two ways we will handle our debt: ​ (1)​ ​increase productivity, and (2) raise taxes.
If you’ve been paying attention, you might have noticed that the American Tax Relief Act of 2015
raised taxes on high income earners with a vengeance. Let me list some of the stab wounds Congress
thrust into your income and wealth:
● The top tax bracket rose from 35% to 39.6%
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Add to that 3.8% Net Investment Tax
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Add to that .9% Medicare tax
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Adding these together, the top income tax bracket is now 44.3%. (This is a 27% increase.)
● The top capital gains bracket rose from 15% to 23.8%. (a 59% increase)
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Here are the hidden or “stealth taxes on high-income earners.”
The Personal Exemption phase out​- This eliminates your personal exemptions (currently $4,050 per
yourself and dependents)
The Pease Amendment​- This wipes out up to 80% of your itemized deductions.
...And of course there’s the ​AMT (Alternative Minimum Tax)​ which removes many itemized
deductions for even lesser income earners.
Now if you think you are safe from all of this, well maybe, but Congress is not done. Expect to see
your taxes rise each year, squeezing more and more money out of your income, leaving you with less
and less!
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What an income tax free retirement means…
...what an incredible impact this can have on you in many ways. It seems obvious that having an income
tax-free retirement can increase your wealth greatly.
It’s probably also obvious that it will increase your income, too. Let’s see how that happens.
First, all of the taxes we listed above go away!!!!! That’s right! ​You don’t care what the IRS tax rates
are, cause you’re not paying them!
Imagine that in retirement that all of your income is received without any income tax. Now if you
need $100,000 to buy the things that make up your lifestyle then all you need to receive as income is
$100,000.
Contrast this with receiving taxable income. You might need $150,000 in income, to get $100,000
after taxes.
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Another way you will have more income is that you might pay no tax on your Social Security income.
You will discover at some point that all the taxes you had withheld from your pay check over your
working years (to pay for provide your Social Security income in retirement) will get taxed again
when you receive your Social Security checks if you report a minimal taxable income.…..Unless you
plan for an income tax-free retirement. Under current law, if you’re a married couple with over
$32,000 of “Provisional income” (Provisional income is all of your taxable income plus muni-bond
income + one half of your Social Security income) you will have 50% of your Social Security income
included with other taxable income to be taxed at whatever your tax rate is. Married couples with
provisional income in excess of $44,000, will have 85% of their Social Security included with your
other taxable income to be taxed. The thresholds for a single person are $25,000 and $34,000,
respectively.
Now imagine that you’re living an income tax-free retirement. Now, not only is the money you
withdraw from your nest egg income tax-free, but your Social Security is income tax-free! Adding 0
(taxable income ) to one half your social security income, gives you very little provisional income.”
So you could wipe out any tax on your Social Security Income.​ Congratulations! You’ve used the IRS
tax code to kick the IRS out of your life!
“But wait! There’s more!” ​to quote the infomercial king, Billy Mayes. ​Here’s another case for getting
rid of taxable income in favor of tax-free income. ​It will reduce other expenses like Medicare Part B.
If you’ve been on Medicare for a while you know that Part A is free (you paid for it in your working
years) and Part B costs you $104 per month (or $121/month for many of us). You probably know that
that $104 is rising. What you may not know is that after 2017 your Part B costs may rise to $2,000 or
more a month if you report substantial taxable income. But if your income is not taxable, you pay the
minimum Part B costs.
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Finally, if you never again pay income tax in retirement, you can expect more control over your
assets, more freedom, more confidence, and the smug righteousness of removing yourself from the
IRS’s iron grip.
What it’s not….
Now I’m not saying you will never again pay taxes. You will pay sales taxes,
gasoline taxes, property taxes…​ but you won’t pay income taxes​… if you’re
successful in making this transition to the world of income-tax free.
