Part I: 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? In this 2 part series, Troy Sharpe discusses efficient tax strategies to keep your portfolio safe from heavy taxes!
60 with 1.5 Million:
Troy Sharpe: You’re 60, with $1.5 million inside your IRA. Do you have any idea how bad your tax problem is? In this video, we’re going to go through some of the challenges that you have, and in part two, we’re going to show you some potential solutions.
Troy: 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. First, I want to lay some groundwork here for this case study. We have John and Jane, who are 60 years old, with 1.5 million inside the retirement account. Inside the IRA. Rolled over from a 401(k). Social security, they’re going to take– We’ll look at 62 and 67, but you’ll see that there’s not a big difference, from a tax planning perspective, of when they take social security. Then, they want to spend about $60,000 a year in retirement. Of course, increasing with inflation.
The first thing that sticks out here, we’re going to look at, this is the conventional wisdom. This is taking social security early, at 62, because a lot of people say, “I’m retiring, I don’t have an income, I may not live that long, let’s just go ahead and turn social security on because that means we withdraw less from our retirement accounts.” Pretty common thought process. I’m sure most of you have had that, those thoughts if you’re in this stage of pre-retirement. Comparing just over here now, so this is conventional wisdom still, but taking social security at full retirement age.
A couple things I want to point out. There’s only 1.5 million inside the IRA. There’s no money held outside in taxable accounts. We see the total taxes, over a 30 year retirement, from 60, with life expectancy to 90, spending a million dollars almost in taxes. Over here, we do cross over a million dollars in taxes. This is not assuming a large rate of return. We’re not looking at 9%, 10%, 11% average rate of return here. This is right around about 6%, give or take, a little bit in that range.
The more growth we have, if you’re comfortable with the stock market, the more taxes you will pay over the course of retirement, because those accounts grow more and you’re forced to start taking required distributions out at 72. There’s really not a lot to look at here. This is why I’m not shocked because I’ve seen people do this for years, where they defer their retirement accounts as long as possible, and then take out what they need along with taking social security soon. There’s really not a lot of planning or strategy, if that’s the case. It’s just a choice that you’re going down that road.
I want to show you here. If we follow the conventional wisdom advice, which financial advisors in this country have been recommending for decades. First, here’s the social security combined, husband and wife, at about 36,000. Let me make this a little bit bigger here. Then over here, if we defer out, 56,000. We do see a higher social security obviously, but look at the estimated taxes paid. We could get away with paying very little taxes in the beginning. As we start to go out, I want you to look to see how big this tax problem actually becomes.
That’s how we get to about a million, and this is just going to 90. Over here, same difference. We can pay very minimal taxes in the beginning, and then as we go out, we have a pretty big tax problem down the road. Because we’re not taking a lot of money out of the accounts, relatively speaking, we do see the account balances grow. Some people say, “Hey, I’m fine with that if that’s the case.” It’s simple, it’s easy, but it’s not efficient. It’s not optimal. That’s not where we want you to be. We want you to be in a much more efficient retirement structure, so you’re keeping more of your money, your accounts have the potential to grow more, and you pay less tax over the course of retirement.
Now, some of you may be wondering, “Where is that tax coming from? If I’m only spending $60,000 a year, why am I paying so much in tax?? That’s a great question. The problem is, once you hit age 72, you have required minimum distributions here. The blue is taking social security early, the green is taking social security a little bit later. If you take social security later, that means you had to pull more from your retirement accounts from 60 to 67 or 62 to 67, and therefore since you’ve pulled more out, your balances are lower and your required distributions are lower. That’s why the green’s a little bit lower than the blue here.
Over here on the y-axis, we see exactly how much money that is that you have to pull out of these accounts. That’s why you’re paying so much in tax, if you leave all that money inside the IRA. Once you turn social security on, if you wait till 67 or even 62, that’s taking or providing you a significant amount of income relative to the overall $60,000 spending goal. We don’t have to take much out of the retirement account, it balloons, it grows, grows, grows, grows, which makes you feel secure, but you’re really setting yourself up for this huge tax trap down the road. We see RMDs get to be $100,000, $150,000, $200,000.
Most of you aren’t going to be spending $200,000, $250,000 when you’re 85, 86 years old, but without tax planning, you have this big problem. That’s what creates these massive amounts of taxes later in life. This is why tax planning is such a critical step in the retirement success plan here at Oak Harvest Financial Group. You now see how bad, how significant your tax problem could be if you do nothing whatsoever. If you want to learn how to save taxes potentially, in retirement, click on the link above, or just wait to the end screen, so the next video, and click on it so the next video plays, where we’re going to show you some potential solutions to really drop this tax liability.