Read The Transcript Below:

Steven (00:50):

Hello everyone, and welcome to the next episode of the Retirement Tech Services podcast. I’m your host, Steven Jarvis, CPA, and with me on the show today, I have a fellow podcast host, Roger Whitney, the host of the Retirement Answer Man podcast. Roger, welcome to the show.

Roger (01:06):

Steven, it is great to be here to talk about taxes. How can I not be excited?

Steven (01:12):

Who doesn’t get excited to talk about taxes? Now, Roger, I actually met you really early on in my journey of working with advisors around tax planning. We got to meet at FinCon in Austin a couple of years ago, and you always stood out in my mind because our mutual friend, Benjamin Brandt, always held you out as, Hey, this is the number one retirement podcast, which you might argue whether the stats back that up or not, but the point is, you talk to a lot of people really regularly about retirement, both consumers and advisors. I guess I’m just saying all this to say that you know your stuff and you also are a financial advisor yourself. You work with clients.

Roger (01:49):

So for the record, I crush Benjamin Brand.

Steven (01:53):

I love it. I love it.

Roger (01:56):

Yeah, I have a lot of different hats that I wear. I’ve done a podcast for nine years on retirement and have a firm Agile Retirement Management, and there’s a whole history of that journey where we work with about 85- 90 clients and we’re an odd firm in that we’re not trying to grow, we’re not a scale business and really looking to scale in any way, which is a little bit counter the normal course of business building. I guess

Steven (02:23):

You have so much fun doing the podcast and your rock retirement community. You’re saying that your business isn’t set to grow, but you do a lot of things.

Roger (02:32):

Yeah, well, what I meant specifically is the advisory practice where we walk like client isn’t. So we have this rock retirement club, we have about 1100 members in it and they pay an annual subscription and within that, outside of the community and all the non-financial aspects, I teach them how to build their own retirement plan of record and they use exactly the same tools I use in my practice and it’s my way of serving at scale where I’m not serving an advisor, but I can empower and equip people to do things. I think there’s this big gap between either your DIY and you’re on the wild west of the internet or you are working with an advisor, which can cost thousands if not tens of thousands of dollars depending on the money. There’s not much in between where people are trying to empower you without trying to sell you. 

Steven (03:21):

That’s a fair point. 

Roger (03:21):

And so that’s the concept of the club and we’ve had a blast doing it.

Steven (03:24):

That’s really awesome. Now, even if you’re not personally making individual plans for all of those people, I mean you’ve got this community of 1100 people that I’m sure ask questions, have thoughts, have things that they get wrong, and that’s actually one of the things I was curious to ask you about specifically around taxes. I think that advisors sometimes will take for granted what the base level understanding of a taxpayer is around tax planning, and I think what I’ve certainly found in working with so many taxpayers at this point is that you probably shouldn’t take anything for granted because you already mentioned that kind of the wild west of the internet is out there sharing all sorts of lovely tidbits about taxes with all these taxpayers. So what are some things that come to mind for you or what are things you’ve seen from taxpayers that you’re like, wait, no, no, no, timeout. Timeout. That’s not how that works.

Roger (04:11):

Well, first off, I work with every client that we have in our firm, so I deal directly with them, and I think it starts at the beginning of the yellow brick road when it comes to taxes like it does with most things, whether it’s the concept of what asset allocation is or what risk is or what an assumption is, taxes are another one where you really do need to start at the first brick of the yellow brick road when it comes to consumers. How the tax brackets work, how to conceptualize tax management in retirement, which is very different than tax management in accumulation, and I think you could almost argue this, and I’m guessing you discover this as well, is the vast majority of advisors don’t understand tax management because they are prohibited from their training and a lot of firms that they work at to really get into tax management.

(05:07):

Now, the people listening to this show are probably much more tax aware as an advisor than 99% of all other advisors. I would argue too that even CPAs when you’re dealing with retirement especially, they are not trained to understand decumulation rules and IRMAA and multi-year planning. They’re used to how do I save taxes this year? And so I think you need to start at the yellow brick road at the beginning because it’s how tax brackets work. Well, how does a Roth work? What is a conversion? What is IRMAA? Is social security tax, what RMDs? What are those and how does that encompass into my plan in terms of tax planning? It really is the basics.

Steven (05:48):

There’s several great things in there on any of those. I think you’re better off assuming that your client hasn’t heard of it before. And I mean for advisors listening, I’m sure you work with very people that are intelligent in their areas. We all have things that we’re good at and things that we’re woefully unaware of. And so if you need to, even starting with Mr and Mrs. Client, I’m sure you’re aware of this, but just humor me for a second. Let me walk through how tax buckets work, how the brackets work, whatever framework you want to use to describe it, just go ahead and assume they need that refresher.

