Q4 Check-up & Tax Moves

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

 

Intro:

Hey, and welcome to another edition of Retire Smarter. Walter Storholt here with you, alongside the great team at True Wealth Design. Of course, joining us all the time, he has been for several years at this point. You know him best as Kevin Kroskey. I don’t know what they would know you otherwise as, Kevin Kroskey. I guess just Kevin Kroskey is what we always call you. We’ve never given you a good nickname here on the show. Maybe after 110 episodes, we should finally turn the corner and do that. Egghead seems to be the appropriate one, but that’s kind of mean.

Kevin Kroskey:

It also has a bit of a dual meaning, I guess, being a bald guy. I think my head shape isn’t exactly egg-like, but I think we could have a little fun with that. I have thick skin. I’m good with that, Walt.

Walter Storholt:

You do have thick skin, so you’re all right with it.

Tyler Emrick:

Wasn’t there a coupon Kroskey mentioned like a few episodes?

Walter Storholt:

You’re right.

Tyler Emrick:

I don’t know.

Kevin Kroskey:

Moving right along.

Walter Storholt:

Yeah. Egghead coupon. Okay, that’s a good debate.

Tyler Emrick:

Yeah.

Walter Storholt:

Do you guys do coupon or coupon?

Tyler Emrick:

I don’t know.

Walter Storholt:

I was arguing with this about Connie, the other day, and she makes fun of me for saying coupon, but I’m like, I’ve said that my whole life, so I don’t know. But coupon is the right way to say it, apparently.

Tyler Emrick:

I don’t know if I’m the best one to ask, Walt. My wife says I make up words all the time.

Walter Storholt:

You and I might be related in the distant life then, Tyler. I feel like I’m the same. I’m the exact same way. That and sayings, I’ll mish-mash sayings all the time. That’s sort of my thing. Fantastic. You heard his voice as well. Tyler Emrick here. How are you doing, Tyler? Good to talk to you.

Tyler Emrick:

Yeah, hanging in there, Walt. I’m glad to be here.

Walter Storholt:

Fantastic. Both are certified financial planners, of course. True Wealth Design, serving you throughout Northeast Ohio, Southwest Florida, and greater Pittsburgh area. Those are the locations where they have presences in person, of course, but you can reach out from wherever you are, at truewealthdesign.com, if you have questions about putting together a plan or something you hear about on the show. And speaking of the show, let’s dive into it this week.

Guys, I’m excited to hear you go back and forth on this. A little bit of a revisit to an episode from three years ago, back on episode 31. We had a great discussion with Kevin, a little bit about a tax-smart retirement distribution plan, the details of that. And it sounds like, Kevin, this is particularly important as we approach the end of the year, so as this episode releases in early to mid-November, good time to bring this back up, especially since it’s been a couple of years.

Kevin Kroskey:

Yeah, you got it. I would say the three, core things we do, year in and year out, for the clients that we serve, we’re doing their financial life planning, really more the big picture stuff, where we’re looking out not just over the next year or two, but really over what we think their lifetime is going to be, making sure that we’re not only measuring what that lifestyle is going to cost them, aligning their investments, coordinating any sort of pension or social security claiming strategies, and surely being tax-smart with all the things that we’re doing. But then, we need to go ahead and look at the investment planning continually. Literally, we’re looking at portfolios every week, and this year’s a good example of that. With the volatility we’ve had, all the tax loss harvesting that we’ve been able to do, and make some of our fourth-quarter tax planning and what we call our tax and investment review planning that we’re doing right now and tying it all together.

And those tax-loss harvesting that we’ve been doing consistently, throughout the year, are going to pay some dividends now. So, the planning, the investing, and the tax planning and prep are the three, core things that we do, year in and year out, for clients. And certainly, we do a lot more, as clients need it, but those are the three, core things. It’s like going to the doctor and getting your checkup every year, getting your labs done, things along those lines. But those are the things that we do, and when we come into this fourth quarter, this is really where we’re kind of looking at and saying, “Hey, this is what we expected you’re going to be spending, this year. Here’s how much actually came out of the accounts. Here’s our income target, which we will get into a little bit more here, but here’s what we are targeting in income, here’s where we’re at, and how are we going to fill up that income target, and what we going to do to execute the tax strategy that we have for the year?”

