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Tax Strategies For High Income Individuals - YouTube
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hey everyone bill lethemon here for
[2]
moneyevolution.com
[3]
and welcome back to another one of our
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daily live videos uh where we're
[8]
broadcasting to you every weekday monday
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through friday
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uh so this is actually episode number
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four um
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last week on episode two i think it was
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i started to talk with all of you about
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what i referred to as the seven core
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elements of retirement planning
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and how each one of these seven elements
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is going to play a part in your ultimate
[28]
retirement goals and some of the things
[29]
that you want to accomplish in
[31]
retirement
[31]
uh things like knowing how much your
[33]
retirement is going to cost we talked
[34]
about that a little bit identifying your
[36]
gap
[37]
where to save money what types of
[38]
accounts are going to be best for
[40]
your retirement dollars uh deciding when
[43]
to collect social security obviously a
[44]
big one
[45]
we talked a little bit about healthcare
[47]
costs and how that needs to play in
[48]
there
[49]
uh the 401k plan for many people is
[51]
going to be another
[52]
big aspect of your retirement and
[54]
knowing how to unlock the full potential
[56]
of that 401k plan
[58]
as you get closer to your retirement
[60]
starting to create that plan for income
[62]
and then finally the last thing we get
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to after going through each one of those
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seven steps
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is choosing your investments and
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unfortunately
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many people start with number seven so
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what i'm going to do
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here today in this video is i'm going to
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be expanding
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on one of these seven elements we're
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going to be talking about where to save
[80]
money
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and specifically i'm going to be talking
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about some of the tax implications
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of where you save money and how that it
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might impact your retirement
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and the amount of money that you have
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for your retirement to be able to
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spend there so i'm going to clear this
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white board here
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and do my best to do that reasonably
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quick here
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and once again if you're watching this
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video and you haven't already
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go ahead and click the like button on
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our page
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at money evolution and that way when
[110]
we're doing our updates you'll be sure
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to get
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notified on that and you'll be sure not
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to miss anything
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we're also planning
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on we're also planning on doing a
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uh rebroadcast of these on our youtube
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channel as well i think any day now i
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think we're going to hit 200 000
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views on our youtube channel so if
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you're
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if you'd rather watch these videos on
[133]
youtube you can head over there and
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subscribe to the youtube channel
[136]
and of course you can always get access
[138]
to the videos on
[139]
moneyevolution.com so what i'm going to
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be talking about here is we're going to
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be talking about some tax strategies
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specifically for individuals that might
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be in the higher tax
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uh brackets uh so first of all what is
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the problem well the problem here
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that i see is that if you have money
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that's specifically for your retirement
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in other words you're saving that money
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so it can provide you
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with a retirement benefit down the road
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but you have that money in a
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non-retirement account in other words a
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non-tax advantaged account
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that's going to present i think some
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potential tax issues for you and that's
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what we're going to be talking about
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here
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so what we're going to be talking about
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are some strategies
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to potentially move that money over to a
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tax advantaged account
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things like maybe a roth ira account or
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a traditional ira or 401k
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so we'll be talking about some
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strategies regarding that
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and again this is not intended to be
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specific tax advice we are going to be
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talking about taxes and everything but
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of course you want to clear any
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strategies that we're talking about here
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today to make sure that they're relevant
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for you and they apply to your situation
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run those past your tax professionals
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your cpa
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or if you have a financial advisor or
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professional that you're working with
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run it by them and of course we can
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act in that capacity for you as well and
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help you
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answer questions specifically as we do
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maybe a financial plan for you so
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so again the problem is that we have
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money over here in non-retirement
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accounts
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and we'd like to try to get this over
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here so why is this an issue well first
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of all
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the first issue is that if you have
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money in a non-retirement account
