Business Innovators Radio - Interview with Tim Dern, Retirement Income Certified Professional and Managing Partner with Mana Financial Group Discussing Taxes in Retir

Episode Date: July 12, 2023

With decades of experience in the industry as a 65 securities licensed professional, he brings a wealth of expertise to his clients. Unlike traditional broker-dealer models, his fee-based approach puts you first. He leads a private wealth team, offering top-notch asset management services with a focus on retirement strategies.As an RICP (Retirement Income Certified Professional), he is uniquely skilled in creating customized plans that maximize your income during retirement. His impressive portfolio includes AUM, Fixed Index Annuities, IUL, Medicare Supplements, Advantage & Drug Plans, and more.But what truly sets him apart is his dedication to education. As an NSSA (National Social Security Advisor), he offers educational seminars on social security, Medicare, proper asset allocation, Roth conversion, and tax-saving strategies. And for those unable to attend in person, he hosts online webinars nationally – using Facebook ads to reach a wider audience.With his unparalleled knowledge and commitment to your financial success, he is ready to help you plan for a secure future. Contact us today to schedule a consultation and experience the difference for yourself.Learn More: https://www.manafg.com/Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-tim-dern-retirement-income-certified-professional-and-managing-partner-with-mana-financial-group-discussing-taxes-in-retirement

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us, Tim Dern, who's a retirement income certified professional and managing partner with Manna Financial Group. and today we're talking about taxes in retirement. Tim, welcome back to the program.

Hello, Mike. Good to see. Good to talk to you again. Yeah, we're just chatting here, here about this really brief topic. It'll probably take about 20 or 30 seconds to cover this little nugget, huh? Taxes in retirement. Now, this could be a two-day-long seminar and still people will be scratching their head. So get us started with first.

What are some of the misconceptions that people have regarding tax? in retirement because I think a lot of times we hear from decades past, oh, at retirement, you'll be in a lower tax bracket because taxes will be lower. Is that the case? Not always. Not always. That is one of the common misconceptions. And I do have a lot of clients that that actually would be true. You know, they're retiring. Maybe they don't have a whole lot of assets saved up. They're not on a salary anymore. And maybe they're, you know, move to Social Security. and those people might experience a lower tax bracket just because the income is not there. But what I find is many people are kind of surprised when tax brackets don't change or even go up in

retirement. And that's the reason we got to start talking to people earlier about making some moves to maybe reduce that tax bill later on. And that's kind of what we spend a lot of time in my practice talking about. Yeah. And I guess it's like if we said, hey, on a scale of 1 to 10, what's the chance that Earth has going to be hit by a meteor or something really odd and obscure. You know, it's like, well, that's probably really not going to happen. But when we think about the question, do you think

taxes will go up over the next five, 10, 15 years? Nobody knows the answer to that. We know that. Even the professionals will, you know, give some educated, you know, comments. But I think for me, I don't follow the markets much. I couldn't tell you what the Dow Jones or the S&P is. I know concepts. But here's the thing, and this is where I would like you to comment on the deficit. That trillion-dollar growing deficit is like America's debt. And if that is huge and growing, the only way to reduce that is two ways, the government to reduce spending or the government to increase taxes. Which do you think is going to happen? Yeah. Well, that's the big question that we're all thinking about. But I would say most clients, most every

I talked to, we all believe the taxes are going to go up. We have a tax cuts and job act that's been in place that was President Trump actually reduced the tax rates. It's been a good thing, but that's going to expire in 2025. So if we go back to even where they were before this was actually a cut, well, then everybody's going to get an increase. We are seeing a lot of legislative risk. This is what I call it legislative risk. Congress can change the rules for qualified money, IRAs, 401Ks, TSP, any of your qualified money that you've been contributing to over the years that you have not paid taxes on. Even the matching of those accounts has not been taxed. But there will be a day when you start pulling money out, you will be paying tax on that. And we saw the Secure Act 2.0. This is a

legislative change that recently talks about these qualified accounts, and you're not only seeing that they're pushing these required minimum distributions. Remember, people are contributing to these plans their whole life. They're not paying any tax when they make the contribution. If it's a 401k or something of that nature, then they may even get a match from the company, don't pay tax. It grows. They don't pay tax. They are taxed at ordinary income when they pull that money out. But the secure Act really changed a few things. They said, now, first of all, the R&D, the required minimum distribution, some people are familiar with this term, some are not, that qualified money, IRAs, 401Ks, anything that was a retirement plan like that, eventually you're going to have to, now it starts this year,

