Masterclass 2.0 - Class 2: Next Level Tax Planning to Differentiate Your Firm

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welcome of course is second of our uh Master Class sessions second out of four

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with Ryan Townsley um for those of you um made it last

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week I we just got amazing feedback on it it was one of the best webinars I think we've ever had for those of you

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who missed it um we do have uh recordings and materials available for

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this whole Master Class um so last week was a tale of two bare markets and we're

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really talking about you know how to talk with clients about retirement

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retirement spending overspending UND spending guard rails all of the things that kind of income lab is is known for

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and Ryan had some really great case studies on that so definitely encourage you to check that out um for today we're

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talking we're shifting gears over to taxes so next level tax planning to differentiate your firm um this one's

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also going to be awesome um feel free to drop your questions in the Q&A rather

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than the chat um it's much easier to kind of manage all the questions in the chat or in the Q&A you can upvote the

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ones you want us to make sure that we try to answer we'll leave uh time at the end for questions um this is also

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available for CE so make sure you stay on um through the end and give us your

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uh your your number um so that we can make sure you get credit for the CE you do have to be on for 50 minutes um so

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and it's not it's not through you know 50 minutes past the hour it's 50 minutes of you actually being logged on so so

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don't don't log off um and we'll also have uh uh certificates available for

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people if you want to submit for rpce um so I think that may be all of

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our uh all of our um admin stuff uh if anybody remembers what I'm missing uh

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please let me know but uh the next two set I'll throw that up again um they have a two we gap between them so we

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won't be together next week it'll be two weeks uh from today we'll we'll be on to the third um the third session and then

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two weeks after that so after Thanksgiving we'll come back for the fourth and final one um so with that

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said let's turn it over to Ryan to uh to take us away and uh talk about

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differentiating your practice with uh with tax planning excellent well thank you very much I appreciate it I'm going

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to go ahead and share my screen just let me know that you can see it and then uh all right great well

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thank you everybody I appreciate it last week was a lot of fun and I'm really looking forward to this in the remaining

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classes uh I highly encourage watch watch them all you know they're each

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individually I think they give a lot of value but then if you look at them as a you know kind of the some of the parts

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you know overall we're going to talk about some great stuff that could just take your practice and that has taken

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you know speak from firstperson view like has taken my practice to a whole another level and just like how the

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implementation of income lab and you know tax planning and things like that

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have just made in general just a better value for clients a better experience uh

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a stickier relationship and a more efficient firm that you can serve your

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clients better so higher quality and serve more of them which so ultimately just make a you know a more efficient

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more profitable uh firm so yeah we're going to dive into it just so you know this a lot of this is not directly

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income lab related I just you know as a value ad we just want to talk about you know the implementation of tax planning

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like if you're not doing tax planning right now you're thinking about it or maybe you just started it here's some like things that would be great for you

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to know and just to you know incorporate into you know the service to your

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clients you're not you know if you're not a CPA I'm not uh you're not going to know everything and you don't need to um

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you just kind of need to know that things exist and they like kind of like trigger thoughts in your mind when you

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hear them and then you could go look them up and and and kind of incorporate them but for the most part you can answer 90% of client questions by

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knowing like 10 things in in taxes so um just a little disclaimer it's not

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investment tax or financial planning devices like for anybody who doesn't have a license that might be watching but uh is I kept the slide I'll probably

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keep it all webinars you know I this is not a high production value um because

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that's just not me um I did the graphics they're not great um I definitely spelled stuff wrong as you say and look

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but the content I think is good so don't judge me on the uh on the appearance of everything but the content I think is

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going to add a lot of value um I thought this was funny just talking about taxes you know I don't know anyone that really

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loves them and I thought you know yes after we killed the British over taxes we add all these other taxes back so and

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this is kind of like looking at the history of taxes you know and and where they come from um overall but but that's

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a conversation for another day uh there's two things I can say as a firm owner and um for those that like don't

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know me I you know there's an intro video and stuff like that but I six years ago I had no idea that I you know

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starting this firm and it would just turn into what it did I I started came from a different industry had no

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experience in financial planning started the business and now we manage about $130 million for about 80 some families

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all nuclear power related because that's the industry I worked in for a long time and I can tell you that the

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implementation of income lab and the addition of tax planning to

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my value added to my clients is by far the most impactful thing that I added uh it's it is a game Cher it completely

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elevates the experience and the the amount that you're able to help clients with and

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a added benefit of that is once you add tax planning and you add income lab and these things it's it's also a fantastic

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client acquisition tool so you know I don't do a lot of marketing most of my uh client

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acquisition is word of mouth and organic webinar hosting and things like that so content you know providing content I I

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don't do paid ads or seminars or anything like that and I'm not saying there's anything wrong with those I mean being able to show this in a seminar is

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a fantastic way but just these two things like to be able to add more value to your clients but also to be able to

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I'd say in a more cheaper efficient way obtain and and retain more clients just

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by adding tax planning in uh it's just a GameChanger so here's like a list of

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things that I thought were good to know about taxes you do not need to memorize the entire IRS code I don't know it at

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all uh I know enough to know when I hear something I need to go look it up or

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incorporate it and that's sometimes that's enough you know people say don't ever memorize anything you can look up

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um but these are the things where if if I know enough to where if I'm looking at

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a tax return or I'm talking with a client and I hear certain words I know enough to where I say okay we need to at

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least dive a little deeper into this so I can help them pay less in taxes that's our ultimate goal right so overall it's

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you know capital gains dividends uh net investment income tax net unrealized

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appreciation tax loss harvesting Social Security taxability Irma for Medicare asset

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location and then bracket management and Roth conversions and of course you know we're going to save the best for last so

