Tax Bracket Management // How to Manage Your Tax Brackets - YouTube

You've reached the voicemail for Kyle Scholl. Please leave a message and I'll

get back to you as soon as I can. Thanks so much have an awesome day!

"Hey Kyle, just giving you a call wondering how much to throw at my Roth

or Traditional IRA. give me a call back, bye."

"Hey Kyle, what are your thoughts on doing a Roth Conversion?

give me a call?" Okay, we're talking tax bracket management today.

At the end of this video you'll have a better understanding

of how to answer some pretty simple financial planning questions that I used

to get all the time. Questions like, "Should I contribute to my

Pre-Tax Traditional IRA or to my Roth IRA?"

"How much should I pull out from my Roth IRA?" "Should I do a Roth Conversion?" Okay, let's get to work.

What's up guys I'm KScholl, Welcome to another Financial Awareness video.

So what is tax bracket management? Well, what it is not is rocket science and

what it is... is exactly what it sounds like. It's

taking an intentional approach to decide which of the marginal

tax brackets you want to fall into each year during

your accumulation years or throughout retirement during your

distribution years. It's simply taking some time to do basic

math and planning each year. Couple things I'm taking into

assumption during this video... One, I'm assuming you already have a

financial plan. Two, I'm also assuming that you are

living well below your means so that you have some

surplus funds each year to even be asking yourself

these questions. If you don't have a financial plan or

you are not living beneath your means so that you have extra money

then this video might make you feel like you're a little behind, but

don't worry we all started somewhere. Let's go over a few examples.

Actually, hold on, before we go into a few hypotheticals

you may have picked up on this from a few of my other videos.

We are of the mindset that Federal Income Tax Rates will be

higher by the time my wife and I begin to live off of our portfolio.

So, as a general rule of thumb, for us, we are putting as much as possible

into our after-tax Roth accounts, but many people like to

get the tax deduction right now to lower their tax burden this

year. To me it's a little bit like playing

chess versus playing checkers, but to each his own. For the sake of

argument let's not talk about write-offs and business expenses

just to keep this easy to follow. Should I contribute to a traditional pre-tax

IRA or to an after-tax Roth IRA and a

distant third cousin to that question would be should I contribute to my

after-tax Roth 401k or my pre-tax 401k. Here's a hypothetical...

Let's say you're single. You make $60,000 per year and you put 5%

into your work 401k to get the full employer match

and you're trying to get your taxable income below $40,000

to prevent being in the 22% tax bracket because 12% is pretty sweet, but that's

quite a jump from 12% to 22%. Okay so $60,000

minus $3,000 for your pre-tax deduction

brings us to $57,000. At this amount you're still

under the $65,000 income phase-out limit

for getting the traditional ira tax deduction.

We know you're single and will be getting the $12,400

dollar standard tax deduction for not itemizing. Which brings you down to $44,600

Therefore, based on this math, you should

contribute approximately $4,600

into your pre-tax traditional IRA.

...and voila you now have just managed your tax brackets and are down to twelve

percent instead of twenty two percent despite

being well above the threshold and making 60 thousand dollars

quick side note whether it's this year or really any year

you suspect you're hitting your targets at work

to make you eligible for that end of the year bonus

keep an eye on the cutoff dates for your 401k contributions

during the actual pay period you think you'll be paid out your

bonus if you can time it right you could adjust your 401k to prevent a

huge tax bill from your bonus check during

that actual pay period if you don't make this

adjustment towards your 401k or don't make any tax withholding

adjustments for that specific pay period then you might be shocked

with how big of a tax bill comes out on that bonus check and maybe as a

result potentially might get a larger tax

refund next year when you go to do your taxes

so you can start to see how you can play some games here hey if you're getting

any value from this video do me a favor and tap that like button

and let me know in the comments below if you have any questions although i did

spend some time in the financial services industry i am not your

financial advisor or your cpa and this video is for entertainment and

educational purposes only how much should i pull out for my pre-tax

accounts if you're a retired firefighter living

off of your pension and social security you might be asking yourself this

question from time to time or maybe you're building up assets in

both pre-tax and after-tax accounts so that you'll have

options to pull from either account during retirement

let's say you're looking to pay cash for a car during retirement

and need to liquidate 25 000 from either your roth ira

or 457 deferred comp account if you are flirting with any of these tax bracket

thresholds the general rule of thumb would be to

work with your cpa and consider pulling funds from

both or only pull enough funds from the pretax

457 deferred comp account so that you don't get bumped up into the next tax

bracket alternatively if you can properly plan

this out by exercising some emotional and financial discipline you

could break up your distribution between two tax years if

you know you are planning to buy a car in the following march then maybe you

pull fifteen thousand dollars out in december and another ten thousand

dollars out in february so that you're not hit with

as big of a tax burden by being bumped up into the next marginal tax

bracket and voila you're managing your tax

brackets should i do a roth conversion very

similar to the math we've done before and you're starting to see a theme here

if you are well inside the 22 tax bracket and not

flirting with a 24 rate then you can strategically consider

converting some of your pre-tax traditional ira

dollars over to your after-tax roth dollars

the downside of doing this is that you'll be voluntarily paying taxes on

whatever you convert but the benefit would be the funds would

be able to grow tax free instead of tax deferred

paying the taxes on the conversion out of pocket

would be ideal but if not you could always pay them from the conversion

huge side note here if you really want to be a pro

with your financial planning try to time your conversions

around the same time as when the market dips or has a pullback

nobody could have predicted what happened in march of 2020

but if you have a dialed in financial plan

and you have these topics on your mind each year

anyway that would have been a great time to do a conversion

because then all that upswing growth would have been inside your

roth growing tax free so as the market continues to fluctuate up and down

over the years keep an eye on that strategy and try to take advantage of it

if you can as you continue to grow your financial

planning knowledge one of the things that will help you make strategic

financial planning decisions is knowing the difference between your effective

tax rate and your marginal tax rate so check out this video right here or i

don't know you might like that one instead i

appreciate your time see you in the next

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