Every step helps
Even if you can’t get all the way to the income tax free world, getting part of
the way can make a huge difference in the money you get to spend and/or
pass on. Even if you don’t get to the income tax free world, if we can decrease
the amount of tax you pay over your lifetime that is a pretty good thing. Now,
clearly, we don’t want the tax tail to wag the dog. In other words, we want to do whatever is going to
create the most “net spendable dollars” for you and your family, your charity, and whoever you care
about. We don’t want to avoid taxes just for the sake of avoiding taxes, if it leaves you with less
money. Any tax decisions that don’t increase your “Net spendable dollars” are probably wasted effort.
So what is an Income tax Free Retirement
Imagine that all of the income you receive in retirement comes from a post-tax or tax-free source.
What is tax-free or Post-tax money?​ Money from a checking account or savings account or
brokerage account where you earned the money and paid the tax on this money is “post-tax” money.
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You have already paid the tax on this money and will never be taxed on it again. Now unless it is a
tax-free vehicle like a Roth IRA, the growth is taxable income, to be taxed every year.
What is tax-free income? ​Any income that you can receive and spend and not pay taxes on.
Examples are:
● Roth IRA’s
● Certain Muni Bonds
● A Personal Retirement Plan that qualifies as life insurance.
This money spends 100%, unlike money from your IRA or 401(k) (or other “pre-tax accounts”), which
you must declare on your tax return. Tax-free money does not get added into your 1040 to be taxed. It
doesn’t raise your tax bracket. It doesn’t make your Social Security taxable. It doesn’t raise your
Medicare Part B costs. It doesn’t cause you to lose your exemptions and itemized deductions.With
tax-free income, there is no tax to pay the IRS, even as you spend all you want.
Contrast this with spending pre-tax money.
Pre-tax money is money that you earn and move to pre-tax accounts without paying taxes. Not
avoiding taxes, you merely defer the tax until you permanently withdraw the money. Pensions,
Traditional IRA’s, Simple IRA’s, 401(k)’s, 403(b)’s, and other retirement plans are examples of pre-tax
money. Congress gives us all the right to accumulate retirement savings (earned income) in pre-tax
accounts.
Living an income tax free retirement requires setting yourself up to withdraw as much income as
you need throughout your life from income tax-free sources. This will not happen by itself unless
you live in abject poverty. In order to live a life of abundance and live a tax-free retirement, you must
plan for it. While you’re planning, why not set your children up for the same “get the IRS our of my
life” retirement? Why not pass on all of your wealth to them income and estate tax free.
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Tax-deferral-​ Why do we tax-defer income in the first place? The assumption that encouraged you to
utilize these plans was the expectation that you would likely be in a lower tax bracket after you retire
than while you are working. And for many people this will be true. Typically those with very little
savings will be forced to live on less and likely be in as low or lower tax bracket, then they were
when earning it. On the other end of the scale, you may make substantially more money in your
working years than you need to maintain your lifestyle.
If so, once in retirement, you may take much less income than you are/were earning. You could be in
a lower tax bracket in retirement. Maxing your deferrals, ie- maximizing your 401(k) and other tax
deferral options may be just what the doctor ordered.
Maximizing your tax deferral
● Tax-Deferring income​- Clearly you may tax defer your income via pensions, profit-sharing
plans, 401(k) and IRA contributions, etc. If you control how you are paid, as business owners or
highly valued employees do, congratulations, you hold a key to the door of tax control.
You have the ability to lift millions of dollars above the rising tide of taxes. Beyond an IRA, 401(k)’s
and Cash Balance plans, there are “Super 401(k)’s that allow you to save all of your unneeded income
up to the millions each year in pretax plans. If that’s your situation, then if you pay any income taxes
at all on income beyond what you spend, then it is your own choice and not required by law.
These powerful tax-deferral plans can shield you from significant income taxes now, keeping your
income tax bracket low. Once retired, if you continue spending at the same or lower level as when
you were working, you will have saved a tremendous amount of taxes.
