Travis Echols, Chartered Retirement Planning Counselor℠ (CRPC®), Certified Senior Adviser (CSA)

How Smart Tax Planning Helped Sally Buy Her Dream Home

Tue, 01 Jul 2025 00:00:00 GMT

Sally’s Story

Sally is 63, single, still working, and preparing for retirement. She holds several accounts:

· $200,000 in a taxable account

· $450,000 in a traditional IRA

· $10,000 in a Roth IRA

· $58,000 in an inherited Roth IRA

· $300,000 in an inherited traditional IRA

Her goal: purchase a $350,000 home in 2025 , paid in full—no mortgage, no debt.

But she also wanted to retire early, preserve assets for her heirs, and maintain a long-term care reserve.

This meant we had to evaluate which accounts to draw from (and when and how much) to fund the home without jeopardizing her broader financial plan.

The Key Insight: Present vs. Future Tax Rates

To make the right call, we needed a detailed financial plan and timeline to compare Sally’s current tax rate with her future retirement tax rate . That comparison would guide every decision regarding withdrawals.

We took a conservative approach, aiming for:

· A high probability of retirement success

· An optimized legacy for her heirs

· Two-year reserves for potential long-term care expenses at the end-of life

Here’s a visual overview of Sally’s projected income sources over time:

Sally's Long-Term Tax Roadmap

Next, we charted Sally’s estimated tax liability from now through retirement.

The unusual shape of this tax curve above comes from the 10-year rule for inherited IRAs , which requires full distribution within a decade of the original owner’s passing.

In Sally's case, that meant drawing down her inherited IRA by the end of 2033.

This graph reflects effective tax rates , but we also reviewed federal/state marginal rates and long-term capital gains rates (not shown here for brevity).

Paying for the Home -- Step by Step

With her long-term tax outlook in hand, we began analyzing the best way to fund the $350,000 purchase.

Her taxable account was ideal to tap first, because she is paying higher taxes now and because we had actively harvested gains in prior years (so the account had reasonably low unrealized long-term capital gains taxed at a lower rate than ordinary income tax rates ).

That left $150,000 still needed.

To cover the remainder, we considered three sources:

1. Inherited Roth IRA : This had to be drawn down within 10 years, the withdrawal would be tax free, but it offered tax-free growth for the remainder of the 10 years and liquidity for unexpected spending shocks during that period and beyond.

2. Inherited Traditional IRA : This had to be drawn down within 10 years of Sally's mom's year of death, taxes would be paid at ordinary rates, so we would eventually want to spread the distribution over the remainder of the 10-year period, but preferably in lower-income tax years if possible.

3. Traditional IRA : Taxable on distribution at high ordinary rates but lifetime tax-deferred compounding (until regular RMDs start at age 73 -- no 10-year rule).

4. Roth IRA (non-inherited) : Best to preserve for long-term tax-free growth and liquidity.

Dialing In Sally’s 2025 Tax Sweet Spot

We began planning in 2024 , so we could split the inherited traditional IRA withdrawals across two years to reduce the tax bite .

With the home purchase scheduled for May 2025 , we built a detailed projection for her 2025 taxes.

This graph shows how each additional $1,000 of income would impact her taxes—a vital tool in finding her tax “sweet spot.”

For example:

· She was facing an earned income credit phase-out bump (dark blue) offset by a Nonrefundable Education Credit Phase-In, keeping her combined tax rate at ~20% for the first $20,000 of additional income.

· Beyond that, the next $25,000 of income would fall into a low 12% federal bracket , which we aimed to fully use .

The Final Plan: How Sally Paid for Her Home

Here’s how we ultimately funded her $350,000 home purchase:

· After a prior inherited IRA distribution in 2024, Sally’s taxable account held $283,000 .

· Remaining need: $67,000 .

We then:

· Took a $45,000 traditional IRA distribution , netting $39,000 after taxes (this filled up the 12% sweet spot).

· Drew the final $28,000 from her inherited Roth IRA —tax-free.

· Left her Roth IRA and traditional IRA balances intact for future use.

Total funds:

· $283,000 (from taxable account - tax-free in 2025)

· $39,000 (from inherited traditional IRA - $6000 withheld on the gross $45,000 distribution)

· $28,000 (from inherited Roth IRA -- tax-free)

= $350,000

Estimated taxes paid: ~$6,000 (federal and state combined)

Note we could have paid even less in taxes by fully distributing her Roth IRAs. In this case, Sally wanted to fill up the 12% bracket, work down her inherited IRA balance, and leave some tax-free Roth IRA money for future unexpected spending shocks in retirement.

Why This Matters

Here’s the takeaway:

1. CPAs typically focus on one tax year at a time. Their work is important, but they are not typically trained or equipped to compare today's tax rate to your estimated future tax rate , which is critical for a host of retirement planning decisions.

2. Most financial advisors don’t go this deep into tax planning . While many offer sound advice, fewer focus solely on retirement, and even fewer possess the tools, training, and time to conduct comprehensive, tax planning like this.

Without this level of analysis, Sally might have unknowingly paid thousands more in taxes—hurting her long-term plan.

This case is just one example that highlights a simple truth:

Minimizing lifetime taxes is key to maximizing long-term financial security.

If you want help building a tax-smart retirement strategy, I invite you to schedule your free 15-minute Retirement & Tax Assessment Phone Call .. .

...because small steps today can make a big difference tomorrow.

Warm regards,

Travis

As always, this free content is not to be taken as advice of any kind. You will want to consult your financial advisor before implementing any of these strategies.

Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation .

At Echols Financial Services, we specialize in retirement planning , tax planning , and investing for individuals over age 50. We do our best work with people who are at or near retirement, who are optimistic but cautious. Learn more about our no-cost, no-obligation process to help you make your retirement a success .

Travis Echols , CRPC®, CSA

Chartered Retirement Planning Counselor℠

Certified Senior Adviser

Echols Financial Services

Registered Investment Adviser (RIA)

How to Build an Optimized Retirement Portfolio

Tue, 30 Jan 2024 14:41:47 GMT

Building and maintaining an optimized portfolio can save or make a retiree tens or hundreds of thousands of dollars over a long retirement. Here is a framework for helping you construct an optimized retirement portfolio. The academic research from the last several decades would suggest seven major building blocks aimed at balancing liquidity, income, growth, and safety over a 20 to 30-year period.

Liquidity--Retirement assets are not being locked up or annuitized such that capital is not available for emergencies.

Income—Using an optimized withdrawal rate, an increasing income is produced to combat inflation (unlike many pensions, bank and insurance strategies that are not inflation-adjusted).

Growth--assets that can combat inflation over a 20 to 30-year period, giving the retiree more income and upside potential under normal and good economic times.

Safety--manages the myriad of investment risks like market risk, inflation risk, and credit risk. Under worst-case scenarios, if withdrawal amounts are adjusted by using guardrails, the portfolio can still provide a lifetime income.

Here is an executive summary of how to build up a portfolio for retirement in seven steps.

1. Values clarification and goal-setting . Figure out the income objective and capability of your retirement assets in lifestyle terms, then financial terms. In other words, set realistic, specific, financial goals based on your core life values.

