Oak Harvest Retirement Process – Step 3 – Tax Planning

Troy Sharpe: What if you could save between $500,000 to $1 million in taxes throughout retirement? Step 3 of the Oak Harvest Oak Harvest Retirement process, Tax Planning, can show you how to do just that.


Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) and host of The Retirement  Income Show. Most advisors throughout the past 10, 20 years in this country have recommended that you follow conventional wisdom when it comes to distributing money from your  financial portfolio in retirement. Conventional wisdom is drawing from our savings accounts first, our nonretirement accounts first in retirement, while we defer and take advantage  of the tax-deferred nature of our retirement accounts and not take money from that.

What we found after sitting with thousands and thousands of families in doing this tax analysis and income analysis and investment  analysis, this is in about 80% to 90% of the cases that we analyzed, the absolute wrong way to take retirement distributions from  your portfolio. One of the big things we need to be looking at is taxes in retirement.

Here, we have a tax case study of the couple that I did in the last  video in this series, Step 2 of the Retirement process, Income Planning. Here’s Kevin and Nicole. They both want to retire in about five years. He’ll be 65, and she’ll be 60. They have a little  over $1 million saved for retirement. This is the conventional wisdom strategy right here.

If they follow the conventional wisdom strategy, total taxes  estimated to be paid in retirement, about $1.5 million, versus the proper tax conversion strategy, looking at Roth conversions,  about $515,000 in total taxes paid in retirement. That’s $1 million in potential savings by not following the conventional wisdom advice that so many  of you are receiving and have received over the years, and going a different route looking at taxes. Such a huge part of retirement income planning is the tax part of it.

When we look at down here, the total value, the total value represents the estimated amount of money they will spend over the next 35 to 40 years, as well as the amount of money left  in their portfolio at the end of their plan when they pass away. $1 million in tax savings– Now, this is a huge number. Typically, we’ll see  anywhere from $400,000 to $800,000, but in the wide majority by far of people we sit with and plan for retirement and look at the tax scenario, there are hundreds of thousands of  dollars and, in some cases like this, over $1 million in potential tax savings.

Now, one thing this does not take into account for is, what if taxes are a lot higher in the future?  This does take into account for the Tax Cuts and Jobs Act to expire after 2025 as current law states, but what happens if taxes are a lot higher  for 4 years or 8 years or 12 years down the road, in year 2030 to 2040 or something like that? This doesn’t take into account.  We need to be looking at taxes, we need to be taking advantage of these historically low tax rates right now by getting money out of those tax-infested retirement accounts and into more tax-free alternatives.

Let me scroll over here. When we look at what this actually looks like– Here’s the conventional  wisdom over here. We have the same social security strategy for this couple. We are recommending they defer their first social security later in life. Here, this middle column  is the total amount of taxes paid under conventional wisdom. They’re still working over the next five years, so they’re going to pay taxes.

If they followed conventional wisdom, then  once they get into retirement here, they would actually pay zero taxes, but as time goes on, look how much tax they’re paying under this conventional wisdom.  These are huge numbers. This is a big tax risk to carry this throughout retirement. Now, we switch over here  to what we would recommend, the Oak Harvest Plan. We are going to pay more taxes. If we take money out of that tax-infested IRA and move it to a tax-free place like a Roth IRA,  we’re going to pay more taxes, but by the time they’re 63, 64 – that’s her age, by the way – look at their tax bill:  $12,000, $12,000, $12,000.

Then, they’re virtually in the 0% tax bracket for all of these outyears. Taxes come back a little bit here,  but look at this: $47,000 versus $1,000. This still assumes married filing jointly. If one of the spouses were to pass away, instead of  married filing jointly rates, it would be the single tax filer rates, which is one of the most punitive parts of the tax code.

In retirement, when one spouse passes away,  you go from married filing jointly to single. You can only file married that year where your spouse has passed away. The following years and all subsequent years, you have to file single.  These taxes would even be higher in that particular situation. When we look at the ramification over time, it is a huge mistake  to follow this conventional wisdom tax distribution strategy in retirement.

Step three of Retirement process, Tax Planning, obviously,  is a very powerful aspect of the overall process, but when you combine that with Step 1, Risk and Investment Management Planning, and then Step 2, Income Planning, now, you have these first three steps  of the Retirement process keeping you more connected, which gives you the opportunity to have more income, pay less taxes, and also reduce risk in retirement. This is why  we’ve developed the Retirement  process, and this is powerful stuff for your retirement.