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you have to pay taxes every year on that
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money
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and so because of that because the fact
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that you're paying taxes every year
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on that account that account is never
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going to grow
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to as big of a balance as an account
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that you have over here
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in one of these tax advantage accounts
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where you don't have to pay taxes on
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that every year
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uh so obviously having to pay taxes
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every year on that is going to also
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affect the potential growth of that
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account again that
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account's not going to grow to as large
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of a balance
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number three is that because that
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balance may not be quite as big in the
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future it's also going to affect the
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potential
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income that you could possibly generate
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from that account
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in retirement and that's what we're
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talking about here today we're talking
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about ways to potentially help you
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improve
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the amount of income that you're going
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to have for your retirement
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and then the fourth thing is it could
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also
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because you have to pay taxes on this
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every year it's going to be contributing
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to your taxable balance
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it could also cause other adverse
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effects like maybe like your medicare
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premiums to go up in retirement
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and that's a big one which we call that
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one of our stealth taxes and i talk
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about that pretty extensively on some of
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our other videos here but
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uh medicare premiums could go up
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um so let's let's talk about this a
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little bit more in detail here so again
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you've got to pay taxes every year on
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this amount
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and for individuals that may be watching
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this broadcast
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and maybe in one of the higher tax
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brackets not only could you have to pay
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regular income taxes on that money but
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you could also get hit with something
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called the medicare
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sur tax and maybe some of you watching
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this are familiar with that so
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the medicare surtax is going to kick in
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for people that have an
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income if you're single
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where your income is over 200 000 a year
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you're going to have to pay an
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additional
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3.8 tax on any of your investment income
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if you're over that level
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if you're married filing a joint tax
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return
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that 3.8 percent is going to kick in
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at 250 000 of income so that's part of
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what we refer to sometimes as the
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marriage
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penalty so a single gets all the way up
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to 200 000
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of income but you can see as a married
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couple
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uh just getting over 250 000 a year of
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income is going to kick them into that
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bracket where they're going to get hit
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with an extra 3.8 percent
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additionally for any of you watching
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that may be in the highest tax bracket
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the 39.6
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tax bracket uh and that's for people
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whose income is over
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four hundred thirteen thousand two
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hundred dollars if you're single
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and four hundred and sixty four thousand
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eight hundred fifty dollars
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if you're married and what happens for
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individuals that are in that category
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is the preferential treatment that you
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get for long-term capital gains
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and for qualified dividends that
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tax rate is going to jump from 15
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to 20 percent so you can see how this
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very quickly
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adds up if you are being affected by
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this
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meaning that your dividend income and
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your
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uh capital gain long-term capital gains
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income is going to be taxed at 20
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you're also going to get hit by this so
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now you've gone from a 15
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tax on that money to now 23.8
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tax so this presents kind of a a real
[451]
challenge here for i think a lot of
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people watching this and a lot of people
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uh may not necessarily realize that they
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may just be
[458]
making earning their income and putting
[461]
money aside but they're not really
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taking into consideration how all of
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this is going to to work in here so
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i'm actually going to try to do another
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little wipe here and clear up a little
[469]
bit of my white board