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but these are the things I think add the most value and that but cover probably 90ish percent of what you'll run into

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this is not supposed to be an all-inclusive lesson on these topics it's really just some you know you got

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to remember there's advisers of varying experience in this webinar so if you're watching this and you're like well

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there's nothing really original just wait till the end because I'm going to show you something really original at the end but we are going to kind of touch on some topics that you probably

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already know um but if you're thinking about adding tax planning I believe that these are the ones that you really need

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to know um you know capital gains dividends interest things like that just you know in general knowing the why

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things get taxed differently and how they get taxed differently obviously we know capital gains less than a year it's

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taxed at a long-term capital gain rate greater than a year um but I you know I'd say educating clients on this so

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they know it most people do know that um they don't however I I would say most

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clients do not know how dividends get taxed so that's that's pretty interesting right is you know you're qualified dividends and you got a little

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bit of a definition down below there's a holding period qualification it also has to meet some company and you know like

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to type qualifications but you have to hold it for a particular amount of time but that's actually taxed as a capital

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gain rate and then that's I would say most people don't know that I'd say the vast majority of people I talked to

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think that divid and not advisors these These are clients think that Dividends are tax that just your normal income tax

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rate so the differentiation between that um I've had clients come in where they

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have a large amount of non-qualified dividends that's always a red flag like why do you have so many non-qualified

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dividends um you know knowing that interest in and bonds and things like that are taxed as normal income tax rate

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you know obviously in a type of account that it would be taxed we're going to talk about that more and where to find

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that you know just looking at the 1099 looking at the the tax return right you can find exactly what the breakdown

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between qualified non-qualified everything is so that's kind of a opportunity right as you're looking through the tax return especially if

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you're using a program like a holista plan as you know my two favorite programs on the planet and I will say

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all day every day I will die on this hill income lab and holista plan if I am picking two that I had to run my firm

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for the rest of my life with it would be those two those two are the best for client value and the best for client

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acquisition by far as you know capital gains rates um

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you know this is I didn't include everything like the single the married rate and everything we'll keep it pretty

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simple here but you've got Zer 15 and 20% and um you know it

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is hard I'd say to be in the 0 per for most people that are going to be a retiree and things but it's definitely

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possible and it opens up a lot of opportunities and we're going to to talk a lot about that is creating tax

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diversity in retirement how that gives you the ability to control your tax Destiny better we're going to talk about

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that at the end and it's going to be great uh here's a little extra something that a lot of clients and again m a lot

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of this is like client focus on what they may or may not know but they don't know about the extra 3.8% tax on

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investment income which also known as niit right so just being aware of that and you know if you're using like a

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holistic plan if you're using an income lab if you're using these different softwares they do uh show you those and

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I'll show you at the end as we go through an example I'm going to kind of touch on every single one of these as we

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go through an actual plan but if you make over a certain amount of money you and you incur capital gains you're going

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to pay a little extra on that so maybe avoiding that right and some ways to do that are to sell different lots of

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stocks rather than to just sell everything to sell if you know if you're r in cash and the client's comfortable

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changing like their asset allocation you can sell something that has less of a capital gain impact you can do some tax

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loss harvesting to offset this or maybe you could even I've done this a lot if a client has a big purchase they want to

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make you can split that that the raise of that cash between two years so if

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they were talking about hey in January we want to buy a new boat or an RV or something well let's sell some of these

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in December and let's sell the rest of them in January because could literally do it like two days apart or a couple

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days apart and not have to pay this extra 3.8% because we kept our income below these limits so this is where it

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gets into how you incorporating yourself into their tax life and really having

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them call you for you know hey I've I'm I'm thinking about doing this U not only

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can you provide the perspective from a retirement planner and how it's going to impact their plan but also from a tax

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planner and then obviously there's going to be situations have it all the time where I'm like I don't know the answer

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to that when I have to talk to a CPA and that's perfectly fine right we're not necessarily trying to replace the CPA

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but we're definitely trying to become more of an authority to help the client uh in any type of situation that comes

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up you want them to call you right the more they call you the more that they see or you know that they communicate

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with you in general the more they see your value and the more they see that you know you really are taking a proactive

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approach um Nua net unre realized appreciation I wouldn't spend a whole

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lot of time like memorizing the ins and outs of this but just knowing it existed

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and hearing like the the word okay I have a client that has employer stock in

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their employer plan that should be enough where you automatically think nuway and then you can go look it up from there but um anyway is an

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opportunity for if someone has employer stock in their employer plan for them to

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be able to actually move that stock out of the employer plan in kind over into a brokerage account they're able to pay

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normal income tax rate on the basis but long-term capital gains on the gains so

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if you think about that that would be very effective for somebody has a very large embedded gain in with company

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stock only inside of their employer plan and also in a high income tax rate right

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little caveat there's a bunch of avat so please don't take this as the allinclusive but you have to distribute

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the entire balance of the account in the year and you have to do this you have to do that there's a whole bunch of different ways um or or hold up bunch of

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different uh stipulations you have to comply with but just think if you have client with XYZ stock in their employer

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plan they've owned it for a very long time like I said this works much better with low cost basis stock it may even be

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dis advantageous if they have a high cost basis stock but it really kind of defeats the purpose right

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um but if you could imagine if you were just doing a standard rollover you would roll over this money into the 41k and

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then every dollar of it would be taxed as normal income when it comes out where let's say if you had a thousand shares

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of stock cost basis of $2 so about $2,000 cost basis the Stock's now worth $50 a share so this is probably really

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applicable for like tech companies and startups and things like that right clients in the 32% bracket so

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essentially they could move every all of that stock over they could pay regular

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normal income tax rate on $2,000 but then long-term capital gain on $448,000