And then, we look out for next year, too, so we’re setting that stage. Where are we going to pull our dollars from? What sort of inflection points are we reaching, whether it’s Medicare, social security, maybe even taking some gifts out of IRAs and qualified charitable distributions? But it’s really looking back and making sure that, hey, are we on track? Do we need to make any changes to the plan? And then what sort of tax strategy can we do over top of that, to just make everything a little bit more effective? So, Tyler and Aaron, in our office, and I have been getting into those appointments. Ryan and Ron are getting in those appointments, in our Pittsburgh office, as well. And it’s a busy time of year for us. It’s a little bit different. And I just had a quick aside here, a conversation with the CPA yesterday, and he’s like, “This is our slow time of year.”

And I think that illustrates the point really, really well because the CPA’s really just wrapped up tax season, here, with extensions after October 15th, and they’re slowing down. Meanwhile, we are really speeding up and doing planning for both this year and next year, so that’s one of those things where a lot of times, people, I just don’t think that they get or fully appreciate, a lot of times, the preparation is more in the rearview mirror. And you’re using those past tense verbs, if you will, whereas we’re using the planning and more so present and looking forward. So, it’s important to do it all, but that’s a big, big difference people don’t appreciate.

Tyler Emrick:

Sure. Kevin, even to piggyback off that, a bit. As you do, I have many contacts still in the industry and financial planners that essentially do similar things as what we do. And many of them are even slowing down because maybe they’re just investment-focused, or maybe they’re focused on life insurance or whatever the case may be, and they’re really not taking that integrated approach. I think that’s what’s so different about our firm, in general, and I spent a number of years at a couple big institutions and money managers that would be very well-known in the industry.

And these are all good companies, but all my time there, come on, this is the holiday season. We’re taking off during Thanksgiving, a week off, we’ve got Christmas, and this is where things kind of slow down. And I think, shoot, even my first time coming over here, it’s amazing how different that busy time of the year changes when we got some of these things we need to get in, either before the end of the year and looking onto the next, as you had mentioned earlier.

Kevin Kroskey:

Yeah, you got it. So, we’ve had a lot of changes, over the last few years, and we have a few more that we know that are coming up. So, Tyler, maybe that’s a good place to start, just take a stroll down memory lane at some of the inflection points and how that’s impacted the work that we’ve done and then, really, the current environment and some of the law changes, more recent ones, how that’s impacting things we’re doing this year and looking the next few years ahead.

Tyler Emrick:

Yeah, I always like to say those lawmakers like to keep us employed and try to make things as complicated as possible, a lot of times, and certainly they’re ever-changing. I think Kevin and I were talking about the episode we were getting ready for today. He had listed out quite a bit of just the different tax law changes that occurred, really just since 2020 and with COVID and some of the changes there, with the stimuluses and the SECURE Act. And we’ll probably get into each of them a little bit here, but it’s really evergreen. Is that the right term, Kevin, where it doesn’t change, right? It’s something, year in and year out, we need to plan for. Am I using the correct term terminology there? I’m not making up words, Walt.

Walter Storholt:

From the podcast side, I can verify. That’s the perfect term.

Tyler Emrick:

All right.

Kevin Kroskey:

I guess change is evergreen, but all the changes are different, maybe I would say.

Walter Storholt:

There you go. That’s a good way to put it.

Tyler Emrick:

Fair enough, fair enough. But planning for that is big, and the one that really sticks out to me is the stimulus changes over … What was that start, in what, 2020, Kevin? Is that right, the first one? And there was about three rounds if I’m remembering correctly.

Kevin Kroskey:

Yeah, yeah, yeah.

