Tax Strategies For High Income Individuals

– Hey everyone, Bill Lethemon
here for And welcome back to another
one of our daily live videos where we’re broadcasting to you every weekday Monday through Friday. So this is actually episode number four. Last week on episode two, I think it was, I started to talk with all of you about what I referred to as the seven core elements
of retirement planning. And how each one of these seven elements is going to play a part in
your ultimate retirement goals and some of the things that you want to accomplish in retirement. Things like knowing how
much your retirement is going to cost, we talked
about that a little bit, identifying your gap, where to save money, what types of accounts are gonna be best for your retirement dollars, deciding when to collect social security, obviously a big one. We talked a little bit
about healthcare costs and how that needs to play in there. The 401k plan for many
people is going to be another big aspect of your retirement, and knowing how to
unlock the full potential of that 401k plan as you get
closer to your retirement, starting to create that plan for income, and then finally the last thing we get to after going through each
one of those seven steps is choosing your investments,
and unfortunately, many people start with number seven. So what I’m gonna do
here today in this video is I’m gonna be expanding on
one of these seven elements. We’re gonna be talking
about where to save money and specifically, I’m
going to be talking about some of the tax implications
of where you save money and how that might impact your retirement and the amount of money that
you have for your retirement to be able to spend there. So, I’m gonna clear this whiteboard, here, and do my best to do that
reasonably quick here. And once again, if you’re
watching this video and you haven’t already, go
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be sure not to miss anything. We’re also planning on, we’re
also planning on doing a rebroadcast of these on our
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we’re gonna hit 200,000 views on our YouTube channel, so if you’d rather watch these videos on YouTube,
you can head over there and subscribe to the YouTube channel. And of course, you can always
get access to the videos on So what I’m going to be talking about here is we’re gonna be talking
about some tax strategies specifically for individuals that might be in the higher tax brackets. So first of all, what is the problem? Well the problem here that I
see is that if you have money that’s specifically for your retirement, in other words, you’re saving that money so it can provide you with
the retirement benefit down the road, but you have that money in a non-retirement
account, in other words a non-tax advantaged account,
that’s gonna present, I think, some potential
tax issues for you. And that’s what we’re gonna
be talking about here. So what we’re gonna be talking about are some strategies to
potentially move that money over to a tax advantaged account, things like maybe a Roth IRA account, or a traditional IRA or 401k. So we’ll be talking about some
strategies regarding that. And again, this is not intended
to be specific tax advice. We are going to be talking
about taxes and everything, but of course you want
to clear any strategies that we’re talking about here today to make sure that they’re relevant for you and they apply to your situation, run those past your tax professionals, your CPA, or if you have a
financial advisor or professional that you’re working with, run it by them, and of course we can act in
that capacity for you as well, and help you answer questions,
specifically as we do maybe a financial plan for you. So, again, the problem
is that we have money over here in non-retirement accounts and we’d like to try
to get this over here. So, why is this an issue? Well, first of all,
the first issue is that if you have money in a
non-retirement account, you have to pay taxes
every year on that money. And so, because of that,
because of the fact that you’re paying taxes
every year on that account, that account is never going
to grow to as big of a balance as an account that you have over here in one of these tax advantaged accounts where you don’t have to pay
taxes on that every year. So, obviously having to pay taxes every year on that is going to also affect the potential growth of that account. Again, that account’s not going to grow to as large of a balance. Number three is that because that balance may not be quite as big in the future, it’s also going to affect
the potential income that you could possibly generate from that account in retirement, and that’s what we’re
talking about here today. We’re talking about ways to
potentially help you improve the amount of income
that you’re gonna have for your retirement. And then the fourth
thing is it could also, because you have to pay
taxes on this every year, it’s going to be contributing
to your taxable balance, it could also cause other adverse effects, like maybe like your Medicare premiums to go up in retirement,
and that’s a big one. We call that one of our stealth taxes, and I talk about that pretty extensively in some of our other videos here, but Medicare premiums could go up. So let’s talk about this a
little more in detail here. So again, you’ve gotta pay
taxes every year on this amount, and for individuals that may
be watching this broadcast, and may be in one of
the higher tax brackets, not only could you have to
pay regular income taxes on that money, but you could
also get hit with something called the Medicare surtax,
and maybe some of you watching this are familiar with that. So, the Medicare surtax is