2. Asset allocation glide path . Figure out how to diversify your retirement assets among stocks, bonds, and cash, based on your age, risk tolerance, retirement goals, and changing market values.

3. Valuation-dependent efficient frontier . Figure out which areas of the markets are historically inexpensive, and which are historically expensive. Don’t take on more volatility than you need to for the growth you need or desire.

4. Multi-asset class approach . Diversify one more step for more growth and less volatility. Put more money in the specific market areas that are less expensive and less money in the specific market areas that are more expensive.

5. Tax-aware asset location and distribution . Save as much on taxes as possible by figuring out which type of investments should be held in which types of accounts. If you are drawing an income from your assets, figure out the least-costly order for making withdrawals.

6. Investment selection based on account type (qualified, nonqualified) and asset-class propensity and magnitude of outperformance (passive, factor, managed, etc. ). Figure out what kind of investment to use (index mutual fund, factor mutual fund, actively managed mutual fund, single factor ETF, multifactor ETF, passive ETF, individual stocks, individual bonds, Unit Investment Trust, closed-end fund, etc.) based on the account type, asset class, and growth and income needs.

7. Rules-guided rebalancing based on retirement glide path and multi-asset-class approach . Readjust the investment mix based on your changing personal situation and changing market values.

Sign up to receive my free monthly email articles...because you want to make the most out of your retirement .

Here is a summary of the details backing this approach. Also, click here for more background information regarding my investment philosophy.

1. Values clarification and goal-setting

Investment planning for (or in) retirement starts with retirement planning. You start with thinking about your life goals...your dreams...your ideal life in retirement. It could involve doing no work, working part-time, or doing seasonal work. Your ideal life could be going back to school, spending more time with family, traveling, ministry, etc.

Ask yourself questions like, "What would I want to do if I didn't need to work for money?" or "What are the most important dangers, opportunities, and strengths I need to address?" or “Ten years from now, if I am looking back on a successful ten years, what will I have achieved?”

This conversation allows you to create specific goals around your most cherished values. And your goals will be unique to you. You then design an investment plan to help you live your ideal life.

This kind of goal-focused, plan-driven approach minimizes the chances of making bad investment choices based on current events and emotions. Instead, you can choose and maintain the specific mix of investments that can best deliver the results you need--using a disciplined, research-driven approach.

2. Asset allocation glide path

The next major question is what kind of investments do you need to meet your goals. All investments have risk. Even "safe" investments over long periods have inflation risk. No single investment delivers growth, high income, and safety of principal. The key is designing a portfolio that balances them in a way that supports your retirement objectives.

And this mix may change over time. For example, for most people, it makes sense to gradually decrease their exposure to high-growth, high-volatility assets like stocks (i.e., equities) as they approach retirement. In retirement, it is usually best to maintain a flat equity glide path, dynamically adjusted for valuation. This approach protects you from the retirement-danger-zone risks of portfolio size effect and sequence risk, while allowing you to take advantage of bear markets and market corrections. See How to Navigate the Retirement Danger Zone .

3. Valuation-dependent efficient frontier

The next step would be to assess how much of your stock allocation should go into which sub-asset-classes. For example, within stocks, how much should be allocated U.S. stocks versus foreign stocks. And within these categories, how much should be placed in small companies versus large, and how much in value (low Price/Earnings) versus growth (high Price/Earnings).

Within bonds, how much should be allocated to U.S. versus corporate, versus foreign, and what maturity and credit risk makes sense.

A more strategic approach may look at historical allocations and set your percentages accordingly. You probably want to also take into consideration the current valuation of the asset classes and weight your allocations tactically, assuming the principle of reversion-to-the-mean will punish recent overperformers and reward recent underperformers. Or at least, you may want to tilt the portfolio heavier toward those underperforming areas.

By using the Cyclically Adjusted Price to Earnings Ratio (CAPE) for the various asset classes, you can project the relative returns of the various asset classes based on their historical averages. The higher the valuation (CAPE) relative that asset class’ historical average, the lower the projected return and vice versa.

There are several combinations of asset classes that fall along the line which is called the “efficient frontier”. This means the portfolio maximizes the return for a given volatility level. Many more possible combinations fall below the efficient frontier, meaning an investor is not getting the most return for the risk taken.

As of the time of this writing, here are Research Affiliates’ projected returns and the valuation-dependent, tactical, efficient frontier (dotted line). Assuming you can rebalance the portfolio periodically as this tactical data changes, you can continually rebalance the portfolio to maximize the return/volatility characteristics of your investments.

If you do not do this, you are buying more pricey assets that will likely lower your future returns and/or raising your volatility with no extra reward for it.

A portfolio using these projections, as you can see, more heavily weights foreign stocks as opposed to US stocks. Depending on where on the efficient frontier line you choose, the weightings would change. For example, the 4.1% return/4.0% volatility (standard deviation) point has 21.7% in stocks, real estate, and commodities combined, with most of the balance (78.3%) in fixed income and cash positions. Whereas, using many of the same asset classes, the weighting for the 6.1% return/12.2% volatility point has 62.9% in growth assets and most of the balance (37.1%) in fixed income.

For someone nearing or in retirement, managing risk must be a key priority. And here is where the big decisions are made.

4. Multi-asset-class approach

The object of diversification is to achieve the best risk-adjusted return for the portfolio, based on the volatility you are willing to endure. Another way of viewing it is that by diversifying, you can minimize your risk to achieve your target rate of return. Stocks, bonds, and cash are the three most basic asset classes. But outside and within these categories you can further diversify. For more on this topic, see Investment Basics to the Rescue .

Stocks can be further divided into the following Morningstar style-box categories.

Here is an example of how one might allocate U.S. and foreign stocks.

Note: International developed markets stocks are on the top two rows of the International Box. Diversified emerging markets is represented by the bottom middle box of International. These numbers are just examples to show how each segment gets an allocation. It is up to the investor to decide what percentages to put into these squares.

You might be thinking at this point that this extra diversification is not beneficial. Wouldn't U.S large stocks and bonds be optimal diversification? The answer is no. Wells Fargo Advisors recently wrote an article on the benefit of broad diversification, using this chart below to illustrate it.

Note in this chart how the efficient frontier for more broadly diversified portfolios provide a higher rate of return for a given level of market risk. Or looking at it another way, more broadly diversified portfolios entail less risk for a given rate of return. Source: https://engineeredportfolio.files.wordpress.com/2016/08/72_15_eps.png?w=913 .

Also see How to Reduce Investment Risk in Retirement .

So, let’s say a retiree has a flat glide path of 40% allocation to stocks. They have decided to place half of their stock allocation in U.S. stocks and half in foreign stocks. These boxes would then guide how the 20% portions would be divided.

Let’s take Susie, who has $500,000 earmarked for retirement. She wants to invest 40% in stocks and 60% in fixed-income. With a 50/50 U.S./foreign allocation, she would invest $100,000 in US stocks and $100,000 in foreign stocks ($100,000 + $100,000 = $200,000 which is 40% of $500,000.

