The Personal Finance Podcast - 10 Tips to Optimize Taxes When You Retire Early

Episode Date: June 24, 2024

In this episode of the Personal Finance Podcast, we are going to talk about the 10 tips to optimize taxes when you retire early. How Andrew Can Help You:  Don't let another year pass by without making significant strides toward your dreams. "Master Your Money Goals" is your pathway to a future where your aspirations are not just wishes but realities. Enroll now and make this year count! Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel! , Ask Andrew a question on Instagram or TikTok.  Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Monarch Money: Get an extended 30 day free trial at monarchmoney/pfp Thanks to Fundrise for Sponsoring the show! Invest in real estate going to fundrise.com/pfp Indeed: Start hiring NOW with a SEVENTY-FIVE DOLLAR SPONSORED JOB CREDIT to upgrade your job post at Indeed.com/personalfinance Thanks to Policy Genius for Sponsoring the show! Go to policygenius.com to get your free life insurance quote. Chime: Start your credit journey with Chime. Sign-up takes only two minutes and doesn’t affect your credit score. Get started at chime.com/ Delete Me: Use Promo Code PFP for 20% off!   Links Mentioned in This Episode:  How to Pay No Taxes in Early Retirement, Debunking the Mortgage Fee Fiasco, and More! With Katie Gatti (From Money With Katie!) How to Access Your Retirement Funds Early! Connect With Andrew on Social Media:  Instagram  TikTok Twitter  Master Money Website  Master Money Youtube Channel   Free Guides:   The Stairway to Wealth: The Order of Operations for your Money  How to Negotiate Your Salary  The 75 Day Money Challenge  Get out Of Debt Fast  Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

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Find your advisor at IG Private Wealth.com. On this episode of the personal finance podcast, 10 tips to optimize taxes when you retire early. What's crack a lacking and welcome to the personal finance podcast. I'm your host, Andrew founder of Mastermoney.com. And today on the Personal Finance Podcast, we're going to be talking about tax optimization in early retirement. If you guys have any questions, make sure you sign up for the Master Money newsletter. That is the best place to get a hold of me,

and you can respond to any of those newsletters, and I will see your emails coming through. And don't forget to follow us on Spotify, Apple Podcasts, or whatever podcast player, you love listening to this podcast on it. If you want to help out the show, consider leaving a five-star rating and review on Apple Podcast, Spotify, or your favorite podcast player. Now, today, we are going to be diving into some of the tips

to optimize taxes when you retire early. And I shot out a poll to everybody over on Instagram at Master Money Co over on Instagram. And I said, hey, what episodes do you want to see more of from us and how can we help you guys more when it comes to building wealth and working on your personal finances? One of the big ones that came back was optimizing taxes, specifically when it comes to early retirement. And I thought this was a great topic to go through. Now, what we're going to do today is I'm going to give you 10 different tips. And really, this is kind of like a step-by-step way that I would kind of look to optimize my taxes. But in addition, you know what you need in your corner when you get closer to early retirement is you're, You need a, a CPA that is going to be able to help you optimize your taxes as well.

My CPA helps me optimize my taxes every single year. They find ways for me to save money on my taxes. And even though CPAs cost money up front, they will save you so much more on the back end via tax optimization that it is more than worth the amount that you're paying for them. So if you're looking for a CPA and you've never worked with a CPA before in the past, you absolutely need to make sure that you have somebody in your corner, helping you with your taxes because it is impossible for all of us to understand the entire tax code. You got to have somebody on your team and this is going to be really, really helpful. In addition, they're going to do your tax returns for you so you don't have to go to turbo tax anymore and try to run the numbers on some of that stuff.

So I think every single person should have a CPA in their corner for tax optimization so that they can start getting that process going. So I'm going to take you through a bunch of steps today as we go through this and a lot of key considerations, especially if you want to retire early. Now, by retiring early, I mean retiring any time. prior to age 59.5 when you can start drawing down on some of your main accounts. I want you to think through how you can start to draw down on some of these accounts as we go through this process. So if that's something you're into, let's get into it.

