Saving money for retirement is important, but where should you be putting that money? Today, Paula Christine is joined by CPA Marty Talty of Kopmeyer Talty to break this down and dispel some myths. Often you hear "just max out your retirement plan," but it's rarely that simple. There's an old adage that you'll be in a lower tax bracket in retirement, but Paula explains why she thinks you should plan to be in a similar tax bracket in retirement.
First, Marty explains the benefit of traditional IRAs and 401k accounts. Your money grows tax deferred, meaning you don't pay taxes until you withdraw the funds. And that could bump up your tax bracket in retirement.
Another vehicle is the Roth IRA, where the taxes are paid up front, and it's not taxed upon withdrawal. Marty also explains the new rules around inherited plans. Nobody wants to think about their own death, but leaving money to your heirs could be an important factor in your financial planning. Marty and Paula also explain capital gains - what is a capital gain and how is it taxed differently?
Next, we talk about non-qualified money. This is money that is liquid - you don't need to make any requirements to access it or withdraw. Having money that you can get to immediately is so important, in the event of those unpredictable life events.
Even though every individual situation is different, Paula asks Marty for some general guidance on how to allocate your savings -how much money should be going into each of these "buckets?" And what about 401k match, if your employer offers it.
The bottom line is that a CPA, financial planner, and estate planner are all essential elements to planning your financial future. Many Americans are now living as long in retirement as they were in their working years, and you need to be prepared.
If you'd like to talk to Marty Talty at Kopmeyer Talty, you can reach him at (734) 953-8600, or find his website at https://www.kopmeyertalty.com.
And as always, you can find Paula online at https://paulachristine.com/
Or send her an email at Paula@PaulaChristine.com
Paula: Welcome to be on the Paycheck. I'm Paula Christine. Stop living paycheck to paycheck and start living the life that you dream about, by taking control of your money. I can provide you with the knowledge and the tools, if you make the commitment to put them into practice. So often when I talk to people about retirement planning, I find that they were told to always just max out their retirement plans to reduce the amount of taxes that they pay.
But when they get into retirement, then the only bucket of money we have is that taxable bucket of money. There are so many other different types of investment accounts that you can contribute to that have tax advantages. So I've asked my friend Marty Talty to come in. He's a CPA, and talk about the different types of accounts, break them down for us so that we can understand them and get you contributing to them. So welcome Marty.
Marty: Hi Paula. Thanks for having me.
Paula: You know, I go back to the statement I just made where we're taught to max out our 401k or traditional IRA with before tax dollars. So everything is taxable when we withdraw. Plus we have the 59 1/2 rule, and then we have the RMD role. There are some advantages to those accounts.
So what are those advantages?
Marty: So Paula, one of the biggest advantages is just the tax deferral on those accounts. The money that you're putting in to those accounts reduces your taxable income today. The money grows tax deferred. In other words, you're not gonna pay any tax on the capital gain while it's earning and while it's growing, but rather you'll pay the tax when you pull the dollars out of the account when you retire, when you reach 59 and a half and you take that money out of the account than every dollar out of that account comes to you as taxable income.
Paula: But the old saying was, because you're in a higher tax bracket today, you know you're gonna be in a lower tax bracket when you retire, but that's not necessarily true. I mean, when I work with clients, I try to tell them, Let's shoot for having the same amount of income as you have today in your retirement, because realistically, what's going to change?
Marty: Right. As we're going through that whole retirement phase, oftentimes there's additional income that's coming into your tax return and maybe you're doing some consulting or some gig work or, you got a part-time job and then you've got some social security benefits, and then you have this retirement account, your IRA account. Maybe you're 72, and you have to start taking RMDs.
All of those components of income start to come into play, and when you add that up, You quickly find that you're in a tax bracket that is not the lowest tax bracket that's made. You're probably somewhere in the middle. So there are more tax costs to those retirement dollars that you're pulling out. You just need to be aware of that and plan for it.
Paula: But there are other alternatives. So when I could get out to retirement, I could actually have money that I can withdraw that as tax free. Like from a Roth IRA?
Marty: Correct. So one of the elements to that IRA planning is a Roth IRA and you could very easily be making Roth IRA contributions as a part of your overall retirement strategy.
Paula: So if I think this through and I'm thinking, okay, I maybe a little bit lower tax bracket. Might be in the same tax bracket and retirement, is it more advantageous for me not to worry about taxes that I'm paying now and contribute to that Roth because there's a lot other advantages to that Roth ira. Tax free withdraws?