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so you know if they're in the higher brackets like a 32% brackets this could save them a ton of money not to mention

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the extra value that you are not subject to niit when you do this so um again

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don't memorize all the code that tells you about Nua I would say if you hear a client say or if you see that they have

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employer stock in their in their 401k or their plan say hey we need to do an a

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net unrealized appreciation analysis of this and even if the analysis comes out

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that it's not worth doing it because a lot of times it does if it's a high cost basis or they're in a low bracket at

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least you took a look at it and even looking at something and choosing not to execute it is a value ad they know the

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client sees that you're proactive they see you're looking at it and they know that you are looking at all of the

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opportunities to help them save money even if you don't end up actually implementing one because it doesn't help

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save tax loss harvesting everybody knows what this is so um I am going to touch on very lightly but then kind of share

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my thoughts on it and where you have some opportunities and especially what I see like maybe Trend in the industry

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right now but it's essentially where you sell Securities at a loss to offset games right we know that so simple

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example etfa is up 500 bucks ETF is down 300 bucks you sell those you have a Net

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game to 200 you only pay taxes on 200 that's great right um the thing is

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though if you sell all if you sell both of those you're now out of the market for at least that portion of the money

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so you can replace it with another ETF stock something like that but it has to not violate the wash sale Rule and the

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wash sale rule means that you can't replace it with the same thing or something that's like near I you know

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let's say almost identical to it within 30 days so typically what people do is that they sell you know an individual

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stock like an apple or something they'll replace it with a Vanguard Growth ETF or with S&P

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500 and wait 30 days and then they can decide if they want it back and that's where it really gets interesting is that

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what I do see with most advisers is that they do a lot of their tax loss harvesting at the end of the year which

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is great if you're doing it at all that's a plus right but um I think maybe

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there's an opportunity to do a little more proactively uh so for my taxable accounts I do tend to try to use

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individual stocks and I know a lot of people may not like that or you may be this is not like a plug for using

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individual stocks if you have great rebound software it's really easy not trying to make a stock sleeve that beats

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the market or anything like that what I'm trying to do is kind of replicate an index right so if I have for example a

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large cap growth sleeve you know I might just be trying to you know replicate the

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Vanguard Growth vug right um so this is my like the green is like my stock

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individual sleeve I'm not trying to show that it beat because sometimes it beats sometimes it doesn't but what I'm trying to do is show that I have like 50

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positions in there and we're getting the same profile as the Vanguard Growth now

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obviously you have to have an account size that supports this you have to have a client that's comfortable with this so there's there's caveats but if you look

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at the opportunity here if you only had the vug in there representing your

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growth then you're you really there's nothing the only thing you can tax loss Harvest is like growth against value or

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growth against bonds or what you you're tax loss harvesting at a very high level which is fine that's that's that's great

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but if you do have the more positions you have you're going to get a relatively similar performance as long

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as you're going for an index style and you're not trying to beat it uh but then you have the opportunity that you can

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take advantage of like wild standard deviations in stocks so you have you know for example Nvidia up a ton you

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have you know couple of these stocks down anywhere from 20 to 50% you can

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sell these at a loss you know trim a little bit off of this if you think it's overextended and essentially maybe get

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back to a standard aidia position and pay no taxes on it or very little the

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great thing about this is it's not forever right you don't have to get rid of these stocks forever you're getting

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rid of them for 30 days so if you still like it 30 days later 31 days right then

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buy it back right and just replace it with what whatever you replaced it with so if you sell all these at a loss you

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replace it with an index fund well then maybe you sell that index fund and replace it with that now you just got to be aware that at that point you might be

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generating some short-term gains and things so you really got to be careful and look at the you know the pros versus

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cons the how much work this is versus the benefit uh I would say higher net worth clients tend to benefit more from

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this and tend to appreciate it more uh and have the opportunity they have account sizes where you can do this kind

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of stuff I also think that in general um for tax loss harvesting we

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should look at it a little more often and actually if your rebound software supports it like mine like set triggers

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for it so instead of just looking at the end of the year to do some harvesting or something on a Time base basis maybe if

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any stock drops 10% um compare especially compared to its peers then you can take it get in there and see if

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there's a tax loss Harvest opportunity for you to sell that off lock in some losses that you can carry forward or

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offset some gains you already have and then if you like it just buy it back in a little over a month

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later Social Security taxability um this is one that the vast majority of clients

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I talk to don't really understand and you know they especially when you say

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things like Social Security is 50% taxable or 85% taxable they say I'm I'm taxed 85% on my social security that

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seems insane I'm like no it does it means that at particular levels in income as you can see on the screen that

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money is is that proportion of money is subject to your normal income tax rate so for example if you're filing joint

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and you're below $32,000 total income you won't pay any tax on your Social

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Security uh if you're in between these values you pay 50% right so that means that you take this number and half of

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that is subject to your normal income tax rate whatever that is uh just be aware that and then after that over

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44,000 85% subjected so most of our clients if we're doing retirement planning if we're using income lab if

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we're doing they're going to be subject to the 85% tax so there's not a ton of value add here what I've seen with this

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is you know the tax torpedo is one thing but that really only uh comes up with

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people who make on the lower end of of income um but the big part of this is

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making the adjustments around their income once you implement Social Security because once you start taking

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social security essentially that's a portion of inome especially if you're doing level income planning where the

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client does not get a raise when they take Social Security right they they just take level income they take Social

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Security so they've got a bump up in that income but then they take less from their Investments so it's a wash if

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you're doing that kind of planning that is going to change their tax profile and just adjusting their tax withholdings

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and things like that around that and you know that's a huge value added in itself