All right. So first, if you are brand new to personal finance, you're brand new to money. At the top here, I'm going to give a quick breakdown because you need to understand this before we dive into some of this other stuff. And it's the difference between taxable versus tax advantage accounts. Now, taxable accounts, These are things like your standard brokerage account, which is a lot of people ask me questions as to what a brokerage account actually is. All that is is if you go to Fidelity or Vanguard or Robin Hood or wherever else you buy and open up an account, if you go there and you open up just a regular account, you are

opening up most likely a standard brokerage account or a brokerage account. So that's all we mean by brokerage account is when you just open up a taxable account at one of these locations. In addition, things like your high-yield savings account, that is also a taxable account that you have to pay taxes on dividends or interest or capital gains if it's your brokerage account. So that's what we mean by taxable account. It's typically just your regular brokerage account. So if you go and open a Robin Hood account today and you didn't click IRA or Roth IRA, if you have that account open, you have a taxable brokerage account.

Or if you go do that at Fidelity, or if you go do it anywhere else and you didn't select a specific type of account, you have a taxable brokerage account open. So that is one big thing I want people to understand on the taxable side. Then we have tax advantaged accounts. Now, these are the fancy, schmanchy accounts that you hear us talk about all the time. And these are things like your 401ks. These are things like your IRAs. They're your Roth IRAs and your HSAs. Now, these are a lot of different acronyms that really have different tax advantages to each and every single one of them. Some offer tax deferral. Some offer tax free growth. Some offer tax free withdraws. And some offer all three. like the HSA can offer all three depending on certain situations.

We have episodes on each and every single one of those accounts. So if you want to learn more about those, make sure you check out those episodes because these are really, really powerful, which you can do with these different accounts. And we'll talk through more so how all of these work in addition to what you need to be doing with them as we go through this process.

So that's step one. Just make sure you understand taxable versus tax advantage accounts. Now, as we get into this, one big thing I want to talk about is the sequence of will. Withdraws. So when you get to a point in time where you're going to be retiring early, you need to understand sequence of withdrawals.

This means what accounts am I going to start with drawing money to fund my lifestyle? Since I have enough money for financial freedom, which accounts are I going to draw money out of first? That's the simplest way to put it. Because a lot of times maybe you have a Roth IRA, you have a 401K, you have an IRA, you have a taxable broker's account, you have a HSA and you're like, well, do I just start drawing on each one randomly? How do I actually think through this so that I have the right order of operations when it comes to withdrawing from my accounts?

Well, well, well, guess what, my friends? Today you're going to learn how to optimize it, especially in early retirement, based on your tax situation. Because how we draw down on these is going to be really, really important to make sure we optimize for taxation. Some of these you want to withdraw on first and some of these you want to withdraw on later so that you can optimize this taxation. So a quick rule of thumb. and I kind of want you to think about this is just really quickly before I dive a little deeper in, taxable accounts usually should be withdrawn on first. And you can utilize these funds early in retirement to minimize taxable income from required minimum distributions later on.

So you could think through having this early so that you can minimize that income coming in. Then Roth IRAs typically are going to be a little bit later. Now, some people kind of argue some of this stuff. We can go back and forth all day long. This is the way I would do it, is thinking through it. Taxable accounts first, Roth IRA later. Now, how are these all these taxed? So for the traditional IRA, contributions are tax deductible, but withdrawals are taxed as ordinary

income, meaning when your money goes in, you don't have to pay taxes on that money. It comes right out of your paycheck from a 401K or an IRA. An IRA is different because you get a tax deduction. But a 401K, you haven't paid taxes on that money yet, goes into the 401K. It grows, and then when you pull the money out, then you pay taxes. Okay? So you're going to get taxed on those dollars, which is why I like taxable. accounts first. The Roth IRA contributions are made with after-tax dollars and withdrawals are tax-free,

which is amazing. And then HSA's contributions are tax-deductible and withdrawals for qualified medical expenses are tax-free. So HSAs are a huge weapon to be in your arsenal of early retirement because it allows you for flexibility. And then taxable brokerage accounts are investments are made with after-tax dollars. You've already been taxed on it. It already was in your paycheck. You just take it out of your time. You just take it out of your check in account and you throw it into your taxable brokerage account and you pay capital gains tax on the appreciation. And so in these situations, that's just kind of how they work. Now, one other big consideration when it comes to this is you also have something called required minimum distributions,