Based on Susie’s further research, she wants to divide her stocks according to the style box allocations above. She would therefore invest $20,000 (20%) in foreign developed large cap value, $20,000 (20%) in U.S. large cap blend, $4000 (4%) in small cap US value, $10,000 (10%) in diversified emerging markets, etc. until all $200,000 is invested per the prescribed allocations. (Note: These are just examples and don’t represent my current allocations for clients.)

Morningstar also uses a similar style box for bonds, but instead of valuation versus size it is maturity versus credit quality. A similar exercise would be done for bonds. Another consideration is whether to hedge foreign currencies in your foreign investments. For some you may; for some you may not. Typically, hedged positions will be less volatile, but if the dollar weakens you will lose some return you would have received from the foreign currency tailwind. I usually hedge foreign bonds to remove the currency impact on returns.

5. Tax-aware asset location and distribution

To help grow and protect your retirement income, you will also need to focus on minimizing taxes by carefully balancing taxable and tax-deferred investments—placing the most tax-efficient investments in taxable accounts and less efficient investments in tax-sheltered accounts.

For example, Susie’s $500,000 is divided into three account types. She has $300,000 in a traditional IRA, $50,000 in a Roth IRA, and $150,000 in an individual brokerage account. Normally, it would make sense to hold most of her stocks in her taxable account and most of her bonds in her IRA. That is because bond interest is taxed at ordinary income tax rates and qualified dividends and capital gains from stocks are taxed at lower rates.

If she invests stocks through tax-efficient vehicles like Exchange Traded Funds (ETFs) as discussed below, she can defer or even avoid most capital gains taxes by holding the asset (perhaps for all her life if she passes the investments to her dependents at death—assuming the stepped-up cost basis rule is still in effect). She may also take advantage of periodic downturns by selling positions when down and buying a similar investment. This is called tax loss harvesting. Tax gain harvesting may also be in order if higher taxes are projected and filling up lower brackets now makes sense.

Meanwhile her bond interest is tax-deferred. She can either reinvest the interest and let it continue to grow tax-deferred or she can withdraw the interest and pay ordinary income taxes on the IRA distributions. She would also want to discover the optimum order for withdrawals if she is drawing an income from her retirement assets. For more on this, see Three Steps to Safely Maximize Your Portfolio Income and How to Dodge the Social Security Tax Torpedo .

Note: Most software packages assume it is best to tap taxable assets first, then tax-deferred assets, then tax-free assets; but this is not always the case. An individual analysis must be done to discover the most tax-efficient withdrawal strategy.

6. Investment selection based on account type (qualified, nonqualified) and asset-class propensity and magnitude of outperformance (passive, factor, managed)

Finally, we come to investment selection. Notice that this step, while first in many investors’ minds, is closer to the final decision to make.

Now that you know what type of investments you want in what type of accounts, based on your retirement income plan and tax situation, you can choose the best type of investment vehicle.

It could be a big mistake to use managed mutual funds for all your asset class choices. Some asset class categories show very little chance of management outperformance when compared to a low-cost index fund. Plus, mutual funds can have phantom capital gains that you could get saddled with that you didn’t even enjoy--if you bought them in a taxable account after a strong growth period for the fund. This would be the situation now. Now would be a terrible time to buy lots of mutual funds in taxable accounts as many of them are projecting large capital gains distributions this year.

However, to hold all low-cost, passive, cap-weighted ETFs for all your asset classes could be a big mistake too. Cap-weighted funds often get risky as the index tracking ETF keeps weighting more and more of the assets to the companies that have done the best recently. This is probably why the research indicates that there is a high propensity for, and magnitude of, outperformance in the growth asset classes. For example, John Hancock Investments show, over 5-year rolling periods, an 81% chance of active management outperformance over the index performance in the foreign small/mid cap growth space with an average outperformance magnitude of 6.55%. But even in the U.S. small cap area, over rolling 10-year periods, 68% of all small-cap value actively-managed funds outperformed the index by an average magnitude of 3.23%.

So, based on the type of accounts and asset classes, you should choose the best investment vehicle. For example, use more passive, low-cost ETFs for large value positions, and use more actively-managed mutual funds or multi-factor ETFs for areas like small cap and growth asset classes. Also, in this regard, you may want to use more mutual funds in IRAs, and more tax-efficient ETFs for taxable accounts, generally.

Notice with this approach, the fees are a secondary consideration after assessing which areas it makes sense to pay extra for active management or for a smart beta strategy. With passive investments, choose a fund with low expenses (considering expense ratios, bid/ask spreads, and commissions for trading). With active positions, focus on management performance (expenses are important but are a secondary concern since paying the higher expenses could be a good investment if it nets you a better performance).

Also, as I discuss in Three Steps to Safely Maximize your Portfolio Income , when taking regular retirement withdrawals from the portfolio, using more income-producing investments (for example, dividend-weighted ETFs or income-oriented Mutual Funds) can protect you from having to sell growth assets at perhaps inopportune times (when you would take a loss).

7. Rules-based rebalancing based on retirement glide path and multi-asset- class approach

Finally, no plan is static. Things change. Even if your personal situation doesn’t change, a pure buy-and-hold portfolio will not likely be best. Portfolio drift over time can significantly change your risk/return profile and jeopardize your financial goals.

Neither buy-and-hold nor market timing are the most effective methods. Instead, rebalancing periodically will keep your portfolio in good shape. And dynamic rebalancing can take advantage of those valuation changes. For more on the basics of rebalancing, see Investment Basics to the Rescue .

As for how often to rebalance, many studies have been done. Michael Kitces’ Finding the Optimal Rebalancing Frequency – Time Horizons Vs Tolerance Bands suggests that tolerance bands are better than time frequency. In other words, why rebalance once per year, or six months, or quarter? Why not rebalance based on tolerance bands instead? The research shows that it is better to rebalance when positions are +/- 20% from the target (on a relative basis). And if this is done automatically, the more often the better. This also tends to keep the absolute basic stock allocation to within +/-5% of the target.

In other words, Susie would rebalance her 20% U.S. large value position any time it hits a tolerance band of +/-20% on a relative basis ($16,000 and $24,000, assuming the same total balance for simplicity’s sake). If she does this with all her positions, her absolute stock allocation is also staying within 35-45% range (since her target is 40%). To rebalance more frequently would increase trading costs and likely miss growth from momentum. To rebalance less frequently would likely decrease overall returns and/or increase overall volatility.

As always, this free content is not to be taken as advice of any kind. You will want to consult your financial advisor before implementing any of these strategies.

Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation .

Travis Echols , CRPC®, CSA

Chartered Retirement Planning Counselor℠

Certified Senior Adviser

Echols Financial Services

Registered Investment Adviser (RIA)

Roth Conversion Done Dirt Cheap

Sat, 24 Dec 2022 19:35:36 GMT

Alex and Anita Case Study - Ages 64 and 62 - Early Retirement

(Note: This case study is hypothetical and does not involve an actual Echols Financial Services client. No portion of the content should be construed by a client or prospective client as a guarantee that he/she will experience the same or a certain level of results or satisfaction if Echols Financial Services is engaged to provide financial planning and investment advisory services.) *

With the necessary disclaimers in place, let's talk about Alex and Anita.

Alex and Anita started planning before they retired.

As a result, they learned that they could retire early and implement tax strategies that could possibly save them enough in taxes to effectively pay for retiring earlier.