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so just to let you know how we do our tax planning at Town capital is we since

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the vast majority of our clients are retired and actively taking distributions we calculate all of their

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withholdings for them we do the withholdings we balance those withholdings around any withholdings and

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even make adjustments for their social security for if they have a pension right so we'll we'll fill out all the

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forms for them have them sign them to do all the withholdings for pensions and everything Social Security and then we

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balance our IRA distributions around that and our goal is to get them as long as they're okay with this goal near zero

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plus or minus 200 bucks is a win right if they owe 200 if they get 200 back that's a huge win but that takes a

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massive burden off of the client and it I don't see a ton of you'd be surprised

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but there's a lot of firms that don't do that right they say you need to contact your CPA and tell us what we need to

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withhold or what the so I just think it provides a better experience it's a very sticky relationship if you're doing all

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of this right so um just to know as far as tax ability just remember what actually counts even non- taxable

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interest counts towards Social Security so like I said for most of our clients uh they will be in the 85% range for

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their social security tax ability this is a big one and we're going to talk about this a lot more as

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we move on but Irma is essentially an a I wouldn't say a

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penalty but it's it's an added cost to Medicare right Medicare is a standard

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cost for most people people but if you make above a certain amount of money

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then you're going to pay a little premium right they're going to say okay you're you know from a needs based perspective you can afford to pay a

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little extra to help out the people that aren't paying as much or aren't aren't making as much so as you can see you've got these thresholds where if you make

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above that threshold you're going to pay a little more for Medicare now the interesting thing is right is what

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counts towards it so long-term capital gains um taxable Social Security it all

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counts towards it and and it doesn't really matter like there are opportunities maybe to help clients get

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out of Irma if they had like extenuating circumstances there is a process for that so for example if they made a bunch

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of money the year before but the next year they're not going to and you can prove that you can write a letter so we've done that for a few clients we we

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fill out the form write a letter help them um not have to pay the Irma for two

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years because that's essentially what happens right is you it looks back two years on your income and you'll pay Irma

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until that falls off so it's like a 2-year rolling average of your income

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and that's how they determine what your Irma is going to be now as you see it's not an astronomical amount of money so

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there are times and I'm going to show you some times where it makes sense to deliberately go above Irma on purpose

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because it's a small amount of money it's not percentage based on your income it's a it's a defined amount of money so

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if it's somebody who's has really high income or really high net worth it may be um not even worth you know trying to

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stable armor if you're trying to achieve other objectives and we're going to talk about those for

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sure this is one of my favorite um it's asset location right and asset

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allocation is what you own location is where you own it right so if you take a deliberate approach to placing different

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investments in different types of accounts you as the adviser can help the client control the taxability of those

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all right so this is not an all-inclusive list and this list actually changes drastically depending

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on what the clients's income tax rate is uh but if you look at you know there's

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tax efficient Investments and there's non- tax efficient or tax inefficient Investments so any dividend or yield

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income interest whatever that you receive in a brokerage account is going to be immediately taxable to you at whatever rates appropriate whether it's

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a qualified dividend normal income tax whatever and anything that incurs in an

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IRA or Roth IRA Etc any type of qualified account is going to be taxable when you pull it out so if you are if we

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make the assumption that regardless of what we do with asset location we're

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going to have uh or asset allocation we're going to have different asset location meaning let's say we own the

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same stuff no matter what we're just going to deliberately place it in different accounts you can place your

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say for example more stocks in your brokerage account and more Bonds in your your IRA or Roth IRA if that makes sense

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for your bracket so that way you don't immediately incur that normal income you could put more gross stocks in your

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brokerage account so you can do the capital gains where you can put more dividend stocks over in your now that a lot of that depends on if it's qualified

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or not so it might even not not even matter more passive Investments maybe go in your brokerage where maybe more High

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turnover high yield things like that go in your IRA Roth IRA so there's a lot of articles about this and you could model

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this really easy using you know um like an Inc lab or and Endor Hillis to plan together especially but just something

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to think about is keeping things in different accounts especially I've had this come up a lot more especially as

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you start working with higher net worth clients is the taxability of your cash and your money market right so if you

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have Jane she lives in Maryland she's in the 22% tax bracket is about an 8% state tax if she owns a money market paying

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4.7% Jane keeps 3.29% after taxes if she looks at a uni money market

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fund which is non- taxable and it's paying 2.89% it still makes more sense

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for Jane to own the taxable money market because their after tax yield is higher

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right now take Sarah who's in the 35% tax bracket and uh is has the exact same

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options uh but due to the higher tax bracket her after tax yield of that

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taxable money market is 2.69% where the equivalent mun is is 2.89% so it would

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actually make more sense for for I'm sorry it should say Sarah for Sarah to pick the mun money market so small

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difference between the two but if you have clients that are in really high brackets really high income this can make a big difference and the evaluation

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of it like I said at least shows that you're looking at these things and you're making choices uh we could do a whole webinar

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on this and actually maybe one day we will but for business owners just knowing the general difference and the

28:56

ability to save money taxes potentially for an es Corp versus a sole proprietorship versus a C Corp and then

29:03

knowing how they can save in different types of accounts a simple versus a SE Ira versus a solo 401k and how they work

29:11

uh are just great things to know for business owners just knowing they exist and then if you get a business owner client you can look these things up and

29:18

do some proactive planning for them uh for the es Corp Soul prop C Corp decision I definitely would get a CPA

29:23

involved but you can surely start and facilitate the conversation and I like to re educate clients on topics and then

29:30

set up a meeting with me and their CPA or you know if it's a state planning me and their state planning attorney that

29:36

way you're involved in the process and you know they associate that you helped them get that done which you did right