which are RMDs, a lot of people call them, which also can throw a wrench later on down the line when you have to start taking these from your 401K. So for traditional IRAs and 401Ks, RMDs must begin at the age of 73. So if you're retiring really early, you're not thinking about this yet. But if you fail to take RMDs, this results in heavy penalties. So you have to plan out those for your traditional IRAs and 401ks. For inherited IRAs, if you have an inherited IRA, somebody passes away in your family and they give you an inherited IRA. RMD rules are going to differ a little bit. And typically, you may need to deplete the inherited IRA within 10 years. And so that's another important distinction that you have there when it comes to this. Now, the reason why I like

taxable accounts first, and I want you to tap on these first, is because withdrawals from taxable accounts early in retirement means that you'll benefit from lower capital gains taxes, except if the rules change, which there's a lot of talk about the rules possibly changing. This would change this entire plan if those rules change and you have to pay a way higher capital gains tax. That's beside the point right now. But especially if you have really low income in early years. So if your income is lower in early years, the amount of capital gains tax that you're going

to be paying is anywhere between zero. 15 and 20%. So in order to pay 0% capital gains tax in 2004 at the time I'm recording this, let's just do married filing jointly for these numbers so that we all have this rolling at the same time. So for 0% capital gains tax, you have to be making $94,000 or less in your household

between you and your spouse. To pay 15% capital gains tax, it's $94,051 or $583,750. And if you make more than $583,751, then you're going to be paying 20% capital gains tax. So this means that your taxable rate on a taxable account is going to be right around that 50% on the gains only. It's not the amount of money that you put in.

It's the gains on those dollars, which is why I like taking that hit early a lot of times so that you can then do some other things. So you could do things like tax loss harvesting to offset those gains and you can minimize taxes based on that. We'll do an entire episode on tax loss harvesting, but you have tax efficient harvesting that you can do. Now, who can help you do tax loss harvesting if you just don't want to deal with that whatsoever? You can do things like robo advisors can help you. In addition, you can get a CFP to help you on a fee basis. If you want to put that into your financial plan, I don't want you to have a CFP with

assets under management. I mean, I don't want them handling your investments and they're taking a percentage every time. But to pay them at an hourly rate or for an entire plan, that's the way to go if you want to do tax efficient harvesting, especially if you have large amounts of capital gains based on maybe you've held Apple stock for the last 60 year or something like that. That would help you a lot in that sense. So you could tap these taxable brokerage accounts first, and then you could do tax loss harvesting if you really want to get nerdy with some of this stuff. Now let's talk about some of the traditional IRAs and 401Ks and when the withdrawal on those.

So we want to withdraw strategically before RMD start to manage your tax bracket. And this can help prevent large spikes in your taxable income if you want to withdraw on some of those. and then if you could consider converting portions of traditional IRAs to Roth IRAs during years when you're in a lower tax bracket. Now, we had an episode on these Roth conversions, which we'll talk about a little bit more here in a second, with Katie Gatty from Money with Katie, where she talks about basically how to pay $0 in taxes when you do these Roth conversions. We'll link that episode up in the show notes below, but that's an entire masterclass on

how to do that. And she did an amazing job on that episode, just explaining that process. So I'm going to leave that for that episode. make sure you check that one out if you have not because that's a way to pay almost zero dollars in taxes in early retirement just by utilizing that strategy especially if your spend is going to be low if you are a frugal person and your spend is low that is going to be super super helpful and you could pair that strategy with a taxable brokerage account and with something along the lines of an hSA and you could probably pay zero dollars in taxes in retirement so it is an amazing amazing things that you can do and then the last resort i have is the roth IRA and so you withdraw from roth IRA's last as they growth tax-free and they don't have RMDs. And this can help maximize that tax-free growth. You want that tax-free growth. That way later on in the line, you could take advantage of that tax-free growth and let those accounts continue to build. And so that's kind of how I think about that, is allowing those dollars to continue to grow over time. Now, if you really, really need the

tax break, then you can start withdrawing on those earlier if you need to. But that's why you need a CFP in your corner because they're going to help you kind of think through this. I'm just giving you the outlying framework, but your specific situation is going to tell you the order of operation to consider when withdrawing. So considerations that you need to think about and talk to your CPA with and write this down is first you want to make sure that you're managing your tax bracket. You want to withdraw from accounts in a way that keeps you in the lowest possible tax bracket each year. That's what we're talking about here. We're trying to have tax efficiency. And so when you develop this plan, you want to manage those tax brackets based on your current situation. This is a very

personal thing. And taxation is extremely personal when it comes to a lot of this stuff. And then you want to make sure you stay informed on potential changes like we're talking about right now. For example, the current administration at the time recording this is talking about increasing taxation on capital gains for specific tax brackets. And so we want to make sure that we understand that and how that's going to work. And you want to stay informed on all these potential changes. Now, we're leaving something else out here, which is health care costs. Healthcare costs are super, super expensive when it comes to our withdrawal strategy. And so the HSA is very, very important for this if you can utilize.

