I’m 60 with $1.5 Million in My IRA How do I Pay Less Taxes – Part 2: Preventing Retirement Tax Trap

Part 2: I’m 60 with 1.5 Million in my IRA, how bad are my taxes, and how can I pay fewer taxes? What tax planning strategies should I use to keep my retirement portfolio safe from high tax rates? This is part 2 of this retirement planning scenario with Troy Sharpe where he presents the best tax strategies to keep your retirement portfolio safe!

60 with 1.5 Million:

Troy Sharpe: You’re 60 with $1.5 million inside your IRA, and you want to know how to pay less tax. Well, in this video, we’re going to show you some potential solutions to save you some big bucks in retirement. Now, if you haven’t watched the first video, click right above here, go watch that, then come back and watch this one so you can see how bad the actual problem is inside your retirement account if you don’t do any type of tax planning whatsoever.

Troy Sharpe: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, a certified financial planner professional, host of The Retirement Income Show, and also a certified tax specialist. Okay, in this video, I’m going to show you two potential directions we could go and really there are hundreds of directions but I want to show you the two that I like the most here. We have all this money inside the retirement account, $1.5 million.

Now, you could have $800,000, maybe $900,000, maybe $2 million, maybe $3 million, whatever that number is, there’s some important things to consider here. This is a case study. How much do you spend? People who have less money inside a retirement account and spend a little bit higher, it may not make sense to do the Roth conversion strategy, but if you spend a relatively small amount, especially when you take into account your Social Security, the more money you have inside an IRA, the bigger your tax problem becomes, and I’ll go through this and explain it, but if you watch the first video, I laid some pretty good groundwork there of what happens when you allow those retirement accounts to [unintelligible 00:01:28].

Okay, this is like I was talking to you and you’re a client right now, this is kind of what we would go through to show this is one of the top-ranked strategies for you to consider. Now, every single year, this can change. If we have a really good year in the market and the accounts are up 30%, the problem is bigger, so we need to shift the tax strategy. In a year like this where the markets are down, we not only change the timing of when we do these conversions because when the markets are down, you can convert the same dollar amount, which is a larger percentage of your overall retirement portfolio.

My point here is that the strategy changes year to year typically how much we’re doing, when we’re doing it. Just trying to get across the educational concept of some potential solutions to this big tax problem that you have inside the retirement account, if that’s where most of your money is. Even if you have a lot of money outside and you still have a large retirement account balance, you still have this problem. Okay, first and foremost, this is one of the top-ranked strategies.

If you remember from the last video, this is taking Social Security at 67, but real quick, we see not only do we have 381,000 in estimated taxes we’re going to pay versus the 1 million if we do absolutely nothing, so significant savings already. We have higher ending balances as well at 6.1 versus 5.5. Now, when we’re extrapolating out over 30 years, again, the strategy is going to change. We have to make some assumptions here, but it’s very, very clear that if we do nothing, we’re going to pay a lot more in taxes than if we have a tax plan. Again, this is why tax planning is such a critical part of the Retirement Success Plan that we put in place here for clients at Oak Harvest Financial Group.

Now, before I show you exactly what we’re doing here, and again, take this with a grain of salt because the strategy can change year to year depending on so many various factors, but the first thing that we’re seeing take place, the blue, is implementing a Roth conversion strategy targeting an effective tax rate of up to about 17%, so required minimum distributions at age 72 when you’re forced to start taking money out of those accounts.

The green shows us what those RMDs are if we do nothing, $100,000, $125,000, $150,000, up to $200,000. Here is your blue. This is targeting an effective tax rate of around 17%, so we eliminate the massive RMD problem that we have. The optimal strategy is to defer Social Security until age 70 where we have the same numbers from last video, but we see how much more income this is. It jumps up to 73.

Now, in the real world, we may tentatively go down this path if you’re age 60, but we may end up deciding to take Social Security at a different age. Just want to again do the comparison. Hopefully that light bulb moment should come on at some point if this is the first time you’re seeing these videos, where, “Wow, we have a lot of decisions to make,” and they all interact with one another, and they all impact how secure you are in retirement. This one, what we’re doing is we’re stretching out these Roth conversions over a series of years, which is a kind of nice balance there between being too aggressive and getting it done over an extended period of time, but again, this can change.

We see we’re paying more taxes here in the beginning versus what we could be doing over here, but I want to point out that Trump tax cuts expire at the end of 2025. I want you to be aware of this. They go back to the 2017 levels. In 2017, you can pull out up to 153,000 before you leave the 25% bracket. Right now and through 2025, you can pull out up to 340,000 before you leave the 24% bracket, so it’s not the percentage changes that will have the biggest impact when the Trump tax cuts expire, it’s the compression of the brackets which is going to impact most people because here you go from 25 to 28 into the 30s much more rapidly at smaller income thresholds.

My point with that is why pay less tax in this time where these brackets are much, much wider when if you simply defer it out, you’re going to have to take the money out because of the required minimum distributions, but you’re going to be in a compressed income bracket because of the tax code. We see here with an extended version, we’re spreading the tax liability out. Then we get into very, very minimal taxes versus over here, we’re just simply kicking the can down the road, we’re not solving the problem, we’re simply kicking the can down the road.

Okay, now I want to show you the alternative too. Remember, there are literally hundreds but possibly a dozen or so that are highly competitive from a mathematical analysis standpoint, and these things change annually based on performance of the accounts, health conditions, goals changing.

I want to show you, instead of targeting the effective tax rate of around 17%, here we’re saying, “Okay, what if we just go up to the 24% bracket?” We want to expedite these conversions because we don’t want to wait until see what happens in the future with potential tax changes. We really don’t want to extend it out. We would rather just go ahead and bite the bullet, get it done, and get into a much more advantageous tax position with our retirement accounts. Here we’re targeting the 24% bracket. We see, yes, we’re paying taxes, it’s about 70,000 a year in taxes; for four years, 280 grand, then we have very, very minimal taxes, and we are basically in a tax-free retirement.

All this Social Security plus any other withdrawals we’re taking from those Roth IRAs, we’re in a 100% income tax-free environment. A lot of you don’t understand the power of Social Security if you’ve done tax planning properly with the rest of the accounts. I guarantee you, if I walked up to 10 people on the streets, that old Jay Leno man in the street thing, and said, “Do you know, if properly planned for, you could have $80,000 of Social Security and not pay a single dime in tax?” Most people would say, “No, you’re crazy, that’s not possible.”

Well, it is possible if you have a Social Security and income strategy along with a tax strategy we call it the Retirement Success Plan here at Oak Harvest Financial Group, you can very simply do that. Again, would you rather be in the 0% tax bracket or just simply kick the can down the road over here? The choice is really up to you. We need to go through these numbers, we need to do the analysis, we need to understand your personal situation, and then start to craft a custom plan to help you pay less tax in retirement.
I hope you enjoyed this two-part series and you learned about Social Security and taxes in retirement. Share this video with a friend or family member. Of course, if you want to continue to receive content and be notified, subscribe to the channel and hit that little bell icon.