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grab the rag i threw on the floor
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okay
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okay so so what are some potential
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solutions well number one is that we
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want to get money from
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this non-retirement account again to
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your tax advantaged accounts
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and there's a couple ways we can do that
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number one
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is if you have a 401k plan at work
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many of you may not necessarily be
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completely maxing out that 401k
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plan uh but for 2017 if you're under 50
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you can contribute 18 000 a year and if
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you're 50 years old or older
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you can go up to 24 000 a year
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so method number one
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is to get more money into your 401k plan
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um
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and a lot of people may not be fully
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maxing that plan out
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and don't forget if you're married
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your spouse may have a 401k plan a
[534]
retirement plan through their employer
[536]
that you can max out as well so that's
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item number one
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item number two
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is the roth ira now unfortunately
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because we're talking about high income
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individuals you're probably thinking hey
[550]
i don't qualify for a roth ira account i
[552]
make too much money well
[554]
that may be true and there is some
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income restrictions on this so for 2017
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if you're single and you make
[562]
over 118 000 a year your ability to
[565]
contribute to that roth is going to
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start to get
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phased out and if you make more than 133
[570]
000
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for the year you can't contribute to a
[573]
roth directly at all
[575]
and then for 2017 if you're married
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and you make over 186 000
[582]
your ability to contribute gets starts
[584]
to get phased out and then over 196
[587]
000 you can't contribute at all
[590]
so how do we get around this or is there
[593]
a way to get around this i should say
[594]
well there is one potential strategy
[597]
because the irs lifted the restriction
[599]
on converting traditional
[601]
ira account money to a roth ira account
[604]
you can now do what i call a kind of a
[606]
back door strategy you can make a
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contribution to
[610]
a traditional ira account
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get my rag here i wrote that wrong
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so you make your contribution to your
[618]
traditional ira account
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and then you immediately convert it
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to your roth
[628]
and again because there's no income
[630]
restrictions on making this contribution
[632]
to your ira account
[633]
and there's no restrictions on income
[635]
for being able to do a conversion
[637]
you could do your regular ira
[640]
contribution
[641]
5500 a year for 2017 if you're under 50
[645]
and 6500 a year if you're 50 years old
[649]
or older and again if you're married and
[652]
you have a spouse
[653]
you can double that you could do 11 000
[655]
if you're under 50 or 13 000
[657]
a year if you're 50 years old or older
[659]
now the one catch here that you have to
[661]
be
[661]
very careful about is if you have other
[664]
ira accounts
[666]
it doesn't matter where those ira
[668]
accounts are at but if you have other
[670]
ira accounts then this strategy becomes
[672]
a lot more difficult because
[675]
you're you're going to have to use what
[678]
they call the pro rata rule so if you
[679]
have
[680]
money over here let's say you have 50
[682]
000 or 150 000
[684]
in this account and it's money that
[686]
hasn't been taxed you need to consider
[688]
all of these accounts as one gigantic
[692]
ira account when you go to uh to do the
[694]
conversion
[695]
and again it gets a little more
[697]
complicated i'm not going to get into
[698]
all those details
[699]
here today but but keep that in mind so
[702]
this works very well
[703]
if you don't have any existing ira
[706]
accounts
[708]
number three is is kind of probably one
[709]
of my favorite strategies
[711]
and it's a strategy using an account
[714]
that you may have through your
[716]
employer sponsored retirement account at
[718]
work and it's called the after tax
[720]
account
[721]
and so this became very interesting back
[723]
in 2014 when the irs
[726]
made a couple changes to some of the tax
[728]
rulings on this
[729]
and essentially find some open space
[732]
here to uh to write
[733]
what it allows you to do is if you're
[735]
under 50
[736]
you can contribute up to 54
[740]
000 a year to your employer-sponsored
[742]
retirement accounts and if you're
[744]
50 years old or older that amount
[747]
jumps all the way up to 60 000 a year
[751]
and how this works let's run through an
[752]
example let's say that you're you're 50
[754]
years old
[755]
so you get the 60 thousand dollar
[758]
contribution so you can contribute
[760]
still a maximum of twenty four thousand
[762]
dollars to your 401k
[764]
and that can be a combination of roth or
[766]
traditional however you want to split
[768]
that up can't go any higher than that
[770]
let's say your employer is giving you a
[771]
match we'll make the math easy here
[774]
let's say they're matching six thousand
[775]
dollars on those contributions
[780]
and so you're you've got a total of
[781]
thirty thousand dollars so far going
[783]
into this
[784]
that difference whatever that amount is
[785]
in this case it's thirty thousand
[787]
dollars
[789]
that thirty thousand dollars can be put
[791]
into an after tax
[793]
account through your employer sponsored
[795]
plan uh so you can contribute all the
[797]
way up to sixty thousand
[798]
now what's nice about that is again in
[800]
2014 the irs made
[802]
a tax law change to this and now they
[805]
let you take money that is in a
[807]
after-tax account through an
[809]
employer-sponsored plan
[811]
and now you can roll this money over
[814]
directly
[815]
to your roth account try to draw
[818]
sideways there
[820]
so that has huge
[823]
implications for many people watching
[825]
this that have that now every 401k plan
[828]
does not have an after-tax account many
[830]
of them do now and i think more are
[832]
adding that in there
[833]
but you definitely want to check on that
[835]
and if you're not sure
[836]
or you don't know 100 that you don't
[839]
have it uh
[840]
make a call to hr ask them the question
[842]
find out if it is something that's
[843]
available
[844]
now if it is available a couple things
[847]
that you want to
[847]
keep in mind number one the pro rata
[850]
rules that normally would
[851]
restrict us a little bit on these back
[853]
door strategies like we talked about
[855]
here
[855]
that's not going to be a factor here so
[857]
you don't have to worry about that
[859]
but you do have to make sure that your
[861]
employer allows for something called an
[864]
in-service withdrawal in other words
[865]
that this money is eligible
[868]
to roll out while you're still actively
[870]
employed by the company
[871]
chances are they probably will but you
[873]
want to double check that and make sure
[874]
that they're going to let you do that
[875]
otherwise
[876]
that money may have to sit in there
[878]
until you retire
[879]
or you separate service from the company
[881]
that's going to take away some of the
[883]
advantages of of this account
[885]
the other factor in here too is even
[886]
though you might have according to the
[888]
irs
[889]
up to thirty thousand dollars that you
[890]
can contribute there uh you may be
[892]
limited by your employer to a certain
[893]
percentage of your salary i've seen it
[896]
uh basically where maybe 10 of your
[898]
salary is the maximum that you could put
[900]
into that so if you're
[901]
at a 200 000 salary you might be limited
[904]
to only putting
[905]
20 000 into that account you may not be
[907]
able to go up to that that full 30.