it. Listen, you may think to yourself, I'm going to have too much money in HSA. I'm maxing this out every single year. Healthcare costs are going to rise. In the last episode, a week ago, we talked about, we showed you health care costs rise at an average rate of 7% per year. This HSA is honestly going to be pacing with health care costs. And so for the longest time, I was like, well, what if I have too much money in my HSA? No, after I read these statistics and I dove deep into the average inflation rate of health care costs, it's at 7%. What is the average? rate that we're running some of our retirement numbers, 7%. So we need to make sure that when we do this, we have an HSA in place. Because honestly, I almost think it's imperative now as I start to

read through these statistics because the HSA is going to help us outplace that health care inflation. Health care inflation and the inflation rate are two different things. And these are really, really massively important when it comes to some of this stuff. So my mind, as always, as I start to optimize for some of this stuff, I tell you guys how I'm developing my thoughts and my processes. And this is one big one for this year is those health care costs are rising rapidly. And I just think they're going to continue to rise rapidly. These healthcare companies, if you look at their stocks, they are absolutely crushing it. And the reason for that is they just keep increasing prices. Our health care system, obviously in the U.S. is broken. It is broken in a lot of

places. And so that's one of the big things that we would love to fix. But I don't know how we're going to fix it. And that's not my expertise at all. But at the same time, it is something where if they don't fix it, we're going to be paying a lot for health care in the future. And HSA will help us at least invest those dollars so they can grow triple tax advantage. And so they go in tax free. They grow tax free. You can pull them out tax free. There's nothing better than that. That's the best account by far. And in fact, the HSA is going to move up most likely on some of our stairway to wealth stuff. And it is going to come in before the Roth IRA in the future because of this reason. You need to make sure you're taking care of your health care. It could destroy your retirement if you don't take care of it.

So everybody listening, please, please think about investing dollars for the HSA or at least plan out your health care costs as we go forward. Now, let's talk about step three, which is your Roth IRA and conversion ladder. So we talked about just kind of a quick synopsis here in step two here of your sequence of withdrawals. But I want to talk through and we're going to dive deeper into the Roth IRA and the Roth conversion ladder. And so this is where you convert your traditional IRA to your Roth IRA. And the one big thing you want to do here is if you're retiring early, you want to start doing this a few years before retirement to spread the tax impact over the next couple of years. And this also allows your funds to grow tax-free in a Roth IRA.

And another big reason for this is because of the five-year rule. So converted amounts must stay in a Roth IRA for at least five years before you can withdraw on them tax-free. Now, remember, when it comes to a Roth IRA, the reason why we do this is because the contributions to a Roth IRA, you can withdraw those contributions. So if we have a traditional IRA and we convert $40,000 to a Roth IRA, we can take that $40,000 five years from now and pull that out and use that money to spend in retirement. This allows us to access our retirement funds early.

And so, like I said, that episode, we've done this twice where we talk about the Roth conversion ladder. We have an episode, it was actually a pretty early episode talking about the Roth conversion ladder that lays out exactly how this works. So if you're not familiar with this strategy, listen to that episode because we go into depth for 20 minutes on how this strategy works and why it's really important. Then listen to that episode we just talked about with Money with Katie talking through how we can actually optimize this with early retirement because it's like step one.

and then step two. Between those two things, we need to make sure, especially if you're retiring early, that you can do a Roth conversion ladder. That's when you're going to be utilizing that Roth IRA. So that's third is think about converting the Roth conversion ladder. Really, really important stuff. In addition to the Roth conversion ladder, there's a great article on this, too, if you want to dive even deeper. And this was my first introduction to this a while ago. And it was by the Mad Scientist. If you've never heard of the mad scientist, he dives into this in an article that is absolutely fantastic. So he talks about the Roth conversion ladder as well. He retired very early. I think.