2023, the age is 73. If you turn 73, you've got to start taking money out of your IRA or of your 401K every year pay tax every year pay tax until you die and they used to start at 70 and a half they moved it to 72 and then this year they moved it to 73 so it's going down the road a little bit but the bigger change on that is when you pass away and that money rolls to a non-spouse and like children are inheriting these million dollar qualified accounts from their parents when they're probably in the highest tax they would ever be in their own career. Right. And this is just blowing up all the tax brackets.

And the change is there's no longer a stretch IRA option for your children. Inherited IRA has to be cashed out and pay all the tax within 10 years. A lot of people think they might even go after that even stronger and say that might be reduced to five years. We're going to keep an eye on it. But again, you're talking about $31 trillion in deficit. there are trillions of dollars in a lot of these baby boomers that are coming right now. The biggest transfer wealth is going to happen in the next 15 to 20 years. I think the government's got their eye on this money and they're going to start going after it.

That's my own personal opinion, but that's what I see starting to happen. Well, and it totally makes sense because like when you laid out the qualified plant, 401K and all those kind of ones where you never paid tax, putting money in, the company might have matched. You never pay tax on that. It's grown over the decades that you worked at the company. And maybe even after you left the company, you left it in that account and never been taxed, never been tax. So here's the government, you know, kind of like, you know, a wild animal waiting by the hole of their, you know, prey going, wouldn't you go to pop your head out? Because I need my tax.

So I think that's a big thing. One point I heard, and maybe you can clarify this on the required minimum distribution, you know, you said, well, it was this age. And that agent, I think a lot of people are confused about that. But one thing that I heard is if you miss your required minimum distribution, like you think, yeah, I'm good to go. I don't need it this year because I've got and you don't take it. Isn't there like a big penalty for not taking that? Yeah, it's 25% penalty today.

So you don't want to miss this. And some people, you know, usually how people miss it is some people think that wherever you have your qualified account that could be a brokerage account, could be in an IRA, could be a 401K. They feel like the institution is going to contact you and say, hey, you've got to take an RMD when you hit this age. They really don't do that because you could take RMDs and satisfy, for instance, if you had three different IRAs, and let's just put some numbers to this, if you had a million dollars in three different IRAs, let's just say that.

the total on that million dollars might be right around 4%. A little bit less than that, but it starts somewhere around 4%. So you've got to take $40,000 out of that million and pay tax this year. And then here's the funny part. When you reinvest that difference, you're going to pay tax on that money again on the growth. And then when you die, they're going to tax it again. So money gets taxed a lot of different times when it's coming from qualified money. So you've got to be kind of careful that you don't miss one of those.

RMDs and sometimes people think, well, you know, I'm going to take all of it from one account. I've got three accounts. Maybe one of them is in a protected account and you say, I'm going to take all 40,000 from one account that might have 250,000 and that's perfectly okay if they're all considered IRAs. But where people miss it is they have some of the money still in 401K or 403B. Now they're pulling money from an IRA thinking they're satisfying all the requirements of all those accounts and they are not. You cannot. And then you get hit.

Yeah. And like you said, you're getting hit with taxes this time and that time and the other time. You certainly don't want to layer in a penalty because you missed a required minimum distribution the right way. Or you thought, I'm good to go because I had, you know, some extra money squirled away. So I don't need it this year. And I think that sometimes people just don't know.