With this knowledge, they decided they did not want to continue to work for a discount. They were ready to start living life on their terms and on their schedule.

They wanted to be confident that their retirement plan maintains their lifestyle without running out of money.

Reducing their taxes, improving their investments, and creating a reliable income stream in retirement was their priority.

Sign up to receive my free emails and articles on retirement planning--no cost, no obligation .

Their Goals and Challenges

Alex and Anita had both worked hard for decades and had sizeable nest-eggs in their retirement plans that they knew taxes would come due on later.

They had also inherited some money from a parent that had given them a good bit of after-tax money beyond their emergency cash.

They wanted to enjoy their grandchildren more and looked forward to traveling and spending a little more time at the beach.

Retiring in their early 60s allows them to access their 401k/IRA monies with no penalty, but they had to be sure of health insurance coverage until age 65 when they would enroll in Medicare.

They also wanted to be mindful of their lifetime tax liability (i.e., their estimated cumulative tax bill over their entire retirement) and not be shortsighted regarding taxes.

With early Social Security available at age 62, they needed some advice as to when each should file.

They believed that the success of their retirement was too important to be doing it themselves and the value of having professional guidance.

Finally, they wanted to be sure their investments were aligned with their financial plan and objectives.

Their ultimate goal was to live the life they love now while having a solid plan for the future.

Their Strategy

The goal was to make Alex and Anita's retirement planning process as simple, effective, and enjoyable as possible.

They wanted to avoid big mistakes and big surprises. They wanted to know they were achieving their goals with less personal time, worry, and effort.

The retirement planning process involved:

Analyzing all of Alex and Anita’s information

Summarizing the options available to them with their goals as the directing compass

Establishing new investment/retirement accounts that could provide better monitoring and tax planning options

Strategizing a withdrawal plan with a goal to optimize their lifetime income while paying the least in taxes (what they owe without leaving the IRS big tips year after year)

Being able to understand all of their options and the tax savings available removed a lot of their worries. They were able to move forward with their plan, confident that they would be OK.

Their Results

The solutions adopted by Alex and Anita helped them in many ways:

They purposely delayed Social Security to get higher benefits, thinking they would likely live beyond the breakeven point of filing early.

In the opportunity gap to Social Security, working with their financial planner and CPA, they started strategic Roth conversions, moving $65,000 of IRA money to their tax free Roth IRAs in the first year of retirement at a Federal tax rate of only 5.6%! See graph below.

By converting $32,500 from each of their IRAs , being ages 64 to 62, their Georgia individual income tax exclusion of $35,000 per individual made their Georgia taxes zero!

This $65,000 Roth IRA conversion amount was calculated so as not to exceed the Adjusted Gross Income (AGI) limit that would reduce their Affordable Care Act (ACA) health insurance subsidy , which substantially lowers their health care insurance premiums until they each enroll in Medicare at age 65.

By implementing what’s called the "hatchet retirement distribution strategy"**, they had a plan for a predictable stream of income at a very low tax rate while keeping their medical insurance low -- all the while starting to defuse the ticking IRA tax time bomb in their future (or their heirs' futures).

They established a bond ladder at relatively high short-term rates to bridge the gap to Social Security (to avoid selling funds if they are down when they need the money).

They aligned their remaining investments to meet their long term goals, withdrawing in the order that made most sense for their objective of maximum income and minimum taxes.

If they stay on plan with this strategy, doing it every year in the gap, it could potentially save them hundreds of thousands of dollars over their lifetime in unnecessary taxes.*

Today, Alex and Anita are having the time of their lives. They are free to travel and spend more time at the beach. They have the financial freedom to spend more time with their grandchildren—and they do it every chance they get.

They have the confidence of knowing that their financial plan is sustainable so they can do what they enjoy doing.

Alex and Anita's retirement plan is reviewed regularly. Most importantly, new tax laws are being monitored each year to ensure they are taking advantage of any opportunities available to them.

Sign up to receive my free emails and articles on retirement planning--no cost, no obligation .

Travis Echols , CRPC®, CSA
Echols Financial Services

Chartered Retirement Planning Counselor℠

Certified Senior Adviser

*DISCLAIMER. The content in this article is not intended to provide tax, legal, accounting, financial, or investing advice, or advice of any nature. Readers are advised to seek out qualified professionals that provide advice on these issues for specific client circumstances.

Please note that for any hypothetical example there are many inherent limitations. In fact, there are frequently sharp differences between hypothetical results and the actual results subsequently achieved by any particular strategy due to each person’s unique financial or tax situation. This is not a promise or guarantee regarding your situation. Any reduction in taxes would depend on your specific tax situation and should be reviewed by a qualified tax specialist.

However, this case study is not an exaggeration for many retirees who have large retirement accounts facing large RMDs at projected high future tax rates.

A vital part of holistic financial planning for retirees is tax planning. Yet so few retirees get any meaningful tax planning. As a result, many retirees get stuck overpaying the IRS year after year…and then, to make it worse, leave their heirs with a big tax problem.

Through creative tax planning, using reasonable assumptions, withdrawing from accounts in the optimum tax order, accelerating ordinary income (strategic Roth conversions) in lower tax brackets, and harvesting gains in lower capital gains tax brackets, the potential cumulative lifetime tax savings are significant.

Our financial planning process includes investment recommendations and tax guidance, but it is not meant to represent formal tax advice. We do not offer specific tax services to clients. Our goal is to bring to your attention effective tax planning strategies to coordinate with your tax preparer to reduce your lifetime taxes. (I have found over my 20 years of experience that this team approach to tax planning and tax preparation works best.)

For clarity, let’s be sure to differentiate tax preparation from tax planning. Tax preparation, also called tax return preparation, typically looks backward, one year at a time, to submit the proper tax forms and accurately calculate your tax liability (and how much you owe or overpaid).

Tax planning, on the other hand, looks at taxes in the context of your overall financial picture. A tax planner not only looks in the rear-view mirror but will look forward 20 to 30 years at your projected tax liability and ask what can be done to lower your lifetime tax bill.

By anticipating taxes, it is possible to significantly increase how much money you will have in retirement. And every dollar saved in taxes is a dollar to fund your dreams and goals. Good tax planning is one of the key areas of retirement success.

If you are retired or close to retiring, and especially if you have large retirement accounts, I urge you to consider hiring an advisor who includes this important aspect of financial planning in their practice.

** The “ retirement income distribution hatchet ” is a retirement distribution model in which the initial retirement distribution rates from a portfolio are high in the early years of retirement, but then significantly decline when deferred Social Security is claimed and decreases even further as retirees spend less later in retirement. It’s name is based on the investment income curve resembling the shape of a hatchet.

Investment Advisory Services offered through JT Stratford, LLC. JT Stratford, LLC and Echols Financial Services, LLC are separate entities.

Tax Planning: The Neglected Piece of Financial Planning that Could Save You Tens or Hundreds of Thousands Over Your Lifetime

Fri, 08 Oct 2021 16:56:59 GMT

What is Tax Planning?

Protecting your lifetime retirement savings from excessive taxes is a crucial part of holistic financial planning. This involves protecting your IRA, 401k, lump sum pension rollover, Social Security, and any other type of retirement account or income stream from crushing tax rates.