in his early 30s. And so he goes deep into that as well. Wonderful, wonderful, wonderful article. And so that's what I want you to think about is this Roth conversion ladder. How can I utilize this? Number four is I want you to start to think through how can I manage my tax bracket in early retirement? You got to have a plan for all this stuff. And if you don't have this plan in place, we've got to make it, put it together. So to stay in lower tax brackets, we need to plan withdrawals to stay within low tax brackets and use a mix of taxable, tax deferred, and tax-free accounts to manage our taxable income. And then we can do tax gain harvesting if we need to as well. So if you're in a low tax bracket, you can consider selling some investments in taxable accounts to realize gains

at a lower tax rate, which is going to help you long term in your tax accounts. Now, when it comes to health care and the HSA, we just talked a lot about it in step two. But if you can, I would love for you to max out contributions to an HSA when you're working. Now, where are you open in HSA is a big question that we always get. And one thing I want you to think about is if your workplace offers it, see what benefits it offers. But in my experience, and from all the research that I've done, Fidelity has the lowest cost aid. This is not sponsored.

I have a Fidelity account. This is actually where I have mine. But also, this is not sponsored or anything else. But from all of my research, Fidelity has the lowest fees and the best investment options in an HSA. And so if you can open one at Fidelity and you don't have to go through your employer's sponsor plan, I would. But if your employer's sponsor plan gives you a match, things like that, think twice before

you go to Fidelity and just run the numbers on that. But really, I like fidelity for the HSA. I think it's a great place to have an HSA. And then when it comes to withdrawals on an HSA, you can withdraw funds for health care expenses in retirement and preserve other retirement accounts. And so the cool thing is when you withdraw funds in an HSA for qualified medical expenses, there is no timeline as to when those medical expenses had to be. You could have had a medical expense when you were 25 and had an HSA and be able to reimburse

yourself at the age of 65 for those expenses completely tax-free. And so you need to think through, hey, how can I save all my receipts? What's my system that I'm going to have in place so that I can ensure that I am really, really cranking this out and making sure that I really get this done right. So I think that's a very, very powerful way for you to be able to really get some tax-free dollars in retirement and you can get a massive amount of them. The HSA is moving up on my list. I'm telling you, it is the best account that's out there. Number six is we want to make sure that also we are thinking through qualified dividends and long-term capital gains. So qualified dividends and long-term capital gains are really important.

And these are taxed at lower rates than ordinary income. So you want to structure that investment strategy to maximize these types of income. And we've already talked slightly about tax loss harvesting. We have an entire episode coming up on tax loss harvesting because it is going to be one. I think it's going to be helpful for a lot of people. And I think it's easier to utilize tax loss harvesting, maybe more so in early retirement than it would be, you know, while you're working, like that, but it depends on what you're doing with your dollars. Other considerations is when it

comes to things like social security. So say you retire at 55 and you're like, well, should I start taking social security at age 62? And you really got to run the numbers on this. So if you're unfamiliar with this, you can start retirement benefit at any point in time between age 62 and up to age 70. Now, what a lot of people will argue is you take your social security later because the social security administration will pay you more to take your social security later. The problem with that is you've got to run numbers based on your personal situation. For me, personally, my plan is to probably take it earlier. And the reason why I want to take it earlier is if I don't need that money, I'm going to take

those dollars and either invest them and allow them to grow based on my terms instead of giving the government a free loan and or what I'm going to do is take those dollars and put them just towards things I enjoy and it is what it is. And so I think really enjoying that money is going to be something that for a lot of people, you really got to plan this out. I'd rather invest those dollars into something. So every month, say, say for example, let's just make this simple. You get $3,000 a month, okay?

And so that's $36,000 a year. I'd rather invest $36,000 additional dollars per year into an index fund than allow it to potentially grow and stay with the government. You know, life is too short to allow the government to keep my Social Security for a longer period of time to think I'm going to make a little bit more. But you can run this through a Social Security calculator and kind of see what you think you would do at that age. But for me specifically, I like to control things.

