smart tax strategies

042: Smart Tax Strategies for Individuals Entering Retirement

Mar 19, 2021

For years, the conventional wisdom has been to grow your assets tax-deferred while you work, then pay taxes on that money when you’ve entered a lower tax bracket.

Unfortunately, that wisdom has gone out the window. Why? It’s simple: America’s massive unfunded liabilities in Social Security, Medicare, Medicaid, and the interest on the national debt. Taxes are all but guaranteed to go up in the years to come, and this makes having a real tax strategy – and not just a tax plan – more important than ever before.

In this episode, we discuss strategies for people nearing retirement to help pay fewer (or even no) taxes in retirement, protect themselves from rising taxes, and better understand why our tax code is all but guaranteed to change after 2025.

Here are just a handful of the things that we'll discuss:

  • Why the conventional wisdom of growing tax-deferred assets and paying taxes when you’re in a lower bracket has gone out the window.
  • Why interest on our national debt is likely to lead to significant tax increases in the years to come.
  • Why it’s so important to avoid taking the 50% penalty by failing to take your required minimum distributions.
  • How to use Roth conversions between the ages of 59 ½ and 72 to avoid paying extra premiums on Medicare B, C, and D.
  • Why tax preparation and tax planning are not the same thing.
  • What may happen when our current tax laws sunset in 2025 – and why this makes planning right now even more important.

Inspiring Quote

  • “Tax planning isn’t writing a check for $7,000 in your IRA on tax day. That’s better than nothing, but planning is looking at your previous tax years and going all the
    way forward until this tax code ends so that you can actually put together a plan.” –
    Ed Siddell
  • “When things go bad in life, you need to know what to do next. You need to take all the emotion out of the decision-making process and be comfortable knowing, no matter the situation, that you can answer the questions that we all have.” – Ed Siddell


LeAnne Siddell: It’s The Retirement Trainer with Ed Siddell, a podcast about finding ways to help you become financially fit for your future no matter what shape you’re in now. Last week, Ed did a webinar on Smart Retirement Tax. This is a webinar that focused on smart strategies for those individuals entering into retirement. Is it possible to position your assets to pay fewer or no taxes in retirement? Some say yes, some say I don’t know.


Ed Siddell: I say yes.


LeAnne Siddell: How do you protect yourself from rising taxes? And what is this all about 2025? Ed Siddell is here to help us untangle the complicated nonsense that taxes sometimes can be.


Ed Siddell: The web of craziness, right? Yeah, and it is. Alright, so let’s set the stage first. So, we have debt, okay. Our national debt has increased significantly, obviously, 2020, and through 2021, we just added another almost $6 trillion. So, we’re pushing $30 trillion in national debt. And that doesn’t even include the unfunded liabilities. So, what are unfunded liabilities? Businesses, business owners like us, we have one set of books, Uncle Sam has two. The one that they report on, and then the unfunded liability. So, an unfunded liability is a mortgage. So, think of it that way.


So, most people, if you buy a $250,000 home, $350,000, whatever it is, you’re getting a mortgage for 60%, 70%, 80% of that because you don’t have the full amount to pay for it in cash. So, you owe that to the bank, that’s an unfunded liability, because you don’t have the money sitting there to cover. That makes sense?


LeAnne Siddell: Yep.


Ed Siddell: So, the unfunded liabilities for America, the US, guess what they are?


LeAnne Siddell: I would have to say Social Security.


Ed Siddell: Yes. Social Security, ding, ding, ding, ding.


LeAnne Siddell: Pensions, government pensions?


Ed Siddell: Yeah, government pensions are definitely up there now, but.


LeAnne Siddell: What about Medicare?


Ed Siddell: Medicare, yeah.


LeAnne Siddell: Bang.


Ed Siddell: Right. And so, really, those are the three biggest, okay? Social Security, Medicare, and government pensions. And those are really, really big numbers. And it used to be, we were always taught growing up, get a deduction now, put money away pre-tax and your IRA, 401(k), 403(b), 457, let it grow tax deferred, and then take it out and pay the tax on it, then because when you retire, you’re not going to be making as much money, you’re going to be in a lower tax bracket. And so, it’s going to wind up saving you money long term. Well, that’s conventional financial wisdom. Well, that’s gone out the window.


And the reason I say that is– let’s go all the way back to 2008. So, 2008, David Walker, so he was the US Comptroller General, kind of like the CPA for the country, if you will, under both Bush and Clinton. So, he’s agnostic when it comes to politics. And he said that, regardless of what politicians tell you, any additional accumulations of debt are basically deferred tax increases. That is so very important.


LeAnne Siddell: Yes.


Ed Siddell: And when did he say that? He said that in 2008, okay. That is really important, because that was also the same time that the CBO, Congressional Budgetary Office, came out with a quote that said, “If Social Security, Medicare, and Medicaid go and change, the rate for the lowest tax bracket would have to increase from 10% to 25%. The tax rate on incomes in the current 25% tax bracket would have to increase to 63%. And the tax rate of the highest tax bracket would be raised from 35% to 88%.” Think about that. Now, what was the national debt back then?