So let's be sure to differentiate tax preparation from tax planning .

Tax preparation , also called tax return preparation, looks backward, one year at a time, to get the numbers right to accurately calculate your tax liability (and how much you owe or overpaid).

Tax planning on the other hand looks at taxes in the context of your overall financial picture. A tax planner not only looks in the rear-view mirror but will look forward 20 to 30 years at your projected tax liability and ask what can be done to lower your lifetime tax bill.

The Importance of Tax Planning

Although tax planning is a hugely important part of holistic financial planning, oddly, many financial planners do not offer tax planning services. Their disclaimers state such. And its impact is regretful and unnecessary.

These advisors may not even request their clients' tax returns each year. As a result, lots of opportunities are missed and valuable tax savings are forfeited, sometimes year after year. Read more about our tax planning services here .

The legendary CPA, Ed Slott, quips, “To make money through investments and yet omit tax planning for distributions is like playing the first half of the game and sitting out the second half.”

Even if you are great at accumulating assets, what good is it if you lose them through unnecessary taxes or leave yourself vulnerable to excessive taxes you could have avoided through proper planning?

I've heard many real-life horror stories of tax mistakes that have cost retirees tens or hundreds of thousands of dollars in unnecessary taxes during their retirement years.

So you want to consider the many creative and proven tax planning strategies that will make the biggest impact on your retirement success…strategies like strategic Roth conversions that can put in your pocket tens or hundreds of thousands of dollars of lifetime tax savings.

...or harvesting capital gains at lower rates -- even as low as zero percent.

These are just a couple of strategies I have written about in my articles and free guides .

Here are some of the tax strategies that you should be considering if you are retired or close to retiring.

Use tax-advantaged accounts
Use tax-efficient investments in taxable accounts
Match investments with accounts
Harvest in the most tax-efficient order
Harvest losses if in high tax brackets
Harvest gains if in low tax brackets
Gift securities versus cash if giving to charities
Bunch charitable contributions and other itemized deductions
Use qualified charitable distributions from IRAs
Avoid unnecessary taxes during transfers
Avoid unnecessary taxes during fund purchases
Take full advantage of tax-free investing
Fill up lower brackets earlier to avoid higher brackets later
Eliminate/reduce taxes on Social Security benefits

So you can see from this short list above, it’s not just about preventing the tax tsunami coming for your pretax 401k and IRA when Required Minimum Distributions (RMDs) are required. There are strategies around how your assets are positioned in different types of accounts, the type of investments you use in those accounts, the order you withdraw from your account, harvesting capital losses as well as gains, and a variety of charitable giving strategies that can save you thousands of dollars over your lifetime.

And when you look at the wave of aging baby boomers retiring and filing for Social Security and Medicare, it is hard to see how tax rates can remain at these current rates. The Democrats are working hard to raise tax rates as much as they can get by with...even as I write this article.

If your current advisor doesn’t help you with strategic, long-term tax saving strategies, you may want to look for one who does. I'm not saying hire us, but at this point in your life, you might need an advisor who includes this important aspect of financial planning in their practice.

The example I give is, when people are young and healthy, they don’t think too much about choosing their doctor because they hardly ever need one. But as they get older and start having health problems, they want the right doctor who specializes in their problem.

If you are retired or close to retirement, you need a holistic financial planner who understands the importance of comprehensive planning, including tax planning for retirees. You want to give unto Caesar that which is Caesar's, not that which is yours.

How We Can Help

If you’re looking for an advisor who will trade stocks to “beat the market,” you’re in the wrong place. I'm not your guy.

If you are looking for someone who will help you with only one aspect of your financial planning, like tax planning only or investment management only, we’re not a good fit. We do holistic planning only because we know that all the pieces of your finances are connected and need to be coordinated. What may seem like a good idea from a tax planning standpoint may be terrible idea from a risk management or estate planning standpoint...and vice versa.

If you are looking for an advisor to help you manage some, but not all, of your retirement assets, you shouldn’t hire us. For a similar reason as above, we insist on doing our best work and we do our best work for you when we are the single coordinating point of contact for all your financial planning. Two generals can’t effectively run an army. Two coaches can’t be calling different plays if the team is to be successful. And I want you to be successful.

Finally, if you enjoy researching and managing your own retirement planning and investments, and you are just looking for a second opinion, that’s great; but we are not going to be the right firm for you.

But if you’re retired or approaching retirement and are interested in hiring an advisor who’ll help you with things like lowering your tax bill, investing smarter, and optimizing your retirement income, you’re in the right place.

We have a carefully designed process to help you make an educated and informed decision about working with us. If we are a potential good fit, you'll receive a free Retirement & Tax Assessment in which we will show you how to improve your retirement and reduce your tax bill before paying us a single dollar.

Our process is designed to help you evaluate the value of our services and make an informed decision about hiring our firm. It starts with a 15-minute phone call. You'll finish this process knowing exactly where you stand in the four key areas of retirement success. Learn more about our process here .

Note: We intentionally limit the number of new clients we take each year to ensure we are delivering the highest level of personalized service to our current clients, who are our top priority. If our calendar is full, please email us and we will respond immediately to let you know when we will be taking on new clients again and will be happy to add you to the waiting list.

As always, this free content is not to be taken as advice of any kind. You will want to consult your financial advisor before implementing any of these strategies.

Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation .

Travis Echols , CRPC®, CSA

Chartered Retirement Planning Counselor℠

Certified Senior Adviser

Echols Financial Services

How to Pay Zero Taxes on Your Capital Gains

Fri, 13 Aug 2021 19:32:26 GMT

If you have savings outside of pretax retirement accounts invested in capital assets (like stocks, bonds, ETFs, mutual funds, precious metals, jewelry, and real estate) which have large unrealized capital gains, this article is for you.

You may be missing the opportunity to pay zero taxes NOW instead of 15% or higher rates in the future.

Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation .

Summary

For your capital assets outside of pretax retirement accounts which have large unrealized capital gains, tax gain harvesting may save you thousands of future tax dollars.

If you are in the lower income brackets for any reason, perhaps by design during the gap years between retirement and RMDs or delayed Social Security, you may be able to take advantage of 0% tax rates on long-term capital gains and avoid 15% or higher tax rates in the future. And it's hard to beat 0% taxes!

If you have both pretax savings in tax deferred retirement accounts (like IRAs and 401ks) AND large unrealized capital gains outside tax deferred accounts, Roth conversions and tax gain harvesting are two great strategies for reducing your lifetime taxes by paying lower taxes now to avoid higher taxes in the future.

Since accelerating ordinary income and harvesting capital gains both increase your taxable income in the year implemented, they can crowd each other out, meaning that Roth conversions may make more sense in one situation, whereas capital gains harvesting may be the best solution in another. And this can change from year to year for the same taxpayer.

Roth conversion and/or tax gain harvesting?

In a previous article, I wrote a fairly detailed article on Roth conversions . I wrote about when Roth conversions make sense and when they don't. I also gave a step-by-step process for making that assessment and identifying the amount to convert.

The idea of Roth conversions is that if you have a pretax IRA or 401k, all that money is not yours. Part of it is Uncle Sam's and he will get his share when you withdraw it.