So I want to focus on the things that I can control. And so really what I'm trying to do is I am trying to make sure that I can control as much as I possibly can. And by doing it this way, it's one of those things that it'll change a lot for me. So let me show you the example, though. There's a smart asset has a social security calculator. And this is just to kind of give you a rough rundown of how this would work. How accurate these are when it's this far out for me is because I wouldn't take Social Security for another, what is it, another about 30 years or so. So for me, I don't know how accurate this is 30 years out, but as you get closer retirement, I'm sure this is very accurate.

And so when you get into this stuff, if, for example, I took Social Security at age 62. This says, then I will receive $53,611 in annual Social Security payments. Hey, I'd rather take $53,611 and put it in an index fund. but if I wait until age 70, I'd get $95,397. The calculation I need to come up with is eight years of investing. Will that allow me to have more money there and or would I just rather take the risk and keep the money and invest those dollars over time because they'd be growing at a larger rate of return?

And so over the course of those seven years, a lot of times, it just depends. And so that's how you want to think about it and that's how you want to plan this out. Really cool stuff to think through and I'm kind of getting sidetracked for this episode here, but that's one thing I would think through is how can I actually plan that out. Next, let's get into RMDs. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy, clothes don't fit anymore, and routines are changing. And it just hits you.

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Save the everyday with Amazon. So when it comes to RMDs and planning for RMDs, when you're getting up there and you're starting to slow down a little bit in your retirement, unless you are getting real healthy and maybe you're running marathons and playing pickleball and playing a little golf and maybe you're doing some yoga and you're out there just having a ball. We have this thing at the age of 73 that comes up called required minimum distributions. And this thing's going to slap you in the face if you have not thought it through. And so you want to make sure you're planning for RMDs and you've got to understand that RMDs are going to start at age 73.

And the government does this because they want to get their tax money. They want to get their tax dollars. You put money into 401K. And if you never take it out of that 401K, they're never going to get their tax dollar. So they make you start to withdraw on those 401K. so you can actually pay taxes on your money or your IRA or whatever else it is. And so I think, you know, planning and understanding RMD start at age 73 and you plan those withdrawals in advance so that you can avoid large taxable income spikes because it becomes

taxable income when you withdraw that money out of there. And if you can convert as much money as possible into Roth IRAs, which do not have RMDs ahead of time, then you'll be able to reduce that taxable income on future RMDs. Now, you'll still have to pay taxes on that money when you convert it, but it is just one of those things that I think can be very, very helpful to plan that ahead ahead of head. So when it comes to RMDs, you want to make sure that you were efficient with those and planning that out with your CPA and your team so that you have that plan in place ahead of time. Also, the next one, number nine is tax efficient investments. So there are other tax efficient investments out there that you need to be planning as you start to build up your wealth. Now, one big thing is things like municipal bonds, muti bonds, for example, have tax.

free interest income if you're really interest in bonds. But index funds and ETFs are some of the most tax efficient ways to invest. This is why we talk about these all the time. And if you are in index fund pro, you know we have a whole thing we talk about this on. But these are generally just more tax efficient due to lower turnover, meaning lower issues of buying and selling securities inside index funds and ETFs and capital gains distributions. Now you may be saying to yourself, well, how do I find the most tax efficient index funds in ETFs? Well, there's this little thing when you start to research index funds called the turnover ratio. And the turnover ratio is a place that is going to allow you to see, hey, is this index fund or ETF selling a bunch of

securities when they shouldn't? The turnover ratio on like Vanguard index funds or a lot of Fidelity index funds, for example, is going to be like 0.0.10. Anything above a half a percent, 0.5 is going to be way too high of a turnover ratio. In fact, you're getting into mutual fund territory there. And so they're doing some funny things, in my opinion. Whereas these lower turnover ratios are going to be really, really tax efficient investments. And so when you want to look at that expense ratio, that's going to make sure your expenses are low. But you also want to look at the turnover ratio to ensure that your taxable income is lower on some of these investments. If you have a very high turnover ratio mutual fund in your retirement, which mutual funds have high turnover ratios.