29:43

all right so now on to my favorite topic and my favorite topic is tax bracket

29:49

management AKA Roth conversions things like that I want to bring back this

29:54

graphic everybody loved it um I didn't make this a friend of mine made it at another um another institution he's

30:01

great but this is essentially a great client facing simple thing that you could show them how taxes work because

30:07

you would be surprised that a lot of dudes don't understand you know when they say well that's going to bump me

30:13

into IR bracket well that's true but it's only for that next dollar right it's not for all your money and there is

30:18

some misunderstanding about that so this is an easy way to put in a value and you

30:23

see how it starts to fill different buckets so what you're trying to teach

30:29

them is that taxes are progressive and that they're taxed on the next dollar that spills into the bucket and then for

30:35

the remainder that and that most times at the end of the year there's going to be some room left in a bucket all right

30:43

um you know that so that's where we bring up the Roth conversion and this is essentially showing them the tax ability

30:51

and this was I was talking about that tax diversity is creating tax diversity meaning your IRA is fully taxable that's

30:58

why you have this you know this this diversion over the government your Roth is non-t taxable so it goes straight to

31:04

you and then you have your brokerage which is partially taxable so you have this small line that goes over the government and that's because of capital

31:10

gains and things like that right so the ability to create this tax diversity so

31:16

you have the choice as the adviser to help the client decide how much from

31:21

each from each faucet we're going to turn on right so if we used all this

31:27

faucet to to achieve their income then they'd be whatever tax bracket they're going to be in for that amount of income

31:33

where if we turn this on enough to take advantage of the smaller tax brackets

31:39

and the standard deduction don't forget about that it's a great reason not to convert all your money to rth is because you still want to take advantage of the

31:45

standard deduction and things like in those low brackets but let's create enough to where we can utilize the standard deduction in the low brackets

31:51

and then be able to turn on these other sources to not go into the higher brackets and that's exactly what we mean

31:57

when we talk about proactive tax planning AKA bracket management AKA Roth

32:02

conversions right so why do I love them they save a lot of money in taxes they

32:07

build a tax-free Legacy for erors the added benefit and they give you the advisor the ability to help the client

32:15

so let's just take a look at like the impact of that all right so if we're looking at the income lab right here

32:22

this is just a generic plan we've got a client who overall has about $1.5

32:29

million they've got a $268,000 joint brokerage account they've got a $22,000 Roth and a $1.2 million

32:36

doll traditional IRA and they are able to take 88 let's

32:42

just call it $8,800 a month after taxes the great thing about income lab is you can change this to show exactly what you

32:49

want it to show whether it be annual whether it be net whether it be in today's dollars whether it be in future

32:54

dollars uh but this client's going to receive about 117,000 gross or

33:00

$106,000 a year after taxes and this is just assuming they're pulling it straight from their Ira right so simple

33:08

example so let's go over take a look at like the taxability of that right we've

33:13

got our interest our dividends and then our IRA distributions and you can see the taxes

33:19

come out all in all to about 10,200 and it's about you know it's

33:25

really so income lab the purpose income lab is to do the general tax planning and then you use a tool like a holista

33:31

plan or something to do the specific so the income lab is like hey here's our grand plan and then let's get really

33:37

granular with it by using the other software right but all in off we're looking at where's the money coming from

33:44

we can say that it's pretty much all coming from the traditional IRA right and some of it's going to

33:51

expenses like taxes and things like that and we're generating some capital gains and then the rest is going to the client

33:57

the the problem with this is they're taking every single dollar right out of this red bucket

34:05

right which is all taxable right they're not using any you know smart tax distribution strategy so really if

34:11

they're they're just going to be here all right so what if we apply

34:19

something a little more um a little more specific to this and we say okay what if we start to create over the next couple

34:26

years especially if you're young and you're not subject to Irma right and you're not taking you know on you know

34:33

you're not on Medicare yet you're not taking social security right yet you you're retired at 59 60 something like that you're not taking rmds you have the

34:39

ability to funnel some of this money over into the Roth in a smart way and under control of the bracket you want to

34:46

be in and you can set yourself up to be able to later like I said turn on these

34:54

other faucets and then maintain the client in a lower bracket forever so by doing that we run through

35:01

the tax lab and the tax lab is awesome it's going to give us not only the

35:06

recommended right so it's going to say Roth conversions below Irma which is great right that's a new feature and

35:11

it's going to say hey if you want to do Roth conversion but you don't want your client to go above the Irma limit and pay the extra for Medicare or at least

35:18

not deliberately right we should probably have a conversation with them about that but what if the client's not

35:23

yet 65 or 64 or whatever if they're 60 years old they're not subject to Irma yet you might not want to use that so

35:29

you can actually review all the strategies see which ones you're looking at you can pick different ones so I can

35:36

pick the Irma or the non-ma version of this to see where I want to be and it's tells clients right just I mean and this

35:44

it's not only for clients this is a fantastic thing that I'm going to show you in the next webinar how to present this to a perspective client and take

35:51

your you know your acquis your client acquisition rate up tremendously but just look at the taxes that are saved

35:58

and the average tax rate taking it from 11.6 down to 6.9% saving a couple $1,000

36:05

in taxes improving their legacy meaning if they do want to leave something to the kids or even if it's just like

36:10

what's left is left then we're going to leave it to them tax-free you can you

36:16

can take a look at the total tax that you're going to pay you can take a look at the tax

36:24

brackets and you can take a look at the break even right and this is you need to educate the client on the pros and cons

36:29

of Roth conversions they're fantastic but if you end up if one person in the

36:35

family so let's assume it's a married couple ends up passing away earlier well

36:41

that's even more reason to do even more worth conversions up front because unfortunately when one spouse passes