And that's the benefit of working with someone that knows all of these updates, knows your situation and then it's kind of like what you're saying right here. That's a that's just such a huge thing. So we we know we feel strongly that taxes are going to go up and who knows what bracket, you know, but we know that taxes in five, 10, 15 years are probably going to be more than what they are now. So it kind of makes me think about, and I know this is cliche in the industry, but would you rather pay tax on the seed or the harvest? Well, you'd rather pay taxes now when the taxes are lower rather than way down the road when, you know, you don't want to pay it at a higher rate. So what are some of the strategies to kind of pay taxes now and kind of get that box checked

and then let your money grow to where you're not going to be taxed again? Well, let's just talk about different types of accounts that people have, first of all. You could have something called a TOD account, which would be, let's say you sold some property, you made some profit, you put the money in an account, could be in a brokerage, could be in a bank. When that money grows, you're going to be making, you're going to get 1099, or you're going to have to pay capital gains tax on that every year. So if you made interest in a CD, for instance, you'll notice that you're getting a 1099 at the end of year. But that's, you know, a lot of times if it's in TOD, that's capital gains tax. That's at a lower rate.

People feel like their qualified money, their IRAs, their 401ks, their 403B, they think that's going to be capital gains tax and it is not. That's taxed at ordinary income rates. Whatever the rate is at the time that you're pulling the money out is what you're going to pay tax on. So this is where we're saying can we get ahead of the qualified money in retirement. So people would start doing Roth. They would start contributing to Roth IRA through a plan. This means you're contributing after taxes. You're taking a paycheck, paying the tax and you're putting some money into a Roth. When the Roth money grows, and later on, if you've had that five years, that money is never taxed. And even if you pass away, it's never taxed to your children. There are no

RMD. So Roth IRA is what most of us want. But here's the problem. When we're working, there's rules and regulations on how much money you can contribute to a Roth. There's limits. and sometimes if you're a high earner you make too much money, you're not going to be able to contribute to a Roth at all. These people end up with these very large qualified accounts when they get into retirement. So this is where they'll say, is there any tax saving moves we can do now as we're going into retirement? So I just want people to know when you retire and you're not working anymore,

the rules for Roth conversion, they change. The limits are not there. And you can now start taking if you retire, let's just say again, you had $500,000 in a IRA or 401K. You roll it to an IRA and then you can start taking a distribution out of the IRA. Let's say you pulled, you know, 50 grand out this year, paid tax and put the balance in a rock. Pulled punny out next year paid tax. You kind of piecemeal it over time where you're converting some of these dollars right now over to a Roth, so later on when the tax is go up, that Roth money is not taxed.

So we do a lot of Roth conversions. We run numbers. We try to not blow up everybody's tax brackets, but sometimes you'll be at the bottom of a bracket, let's say it's 22% bracket or a 24% bracket, you might have $100,000 of room in there before you get to the next bracket. So sometimes people can look at their different tax brackets, see what their appetite is, and they can can start pulling money out now paying tax, putting the money into a Roth. Later on, that money is not taxed to you. If you die, it's not tax to your errors. And there are no RMD.

So we're doing some, what we call Roth conversion strategies later in life when people are saying, okay, I've got these qualified accounts. Can we move some of this money? And we do that quite a bit. And that makes total sense to me where it's like, here's this big old account with money that's never been taxed. And we know it has to be taxed. So do I want to just take it on the chin now or, you know, in sections?

But if I heard you correctly, you were saying that that is something that you're doing like later on or in retirement. What if there's someone that's in their mid 40s or early 50s and they've got a big old 401k or an IRA that, again, is qualified money not been taxed? Would that strategy make sense for now potentially to, start taking money out sequentially, pay taxes and then put it into rough? Well, here's a couple of things we got to consider. So first of all, if you're still working for that company and you have like a 401k and you're

45 years old, you're not going to be able to take money out without a penalty. So really the strategy might start when you're 59 and a half because that's when you're eligible to take money out without a penalty. And we have software. In fact, this is what we do. We don't want to guess on this. I have a nice software I do with my clients. We call it your retirement tax bill.