Their job is to try to beat the market, which they never do. But they try to. And so they buy and sell a lot of security. So their turnover ratio is higher, meaning you're going to pay more taxes on those security. So you got to make sure that you have to try to beat the market. have tax-efficient investments, index funds and ETFs traditionally, especially the ones we talk about here are really, really tax-efficient. So really, really important to make sure that you are looking at that as you go through this. Now, lastly, is I want you to stay informed and I want you to adjust

based on some future tax laws. Tax laws are going to change with all of this stuff. And so you got to stay informed and just make sure it's going on. We'll try to inform you as much as possible on this podcast to make sure that you are informed of some new tax laws and some changes and how that's going to impact your early retirement. But that's another big thing that I want you to do in the last step here is stay informed about the changes in tax laws and adjust your strategy accordingly. And so what you can do is kind of take down this list that we just talked about. And then every year or so, you could throw it into chat GPT, for example, and you could say, hey, can you tell me if anything has changed based on any of these over the course of the last year? And that'll give you like an instantaneous way to get

updated so you don't have to go dig through each and every single one of these topics. You can get an instantaneous update of all the different changes based on this. So that's one thing that you could do if you're not like me and you're a money nerd and you're up to date on all this stuff all the time, then you could go into chat, GPT, have it help you out. Sometimes it's wrong. So just make sure you're double checking that stuff, but then go through that process. But this is also why it's important to have a CPA in your corner and possibly a CFP, depending on where you are in life, to have this available as you start to see some of these updates. And it's really important to think through that as you go through this. Now, you may be thinking yourself, yeah, that's a ton of information.

Thank you so much for that information. but can you kind of give me an example of a timeline possibly? And so I put together just like a quick example timeline of how this could look based on your age by age. So if we look at how to optimize these taxes based on age, let's say for example, you retired at the age of 50, okay? So if you retired at the age of 50 between ages 50 to 55, you want to focus on maxing out contributions to tax advantage accounts and build up HSA funds and start Roth conversions if you can. And so you want to start to have those Roth conversions, especially if you're, like say, for example, you're 50 and you want to retire at 55, like we talked about in the last episode, that you

want to focus on for sure starting those Roth conversions, if you can, during your last working years. And then between age 55 to 59, you want to use funds from your taxable accounts to cover living expenses, and you want to consider Roth conversions during low income years so that you can really maximize the tax efficiency there. Now, on the Roth conversions. One of the best numbers to utilize is the standard deduction for each year to convert over to the Roth IRA because that's going to allow you to really save a lot of money on taxes and get to zero, which is what we talk about in that episode. And so that's going to help you with your low income years for sure. Then between age 59.5 to 72, you can start to begin penalty-free withdrawals from

retirement accounts if you need. And you can also continue Roth conversions as well. And then age 73 and beyond, you want to make sure that you're managing your RMDs and you're using your Roth IRA for tax-free withdrawals and you optimize for Social Security benefits. So it changes over time, depending on where you are in life and what age you are. The tax code, especially when it comes to retirement in these taxable accounts, is a lot of it's based on your age. And so your age matters for a lot of this stuff. And so optimizing based on your age is going to be really important. And actually, now I just gave myself an idea for another episode. And we'll do an episode on how to maximize taxes based on age. This was just a quick synopsis of how you could do that.

but thinking about how you can maximize your tax efficiency in early retirement based on age is going to be a really, really good episode too. So we will put that one together for you guys if you want it. Just shoot me an email and tell me you want that or sit me a message on Instagram or TikTok or whatever else. And we could talk through that as well. But by carefully making sure that you have a tax strategy in place, this is going to be so much more beneficial to you in your retirement.

You're going to save so much money. I'm talking about tens of thousands of dollars per year possibly. And over the course of your entire retirement, the opportunity cost is going to be well over a million dollars. So tax efficiency is really, really important. And making sure you have a plan in place is going to truly, truly help you when it comes to building wealth. So listen, I hope this was helpful, at least got you started into thinking through how can I become more tax efficient when I want to retire, especially a lot of you listening to this podcast, want to retire early. You want that financial freedom. And so because of that, you got to start thinking through this a little bit and

educating yourself more so on this. We will do more episodes on this, like I said, and we will really start to dive deeper and deeper. This was the bird's eye view to get you start. it and we'll start to dive deeper and deeper into this as we start to talk more about it. Listen, thank you guys again for investing in yourself today. I truly appreciate each and every single one of you and we will see you on the next episode. When a country's productivity cycle is broken, people feel it in their paychecks, their communities, their futures. What does this mean for individuals, communities, and businesses across the country? Join business leaders, policymakers, and influencers for CGs national series on the Canadian Standard of Living. Productivity.

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