going to kick in for people that have an income, if you’re single, where your income is over $200,000 a year, you’re going to have to
pay an additional 3.8% tax on any of your investment income
if you’re over that level. If you’re married, filing
a joint tax return, that 3.8% is going to kick
in at $250,000 of income. So that’s part of what
we refer to sometimes as the marriage penalty. So a single gets all the way
up to $200,000 of income, but you can see as a married couple, just getting over
$250,000 a year of income is going to kick them into that bracket where they’re gonna get
hit with an extra 3.8%. Additionally, for any of
you watching that may be in the highest tax bracket,
the 39.6% tax bracket, and that’s for people whose
income is over $413,200 if you’re single and
$464,850 if you’re married. And what happens for individuals
that are in that category is the preferential treatment that you get for long term capital gains
and for qualified dividends, that tax rate is gonna
jump from 15% to 20%. So you can see how this
very quickly adds up. If you are being affected by this, meaning that your dividend income and your long term capital gains income is going to be taxed at 20%, you’re also going to be hit by this. So now you’ve gone from a 15% tax on that money to now 23.8% tax. So, this presents kind
of a real challenge here for I think a lot of people watching this. And a lot of people may not
necessarily realize that. They may just be making,
earning their income and putting money aside, but they’re not really
taking into consideration how all of this is going to work in here. So, I’m actually going to try to do another little wipe here, and clear up a little
bit of my white board. Grab the rag I threw on the floor, okay. Okay, so, what are some
potential solutions? Well, number one is that
we want to get money from this non-retirement account again to your tax advantaged accounts, and there’s a couple ways we can do that. Number one is if you
have a 401k plan at work, many of you may not necessarily
be completely maxing out that 401k plan, but for
2017, if you’re under 50, you can contribute $18,000 a year, and if you’re 50 years old or older, you can go up to $24,000 a year, so method number one is to get more money into your 401k plan, and a lot of people may not be fully maxing that plan out. And don’t forget, if you’re married, your spouse may have a 401k
plan, a retirement plan through their employer that
you can max out as well. So that’s item number one. Item number two is the Roth IRA. Now, unfortunately,
because we’re talking about high income individuals,
you’re probably thinking, “Hey, I don’t qualify
for a Roth IRA account, “I make too much money.” Well, that may be true, and there is some income restrictions on this. So for 2017, if you’re single and you make over $118,000 a year,
your ability to contribute to that Roth is going to
start to get phased out, and if you make more than
$133,000 for the year, you can’t contribute to
a Roth directly at all. And then for 2017, if you’re married and you make over $186,000, your ability to contribute starts to get phased out, and then over $196,000 you
can’t contribute at all. So, how do we get around this, or is there a way to get
around this, I should say? Well, there is one potential strategy because the IRS lifted the restriction on converting traditional
IRA account money to a Roth IRA account,
you can now do what I call kind of a back door strategy. You can make a contribution
to a traditional IRA account. Get my rag here, wrote that wrong. So you make your contribution to your traditional IRA account, and then you immediately
convert it to your Roth. And again, because there’s
no income restrictions on making this contribution
to your IRA account and there’s no restrictions on income for being able to do a conversion, you could do your
regular IRA contribution, $5,500 a year for 2017 if you’re under 50, and $6,500 a year if you’re
50 years old or older. And again, if you’re married
and you have a spouse, you can double that, you can
do $11,000 if you’re under 50, or $13,000 a year if you’re
50 years old or older. Now, the one catch here
that you have to be very careful about is if
you have other IRA accounts, it doesn’t matter where
those IRA accounts are at, but if you have other IRA accounts, then this strategy becomes
a lot more difficult because you’re gonna have to use what they call the pro-rata rule. So if you have money over here, let’s say you have $50,000
or $150,000 in this account, and it’s money that hasn’t been taxed, you need to consider all of these accounts as one gigantic IRA account when you go to do the conversion. And again, that gets a
little more complicated. I’m not gonna get into all
those details here today, but keep that in mind. So this works very well if you don’t have any existing IRA accounts. Number three is kinda probably
one of my favorite strategies and it’s a strategy using
an account that you may have through your employer-sponsored
retirement account at work, and it’s called the after tax account. And so this became very
interesting back in 2014 when the IRS made a couple changes to some of the tax rulings on this, and essentially, I’ll find
some open space here to write, what it allows you to do
is if you’re under 50, you can contribute up to $54,000 a year to your employer-sponsored
retirement accounts, and if you’re 50 years old or older, that amount jumps all the
way up to $60,000 a year. And how this works, let’s
run through an example. Let’s say that you’re 50 years old, so you get the $60,000 contribution, so you can contribute
still a maximum of $24,000 to your 401k, and that
can be a combination of Roth or traditional, however