So we can put in your account, how much money's in there, whether it qualified, and maybe we add all your accounts in there. We can actually see, estimate what you would be paying tax on over your lifetime, not just next year, not just the next two years, over your retirement lifetime. So we start to really look at that. And this is when people start seeing that qualified money is taxed, income, then the balance if you reinvest, which most people do, pull money out, pay tax, you put the money in a CD or maybe another investment.

You're going to pay tax on that growth again. And, of course, if you die, it's taxed again. So when we put all these taxes together, sometimes it's pretty scary. We'll have somebody with a $500,000, you know, IRA, and we look if they live to age 90, they could be paying $450,000 of tax on that $500 grand. It's crazy. So that would be, wait, we maybe start pulling some money out now. Pay tax.

You're not getting out of the tax, but you're paying tax at a lesser rate, and then you're moving that money into an account that's never tax. So we do that with Roth conversions. That's one strategy. We use cash value life insurance, which is another very strong option today. The government in section, Title 26 of our tax code, is where you'll find all the rules for qualified money, 401k, 403B, all big qualified accounts and something else called 7702. This is actually around life insurance. You still have a

whole bunch of tax strategies around life insurance. In common, people pull money out, pay tax today, and put the balance into a life insurance policy. Pull money out next year, pay tax, put the balance in life insurance. Maybe they do that over five years. The idea is you're converting some of those qualified money that you're going to leave to your heirs, your beneficiary, your wife, your children, whatever. You're trying to convert it to tax-free money, but the Roth, you're going to get the lesser amount. If you had $500,000 and you converted it over five years, you might have $375 left in the Roth. That's what your heirs would get tax-free.

You take that same $375,000 balance. You put it into a life insurance policy, like an IUL, index universal life policy, you actually can double the benefits. Now you're leaving $700,000 tax free to a beneficiary or loved one. So now, of course, you have to qualify with health, and we're not trying to get people to do monthly payments when they're this age. But if you have an asset, you have a million dollars, you have two million dollars, you have a lot of money. I've even seen $500,000, people take one payment of $50,000, pay the tax, and put it into a life insurance, policy trying to give their son instead of 50 grand tax free a $100,000 tax free. So you should

consider all your options because there's a lot of vehicles today in the insurance products that can really help people when they're doing their tax planning. You just don't want to do nothing if you have options because you're going to leave a big tax burden when you pass away to your loved ones in beneficiaries where you could make some moves today and maybe resolve that and lead people tax-free money. So that's one of the things that we're still doing. Roth conversions and IUL are very popular right when people are around retirement age. That's usually when people are making moves like that. Yeah, that's a huge piece that I think a lot of people don't realize is, you know, there's what's the old saying? There's only two things you can't, two things certain in life,

death and taxes and you can't avoid either one, but you can optimize for either one. You know, you can take better care of yourself, eat better exercise. And then on the tax side, do some of these things that you're talking about. And I think that last piece that you were mentioning, a lot of people have big misconceptions about. And I don't want to go into detail about the actual life insurance strategy. But I think that the takeaway, the aha for me was, I think when people hear the word life insurance. They think, oh, red flag, confusion, I've heard. And that's not the case because these types of life insurance contracts are really powerful financial vehicles. And if it's done right, set up right, it can accomplish some of the things you're talking about for these tax-free growth

and transferring to airs. And that's the thing. Does that fit in your financial plan? Question mark. Get with someone like Tim who's going to help you make that decision and never you're going to, you're never going to put all your eggs in one basket, whatever that is. Annuities might be great, but you're not going to put your entire retirement plan in one product. So I think that's been so eye-opening for me to hear today with these, you know, are Roth conversions helpful? Are there ways to reduce taxes in retirement? Maybe a Roth conversion, maybe using some of that money to put into a life insurance contract. Really big, big pieces there, Tim.