[909]
so that's um another factor there
[912]
so there's a couple of strategies there
[915]
that you can use to again kind of shift
[917]
some of this money over to
[918]
a tax advantaged account another
[921]
strategy i'm not going to get into a
[922]
whole lot of detail here
[924]
but annuities and life insurance are
[926]
another
[927]
potential tax advantaged account where
[929]
you can remove it from an account that
[931]
you have to pay
[932]
taxes every year on to an account where
[934]
you've got some tax advantages now
[936]
with annuities and life insurance that
[938]
gets a lot more complicated
[940]
they can be higher cost and certainly if
[943]
you're considering that you want to
[944]
weigh
[945]
those potential higher costs along with
[947]
any of the
[948]
potential tax savings that you may be
[950]
getting as a result of that
[952]
and then finally the last thing that i
[954]
want to talk about here as it relates to
[956]
this
[956]
is if you're in a high tax bracket and
[959]
you've used some of these other
[960]
strategies
[960]
you may still end up with some money
[963]
over here in this non-retirement account
[965]
and that may be okay there may just be
[967]
nothing really that you can do
[969]
about that but the final step in this
[971]
whole process is to start paying
[973]
attention to
[974]
what kinds of investments you put inside
[977]
this non-retirement account
[979]
certain types of investments a little
[980]
bit different tax characteristics
[982]
for example interest income
[987]
that's taxed at your ordinary income tax
[990]
rate if you're in one of these high tax
[992]
brackets that could be
[993]
39.6 percent plus you might also get hit
[996]
with that medicare surtax of three point
[998]
eight percent
[999]
uh so interest income for non-retirement
[1001]
accounts is a very
[1002]
tax inefficient type of an investment
[1005]
that you could do there
[1006]
um short term capital gains is another
[1010]
one too and those are investments that
[1011]
you buy and then you sell
[1014]
shorter than a one year time span that's
[1017]
also going to be
[1018]
taxed at ordinary income so a strategy
[1022]
here is to start thinking about as
[1023]
you're
[1024]
putting together your overall asset
[1026]
allocation maybe you want to do things
[1028]
here that are geared more towards
[1030]
long-term capital gains where you can
[1032]
maybe potentially defer
[1034]
taxes out a couple years out into the
[1036]
future where you're buying and holding
[1038]
things
[1038]
for longer periods of time things that
[1040]
have qualified
[1042]
dividends and then if you want to have
[1044]
some bonds or some things to pay
[1046]
interest income
[1047]
put those into one of your other more
[1049]
tax advantaged accounts and then that's
[1050]
a way to kind of balance that off
[1053]
so i know i went kind of quick here with
[1055]
this video and
[1056]
gave you hopefully some pretty good
[1058]
ideas again if you're watching this
[1060]
video
[1061]
any place other than our blog at
[1062]
moneyevolution.com
[1064]
and you want to head over check out some
[1065]
of the resources that we have there
[1067]
um we do this as part of the seven core
[1070]
elements
[1070]
this is something that plays into our
[1073]
comprehensive
[1074]
financial plan that we do for clients
[1076]
and i'll probably include a link here
[1078]
below this video
[1079]
and if you click on that link it'll take
[1081]
you to a page it'll tell you all about
[1082]
our financial plan that we do
[1084]
where we again will address each one of
[1086]
those seven uh core elements and see how
[1089]
it affects you help you make decisions
[1091]
on which of these accounts may be best
[1093]
for you
[1094]
uh in your family roth iras traditional
[1096]
401ks
[1097]
uh kind of look and see how all of that
[1099]
stuff kind of interrelates to one
[1101]
another so
[1102]
anyway that's it for this video if you
[1103]
like what we're doing here please give
[1105]
us a like
[1106]
subscribe to our pages and i'll see
[1108]
everyone back in our next video thanks
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