Now once retired, you have the opportunity to move these pre-tax savings to tax-free savings.
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● Post-Tax growth-​ Because the earnings on your post-tax accounts are taxable, even though the
principal is not, significant monies in post-tax accounts can cause significant taxes during
your earning years and during retirement. Instead, you have the option of choosing to give
your post-tax accounts tax-deferred status. In other words you can shield the growth that is
otherwise taxable from taxation for as long as you want.
How can you give tax-deferred status to an account that is not an IRA or 401(k)? ​You can buy a
non-dividend-paying stock and defer the growth your entire lifetime, even passing along the asset
income tax-free up to the date of your death.​ ​There are also tools that mimic IRA’s tax wise. These
tools fall under the tax code for annuities. You can avail yourself to all the features of a fixed annuity
or an index annuity or a variable annuity… or you can disregard all of the other features of annuities
and create your own tax-deferred shell over your post-tax money.
So it may be really useful for you to defer as much income as possible. For others, they can create
greater net spendable wealth by growing their savings in tax-free accounts.
Tax-deferral is not without risks! ​All your tax-deferred growth in IRA’s, 401(k), pension plans, etc., is
subject to Required Minimum Distributions (RMD’s) starting at age 70 ½. These RMD’s may force you
into higher tax brackets then if you only withdrew the money you needed to live on. It is important
that you plan for your RMD’s in a tax-minimization strategy.
Which is better for you (Tax-free accumulation or tax-deferred accumulation) determines how best
to reduce your taxes over your lifetime. Either road you take, can get you to the same end, an Income
Tax Free Retirement. The truth is that everyone’s situation requires a different tact. You need a
custom plan to successfully minimize your lifetime taxes.
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Not your CPA’s​ ​Job
Most people assume that their CPA is taking care of this. If your CPA creates a tax plan for you, you
are a rare human being! To be clear there are some CPA’s who have focused their careers on tax
planning, but they are rare and usually famous and very expensive. Most CPS’s are focused on doing
tax returns and producing financial statements or work internally for large companies. So expect
your CPA to ask if you want to make an IRA contribution to reduce your taxes (if your income falls
within allowable limits). Expect your CPA to suggest you max out your 401(k) to reduce your taxes.
Beyond that, don’t expect much! The truth is your CPA does not get paid enough to specialize in
saving you taxes.
Who’s job is it?
It is left to financial advisors to help your maximize your wealth in the face of taxes. Again,
unfortunately, very few financial advisors are trained or licensed to work in the area of taxes. So
most investors think they have done all that is possible, because they have a CPA and a financial
advisor. They haven’t been told there is more they can do. Most likely you have big globs of tax
savings you’re missing out on; you just haven’t been told how to find them. Due to ignorance—no
fault of your own, you are losing a fortune to the IRS. I’m sure you’re an expert in your field of work;
you just don’t have a tax-planning expert on your team.
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How do you get to an income tax free retirement?
How do you squeeze the IRA out of your money, like wringing the moisture out of your clothes?
There are three basic tax-free growth tools.
The best known is the Roth IRA.​ First, let’s be clear on the difference between a Traditional IRA and a
Roth IRA. With a traditional IRA, you are setting aside income that would otherwise be taxed in the
year you earn it and growing it in a “tax-deferred” or “pre-tax” retirement account. Your accounts will
seem to be tax-free until they are taxed.
Remember,​ these accounts face required minimum distributions (RMD’s) beginning in the year you
turn 70 ½. It is likely that these accounts will face additional excise taxes on top of income taxes, like
the 15% excise tax imposed on IRA’s of the wealthy in the 90’s. (By the way, if you owned an IRA of
$100,000 plus, you were deemed to be “wealthy.”) With a Roth, you pay the tax in the year you earn the
money or in the year you convert pre-tax money to a Roth IRA. Now the entire account grows income
tax free. You can spend all the money in your account income-tax free. There are no Required
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Minimum Distributions for you or your spouse. If you pass your Roth to your children or
grandchildren, they can spend it income-tax free.