Tyler Emrick:

Yeah. And as I think about, and Kevin alluded to it, a little bit earlier, I think income targeting is a big thing that we do for our retirees. I think, while you’re working, and you have that paycheck coming in, it’s very easy to say, “Hey, I know what my paycheck is coming in, every two weeks.” And you build your lifestyle and spending around that. And once you retire, it’s like, hey, that shuts off, and now you have this whole, open world. And you have multiple accounts and all these different places that you can pull money from, and the question becomes how? How do you wrap your arms around that, and how do you do it efficiently and effectively? And I think it all starts, from our mind, income targeting, and that might be just a fancy term to say, “Hey, how much money and how much tax money do we want to take out of our account, this year, that makes sense from a tax standpoint or a legislation standpoint?” Would you say that’s a pretty simplified way to explain it?

Kevin Kroskey:

Yeah, we know what the tax rates are this year, and looking out over the next few years, assuming that there’s no change, and then we know what the rates are going to revert to, come 2026. So, a basic tenet of tax planning is, if you can lower your overall effective rate that you pay over time, that’s great. If you know your rate’s going to be higher in the future, and it’s lower today, then that’s a good way to go ahead and say, “Hey, maybe we want to realize some more income,” things like that, for sure.

Tyler Emrick:

Yeah. Yeah. So, that’s normal, and then, when we have one of these unique situations like COVID and the stimuluses, I distinctly remember being in a meeting with Kevin, and him bringing up and saying, “Hey, I know we typically have these income targets each year that we set, and we want to go to a certain level. Maybe we need to rethink this, to pick up some extra stimulus and some of those extra payments for our families.” And that change, hey, we went into the year assuming that we were going to take income up for a number of families, to a certain level, and then, when these changes happen, if you build that into your plan that you can be very malleable or certainly can make some of those changes on the fly, then we can say, “All right, no. Hey, let’s decrease that income target down to whatever level so that way we can pick up this extra tax benefit.”

And having that integrated approach, where, heck, if I didn’t know how much a family needed to live off of, and I didn’t know what their tax bracket was going to look like, down the road, similar to what Kevin had mentioned with the tax bracket management, how can I effectively manage that income, each year, and say, “Yeah, let’s bring that down. We can pull from another account if needed, and then you’ll really maximize and pick up some of that extra cash.” Right, Walt? If you can get more money from the good, old IRS might as well do it.

Walter Storholt:

Might as well cash in when you can.

Tyler Emrick:

Yeah.

Walter Storholt:

I think that makes a lot of sense in that regard, so it’s, again, that evergreen mentality. I really like how you put that originally, to start with, Tyler-

Tyler Emrick:

Yeah, I’ll take that.

Walter Storholt:

… and then Kevin’s adjustment to it. The expectation of the changes is evergreen.

Tyler Emrick:

Yes. And being flexible and having the flexibility to do that all starts from planning and being able to make those changes on the fly and having someone in your corner, of course, that can bring those up. Because I’ve got Kevin to help me out, and certainly, Aaron and some of the other guys here in the office, we’re always working as a team to say, “Hey, are these things that we need to know about? Hey, did you guys hear this? Hey, are we adjusting here?” And I think it’s extremely important, and I think that’s a pretty big value add from our firm and the way that we do it.

Walter Storholt:

Where else-

Kevin Kroskey:

Yeah. No, I …

Walter Storholt:

Yeah, where else-

Kevin Kroskey:

I can-

Walter Storholt:

… are you making those adjustments, Kevin?

Kevin Kroskey:

You read my mind, buddy.

Tyler Emrick:

That’s why we got you here, bud.

Kevin Kroskey:

As Tyler was talking, a couple things came to mind. So, the income targeting, when you think of that, say, just for round numbers, let’s say that we wanted to target $200,000 of income for a client, and maybe they only needed, say, $100,000 for living expenses. So, rule number one is make sure that you have the money that you need to have the lifestyle that you feel comfortable living and can afford to live. But then, we may want to realize income over and above that for more so these tax planning reasons and really to optimize the after-tax wealth over time. So, I just want to make sure that that’s clear to the listeners, but what goes into that, too, are some of these things, like Tyler mentioned, with the stimulus.