Right, right. Yeah, and the confusion is when you're talking about, insurance products. I'm specializing and focusing my practice on retirement planning. That's what we do. And usually when we're running numbers for people, that's when it makes sense. Sometimes we'll look at all of these Roth conversion strategies and we'll just at the end of our discussion with the client, say, this doesn't really make any sense for you. You're really going to be only pulling the minimum out of these accounts. You have pensions. You have all this other money. Maybe this doesn't make as much sense for somebody that's not taking big distributions or maybe they're planning on leaving money

to a charity or something like that. But when we can actually show somebody where you can take taxable money and turn it into never tax money, that might interest some people. And when we run numbers on this, you can see where it really makes sense. One quick last story here, I would tell you, I had, now I've done this with clients with $2 million. People have used, you know, $100,000 a year, over eight years, for instance, and converted $800,000 into a plan because they wanted to leave their kids instead of the balance. You know, maybe they're now going to leave millions of dollars tax-free. But a touching story was I had a lady came in and she only had like $100,000 in an account that she did not want to touch. And her biggest purpose was that was the money that she was going to leave

to her two daughters. She didn't really have any other money except that. She had money to survive and Social security and a pension, but the savings was, I can't touch this money. I don't want it in the market. My sole purposes, I want to leave it to my two daughters. And of course, that's taxable. So what we ended up deciding, and she had this trip that she wanted to do to go to Greece. And her daughters were telling her, Mom, go to Greece. And she said, I don't want to spend your money.

And it was one of those situations. So we took half of the money. We took $50,000 of that money. We put it into the life insurance product. she was able to get $125,000, way more than, you know, what she would have left, you know, after tax to her kids. She ended up giving them $125,000 tax free, and then she was able to go take her trip and enjoy some of the money on her own, which it was a win-win for her children. It was also a win-win for her. And a lot of times that's how we see this play out.

If you are still fairly healthy, you know, you could have blood pressure medicines and things, but all, you know, bad stuff. You know, you have to get a physical. But people right now, they're healthier now later in life. And they are interested in leaving tax-free dollars to their children or to their spouse. So these are strategies that are quite popular today. These insurance companies have made wonderful offers. Not only can you use the money, you know, tax-free to your loved ones, but if you wanted to start pulling some money tax-free and income, there's ways you can actually use the money.

It's structured right. can get tax-free income in retirement from these insurance products. You can also use them if you had a stroke or a heart attack and you didn't die. They have what they call living benefits. This is where you can get money out. And if it's structured, right, tax-free to use for home health care, nursing care, things of that nature. So we look at the whole variety of products out there. They don't all work the same way. So hopefully you have an advisor that understands and designs these products to fit your needs and goals. But I would tell you the people that are just saying no to life insurance,

because they have a preconceived notion, I think they're missing it. The products have changed quite a bit today, and I think people should look at their options before they make a decision. Yeah, and Tim, you know, I'll make one last point about that last comment you made, because for me, the newbie listening to you teaching these points that just jumped out at me. You know, like you said, misconceptions about life insurance. A lot of people think, oh, life insurance pays out when you die, but you use the phrase living benefits.

And that's such a huge thing because you mentioned some of those care. And there's, I'm sure, a litany of other things that would be fall under that to go, wait a minute. I've got this life insurance policy that I can actually get benefit from while I'm still living. And that's huge. Secondly, there are certain ones of those kind of conditions that you might need to access the money for that if you didn't have that life insurance contract structured that way, the alternative is you're buying one of the supplemental type planned that you pay for years and years and years and if you never used it, it's just a cost and an expense and it never did anything for you.

You don't get the money back. Whereas in this, if you had that benefit and you didn't need the living benefit for those long-term care type things, it just still sits in that policy growing and cash value. So I think that's to me that, that aha, that misconception that people need to realize maybe there's been some advancements over the last decade or two where maybe it might make some sense. So get with someone that can assess what you're looking to accomplish. Tim, you just are just a wealth of information. Thank you so much for coming on.

And if someone is interested in reaching out and connecting with you for that no obligation consultation, what would be the best way they can do that? Well, Mike, my company is called M-A-M-A-M-A-N-A-F-N-A financial group. And my website is mannafg.com. Manafg.com. You go on there, my phone numbers, my email, all the services that we provide, everything on there. That's how people can contact me. But appreciate you having me on today.

And really thank you for your time. You're welcome, Tim. Thanks so much. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, Visit www. www. Influential EntrepreneursRadio.com.