Marty: Right? And so one of the benefits of the Roth IRA that a lot of people are not aware of is, um, hate to plan for your death, but on your death that Roth IRA would pass to the beneficiaries as a tax free account Also. Those are just some of the really big benefits of those Roth IRAs. While you don't need to put everything into a traditional IRA, I think it's a good idea to maybe do a mix of some traditional IRA to get a little bit of a tax savings.
Also build that tax-free bucket of money, if you will, called Roth IRA.
Paula: I'm gonna go back to something you said about that inherited IRA, cuz the rules just changed. So if you're inheriting an IRA today, you actually have to take that money out within 10 years.
Marty: Correct.
Paula: So can you imagine how that could affect your beneficiary's tax bracket if you have a half a million dollars and they have to withdraw it in 10 years? You gonna be changing their tax situation.
Marty: That's true, right. That's very complex tax planning.
Paula: Well, I think when anything, when you're contributing to your retirement or your inheritance to your beneficiaries, you should sit down with the CPA and at least I think on an annual basis, and kind of talk about what your best solutions are, along with an estate planner and a financial planner.
Marty: Right.
Paula: Okay. So I know that there's another bucket of money that I often talk about, which is that non-qualified bucket. Instead of having taxable income, you have capital gains tax. Do you wanna explain what that's all about?
Marty: So, on non-qualified money, those are accounts that you're setting up with your after tax dollars.
In other words, you've gotten your paycheck. You've paid your bills and now you've got a hundred dollars left over. And that hundred dollars, you're gonna send it into either a savings account of some sort, or maybe you have a little investment account that you're gonna buy some stocks in or what have you.
Those are the after-tax accounts that we're referring to. Those are assets that you can get at anytime. You don't have to be 59 and a half. They're not qualified in any respect to those kind of rules. You're able to get at that money. Put a new roof on or buy a refrigerator or any of those kind of things you don't have to borrow from your IRA.
I think it's a good piece of anybody's financial plan to build that bucket of assets up also and have an ability to get at liquid cash or liquid assets, without having to incur the tax costs of going to an IRA or having to borrow from your IRA. It just gives you another option. That's a good piece of overall financial planning.
Paula: Yeah, it's never really good to borrow from an IRA or a 401k. I mean, it's just not good practice. So explain really quickly though, what a capital gain is.
Marty: So a capital gain is, let's say you bought Ford Motor Company stock and you bought it at $5 a share and you held onto it for two or three years, and you sell it for $15 a share.
You have a $10 gain. So what you would pay tax on is that $10 you would not pay tax on the $15 that you receive. Because you've already paid tax on that five that you spent when you bought this stock. So you're gonna pay taxes on the $10 gain and you're gonna pay tax at a capital gains rate, which is typically, now there's a lot of complexities around that, but typically it's a 15% tax rate as opposed to ordinary income, which is taxed at a higher tax rate typically, so you're spending less money on taxes. You're not paying tax on the full $15 that you've gotten. You're also not paying the higher ordinary income tax rates on that income. So again, it just gives you a little better option in terms of raising cash for those expenses that come up through life, whether it be repairs or trip or college or whatever.
Paula: Yeah, I agree. I think that everybody should have that. I call it the non-qualified bucket of money. You'd have your taxable bucket, which would be your traditional IRAs and 401ks and then your Roth bucket of money and then the not qualified bucket. One other bucket that we could talk about is an annuity. I know that annuities have a lot of bad press, but there are some really good advantages to using an annuity. I don't necessarily wanna get in the conversation exactly. What they totally entail, but let's just talk about how they work tax wise. Annuities.
Marty: Yeah. So the tax on an annuity is maybe you bought an annuity for $10,000 and now it's worth $25,000. Well, if you were to liquidate that annuity, you would pay tax on that gain, the $15,000 gain, but you're gonna pay tax on that $15,000 gain at an ordinary income tax rate. You don't get those capital gain tax rates on those annuities, and that's because as that growth is incurring, you're not paying tax as that growth is going on in the account. It's only on the event of liquidating that account.
Paula: So you don't pay taxes on the money you already put in, cuz that was before tax, but you pay on your growth.
Marty: That's right.
Paula: So let's brainstorm some strategy. So let's say I had $10,000 that I could contribute to all three of those accounts. What would you suggest would be first, second, and third? Or how would I divide that $10,000 up?