36:47

away there is I'll call it a bit of a widow penalty where the remaining spouse after that year has to now file as a

36:54

single filer so not only do they lose a portion of social security whether it be in the future or they're drawing now but

37:00

they also have to file in a higher tax bracket so converting to Roth in the early years in retirement makes even

37:05

more sense for that but if by chance both spouses passed away earlier than

37:10

the break even age then it would have been better not to do the Roth conversions but uh unless you know

37:16

something specifically about you know longevity or something like that and you think they're going to live even an average lifespan this makes a lot of

37:22

sense number two is the biggest risk to Roth conversions are if the government

37:28

decides to materially lower our tax rates for a very long period of time and that's

37:34

usually a where like me and the clients that all start laughing uh because we know that that's a very low probability right the government typically does not

37:40

lower taxes especially not for a long duration of time like a 30 40y year retirement so we can look at the break

37:47

even and see what that looks like we can explore different strategies and stuff like that and then when you're ready if

37:53

you once you you know you see a strategy you want and remember sometimes income lab will recommend like Roth conversions

37:59

to the 24% or Roth conversions to the 32% you don't have to choose that right

38:04

you have to find out what the client comfortable with and if they're more comfortable with hey I like the strategy but I don't want to go all in let's keep

38:11

it to the 22% bracket that's perfectly fine right that's absolutely fine but

38:17

what that does is it allows us again to systematically over time we're going to

38:22

fill this non-t taxable Source up in the brackets that we can predict and then at some point we're going to turn both of

38:28

these faucets on so that way we have enough coming from the IRA or the 401K or whatever to take advantage of the low

38:35

rates but we're have enough coming from the Roth or other other areas to where

38:40

we can maintain ourselves in a low bracket that's essentially what this is doing right it's a wonderful

38:45

strategy so if we go ahead and we take a look at how that changes the

38:52

landscape right let's go to our tax Planning number two

38:58

we've got our Roth conversions in here and if we take a look at what that

39:04

looks like now look at what the flowchart looks like right we're actually taking from our brokerage

39:09

account and living off of that uh keeping our taxable income very low to make more room for Roth conversions in

39:16

the beginning this is a wonderful strategy for anybody that has cash on the sidelines brokerage account anything

39:23

like that especially one with not a lot of capital gains this is a way for them to take advantage you could actually live on that money in the early years of

39:29

retirement have essentially no income right if we take a look at this this is 2025 same income so we've got the same

39:38

dividends everything like that but now since we're living on the brokerage account we have no IRA

39:44

distributions we have 10,200 in long-term capital gains which is kind of like okay here's what we estimated we

39:50

would have to to develop and then that leaves us room

39:58

to do Roth conversions now deciding if you want to go above Irma that's the dotted line here income lab also

40:04

delineates that or if you want to go all the way up to the limit so for this we

40:09

did Roth conversions right of about 227,000 because the client was comfortable with that and maintained

40:14

them in the 22% bracket it did not they not impacted by Arma since they're only

40:20

60 years old so it's a beautiful thing and you can actually show clients how

40:26

this progresses in income lab over time so you can see 2025

40:33

2026 2027 and you can you know is all these these aren't going to be exact numbers because we don't know what's

40:38

going to happen with the tax code we can give clients a really good visual as to

40:43

how the money flows differently when you're doing proactive tax planning than when you're not doing it right you can

40:50

see so security kicking at some point you can see there's money starting to come from the rth so we' turned that

40:56

other faucet on at this point right this is great so just a wonderful way to be

41:01

proactive um to what I say it's a very lowrisk strategy considering that only

41:07

one person in the family if they are married needs to live to an average age to make this worth it and there's a low

41:13

chance that the government's actually going to lower taxes so this is what I think is like maybe

41:18

the only original idea I ever had in my life and I'm really proud of it so hopefully you guys love it but we we

41:25

went over this in webinar 1 so if you haven't watched master class one please do it's going to make a lot more sense but I like to create I created in 2022

41:32

and I have right now A Down Market plan or a bare Market plan and it's a way to

41:37

empower clients to be comfortable with how do we take advantage and how do we you we might be scared of down markets

41:44

but but how do we find some type of Silver Lining right so at these different levels of decline you can see

41:50

I have some different actions now the ones I highlighted are Expediting or

41:56

even increasing Roth conversions based on how far the Market's down so let's go back to our example and let's say that

42:04

in 2025 this client was going to convert about $200 and some thousand

42:10

dollar to Roth we'll just keep it round numbers right but typically you you know I like to do most of it at the end of

42:17

the year because you never know what's going to happen with a client's spending they may have a health issue they may need to buy a car they may need to do

42:23

this may need to do that and if the market is kind of raging along I said okay well we'll look at this at least in

42:28

the back half of the Year where if you get a nice 10% pullback in the market it may be a good idea to say okay let's go

42:35

ahead and do half of that now we're g to get our money over into the Roth IRA at a discount let's go ahead and do half of

42:41

that where if you start to get a 15 a 20% down Market you may do more or you

42:46

may even do the whole thing at that even with the risk of going into a higher bracket so I actually change the timing

42:54

and the depth of the Roth conversions I do base on the the how you know if the Market's down and how much and here's

43:01

the rationale behind that is let's say it's October 2021 you have a a a stock

43:07

market that's at an all-time high you convert $100,000 from your IRA into your Roth

43:13

IRA you pay $20,000 in taxes we'll just keep this very even and simple right

43:19

880,000 goes into your Roth so 100 paid 20 in taxes 80 Grands now your Roth and

43:25

then from there you get some type the average return whatever the market gives us from that on right so we don't know