If you have pretax savings in tax deferred retirement accounts (like IRAs and 401ks) AND large unrealized capital gains, you have two strategies that could potentially save you tens or hundreds of thousands of dollars over your lifetime.

But these two strategies compete with each. That's because these two strategies trigger two different types of taxes which both have two different progressive brackets applied to assess your tax liability. It takes some analysis to decide which strategy is best for each individual taxpayer...and it can change each year for the same taxpayer.

For some people, their IRA or 401k is a literal ticking tax time bomb that will result in unavoidable crushing tax rates in the future--and that is not even assuming higher tax rates due to factors such as the government needing to support entitlement programs for the wave of baby boomers retiring, etc.

But the good thing is you may have some control over when and how you withdraw or convert that money. And If you can pay $10,000 in taxes now to avoid $20,000 in taxes later (taking into account the time value of money), then Roth conversions can make a lot of sense.

This Roth conversion strategy could save you tens or hundreds of thousands of dollars over your lifetimes in ordinary income taxes by accelerating ordinary income in the lower brackets (10%/12%/22%/24%) to avoid future higher brackets (32%/35%/37%). Or filling up the 10 and 12% brackets to avoid the 22% and 24% brackets, etc.

For others, instead of avoiding future "ordinary income tax rates", you may be able to avoid higher "capital gains" taxes by harvesting long-term capital gains at 0%/15% to avoid 18.8%/23.8% brackets--or selling assets at 0% capital gains to avoid 15% or higher later...or selling at 15% to avoid 23.8% later.

At various income levels, it may make more sense to harvest capital gains rather than doing Roth conversions. (They can crowd out each other, so you need to pick which strategy is more advantageous each year based on your current and future tax projections. That is because capital gains are stacked on top of ordinary income minus deductions to establish your total taxable income.)

If you deliberately cause yourself or find yourself to be in the lower income brackets for any reason (maybe during the gap years between retirement and delayed Social Security or Required Minimum Distributions (RMDs)), paying ZERO taxes on a certain amount of capital gains to avoid future 15% tax rates or higher may be a better strategy than a Roth conversion.

It all depends on your situation as to which strategy is best--and this can change from year to year based on your situation and the current and future tax rates.

It could also be that the optimum strategy in a given tax year is a combination of a Roth conversion and capital gains harvesting.

The goal is to choose the optimal balance between Roth conversions and harvesting capital gains. Here is a flow chart to help with that decision .

For those of you who want to dig deeper, this Michael Kitces article, though using 2020 tax rates, goes into this topic in greater detail .

Below are 2021 tax rates for both ordinary income and capital gains.

Figure 1. 2021 Tax Rates

Note: This article you are reading is referring to long-term capital gains which are held for more than a year before they are sold for a gain. Short-term capital gains result from selling capital assets owned for one year or less and are taxed as regular ordinary income. Learn more here .

An example of harvesting capital gains at a zero percent tax rate

For example, here is an example of a 62 year-old retired couple who has a large taxable account with highly appreciated mutual funds. They have not yet filed for Social Security but have some dividends and a pension that results in an adjusted gross income of $45,408 and a taxable income (filing standard deduction) of $25,100.

So how much long term capital gains can they harvest free of taxes by selling some of their highly appreciated assets in 2021? The answer is $60,000.

Figure 2. Example of a tax-free long-term gains harvesting opportunity

Remember, if this couple wants to harvest all of the $60,000 of gains at a zero percent tax rate they will have to sell more than the $60,000. That's because the basis of what the client paid for the investment will not be taxed with the sale. So, depending on the proportion of gains to basis, this might mean a sale of $200,000 of securities in the account to capture the $60,000 gains.

For older investors who have seen large gains due to strong stock market returns, their risk level may need to be reduced anyway, making this a win-win strategy.

However, unlike harvesting capital losses where there is a wash rule that mandates you wait 30 days before buying the same investmen t, there is no such rule for capital gains harvesting. So this couple can immediately buy the same stock or bond or fund that they sold.

The beauty is their new cost basis would now be a higher price, meaning future gains would now be based on the current higher market price rather than the lower share price they paid years ago.

Now, this couple will have to manage cash flow for their living expenses, so they may use some of the sold shares for their expenses (tax free from their taxable account) and reinvest the remainder.

If the couple has a strong confidence they will want to keep these investments for life AND there will never be a need to sell them AND long-term capital gains tax rates won't rise AND the step-up in cost basis at death won't be removed from the tax law in the future, they and their heirs may avoid capital gains through death. But those are a lot of things to count on, and it's hard to beat a zero percent tax rate, especially when the next bracket is 15%.

As always, this free content is not to be taken as advice of any kind. You will want to consult your financial advisor before implementing any of these strategies.

Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation .

Travis Echols , CRPC®, CSA

Chartered Retirement Planning Counselor℠

Certified Senior Adviser

Echols Financial Services

How to Reduce Your Taxes on Your IRA RMD using QCDs

Sat, 03 Jul 2021 00:00:00 GMT

Originally written on Aug 2, 2018 and updated for tax law changes.

If you are no longer working and have reached the age of 72, you probably know about Uncle Sam’s rule for you to take a Required Minimum Distribution (RMD) from your traditional and rollover IRA(s) each year for the rest of your life. You can always withdraw more, but this requirement is the minimum you must take or be severely penalized. Fortunately, this rule does not apply to Roth IRAs. (The SECURE Act of 2019 changed the starting RMD age from 70½ to 72 starting in 2020, but fortunately you can still make a Qualified Charitable Distribution (QCD) starting the year you turn 70½.)

Sign up to receive other helpful email articles on retirement planning--free of charge .

If you have delayed paying taxes in your pretax IRA, 401(k), or 403(b), etc, there comes a time when the IRS wants their taxes. And if you don’t give them their taxes based on their required withdrawal schedule, you'll get hit with a 50% penalty on top of what you owed.

Along with Social Security and other retirement income, this RMD can significantly raise your tax rate. Also read How to Dodge the Social Security Tax Torpedo . There are not many ways to reduce this tax burden. In the past, retirees have used various deductions including charitable cash contributions and gifting of highly appreciated assets to charities. (The latter not only gives you, the donor, a deduction but also avoids a long-term capital gains tax bill.)

However, with the passing of the Tax Cuts and Jobs Act of 2017 (TCJA) , with its almost doubling of the standard deduction, itemizing deductions won’t make sense for near as many retirees. Ah, but there is still a strategy. But first let’s better understand the RMD.

The RMD tax time bomb

How much you pay in taxes on your RMD partially depends on where your taxable income falls in the tax brackets; but how much you must withdraw (i.e., the amount of the RMD), which adds to your taxable income, is based on your age and your total IRA/401(k) account balances as of the end of the previous year. If you have a 401(k) and are not working, you will have to take an annual distribution that also includes those 401(k) assets in the calculation.

An RMD must also be taken on a Roth 401(k) , even if there are no taxes to be paid. (Note: After retirement, it is often a good idea to roll over your Roth 401(k). The Roth 401(k) would be directly rolled to a Roth IRA . Any after-tax monies in your regular 401(k) can be converted and rolled into a Roth IRA too. Doing this avoids any RMD requirement on your Roth and after-tax savings, allowing the magic of compounded tax-free growth—not only for your lifetime, but stretched over the lifetime of your spouse and, eventually perhaps, up to 10 years for non-spouse beneficiaries.