Roger (06:16):

Yeah, totally. And I think the way I approach it is even if they understand it well, we need to walk through these issues in a organized way and that way they just get revealed naturally. Another thing I think when it comes to what someone needs to help say a consumer or a client when it comes to taxes, usually they’ll come, if they’re talking about taxes, they’re going to come because they read an article or they had a story from a friend who had a bad experience and become hyper-focused on one particular tax issue, and they’re sensitized to that and they want to solve for that when it might not be something they need to solve for. There might be actually something bigger so they can get focused a little myopically on something that might not actually even apply to them or be that important.

Steven (07:04):

Yeah, one that’s definitely retirement related that I know has come up more than once, but it came up recently had a client who was fixated on a friend of theirs because friends are the worst when it comes to taxes. A friend of theirs who is not paying any tax on their social security, which definitely can happen, especially if social security is your only source of income, which it turns out was the case with this friend, but the client I’m talking to has a pension. They’ve got a large taxable investment account and they’re getting close to RMD, so we’re doing Roth conversions together, and their friend wasn’t paying any tax on their social security, so they were fixated like, how, come on my tax return and says, I’m paying taxes on social security. We have to make that stop right now. Let’s talk about this because in your situation that’s not only is that not really possible, it’s also not at all what we should solve for. We are solving for bigger things here.

Roger (07:53):

Yeah, it’s counterproductive and it’s taking, I think most people think tactically first, think of a patient that goes to a doctor because they have a pain, all they want is the pain to go away, and that means that’s the pill, that’s the fix or whatever else it is. So they’ll come in and say, give me that pill. Well, what does the doctor do? A doctor goes through a diagnostic process starting at the beginning and working through what is the source of that pain and then decides what the treatment should be, not just to simply take it away in that moment, but to actually alleviate it long-term and in retirement planning for me or in financial planning in general, I think we need to have much more of that approach. And so what I constantly do with clients and in the club is they’ll come in wanting to talk about social security taxation, and I will go through the plan of record and say, okay, well we will get there, but we have to think through it from the beginning.

(08:52):

That way we can think, what is it we want to accomplish? Let’s say minimize tax, just choose that and then what do we mean by that? What strategies are available to us? And then what tactics are available under that strategy? So if they come in wanting to solve for say, social security taxation, well, if they truly want to minimize say lifetime tax, we can say by paying that tax, we’re going to minimize things over here in the diagnosis and in the treatment. And then they can see, they can be part of building that story so they can understand why, because they’re coming in with that paine of, I can’t pay taxes on my social security. They don’t have the entire picture and own any of that story. So they’re thinking from a very limited view.

Steven (09:36):

I like that analogy that you used. You got to start with the first brick of the yellow brick road. We got to start with square one before we get to all these fun strategies. And being able to walk a client back through that to say, and especially if you are building that framework from day one of working together of building those tax concepts, then you can start referring back to things, Hey, remember how we talked about that? The goal here is minimizing taxes over the lifetime of your wealth, and here’s what this means for your goals. And so yes, it would be nice. I would love if I didn’t have to pay any taxes on social security too, but remember that in the grand scheme of things, here’s what we’re doing to really accomplish this bigger goal.

Roger (10:13):

And it’s storyboarding in a lot of ways, and I’ll show you this because I’m working at it right now. I had a two-hour meeting. This is, you can’t see this if you’re listening, but I’m showing Steven a standard operating procedure on building an allocation and determining whether you do qualified withdrawals or do Roth conversions, which is a tax question. Yeah, okay, I have this deficit of spending each year that I have to pay for and I have after tax assets, I have tax deferred assets and maybe I have Roth assets. Where is the best place to pull money to create my paycheck? Now, the default order is typically you drain all your after tax assets, then you go to tax deferred and then you go to Roth. That’s the default in most software. But if you’re tax aware, which I’m guessing you are, if you’re listening to this show, well, what if you’re in a low tax bracket for three years or four years?

(11:01):

There might be an opportunity there. And then the opportunity could be maybe I draw from qualified assets to pay for life to fill that deficit, or I do Roth conversions to take advantage of those low tax bracket years. In my experience, I’d be interested in your thought. I think almost all decisions, but especially this decision is at the end of the day, you’re going to get to a guess. So if it’s a guess, because you can’t, I don’t care what software says what, it never makes sense to always do Roth conversions or always do qualified distributions. It’s never, always, you’re going to have to get to a judgment call based on what you’re trying to solve for. So if that’s the case, if it’s not figureoutable in any meaningful way, you want to have a procedure to think through it logically through the lens of what do I want and your feasible plan and your resilient plan so you can get to a guest that is logical and you can have some confidence in that you just didn’t wing it or intuit it. And so this idea of process thinking I think is really critical and stuff like this.