43:31

what that's going to be we can say we know on average over the long term what it's going to be but you know shortterm midterm we have no idea right so that's

43:39

great right I mean you're still in the if we're long-term investors then we're we have a 30 some year runway for

43:44

retirement this is a wonderful strategy but what if it's October 2022

43:49

now and the Market's down 22% well and we convert a 100,000

43:57

same scenario we PID 20,000 in taxes now we have 80,000 in our WTH but that

44:02

880,000 is going in here meaning that we get 28% upside for the market to come

44:10

back to even and then we get an average return after that right so that's why I think this math behind us makes a lot of

44:16

sense to where the if you're going to convert anyway it makes more sense to

44:22

expedite those conversions or even increase them the more the market goes down if you have the room for it

44:28

obviously if the client's comfortable and all that you have to have these conversations right but just think about that is maybe even if the Market's down

44:37

a lot like 30% maybe at that point we even convert into a higher

44:43

bracket right so maybe at that point we go back and we say okay well the extra

44:50

2% tax from 22% bracket to the 24% bracket makes perfect sense if we're

44:57

going to get an additional 28% of upside because the Market's down so much so you

45:03

can go back and just change your strategy and it might just be for that

45:08

year right and you can do a more aggressive Roth conversion the more the

45:13

Market's down and you may even consider if someone is subject to Irma converting

45:19

above that because if we're talking about converting hundreds of thousands of dollars to Roth

45:27

and let's just say it's 200,000 right and they're going to pay an extra 2% in tax that's an extra

45:35

$4,000 in taxes for doing above and let's say they're they're going to get an Irma of about a thousand a year that

45:41

means it's going to cost them 5,000 but if we have 200,000 and we're going to get a 28% return to get back to even on

45:49

that we're going to make 56,000 so just something to think about right is it worth changing the the

45:57

timing and the depth of the Roth conversion based on how far the market

46:03

is down when you do get a down market right and it's actually a way to make clients a little I'm not going to say

46:08

excited they're never excited when the Market's down but maybe just a little more um interested a little more you

46:15

know intrigued or whatever just because you're providing like I said a silver lining an opportunity to do something

46:22

let's take advantage of this down Market we're not just going to sit here let's you know we have a plan it's pre-written

46:27

and we're going to execute that plan and we're actually going to do the same things we say and I think this adds a ton of value to your to your your firm

46:35

um it it shows clients you're engaged it so shows them your Dynamic you're not just stuck into here's what we're going

46:41

to do it shows them you're you're you're not scared because if you're willing to do Roth conversions and move money over

46:47

and do all these things it shows that you believe the Market's going to go back up just inherently and I think it's a wonderful strategy uh for you and

46:54

clients it's great for the relationship it's great great for client acquisition I'll go over this with all my

46:59

prospective clients and it is it just really resonates with them so here's my

47:04

conclusion uh do tax planning right just do it if if you want to differentiate yourself and not just be an investment

47:11

manager or you know financial planner I mean those things are great but adding tax planning to it really does just

47:16

include a whole another level of complexity clients love it it makes the relationship very sticky right if I'm

47:23

not only managing their Investments I'm also calculating their retirement income but I'm also doing all the withholdings

47:29

everything all the tax calculations for them if they're going to sell some stock I'm telling them what they need to pay in capital gains I'm helping them make

47:35

the estimated payments right all these things just make for a very high service

47:41

and high retention type of firm that and and I really do just love the feedback

47:47

from clients on what the addition of this because we didn't always we do this right um the first year I say purely

47:54

just did kind of the standard Financial Planning and you know investment management and we added this in like at

48:00

the end of year one and really kind of ramped it up uh year 2 three and it's made a huge difference and I will say

48:06

this again my biggest plug is that as a career changer uh somebody who does not

48:13

have a ton of experience in the industry but is uh always curious always willing to learn always want I I want to be the

48:20

best um I think that the implementation of income lab and holista plan um income

48:25

lab especially for I mean for retirees there's no substitution if you watch part one of this master class you know

48:31

there's no substitution for income lab for a retiree uh but the addition of uh these two softwares and just you know

48:37

proactive tax planning and some of these Innovative strategies have made the world of difference not only in my

48:42

client I'd say happiness Factor retention rate but also CL you know new client acquisition so uh I'm going to

48:49

stop rambling we'll go ahead and open it up for for Q&A and um so go ahead and

48:54

throw your questions out there prior already have a ton we got we got a ton and as expected lots of people love your

49:00

spreadsheets so we'll defin make those those available and I agree it just it tells the story so visually and nicely

49:07

problem I mean so many questions here Ryan we'll try to to hit a few

49:13

um I think from a from a practical standpoint are you doing anything to how how are you monitoring for given clients

49:20

you know when you hit those points in your down Market plan or your bare Market plan do you have a software that does that or how do you do it

49:27

yeah I I kind of use um you know um Black Diamond has some things you can

49:33

you know kind of incorporate to to to look at performance from a high level and kind of see where people are at uh

49:39

another way to do it is um is to set like triggers in like a general software

49:45

like a quanti or something if you're kind of monitoring that looking at that you know once some once a you know every

49:51

couple weeks once a month or so um so I I'm a big fan of quanti it's a good program and it's a really easy way to

49:57

like track your models performance and things like that so yeah that's that's how I do it awesome um couple questions on kind

50:06

of earlier retirees ACA credits getting in the way of Roth conversions and things have you run into that and how do

50:13

you handle it yeah it depends so um if you're working with a client that's not worried about that you don't you know

50:19

say if they are uh a government retiree or a lot of the people I work with are

50:24

uh retire from a utility and still for the most well did uh they're gone now but it's grandfathered in that they have