The SECURE Act of 2019 limited the stretch of non-spouse beneficiaries to 10 years. So, Roth 401(k)s can be subject to the RMD rule; Roth IRAs are not.

(As for after-tax contributions in 401(k)s, the sooner you can rollover that 401(k) to a Roth IRA the better, so the interest starts accumulating in your tax-free bucket versus your tax-deferred bucket. If you are still working, ask about your company's in-service rollover policy.)

The RMD distributions are based on IRS life expectancy tables (Reference Uniform Lifetable II if your spouse is the sole beneficiary and more than 10 years younger than you. Else reference Uniform Lifetable III.)

Here is a short section of Lifetable III with RMD percentages calculated for perspective.

At age 72, your RMD is 1/25.6th (or 3.91%) of the IRA value ending December 31st of the previous year. At age 79, it is 1/19.5th (or 5.13%) of the IRA value ending December 31st of the previous year. The divisor is your “statistical life expectancy”, so you are are dividing your IRA assets by the supposed average number of years someone your age is expected to live.

As you can see, the older you get, the percentage goes up, making it harder and harder for your rate of return to keep pace with your withdrawal. Eventually, if you live long enough, the portfolio will be virtually depleted--though the tables do give a generously-long life expectancy.

(The RMD method of spending down your retirement nest-egg to meet living expenses is not the best method. The taxes must be paid on the RMD, but the RMD does not have to be spent. At a certain point, the RMD, minus taxes, that is above your living expenses needs to remain invested for future years, albeit in a non-IRA, taxable account. All the RMD rule says is: this amount must come out of the IRA so taxes can be collected. For more on this, read How to Manage Cash Flow in Retirement .)

Below, I plotted the percentages calculated from Lifetable III to show the rise with age (from 3.65% at age 70 to 52.63% at age 113).

Note: A recent IRS proposal would update the life expectancy tables used to calculate RMDs. The proposed tables reflect longer life expectancies than the current tables and thus would make the annual RMDs smaller.

The Qualified Charitable Distribution (QCD) solution

There is not much wiggle room to escape the taxes on RMDs once they begin. Itemizing deductions could offset the taxes owed. But with the tax change of 2017 (starting in 2018), what can you do if you don’t itemize, but instead opt to claim the much higher standard deduction?

A qualified charitable distribution may be the answer. A QCD is not an itemized deduction, but a donation to a qualified charity (qualified per the same requirements as if it was a deduction). Instead of being an itemized deduction, a QCD comes right off your income on the 1040 form. If all requirements are met, it is possible that the QCD could, in essence, eliminate all taxes that would have otherwise been owed on the RMD.

There is a long history on this QCD tax provision, but fortunately, the PATH Act of 2015 finally made permanent the use of the QCD to lower taxes on the RMDs .

As Michel Kitces writes in his white paper entitled, Rules And Requirements For Doing A Qualified Charitable Distribution (QCD) From An IRA , “The core requirements for making Qualified Charitable Distributions (QCDs) from an IRA to a charity are contained in IRC Section 408(d)(8) (as created under Section 1201 of the Pension Protection Act of 2006). Under the QCD rules, the IRA owner must be at least age 70½ to do the QCD to the charity (and notably, the IRA owner must actually be age 70½ or older on the date of distribution, not merely turning 70½ sometime that year). Under IRS Notice 2007-7, Q&A-37, even a beneficiary of an inherited IRA can be eligible for a QCD, as long as the beneficiary themselves is at least age 70½ on the date of the distribution.”

If the IRA is not receiving any employer contributions (e.g., SEP IRA or SIMPLE IRA), each person can donate up to $100,000 as a single distribution from his or her IRA. The recipient cannot be a private foundation or donor advised fund .

The check from your IRA must be made payable to the qualified charity. It is more trouble and time-consuming to have the check sent directly to the charity, usually requiring a Medallion guarantee (a similar but more strict process than getting a notarized signature) . For most people, the best path is to have the check made payable to the charity but mailed to the IRA owner, after which the owner can forward the check to the charity.

The benefits of a QCD

The benefit of using the QCD is that you can gift pre-tax dollars to the qualified charity of your choice. The donation comes out of the IRA without any of the tax consequences that would have otherwise applied. So, although the QCD is not a charitable deduction, it is excluded from your taxable income.

If you have started taking RMDs, beginning at age 72, the QCD is deemed to satisfy the RMD. Therefore, the QCD can be coordinated with your RMD to reduce or eliminating the taxes you would have otherwise had to pay on the RMD.

Now this works a financial benefit to you only if you would have given that money anyway and didn't or couldn't deduct it. If you itemize deductions you could still use the QCD instead, but why not just take the distribution into your own account and then declare the donation as a deduction. However, reducing your AGI for other financial reasons could tip the scales toward using the QCD. Where the QCD is extremely valuable is for people who don’t itemize deductions (and an estimated 94% of tax filers won’t itemize under the new tax laws). Those who don't itemize can still receive a tax break on their donation as a QCD.

Here is an example:

Richard turned 72 years old this year and has an IRA with an ending value last year of $870,000. His RMD this year is 1/25.6th (or 3.91%) of $870,000 which equals $34,017. Richard would like to give $12,000 to his church this year. Instead of giving $1000/month as he normally would from his checking account, Richard donates a $12,000 QCD to his church, which satisfies $12,000 of his RMD obligation. He then pays taxes on the remaining $22,017 ($34,017 RMD - $12,000 QCD). Instead of having to pay income taxes on $34,017, he will only pay taxes on an $22,017.

Using this strategy, Richard and his wife Linda can claim the $26,500 standard deduction for married couples (plus $1,250 over age 65 per person additional deduction), and also reduce their taxable income by $12,000. If they are in the 24% tax bracket, they would save $2880 in taxes by implementing this strategy. The after-tax checking account money he would have given to his church can now be reallocated to living expenses and the $2880 tax savings from the QCD could buy them an extra vacation!

Important QCD considerations

Here are some things to keep in mind regarding QCDs.

Remember, you cannot make a QCD until you actually turn 70½. It does not qualify if you merely turned 70½ sometime that year.

To count as a QCD that is not taxable, the check from the IRA custodian must be made payable to the charity, not the IRA owner.

Your IRA custodian will require you to fill out and sign an IRA distribution form. On this form you should specify that the distribution is charitable and that the check is to be made payable to an alternate payee (i.e., to the charity versus yourself). Then have the IRA custodian send the check to you. After you receive the check, make a copy of it for your records and deliver it to your charity. Since your name is not on the check, you will not endorse it. Keep a copy of the signed distribution form with a copy of the check in your tax file.

Do not withhold taxes on the QCD as taxes will not be owed on the charitable distribution.

When you meet with your accountant to prepare your taxes, make sure he/she is aware of the QCD. Have a copy of the check attached to your 1099R if possible. Before signing or approving your return, be sure to verify the QCD is properly deducted from your income (on line 4b of the 1040 form). Unfortunately, IRA custodians often don't properly code the distribution on the 1099R as a charitable donation--so keep your records available and be sure to inform your tax preparer of the QCD, or he/she could miss it and you will miss out on the tax benefit.