Steven (12:07):

It’s a great reminder that always is never the case. Let’s use as many superlatives as we can here. But I mean if we could go with always, none of us would have jobs as advisors. It would just be click a couple of check boxes and move on. It’s not always, the only thing I could even begin to slap always on is if we extrapolate this way out to, well, you should always go through the analysis, you should always go through the process, but the outcome, the recommendation, it can’t be an always because it’s got to be situation dependent.

Roger (12:34):

So as an advisor or as a client, the danger is all of the people, and there’s some pretty well-known people in the tax base when it comes to advisors that say always to me, that is a person you run from. That means they’re not a critical thinker, that they’re marketing more than they’re actually being critical thinkers. So I always run away from always people.

Steven (12:55):

As you should. Like I said, the only always I’ll use is that you should always be thinking about it. You should always be going through the process. You should always be doing the analysis. That’s one of the things I like about taxes, especially for advisors, is this is something that needs to come back up every year. The answer should be different in different years. Maybe not every year. Maybe you have three or four years where it looks very similar, but we’ve got to come back to this. We’ve got to make sure it still makes sense as life changes, as tax rates changes, as tax laws change, whatever the case might be. But what a great opportunity to come back and continue to deliver value to clients.

Roger (13:28):

And that’s why I think within the context of tax management here, that’s why if you’re considering Roth conversions with clients, let’s just use that as an example, you should have a standard operating procedure of how you think through that because then you can follow that operating procedure, those checklists to help frame the thinking to get to that judgment call. And I think that’s where all the time needs to be spent is what is that procedure? And that’s what we build lots of procedures.

Steven (13:53):

One of the questions I love to ask advisors, whether it’s tax specific or not, is to get people to think about, okay, well when wouldn’t this be a good idea? Because if you can’t articulate to me why your recommendation could be wrong in a different situation, then I lose all faith in your expertise. To your point, if you think your solution is always the solution, Nope, we’re done. We don’t need to talk anymore. To your point, I’m going to run away.

Roger (14:19):

Yeah, exactly. So it should be, think of it as, well, you’re an adventure racer. I’m an adventure racer. These are defined paths. But if you do most, a lot of adventure races, at least some that I’ve done, you come to forks in the road, any of the paths will get you there. They just may require you to go on a different kind of journey to get there. So there are multiple ways to get there in almost every situation. And so to your point, there’s not just one right path. This path is going to require me to pay tax on my social security and perhaps have IRMAA for a few years. This path will avoid those things, but are going to cause me to say, have larger required minimum distributions and maybe drive me up into a larger tax bracket which might hurt my spouse if one of us, if we go to the single bracket later on, they’re just different paths.

(15:07):

And so you just want to think thoughtfully, what am I willing to go on? And that’s one thing I think about Steven with tax strategies. There’s some tax strategies that are pretty simple to make quick decisions on. A Roth conversion is a really good example. You don’t have to build a multi-year Roth conversion strategy. Just make a decision here we are almost Q4 of 2023, make a decision for this year. You can make a different decision next year when you start to sign up for strategies that take some legal things. Maybe it’s trust planning, things that are a little less undoable. You’re getting married to them rather than just simply dating them for a year. That’s a little, you got to slow down on those decisions.

Steven (15:44):

I like that analogy. Roger, I’m going to get real specific just here for a second because I get this. I’ve been kind of surprised sometimes when I get different opinions from different advisors, but we’ve been talking about taxes in retirement and how that changes 1100 people that potentially can ask you questions. What is your response when people ask about tax withholdings on social security,

Roger (16:03):

On tax withholdings after retired?

Steven (16:05):

No, when they’re taking social security as far as getting the actual taxes paid on the social security.

Roger (16:09):

I’ve never had that question.

Steven (16:11):

So I assume that would be the case for consumers because most people have no idea they can have taxes withheld from Social Security because no one tells them they can. But I’ve had more and more advisors tell me that they don’t ever recommend that to their clients. So again, just curious if that’s something that you might not get the question from your community. Is that something you ever proactively recommend to your clients?

Roger (16:33):

It’s not even on my radar. Maybe it should be, but it’s not even on my radar. And there’s just so much to think about. We do calculate paying estimated taxes and help them pay estimated taxes, but we don’t ever have taxes withheld from social security. I’ve never even thought of it.

