Taxes In Retirement

033: Taxes in Retirement: Part 1

Oct 16, 2020

Taxes are the single biggest expense that people have in retirement. Everyone wants to have a plan in place to deal with them, but few know how to do it well.

When you retire, paying taxes on Social Security and even on ordinary income can be voluntary, but only if you have the right plan in place. With the national debt rapidly rising and no predictable budget set by Congress for several years in a row, personal planning has gotten more important than ever.

Today, in the first part of a two-part series, we take a look at the state of taxes for retirees right now, why retirees are proving conventional wisdom about taxes wrong all the time, and what the future may hold.

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

  • Why most people don’t need less income when they retire – and aren’t in a much lower tax bracket in retirement, contrary to conventional wisdom. 
  • Why the low taxes brought into effect in 2018 will likely go away in the event of a Biden win. 
  • Why your tax retirement is the most expensive money you can buy – and how to plan accordingly. 

Inspiring Quote

  • “The single largest asset that most people have other than their home is their pre-tax retirement.” – Ed Siddell
  • “Regardless of what politicians tell you, any additional accumulations of debt are basically deferred tax increases.” – David Walker




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 financial shape you’re in now. Taxes, are they going up? Are they going down? Staying the same? And what do we do? This is LeAnne Siddell and here to help us with all of our questions and to give us some guidance to help us stay in the best financial shape possible, the retirement trainer, Ed Siddell. Hi, Ed.


Ed Siddell: Hey, LeAnne, what’s going on? Craziness?


LeAnne Siddell: Ah, it is crazy. 


Ed Siddell: The political seat. Tis the season, right? Politics, you got to love it or not.


LeAnne Siddell: You know, it’s interesting whenever I…


Ed Siddell: Still can’t watch the news.


LeAnne Siddell: Well, and when you say taxes, that’s something that just generates a whole chill up everybody’s spine.


Ed Siddell: You know, earlier today, we meet with a family that just started helping and she made a comment. He made a comment about guarantees and he said, “Well, you know what they say?” She says, “Yes, there’s only two guarantees, and…” 


LeAnne Siddell: Death and taxes. 


Ed Siddell: Yeah. And then she said, “Well, Aren’t they the same?”


LeAnne Siddell: Oh, that’s good. That’s very good. 


Ed Siddell: Oh yeah. It was like, hey, boom, oh my god. I’m going to steal that one. That one’s pretty good. 


LeAnne Siddell: That is. So, is this something that we need to start worrying? You know, I don’t even like the way I phrased that question because worry does… 


Ed Siddell: Plan for it, right? You know, I mean, those are the things that we just need to plan for. Here’s the problem. There’s a whole lot of things. So, number one, this is the political free zone, if you will, because it’s all about the math. It’s always all about the math. And so, we’re going to approach this more from a Finance 101, Econ 101, Tax 101 and just kind of lay out the groundwork because people need to understand that, well, so let me ask you this. What is the single biggest expense that people have in retirement? 


LeAnne Siddell: Taxes? 


Ed Siddell: It is. Well, you knew the answer so you’re cheating. Yeah. You’re looking at the answer sheet. Everyone always says healthcare and that is expensive but taxes. And most people don’t realize that when you retire, paying taxes on Social Security is completely voluntary. Actually, depending on pensions and other things, but generally speaking, paying taxes in retirement on ordinary income can also be voluntary. So, having the plan in place is so very important and that’s why people need to plan. It’s just planning, planning, planning. We say it all the time, but it’s imperative. When we’re helping families and we’re putting together their retirement fitness plan, I always tell people, my job is to keep them safe. And part of that is in how we measure wealth. It’s not what you make, it’s not what you save, it’s what you get to keep at the end of the day. So, that’s why step three in our five-step process is it’s all about the taxes. We don’t do the actual tax planning as far as the tax returns but quarterbacking and working with the CPAs and using our tax planning and financial planning software, it really helps lay out the groundwork to educate the families that we’re helping so that they know what to do next.


LeAnne Siddell: Got you. That’s kind of the next direction I was going to have you go was just to talk about what your crystal ball says. This is not something that I think that you need to have glasses on for as far as knowing whether taxes are going up or down. It kind of looks like that’s not something that we need to have a crystal ball for.