LeAnne Siddell: Oh, my gosh, was it somewhere in the teens? I don’t know.


Ed Siddell: No. Are you ready? It was right at $8 trillion.


LeAnne Siddell: Oh my gosh.


Ed Siddell: $8 trillion, okay. Now, that’s important. Because when I teach classes, and we talk about this all the time, people say, “Oh, my guys, that’ll never happen.” It’s never going to get to that point, it already did. Alright, I mean, those were the tax rates in the 60s, from ‘60 to ‘63. So, we were already there once. And when we look at what the national debt is right now, so we’re in the spring of 2021, the current administration just signed another $1.9 trillion, that’s under Biden. Under Trump last year, it was $3 trillion. And so, we’re pushing $30 trillion in 2021. So, we’re looking at about 13 years or 12 years, where we went from $8 trillion to $30 trillion. So, you tell me which way your tax is going, up or down.


LeAnne Siddell: Yeah, but we become so callous to watching that number climb. I don’t think that the average everyday person that is not an economist, like they’re not even digesting the fact that that number has gotten so high, and what we need to do to get that paid off because, again, it is something where people see that as not part of their overall responsibility. At least, it just doesn’t seem to even affect.


Ed Siddell: It’s not computing.


LeAnne Siddell: It doesn’t even seem to affect, right?


Ed Siddell: Yeah. And if we really look at it, we break it down just to put everything in perspective. The America’s biggest expenses, we already talked about the unfunded liability. So, you have Social Security, that’s number one. Number two is Medicare. Number three is Medicaid. And number four is interest on the national debt. Now, okay, so that’s number four. That’s a big deal, because we’re interest rates right now.


LeAnne Siddell: They’re basically at zero.


Ed Siddell: Zero, thank goodness. Okay. So, if rates go up 1% or 2% or 3%, the interest that we’re carrying on the national debt is going to really skyrocket to number one. So, right now, we’re paying approximately 78 cents of every dollar. Well, this is from 2018. So, the reports, we haven’t gotten those, though, it’s about two years behind. So, 2018, 78 cents of every tax dollar was covering those four items. They were estimating by 2021, by this year, alright, there is only going to be eight cents of every tax dollar left to fund every other program, Border Security, Disaster Relief, IRS. I’ve been thinking about that. NASA, Army, Air Force, Navy, FEMA, the CDC, food stamps, Coast Guard, State Department, Congress, well, yeah, I think they shouldn’t be paid anyways, because I don’t work, FBI, CIA, and the list goes on and on. So, at some point, right now, I mean, taxes are going to have to go up.


LeAnne Siddell: Yeah.


Ed Siddell: Okay. So, how do we do that?


LeAnne Siddell: And what does that look like as far as those that are entering into retirement, having some kind of plan and play?


Ed Siddell: Yeah. And that’s the whole thing. We talk about the magical ages when it comes to retirement. So, the first magical age is 59 and a half. Why is that a magical age? Because that’s the earliest that you can start withdrawing on your pre-tax retirement without the early withdrawal penalty of 10%. Okay. The second magical age, there’s actually two now, it used to be 70 and a half until they passed the Secure Act, which may be a topic for another day. That’s when Uncle Sam says, “Show me the money. You’ve deferred your taxes long enough, I want my money.”


And so, they have a scheduled payout that each and every year, at 70 and a half, it is about 3.65%. If you are not 70 and a half, prior to January 1, 2020, now, your RMDs, required minimum distributions, don’t have to come out until you’re age 72, alright. And then it jumps to just shy of about 4%. So, we’ll just say it’s about 4%, but the older you are, the more it goes up. And it’s based on your pre-tax retirement account balance of December 31 of the previous year. Now, in 2020, there was a moratorium on all RMDs, required minimum distributions, so none of them had to be made or taken, but if you don’t take that required minimum distribution, guess what the penalty is?


LeAnne Siddell: 50%.


Ed Siddell: 50, the largest penalty in the US tax code, and it’s on seniors.


LeAnne Siddell: Yeah.


Ed Siddell: I mean, how crazy is that? So, when you’re looking at the RMDs, because you have to take that money out, whether you want to or not, whether you need to or not, you have to pull it out. And when we’re meeting with– met with a young lady, widowed, and we’re looking at the RMDs that she has to take out. And now all of a sudden, it creates this huge spike in taxes. And I’m not just talking about an ordinary income because now, 85% of her Social Security is going to be taxed. And now, she’s subject to the means-based testing, which is you can’t really call or you’re not allowed to call it a tax, it’s a premium adjustment charge in your Medicare B, C, and D. Basically, you’re being penalized because you save the wrong way.