A lot of people, we lower their income targets because what they would’ve foregone in the stimulus really would have been at a marginal tax rate, sound a little egghead-y here for a moment, forgive me, but at a marginal tax rate that was higher than what we expected their long-term tax rate to be. So, it was one of those things where you just, hey, pump the brakes. Let’s rethink this. And for some clients, we were seeing a 30-some percent marginal tax rate, if we didn’t lower their income amounts. And that same sort of principle applies to other things. Anybody that is pre-65 and able to avail themselves of an ACA tax credit, healthcare tax credit, as your income goes up, you may forego some of that tax credit. But okay, it’s just maybe a little bit of a unique way to think about it, but we can really calculate what that implied tax rate’s going to be, by foregoing that benefit and paying a higher premium.

Or same thing goes if you’re on Medicare, and you have these income-related monthly adjustments or IRMAA for short. If you go over this IRMAA tier, what’s that going to do to your tax rate? And literally, that helps us normalize this and really compare and say, “Okay. Hey, where do we want to income target?” And all those things that I just mentioned are tied to inflation and to cost of living adjustments. And as everybody knows, and we’ve been having a lot of conversations about, inflation certainly has been there. But Tyler, I’ll kick it back over to you. Why don’t you talk about some of the inflation changes that we’re seeing here, as it impacts the COLAs for these things?

Tyler Emrick:

Yeah, absolutely. As we mentioned, going into year-end, and some of the work that we’re doing for our families, and we’re wrapping up this year. And to start this year, we had certain income targets that we were wanting to go up to. I think one of the big ones is that IRMAA that you had mentioned, Kevin, but when you look at those, they do go up each year. And when we experience a year like we did certainly this year or even over the last 18 months, and inflation numbers have been so high, these limits that we have to abide by and be cognizant of, they go up from year to year. And when we experience inflation, those numbers go up quite a bit.

So, when we were looking at someone’s income plan over this year, for a retiree, and let’s just say we got them a monthly distribution that they’re living off of, and they’re all fine and dandy and good. And then now, we’re coming to the end of the year, and we’re like, “Hey, we had this extra room that we want to maybe take some additional money out, or we may maybe do some Roth conversions.” And we want to take that money out and pay taxes on it because it makes sense for them, in their situation, and what they’re trying to accomplish.

That limit that we started the year with was much lower than what we’re probably going to end up taking their income at, this year, because now we understand and say, “Hey, we understand how those tax brackets, we understand how those IRMAA limits are increasing, and they’re so high, then that’s great.” And I think even more so, too, looking to next year, a big source of income a lot of families have is social security. The social security increase, I think, this year is 8.7%, Kevin. Is that right? Or somewhere right around there.

Kevin Kroskey:

Yeah, exactly. And that’s a really good point. So, you got 8.7% there. What a lot of people don’t know is that the tax brackets increase, and this was part of the 2017 tax reform.

Kevin Kroskey:

Yeah.

Tyler Emrick:

Yeah.

Kevin Kroskey:

So, rather than the COLA for social security, the tax brackets are increasing at the chained CPI, and I happened to do a quick Google search before a call. And I’m just looking here. Historically, there’s about 0.2, 0.3% difference between the two, and in short, what that means is, it’s a substitution effect. So, think about some of the things that we’ve had over the last year or two, grain prices going really high, beef prices going really high, so maybe it’s cheaper to go out and substitute chicken or cheaper not to eat, I suppose.

Tyler Emrick:

Peanut butter. Peanut butter and jelly.

Kevin Kroskey:

Right. But I’m looking back here. Just the annual difference between those two measurements maybe got up to as high as 0.6 or 0.7%, and it looks like it’s come in a little bit, over the last couple months. But the tax brackets are increasing at that chain CPI, which isn’t a big deal now, but when you project that out over 10, 20, 30 years of compounding, it’s going to be a huge difference. And it was a nice, stealthy way that the government could go ahead and pass a quasi-tax increase, at the same time that they were lowering brackets. I also think this is going to make its way into social security reform, at some point, because people don’t understand math, and it’s easy to do these things and help close those gaps.