● Income from a Roth doesn’t count as taxable income.
● It's not included in your Adjusted Gross Income.
● It doesn’t make your Social Security taxable.
● It doesn’t affect your Medicare Part B costs.
So why wouldn’t everyone want to go straight to a Roth IRA instead of a pre-tax account like 401(k) or
IRA? Some people earn too much to contribute to a Roth because there are income limitations on
who can contribute to a Roth.
But all of us can do Roth Conversions, converting your pre-tax accounts to Roth accounts. If you can’t
contribute to a Roth now, your 401(k) plan may allow you to overfund your 4019K) contributing
money beyond what can be deducted. Why do this? Because you can then, convert that over-funded
portion to a Roth, with no additional taxes. Some of you make too much money to stomach
converting your IRA’s to Roth IRA’s, because to convert an IRA to a Roth you have to pay the tax on
the conversion. But remember, you can convert later when retired and have much less taxable
income.
Other tax-free retirement tools include certain Muni-bonds and Personal Retirement Plans (PRP’s).
PRP’s that qualify as “life-insurance” receive the tax-free growth status of Life Insurance. This is not
designed around a large tax-free death benefit. Rather its designed to provide tax-free income
throughout retirement.
The magic in getting to the tax-free world is doing so without increasing your taxes. The challenge
is finding the strategy to offset the tax that you would otherwise pay on moving to the tax-free world.
So while there are only a few tax-free growth tools. There are a number of mechanisms or strategies
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to offset the Roth conversion cost.
If you recognize the impact taxes will have on reducing your wealth, then is critically important to
develop your strategy to get to “income tax free,” and​ it is also critically important to speak with your
financial advisor each year to grab unplanned opportunities to further your plan’s success.
Here’s some examples of unplanned opportunities:
1. If your IRA or 401(k) account falls in value
2. Any year when your income falls. Perhaps your quit your job, our out of work due to disability
or illness or vacation.
3. Any year when you have increased expenses. What if you have increased medical expenses or
can write off a larger than normal amount.
4. Any year you get big tax credits.
5. Any year when you have an increase in losses. Let’s say you have a substantial loss in one of
your businesses that is a Sub S or LLC and you pass that loss onto your personal return.
Your plan needs to fit all of the possible variables in your life. That means you need a custom plan to
get you to your own tax-free Retirement. We’re happy to help you design your own Tax-Free
Retirement.
For questions or more information please call 704-552-1230 or complete the
following communication.
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What a great read!!!
Here are ​TWO​ ​great takeaways …
1)
2)
Nobody but ​YOU​ can take charge of your future and get the help you need to show you
factually how you are positioned for retirement.
Nobody can make decisions about ​YOUR MONEY​ to optimize your future, but you.
Ask Yourself??
Are your current investments right for you? Will they last you your lifetime? These are critical
questions that most investors would love to know the answers to, but don’t know how to get them.
We have an ​exclusive offer ​for you to receive a complete
“Financial MRI”
to see your financial Future
The first step is to get a factual, non-biased analysis of your investments.
Heafner Financial is an independent Financial Advisory firm. Jim Heafner is a Certified Financial Planner,
a Fiduciary who is obligated to act in your best interest. We work to create financial plans that work to
accomplish your goals.
Investment advice is offered by Retirement Wealth Advisors, Inc. (RWA), a SEC Registered Investment Advisor. Our Headquarters Is Located at 89 Ionia Ave NW Suite 600, Grand Rapids, MI 49503; ​(800)903­2562​. Investment Advisory Services Are Offered Through Retirement Wealth Advisors. Insurance and Annuity Products Are Sold Separately Through Various Companies. Securities Are Offered Through TCM Securities, Members: FINRA & SIPC, 2230 Towne Lake Parkway, Building 800, Suite 130, Woodstock, GA 30189. 13