And so, now, 85% of Social Security is being taxed, you’re paying extra on your premiums for Medicare B, C, and D, but if you plan the right way, and that sweet spot between 59 and a half and 72, you can get rid of those by doing Roth conversions. And maybe, even thinking outside the box, this young lady had charitable inclinations, she gives about $15,000 a year away to her church and a local rescue charity. And what we had looked at, because she had to take about $20,000 a year out of her pre-tax retirement, and we decided to do a qualified charitable distribution, and it came directly out of her IRA to fund the church and to the charity, so it never touched her hands. And because it never touched her hands, she never got taxed on it, and it didn’t count against her income, but the IRS still qualified it as part of her required minimum distribution. Now, she did pull out the other $5,000, which she got taxed on.


So, what did that do? Just by kind of changing things and rearranging the puzzle, it limited her taxes on our Social Security and eliminated the taxes on her Medicare B, C, and D. Now, going forward, what we help our clients do is decide when they want to pay taxes and how much they want to pay taxes.


LeAnne Siddell: Well, that’s what I was going to reference before. We’re talking one thing is about tax planning, and the other thing is referencing, just preparing your taxes. You make a big point, everybody is involved in preparing their taxes, but that is not part of tax planning. And that is kind of one of those key things that I think you mentioned throughout the webinar, and in several of your other seminars that you’ve done is to focus on being proactive about what that looks like, planning your taxes, how do those puzzle pieces fit together?


Ed Siddell: Yeah, and tax planning isn’t on tax day, writing a check for $7,000 in your IRA, that’s better than nothing, but tax planning is looking at your previous tax years and going all the way forward until this tax code ends, so that you can actually put together a plan. So, you know each and every year, how much you can convert into a Roth. Look, Uncle Sam is getting their money, right? You just have to decide when you want to pay it, alright, and how much you want to pay. Do it on your schedule, not theirs, and do it while taxes are low because right now, taxes are lower, and take that money out. And this has a direct effect on the Secure Act, too, because of the Secure Act, what it did was anytime Uncle Sam throws us a bone, they always take something away.


The bone that they gave us was, yeah, we were able to delay our required minimum distributions from 70 and a half to 72, an extra 18 months, but what they took away was our ability to, when we pass on our IRAs to our non-spouses, so for you and me, if I were to pass away first and leave you my IRA, it’s yours.


LeAnne Siddell: It’s mine.


Ed Siddell: And then you can take it out over your lifetime, but if we both pass away, we leave it to our kids. It used to be you could stretch it out and would be called a stretch IRA. You could stretch it out over your lifetime, and that’s important because it would continue to grow, we keep taxes low, but now under the Secure Act, Uncle Sam said, “No, no, no, nope, can’t do that anymore. You have to take it out by the end of 10 years.” So, if you have children, grandchildren that are income producing, and you know it’s saving 500,000 in a pre-tax or a million dollars, it’s not that hard to do anymore. Now, all of a sudden, that gets added to the top line on their income, and it could throw them into a much higher tax bracket. So, they’re going to wind up getting pennies on the dollar.


But if you convert that into a Roth, a couple things happen, number one, there’s no required minimum distribution because you’re paying in the taxes now at a much lower rate. Okay. The other thing is, is that it’s going to continue to grow tax deferred, and when all that money comes out, it’s 100% tax free, and because when it comes out, it’s tax free, when you pass it on to your kids and grandkids or non-spouse, the Secure Act doesn’t come into play, they do not have to take out those required minimum distributions either. So, from a planning standpoint, that’s a pretty important tool.


LeAnne Siddell: Absolutely. So, 2025, still the magical age that we’re looking at right now is for when those new tax laws will sunset at that stage, but what we don’t know is with a new administration, those deadlines could change, correct?


Ed Siddell: Yeah. I mean, there is that legislative risk. And that’s why doing the planning is so important because you want to do it, so that it fits your schedule, so that you know what those taxes are, and it’s part of your overall planning process.


LeAnne Siddell: Well, I think you’re going right back to where we always go back to, and that is the retirement fitness plan, bringing things back into a plan. We need a plan, whether it’s tax planning or where your income is going to come from, your cash flow, all of those things revert back to the retirement fitness plan.


Ed Siddell: Yep, because when things go bad in life, as they sometimes do, which we’ve all experienced here over the last year, year and a half, you need to know what to do next, you need to take all the emotion out of the decision-making process and be comfortable, and knowing no matter the situation that answer those questions that we all have.


LeAnne Siddell: That’s right.


Ed Siddell: Yeah, I’m going to be okay.


LeAnne Siddell: So, if you have questions, or if you would like to get some time on the phone with Ed, our phone number here at the office is 614-526-4118. Check us out on our website at, or you can email us at Thanks, Ed.


Ed Siddell: Thanks, Leanne.




Get your complimentary copy of The Roadmap to Retirement Income