To be on the safe side, give the charity enough time to cash the check by the end of the year. Your sending of the check and the recipient receiving the check by year-end may not be enough to prevent an ornery IRS tax auditor from disapproving the QCD for the year you intended.

Finally, talk to a retirement adviser before doing a QCD. An article like this cannot get into all the caveats to consider.

The timing of distributions is also important for a QCD to count as the RMD. Be sure the QCD is made before personal distributions “fill up” the RMD.

Making a QCD before RMD age

With the SECURE Act of 2019, starting in 2020, you can make a QCD at age 70½ prior to minimum distributions being required at age 72. This creates a 1-2 year opportunity to make pre-tax charitable donations from your IRA without them having to qualify as RMDs since RMDS have not yet begun.

Making a QCD while contributing to your IRA

Because the SECURE Act made IRA contributions deductible for those who qualify for the qualified charitable distribution (QCD) provision, the SECURE ACT reduces the allowable QCD by the IRA deduction allowed for a taxpayer over 70½. The rules state , ‘‘The amount of distributions not includible in gross income by reason of the preceding sentence for a taxable year shall be reduced (but not below zero) by an amount equal to the excess of— ‘‘(i) the aggregate amount of deductions allowed to the taxpayer under §219 for all taxable years ending on or after the date the taxpayer attains age 70½,‘‘(ii) the aggregate amount of reductions under this sentence for all taxable years preceding the current taxable year.’’

Example. Jim made traditional IRA contributions at age 71 and 72 for a total of $14,000. A few years later, Jim wants to make a qualified charitable distribution from his IRA of $20,000 to his church. The first $14,000 of the $20,000 distribution will not be treated as a QCD, leaving only $6000 as a QCD to reduce his taxes.

Start tax planning early considering strategic Roth conversionsStart tax planning early considering strategic Roth conversions

The QCD strategy is extremely effective based on how charitably inclined you are. However, a much more powerful tax planning strategy to mitigate the future tax time bomb for retirees who have large amounts of their savings in pretax IRAS and 401ks is strategic Roth conversions. Planning early, before you claim Social Security, or before you reach RMD age, can make the QCD strategy described here merely icing on the cake to reduce your lifetime taxes and make the most out of your retirement. Read "Roth Conversion for Retirement" because this could save you even more than QCDs from the IRSs crushing taxes on retirees .

Conclusions

In the new tax era, using Qualified Charitable Distributions (QCDs) is a smart tax-saving strategy for many retirees. It can effectively use your generosity to lower your taxes while taking advantage of the simpler and higher standard deduction.

I want to be careful to pay the IRS all I owe them; but I don’t want to give them a tip. Instead, I think I’d rather spend their tip on my family or my favorite charity.

As always, this free content is not to be taken as advice of any kind. You will want to consult your financial advisor before implementing any of these strategies.

Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation .

Travis Echols , CRPC®, CSA

Chartered Retirement Planning Counselor℠

Certified Senior Adviser

Echols Financial Services

Enough is Enough

Thu, 24 Jun 2021 18:24:14 GMT

The latest book I am reading is “ The Psychology of Money ” by Morgan Housel. Chapter 3 is entitled “Never Enough”. In this chapter, Housel talks about when rich people do crazy things.

He tells stories of wealthy people who never had a sense of enough and wrecked their reputations, families, freedom, and happiness because of it.

I have also talked to older couples who tell me they once had a much better retirement in view, but the quest for more led them to make unwise investment decisions that left them financially crippled in retirement.

The importance of knowing when you have enough is not only vital to when you retire but also how you retire. It can affect how you invest, how you withdraw, and your overall satisfaction before and during retirement.

Be sure to read to the end where I summarize a few key takeaways.

Housel makes the four following observations in chapter 3 of his book.

Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation .

Observation 1: Being Satisfied with Success is Hard

The hardest financial skill is getting the goalpost to stop moving. He states that if expectations rise with results, there is no logic in striving for more because you’ll feel the same after putting in extra effort.

The taste of having more can increase ambition more than satisfaction. So celebrate your success and enjoy it.

If you are bored, find your excitement in ways other than throwing a wrench into your financial security.

This article will give you some idea of your financial freedom number and other types of retirement options often not considered .

Observation 2: The Cost of the Comparison Game

Social comparison is the problem here. Housel talks about how a rookie baseball player who earns $500,000 a year can feel broke compared to Mike Trout who has a 12-year $430 million contract.

There is virtually no ceiling in this comparison game. It is a battle that can’t be won.

I think it is possible to work hard, do your very best, be a wise steward, and then be satisfied with the outcome whichever way it goes—because much of the outcome is out of our control anyway.

Observation 3: Recognizing that Enough Means Enough

Enough is not too little. Housel writes, “The idea of having enough might look like conservatism and leaving opportunity and potential on the table. I don’t think that’s right. Enough is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.”

A "never enough" mindset can cause you to work too hard and burn out or neglect more important things. It can result in overspending or underspending. It can also manifest itself in holding speculative investments that are too risky for your goals.

Larry Swedroe has an appendix titled "Enough" in his book on investing to capture returns with less volatility. I summarize Larry's book in my article "How to Reduce Investment Risk in Retirement" .

Observation 4: Your Values Show You What You Can't Risk

There are many things never worth risking, no matter the potential gain. Centamillionaire Rajut Gupta could have done anything he wanted in life, but he wanted to be a billionaire.

He wanted it so badly that he used insider tips and went to prison for it. After he was released, he told the New York Times that he had learned a lesson:

“Don’t get too attached to anything—your reputation, your accomplishments, or any of it. I think about it now. What does it matter? Okay, this thing unjustly destroyed my reputation. That’s only troubling if I am so attached to my reputation.”

Housel comments that this seems like the worst takeaway Gupta could have “learned”. Reputation is invaluable, freedom and independence are invaluable, friends and family are invaluable, etc.

The insatiable desire for more is alluring and dangerous. Granted, fear is also a destructive mindset in our media-driven culture in which everything is a crisis, whether real or invented. Remaining optimistic, but cautious and wise can help you avoid both pitfalls.

Key Takeaways for Retirees and People Close to Retirement

Keep your eyes on your cherished values and goals and then weigh all the relevant opportunities and risks that could advance or sabotage them.

It's not just about knowing your numbers, but how you interpret them. For example, some retirees have a "never enough" attitude regardless of their abundance. Others are overconfident and not truly aware of the risks they are taking.

By separating needs from desires, you can ask if the potential loss you will have to accept to achieve a given desire is worth the risk. Knowing when you have enough liberates you to enjoy a deeply satisfying life now while planning for the future.

As always, this free content is not to be taken as advice of any kind. You will want to consult your financial advisor before implementing any of these strategies.

Sign up to receive my free monthly email articles on retirement planning--no cost, no obligation .

Travis Echols , CRPC®, CSA

Chartered Retirement Planning Counselor℠

Certified Senior Adviser

Echols Financial Services

Registered Investment Adviser (RIA)