Ed Siddell: Yeah. You’re right. Okay. So, let’s go back and kind of lay the groundwork a little bit over the last 20 years, and we’ll kind of lead in to where we’re at today because it’s such a stark difference but yet the attitudes were exactly the same. And what I mean by that is so I’m a very, very young 21-year-old. No, I’m kidding. But we’ve been doing this for a long time. Most people, we’ve always been told to put money away pre-tax, okay, get the deduction now, and that’s what pretax is. So, you get the deduction now and it grows tax-deferred, and when it comes back out, you pay ordinary income tax on what you put in as well as all the gains. So, if you start off with $100,000, $50,000, whatever that paycheck is, let’s just say it’s 100 and we’re going to use round numbers, make the math easy, and you put away $10,000 into your 401(k) pretax. Your W2 is not going to show 100,000. It’s going to show 90,000. So, it actually takes it right off the top. That is what we’ve always been told. So, I call that conventional financial wisdom because that’s what we’re told to do and the reason is it’s the best way to save for retirement. You know, we’re going to need less income when we retire. Wrong. And you’re going to be in a much lower tax bracket when you retire. Wrong, okay, typically. And it’s a different reality today.


LeAnne Siddell: Well, it’s kind of a moving target. How do you say that when our world is so much different than when we were in our 20s? 


Ed Siddell: Yeah. It is. So, taxes, it’s that legislative risk. So, that’s why you need to have that plan and be very pragmatic when you’re putting your financial plans together. Chances are you’re not going to be in a lower tax bracket lifestyle, especially right after you retire, especially with the families that we’re helping and working with. They’ve got that bucket list early on. They’re going to do a lot of traveling. So, a lot of times we’re seeing on average, spending goes up anywhere from 8% to 12% for the first seven, eight years after retirement, and then it goes down, and then it comes back up, again, because of health care issues. And as far as deferring the taxes and the money coming out being in a lower tax bracket, it’s that legislative risk. Right now, and again, political free zone right now whether you like it or not, we’re in all-time historical low tax rates. I mean, we really are when you add in the standard deduction and everything else, which we’ll go through. 


But really, laying out the groundwork is so important because starting in 2018, the standard deduction for single filers under the age of 65 more than doubled to 12,000. The standard deduction for married filing jointly for individuals under the age of 65, more than doubled to 24,000. Now, if you’re over the age of 65, as a single filer for this year, it’s just shy of 14,000. And if you’re married filing jointly and you’re both over the 65 and older, you’re pushing $27,000 as the standard deduction. So, that’s a huge chunk because most folks that are entering that next phase in their life as they’re getting ready to retire in retirement, they don’t have a whole lot of debt so they can’t itemize. So, that’s a huge, huge tax savings right there. Okay. When we look at the biggest expenses from 2018, 2019, we don’t know what it is for this year, the four biggest expenses in this order, Social Security, Medicare, Medicaid, and interest on the national debt. And the expectation, so this was from the CBO, Congressional Budgetary Office, and this is in 2008. They said that by 2020, these four categories will devour $0.92 of every single tax dollar. Think about that, those four things. So, that means that there’s $0.06 leftover to fund, or I’m sorry, $0.08 leftover, simple math.


LeAnne Siddell: I was just going to say don’t question your financial advisor. 


Ed Siddell: You know, to fund things like border security, NASA, the Army Air Force, the armed forces, FEMA, the CDC Center for Disease Control, food stamps, Congress. It’s debatable whether or not we want to fund them, IRS, fish and wildlife, the Peace Corps, and the list goes on and on. So, $0.08 of every dollar. So, that’s what it was anticipated in 2018 for this year. So, obviously, we won’t know. We don’t have a budget. We haven’t had a budget in years because of Congress. So, we don’t really know but we do know that we added over $3.5 trillion dollars to the national debt. As a matter of fact, while we’re talking, I’m actually going to pull up the national debt clock.


LeAnne Siddell: Well, with COVID, I am sure that has created quite a jump. 


Ed Siddell: Oh, it has. 


LeAnne Siddell: And that’s without the second supposed stimulus that we were supposed to see. 


Ed Siddell: Oh, absolutely. Absolutely. So, the national debt as of 3:19 PM on October 13, 2020 is $27 trillion, actually over. And so, the debt per citizen is $81,866, and the debt to cover the national debt per taxpayer is $216,772. Ouch. 


LeAnne Siddell: Ouch. 


Ed Siddell: Okay. So, when we asked that question, “Are taxes going up or going down?” again, so you’ve got one side of the country shut down, not because we wanted to, but because the government told us that we had to. So, you had businesses shut down, restaurants. Some will never reopen again. It put a lot of people in financial harm, financial peril. So, they had to do this disaster relief under the CARES Act, but yet at the same time, it added $3.5 trillion to the national debt and that was the first go around, and there’s probably going to be a second go around. All right. So, that’s the current administration. The candidate to the democratic, Biden, and again, I’m just repeating what they’re saying, taxes are going up. So, depending on which you’re listening to, it’s either anybody over 400,000 but they said several times that as soon as he gets an office, he’s going to do away with this current tax cut. So, it’s automatically going to go back to 2017 which means taxes are going up for everybody. So, one way or another taxes have to go up. 