Tyler Emrick:

It’s something we plan for already. When we’re starting projecting out over the next 30 years, that’s a long time horizon. So, these small increases in the numbers that you use or assume for each of them, whether it comes in the form of spending, or you think about in the form of social security, which I think you are maybe alluding to there, Kevin, as far as, hey, now your social security increases at 8.7%, but if any law changes to where they start going, and that increases based off of chain CPI, that’s a lower increase that you’re going to get, on a year-over-year basis.

And the longer out we’re projecting, then the more impactful that can be from a plan standpoint. And I know we make some adjustments inside of our plans, already, to account for that, so that way, we don’t assume that these big, social security payments are going to be there as our families age into retirement and get into their 80s and 90s. And that might be a little bit more muted of a benefit, and we think it’s a nice, easy way to account for that social security … I don’t want to call it a problem, but maybe some of the changes that are coming down the road there.

Kevin Kroskey:

Yeah.

Walter Storholt:

Seems like the constant message is being proactive, Kevin. That comes up over and over again.

Tyler Emrick:

Yeah.

Kevin Kroskey:

You’re absolutely-

Tyler Emrick:

Yeah.

Kevin Kroskey:

Yeah, it’s the same thing with the CPA story that I said, where they’re looking in the rearview mirror and getting things done for a year that’s already been closed in the books. And we’re looking forward, not only for the next year or two but also to do this sort of tax planning. And this is one of the … We’ll come back to pain point, but you really have to look out and see any sorts of peaks or valleys of income that a client’s going to have. And sure, you don’t have perfect foresight to that, but then you overlay what we know with tax rates today and in the future, and there’s definitely some good information there, in current law, and how that’s going to change.

But if you don’t have that plan in place, and you’re flying blind here, it’s … Tyler and I both, I think we’re actually going to get into this, in the next episode, but we’ve had some conversations recently, where it’s almost like the drug manufacturers will go out and put an ad about, hey, this stellar drug. And then, the potential patient or user goes in and say, “Hey, doc. Why don’t you give me this?” And then it’s putting the cart before the horse. Really, what’s the underlying cause and those sorts of things? So, we’ve had several conversations recently, and it’s common, over the years, where people think that they have this problem or should do this one thing, but they really don’t have a concept of how it fits into their overall planning. And that’s an issue, for sure, so definitely putting cart before the horse.

But this sort of changing, it’s evergreen. Nothing is static. Life is a four-letter word, and it’s always evolving. But it’s just what it is, so I think you have to get comfortable with the change. You have to be proactive. You make assumptions, and you look back and say, “Hey, were these assumptions accurate? Or has something changed in your life, whether that’s by force or by one, and do we need to make some changes to the big picture part of it?” This is one of the underbellies of financial planning. Sure, investments may be sexy. Tax planning, who doesn’t like to save money on taxes? But you really need that conductor to pull it all together, the taxes, the planning, and the investing, and make sure it’s going to sing well and make sure it’s going to be good on your ears.

Tyler Emrick:

There’s always competing objectives. What lever do you want to pull, and what becomes most important to you? What’s important to you now, that might change over the course of the next four or five years or whatever the case may be. So, I always feel like there’s so many competing objectives, as we look at retirees, whether, hey, maybe there’s a tax benefit, maybe there’s a state planning benefit, maybe there’s a lifestyle and income benefit, and not always do they jive.

And sometimes, you’ve really got to decide and make a decision and say, “Hey, what’s going to be most important in this particular situation?” And I think our job, as financial advisors, is to present those, give the financial case, give almost the financial planning case, and then our families can decide the emotional side of it and make the decision that’s best for them. But our job is to present it and give these opportunities and then say, “Hey, the family, do they want to take advantage of it or not?”