50:31

some type of like retiring medical benefits that aren't impacted by the ACA uh limits so for them no it would be you

50:38

know we don't have to really talk about that for people that are um we have to have just like the Irma conversation we

50:44

have to have a deliberate conversation of is there a math-based benefit to

50:50

doing these conversions based and versus what you're going to pay in healthcare

50:55

it's the same conversation right so you can run those quotes on you know if you're doing I don't know all the websites but Maryland Health connection

51:01

Penny all that you can run those income based quotes to see what the healthcare will cost you and then you could do the

51:06

math of the Roth conversion and you can see if it's worth it more likely it's going to be more worth it the further

51:12

the markets down because you're getting that you know like I said that upside of taxfree grow so you know but that's a

51:17

great question you definitely have to look at that yeah and I think we did have a webinar which we can we can link

51:23

to on the on the master class page as well with uh where we talked more about

51:28

ACA credit planning and things and showed people how to do that in income lab um you can also I know you were kind

51:35

of showing very generic you know great examples right but you can get extremely fine-tuned and you know say hey I'm not

51:42

going to do Roth conversions in these two years because of ACA credits but then I'll do them in other years you can

51:48

somebody was asking uh you know are you converting the entire Ira you can put a floor on it to say no I'm always going

51:54

to leave some in the ira because even though I'll have rmds you know those will probably be taxed at zero or 10% or

52:00

something so you can a lot of questions along that lines of there's there's a lot of subtlety sounds like you don't

52:07

shy away from that kind of thing with clients because it shows a lot of value um but just so people know you can you

52:13

can do all of that um yeah subsequent webinars um the next two master classes

52:18

I'm actually going to show you like how I create a plan for a prospective client and then how we add more details and

52:25

features as they become come closer to becoming a client or become a client and then how do you customize all those things as you really start to get very

52:32

specific in your your retirement planning so that it is an evolution of the plan right I I know you had several

52:39

examples in there that I really liked kind of highlighting how there's some art to this like it's it's not about you

52:46

know run the numbers and just do whatever it says I mean even what you said about like hey what the tax rates

52:52

will be you know in the future by the way there is a way to turn off

52:57

tax custom job act sun setting which you know some people might say you know

53:02

given yesterday maybe you do want to che check that out too right but who knows so there's all this art given that you

53:08

work with Engineers like is that just a natural thing that they understand or do you how do you talk them through the

53:15

process of like Hey we're going to make good judgment calls here not necessarily um you know just go wherever the number

53:21

looks lowest yeah so they they definitely understand probability and

53:26

that's kind of where where we try to talk with most things and when I say probability I mean like okay we don't

53:32

know what's going to happen with the tax cutting jobs act so let's look at both of these the you know the the sunset and

53:38

the non-s sunset let's see what our game plan would be and let's just say okay if we go this route we're going to execute

53:44

this way this route if not if we have decisions we're making up front that are going to be let's say in hindsight good

53:50

if it's sunsets but bad if it doesn't then maybe we hedge our bets a little bit and we do half of this or we do so

53:56

yes there's always an art to it um you know with with Engineers they do love the math so if you show them the math

54:02

they're good with it but nuclear engineers in particular are always thinking about what if so what if this

54:09

doesn't happen or what if this Law changes or what if and contingency plans what do we do if something changes so that's an important part that and that's

54:15

part of the art of going over plan is um this is what the plan looks like if everything goes perfect but let's also

54:20

have some backup stuff or some contingencies if it goes um maybe not necessarily as planned right right we

54:27

did have another question into that the subtleties and the complexities of tax planning some's mentioned qcds um just

54:34

so people know if you do have people who are going to be charitably inclined and after 70 and a half

54:40

um at least the income lab software will will automatically hold money back from Roth conversions to do the qcds because

54:47

I mean what's better than tax-free uh you know distributions um so you know

54:53

once you combine all these things I I kind view it as like uh you're you're riding up this um this graph of like the

55:00

value of tax planning right and bracket management gets you way up and then qcds are pretty decent and then you know

55:06

floors on you know hey I I'll still pay some rmds and you know there is a point of diminishing returns but I think

55:12

viewing them as like okay how high up this uh this value curve can we go is an

55:17

interesting way to go yeah and then talking about you know tax planning and then adding on charitable planning and

55:24

Legacy planning too like just getting clients to maybe gift an appreciated

55:29

stock to their favor charity rather than cash and a lot don't even know you can do that right like that's huge you're

55:35

giving away the capital gains and everybody benefits so things like that are just huge value ads for clients and

55:41

they really they do remember that you made those recommendations yeah and I think that your your points about how you highlight

55:48

this to clients um just I mean understanding the

55:54

value that you bring is I think one of the one of the big takeaways for me on this

56:00

um I think uh that'll don't think we have time for for any of some of these are a little more complex but again we

56:06

will we we take all these questions and we go through them the ones that we haven't answered we will either answer

56:13

via email especially if it's something specific to the software or try to answer in the in the the final session

56:18

we might might have some time to do kind of a a recap um or even you know we may

56:24

put together some quick videos just to answer them and include them in that um that link to all the master class

56:29

materials which I've put in a couple spots both in the Q&A and the chat um so

56:34

please uh please check that out and um yeah the next two classes too are going

56:40

to be less PowerPoint pre because this was like kind of queuing up everything that we and more of me just kind of

56:47

driving through the software showing you how I use it with perspective clients and how I use it with actual clients uh

56:53

and and and the variations and plans and things like that that we can create so um I'm really looking forward to that

56:59

please tune in for it you'll love it definitely well thank you this was great again Ryan really appreciate it um and

57:06

we will uh see everyone in two weeks have a great week everybody right thank

57:11

you everybody take care