you want to split that up. Can’t go any higher than that. Let’s say that your employer
is giving you a match. We’ll make the math easy here. Let’s say they’re matching
$6,000 on those contributions. And so you’ve got a
total of $30,000 so far going into this. That difference, whatever that amount is, in this case it’s $30,000, that $30,000 can be put into an after tax account through your employer-sponsored plan. So you can contribute all
the way up to $60,000. Now what’s nice about
that is again in 2014, the IRS made a tax law change to this, and now they let you
take money that is in a after tax account through
an employer-sponsored plan and now you can roll
this money over directly to your Roth account. Try to draw sideways there. So, that has huge
implications for many people watching this that have that. Now, every 401k plan does not
have an after tax account. Many of them do now, and I think more are adding that in there, but you definitely want to check on that. And if you’re not sure
or you don’t know 100% that you don’t have it, make a call to HR, ask them the question. Find out if it is
something that’s available. Now if it is available, a couple things that you wanna keep in mind. Number one, the pro-rata
rule that normally would restrict us a little
on these back door strategies like we talked about here, that’s not going to be a factor here. So you don’t have to worry about that. But you do have to make
sure that your employer allows for something called
an inservice withdrawal, in other words that this
money is eligible to roll out while you’re still actively
employed by the company. Chances are they probably will, but you want to double check that and make sure that they’re
gonna let you do that. Otherwise, that money
may have to sit in there until you retire or you separate
service from the company, and that’s gonna take away some of the advantages of this account. The other factor in here, too, is even though you might
have, according to the IRS, up to $30,000 that you
can contribute there, you may be limited by your employer to a certain percentage of your salary. I’ve seen it, basically, where
it may be 10% of your salary is the maximum that you can put into that. So if you’re at a $200,000 salary, you may be limited to only putting $20,000 into that account, you may not be able to go up to that full 30. So that’s another factor there. So there’s a couple of strategies there that you can use to, again,
kind of shift some of this money over to a tax advantaged account. Another strategy, I’m not gonna get into a whole lot of detail here, but
annuities and life insurance are another potential
tax advantaged account where you can remove it from an account that you have to pay taxes every year on to an account where you’ve
got some tax advantages. Now, with annuities and life insurance, that gets a lot more complicated. They can be higher cost. And certainly if you’re considering that, you want to weigh those
potential higher costs along with any of the
potential tax savings that you may be getting
as a result of that. And then finally, the last thing that I want to talk about here as it relates to this is if
you’re in a high tax bracket and you’ve used some of
these other strategies, you may still end up
with some money over here in this non-retirement
account, and that may be okay. There may just be nothing,
really, that you can do about that, but the final
step in this whole process is to start paying attention
to what kinds of investments you put inside this
non-retirement account. Certain types of investments,
a little bit different tax characteristics, for
example, interest income. That’s taxed at your
ordinary income tax rate, and if you’re in one of
these high tax brackets, that could be 39.6% plus
you might also get hit with that Medicare surtax of 3.8%. So interest income for
non-retirement accounts is a very tax inefficient
type of investment that you could do there. Short term capital gains
is another one too. And those are investments
that you buy and then you sell shorter than a one year time span, that’s also gonna be
taxed at ordinary income. So a strategy here is
to start thinking about as you’re putting together
your overall asset allocation, maybe you want to do
things here that are geared more towards long term capital gains, where you can maybe
potentially defer taxes out a couple years out into the future, where you’re buying and holding things for longer periods of time. Things that have qualified dividends. And then if you want to have some bonds or some things to pay interest income, put those into one of your other, more tax advantaged accounts,
and then that’s a way to kind of balance that off. So, I know I went kind of
quick here with this video, and gave you hopefully
some pretty good ideas. Again, if you’re watching this video any place other than our
blog at, and you want to head over, check out some of the resources that we have there. We do this as part of
the seven core elements. This is something that plays into our comprehensive financial plan that we do for clients,
and I’ll probably include a link here below this video,
and if you click on that link, it’ll take you to a page,
it will tell you all about our financial plan that
we do where we, again, we’ll address each one of
those seven core elements and see how it affects you,
help you make decisions on which of these accounts may be
best for you and your family, Roth IRAs, traditional,
401ks, kinda look and see how all of that stuff kinda
interrelates to one another. So, anyway, that’s it for this video. If you like what we’re doing here, please give us a like,
subscribe to our pages, and I’ll see everyone back
in our next video, thanks.

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