Kevin Kroskey:

Yeah. And I would say make it very concrete and clear. So hey, here’s path A. Here’s path B. Here’s what we recommend and why. What’s going to make you feel most comfortable, Mr. And Mrs. Jones?” That sort of thing. And it’s not just comfortable. You got to start with the math, in our view, and then you start with the quantitative, and then you go to the qualitative. I think, if you go the other way around, it just often leads to bad outcomes and poor decision-making.

Walter Storholt:

We want to avoid both of those things, so that’s good. That’s part of the goals, right?

Tyler Emrick:

Yes.

Kevin Kroskey:

Yeah, I think as we wrap up, here, this was good, in my view, just to talk high-level and have some of that inside baseball conversation. But there’s just a lot that’s going on with all the things that we’ve been discussing and a lot more that we haven’t, but just making sure that we understand what a client’s lifestyle is, that we’re measuring that, that we’re making adjustments to it, that we’re aligning the investments to go ahead and produce and preserve that income and that lifestyle, over time. And then, making sure that we’re staying on track, and we don’t have to make big course adjustments, down the road. And then, of course, we’re being tax-smart and having that overlay with everything that we’re doing, but there’s a lot of complexities. There’s a lot of opportunities with all the law changes that we’ve had, as well.

There’s even more for business owners, which we didn’t mention today, but it’s tough. It’s a lot of information for us, and it’s great that we have a good handful of smart, motivated professionals that are working together to make sure that we can do a good job for clients. It’s one of those things, Walt, where the more you know, the more you realize you don’t know. And this will maybe be a good segue into our next episode, but it’s usually those things that you just don’t know what you don’t know, a lot of times, or you think it’s simpler than what it really is before you get into it. So, maybe we’ll set the stage for some stories we’ll share, next time, and hopefully help people understand some of these things that maybe they don’t fully appreciate and can help nudge them, in a polite way, to get the help that they need, whether that’s from us or some other competent and trustworthy professional.

Tyler Emrick:

Yeah. And that’s the way I think about it, too, coming to the year’s end. In my mind, it always goes to almost a checklist. Have these things been accomplished? Have we got in what we needed to? Is there anything that fell through the cracks? And then, as you look to next year, have you adjusted contributions to your retirement plans? Have we changed the income targets? Have we done all these things? And going down and just checking them off, one by one, to ensure that nothing falls through the cracks for end-of-year planning and then certainly starting off the next year on the right foot, to make sure those things that you’re doing are done the right way.

Walter Storholt:

Yeah. Checklists may not be the most exciting thing, but they are effective. And that’s ultimately what’s most important, so-

Tyler Emrick:

As Kevin was talking, Walt, I was sitting here, thinking, is there another word? Is there another word but checklist? But that’s all I could come with, so I guess that’s what we go with.

Walter Storholt:

I think it is what it is, right?

Tyler Emrick:

Yeah.

Walter Storholt:

I’m sure pilots get pretty tired of having to go through the checklist every single time before they take flight, but there’s a reason those checklists are in place, right?

Tyler Emrick:

Mm-hmm.

Walter Storholt:

Making sure nothing gets missed because that’s how important it is. Sounds like it’s similar in the financial planning world and the realm in which you guys operate every day, making sure that not only here at the end of the year, but every day, you’re following the right path, in terms of your planning philosophies and process. And that’s part of what makes True Wealth Design the place to turn to if you have questions or need advice when it comes to investing and managing your portfolio and figuring out what your financial future is going to look like and how to accomplish those goals that you have.

In fact, if you’d like to set up that time to meet with Kevin and Tyler or an experienced member of the True Wealth Design team, you can go to truewealthdesign.com and click on the “Are we right for you?” button, to schedule your 15-minute call with an experienced advisor there on the team. Again, go to truewealthdesign.com and click, “Are we right for you?” Or you can call 855-TWD-PLAN, 855-TWD-PLAN, and we’ll put all the contact info you need in the description of today’s show.

We’re looking forward to the stories on the next episode, as we continue this conversation’s spirit forward. Come back and join us for that one as well. For Kevin and Tyler, I’m Walter. We’ll see you next time, right back here on Retire Smarter.

Disclaimer:

Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.