Marty: Well, that's kind of a tricky question.
Paula: I like tricky questions.
Marty: Yes, you do. And I would say to look at your overall financial situation. So my feeling is that if you don't have a good savings account strategy where you have liquid cash or investments that you can get at that are not included in an IRA.
You need to build those assets up, whether that be through savings accounts or the non-qualified type investment accounts. You want to be building those up to some level that you are comfortable with. While that's going on, you always wanna be saving for retirement. You wanna put some money aside for retirement, and it's just a good discipline to get into that savings pattern.
With your 401K contributions and to get those retirement assets built up, it's a plan that needs to be monitored as you go through your different stages of life, if you will. If you have kids that are starting to go to college, that's a pretty expensive time of life, and you're gonna wanna be able to have cash that you can get at for those expenses.
So you just really wanna spend looking at your overall financial goals, how are you measuring up to those financial goals that you've put in place?
Paula: Do you think about, you know, max out your 401k up until the employer match, and then maybe consider then going to look at either the Roth or the non-qualified?
I know it's not perfect situation for everybody? But it at least gets you kind of contributing to the three different buckets?
Marty: Well, that's a really good point, Paula. You really wanna be contributing to these 401ks, at least to grab the employer's contribution. If the employers have a 401k. Typically they have a 401K plan that says they're gonna match 3% of your wages, if you contribute 5%., Well you should at least be contributing that 5%. That 3% company matchis really free money and you should be doing everything you can to get it. You always wanna be contributing to these 401K plans, at least to grab the employer match. And then you look at your personal situation and what your overall goals are, it makes a difference whether you have pension income that you can rely on.
Most companies don't have pension plans anymore, so we're self-reliant on these 401K plans. The other thing I see is that many people who are retiring now are living 30 years into retirement. They're living longer than they worked. I know when I was a child, my parents didn't live 30 years in retirement.
They might have lived a couple of years in retirement, so we're not used to seeing anybody else. We're not used to seeing people plan for retirement like you're having to do now. Now it's becoming much more complex because of your different savings options and the different tax treatments of the income when you do retire.
Paula: Yeah, retirement has definitely changed and then now we've got the impact of inflation, right? Affecting our retirement. Everything comes down to two things, living on a budget and then preparing and having a plan of how you're going to get forward in your life. I mean, without that, you have no idea what you're doing, right?
And that means reaching out to someone like yourself, a financial planner or estate planning attorney. Maybe not necessarily every year, but sitting down with them every couple of years just to make sure that you're on track, right? And then as you get closer and closer to retirement, should be something you do on an annual basis, right?
Marty: And all three of the people, all three of the professionals that you just listed are important pieces to that whole planning process. These are not things that you want to just take on yourself or make assumptions or listen to your best friend. I mean, you wanna be dealing with professionals when you're talking about your retirement, because once you stop working, you stop earning. Now you have to live off of what you accumulated.
Paula: Yeah. You go from accumulation phase to distribution phase, and that's totally two different ways of planning. So Marty, if anybody wants to reach out to you for your advice, how would they get ahold of you?
Marty: Phone number (734) 953-8600. Reach out to us through our website. Our website is KopmeyerTalty.com.
That's K O P M E Y E R T A L T Y.com. You can Google me, you can Google the firm. We all show up. That seems to be the easiest way to do it. I used to be able to tell people when I first started in this business, youwould look me up in the Yellow Pages , but I don't think people know what the Yellow Pages are anymore. I just dated myself, so.
Paula: You sure did. ,
Marty: I hope that tells you I've been around, I've seen a lot of stuff and that I know what I'm doing, so.
Paula: Yeah, it tells that you're experienced. . So Marty, I really wanna thank you I some great information that you shared with us today. So Marty's contact information will also be in the show notes.
If you'd like to reach out to me, you can email me at paula@paulachristine.com. Or you can check out my website at paulachristine.com. There's some great resources out there, and there is a budget worksheet that if you wanna get started on your budgeting, visit the website and download it. So thanks again, Marty, for joining us today. I really appreciate it.
Marty: Very good. Thanks for having me.
Paula: So next week we're gonna be talking with Mike, who's going to educate us on veterans and the benefits they have for buying a home, which I really truly know nothing about. So I'm really looking forward to learning about that topic. Anyway, thanks and have a good day.