And it’s not me just saying this. So, David Walker was the Comptroller General for the US, kind of like the CPA for the country if you will 10 years under both Bush and Clinton. So, he’s kind of agnostic when it comes to politics. And he still sits on the board for the Social Security Administration. You know, he’s the real deal and he said, and this is important, “Regardless of what politicians tell you, any additional accumulations of debt are basically deferred taxes.” Do you know when he said that? 2009. That was 2009. Okay. That was when the national debt was still about $9 trillion, which was a lot. And so, when Bush took it over, it was 5 trillion. Alright. So, under Bush for over eight years, he almost doubled it, under Obama, he doubled it, and now it’s that continual deficit spending that we see over and over and over again. And that’s my biggest fear being a fiscal conservative is how are we going to get this under control? Because it’s not just going to impact the families that we’re helping in you and me, but our kids and our grandkids because eventually, someone’s got to pay that bill. It’s got to get paid. 


When we look at history right now, so this current tax code is set to go away or sunset, if you will, December 31, 2025. However, we have this election coming. And so, again, this is a political free zone and it’s just about the math. It’s all about the math but there’s a reality and the election is going to have an outcome on our retirement planning, on our retirement savings, and our cash flow, because you hear me say it all the time, as we’re teaching people and helping families, retirement is all about cash flow. And so, if you have to pay more and more out of your pocket to cover taxes, that means there’s less and less for you to be able to maintain your lifestyle.


LeAnne Siddell: So, let’s move to what’s the next step? What do we do?


Ed Siddell: So, what we’re doing, we’re helping a lot of families because even though under the CARES Act, there’s no required minimum distributions for this year but I tell everybody, when it comes to retirement planning, especially when it comes to taxes there’s two magical ages. So, the first age is 59 ½ and the second age because when I’m teaching these classes, I always ask everybody and you have half the group says 70 ½ and the other half says 72, and I’m like, this is why I love this question. Everyone’s right because the SECURE Act that was passed effective January 1, 2020 this year, if you are 70 ½ before, then you have to continue taking required minimum distributions. So, December 31 of last year or earlier, you can’t stop but if you didn’t turn 70 ½ until this year, all right, then you can wait until the age of 72. So, I call it that sweet spot. We’re going to wind up having to do this in two episodes.


LeAnne Siddell: Yep, definitely.


Ed Siddell: So, there’s a lot of planning that can be done and we’ll get into that in more detail in the next episode but when we’re helping people, the software that we use, it really does narrow it down based on your situation, the amount of assets that you have pretax because think about it, the single largest asset that most people have other than their home is their tax retirement. 


LeAnne Siddell: It’s their pretax.


Ed Siddell: It is. And I tell everybody all the time, that is the most expensive money you can buy. It really is. And it affects everything that you do. And so, being able to get that under control, taking advantage of the current tax code. So, even though we’ve met with everybody a couple of times this year and talked with them and we’ve updated their plans, one of the things that we’re doing is we’re already scheduling everybody for right after the election to I don’t want to say right after because we don’t know when it’s going to be resolved, but later in November and December so that we can come up with our tax plan as far as the Roth conversions. Because that Roth converting that so a Roth is, we talked about pretax, right, where you put the money in, you’re getting a deduction now and it comes out and you pay ordinary income on the original contribution and all the growth. In a Roth is you’re not getting the deduction now. I think the example that I used in the beginning of the show was using $100,000, you put in 10,000, your W2 is now 90,000. 


Well, with a Roth, if you put in 10,000, it’s still $100,000. So, you’re putting in that money after tax, you’re already paying the tax on it but it’s going to grow tax-deferred and when it comes out, it’s tax-free. So, I use this saying all the time, “Would you rather pay tax on the seed or the harvest?” And the example that I use in class is would you rather pay taxes on a $10,000 bag of seed that plants 100 acres that can yield $100,000 in revenue or pay tax on $100,000 in revenue? And it’s not a trick question. Because a lot of times when I say people look at me, like, “We know it’s really not a trick question.” Yeah, you want to pay taxes on the $10,000. So, that’s why having that plan is so important.


LeAnne Siddell: Well, that’s what I was coming to next. So, how can people find out what they need to do to save on their taxes?


Ed Siddell: You know, give us a call. No cost. No obligation. I really want to educate people, help people out. We’ll put together the plan, the retirement fitness plan. We’ll really concentrate on step number three, which are the taxes to see if you’re a candidate for Roth conversions and look at some other areas that you may be able to start planning for long term because of making sure that you have the right positive impacts for your cash flow in retirement.


LeAnne Siddell: So, if you want to give us a call, the office number is 614-526-4118 or you can send Ed an email at or you can reach us through the website at Thanks, Ed. 


Ed Siddell: Thanks, LeAnne.




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