Steven (16:47):

So this is an interesting one to me because the outcome’s not going to be any different as long as it’s executed right. The IRS is going to give some preferential treatment to withholdings just from a consideration of what time of year they were paid. But at the end of the day, whether we have withholdings or make estimated payments or the withholdings come from our IRA distribution, as long as it gets followed through on it doesn’t really matter really. I’m coming back to this idea of always, because in general, if I’m working with clients and they have social security, we are typically going to recommend, Hey, let’s go fill out the form W4V and have 22% withheld from your social security. One less decision you have to make during the year. And it creates some flexibility when we do need to make other withholdings. But again, to your point of let’s have a process and let’s make sure we follow that process. As long as the taxes get paid, whether we do it through an estimated payment or a withholding, we still took care of what the IRS asked us to.

Roger (17:40):

Yeah, and I think the one thing I like about that pathway is it’s clear and people become comfortable with it, just like they have Medicare taken out of the social security and they’re used to having taxes out of their paycheck. It just becomes comfortable. So even if it’s an overpayment, it’s a surprise to the upside. People hate surprises to the downside.

Steven (18:01):

Well, the next time we’re in person together having lunch, I’ll talk you through it. I’ll see if I can convince you to start having your clients withhold from social security. But really the bigger point is that it gets proactively addressed. And I love that you could immediately say, oh yeah, we help everybody with estimated payments because I meet too many advisors who have clients who get frustrated every year when they have these surprise tax bills because they’re not taking a proactive approach whether you’re proactively doing withholdings or proactively doing estimated payments proactively do something.

Roger (18:31):

Those kinds of surprises are not fun. And we’re caught in a little bit of a gray area here too, Steven, in that. And from an advisor standpoint, in that one, every CPA I interact with, which is very few always say pay the safe harbor from last year, if anything, and in retirement, you have very big swings in what your actual income is, and they’re not involved in thinking through qualified pre-tax withdrawals. They don’t think in those terms. So what ends up happening as an advisor is we do everything but “tax advice”. We do all the planning, the scenarios of what makes sense, and then we have them go get it blessed by their CPA because legally we don’t give tax advice. And especially if you’re at a firm that’s very sensitive to that, and I’m not a CPA, that’s not what I do.

(19:23):

I don’t think about taxes all day long. That puts an advisor in a really weird place where a lot of times we’re educating the tax professional because they’re not used to, in my case, retirement planning and having them bless it and having to do our own tax estimates. So we do all of our own tax estimates with clients. We review all of their tax returns. I just started to build a 2023 tax draft for a client this year because thinking about year end items, it just puts us in a weird place. Most of us aren’t trained in this, and it’s important to have someone to rely on to be able to, if you’re not going to hire an EA or become versed, I can’t find CPAs, I can’t find people to do taxes for my retirees.

Steven (20:06):

It’s really tough. I mean, that’s actually a lot of where Retirement Tax Services came from was really this incredibly underserved group of people preparing for and into retirement who it doesn’t make sense anymore to just do it on h&r block, but your local CPA wants to work with business owners wants to charge thousands of dollars for return if they’re going to touch it at all. And so it can be hard to find that help. That also reminded me of just another talking about concepts that we might take for granted that people understand. You mentioned Safe Harbor had a client just a few weeks ago who was legitimately concerned that since they had unusually high income in 2022, that meant that their tax bill would be higher in 2023 because someone had sort of partially explained Safe Harbor to ’em. They didn’t understand that that was just how the IRS looks at how much got paid in during the year. By the way, there’s multiple safe harbor provisions, but they’re like, geez, I had all this extra income because my advisor helped me do a Roth conversion and now I’m screwed for the next couple of years. And I said, okay, hold on. Here’s how this actually works. And they were so great, we didn’t make any changes, but there was clear value in that conversation forum just because they left with just this lighter feeling of, oh, okay, I didn’t mess everything up. I am going to be okay. We’ve got a plan. We’re going to be good.

Roger (21:18):

If you want to be a hero to a client, get involved in what’s going on with taxes and be the one that can bring clarity. Because what ends up happening is they’re going to get bad information or partial information or they misunderstood the information and it’s going to freak ’em out. And God forbid they go on the internet where there is going to be this onslaught of information that really, I think of the internet as one big marketing funnel. Everything is created to market. There are very few safe places that are safe to just get good information. And as an advisor, whether you’re really doing you’re involved in their taxes or not, you should be that safe place to now, let me see, find that issue. Let me help give you clarity on that. That’s worth a lot. And I think that makes you indispensable as an advisor if you can be that safe place when it comes to whether it’s taxes or other things.

Steven (22:13):

Yeah, I’m pretty sure I could spend the rest of my life just trying to contradict bad tax information on the internet and I still wouldn’t make a dent in it. So rather than individually call all of those people out, I try to just provide, like you said, provide a safe space for here’s where you can come for quality information.

Roger (22:29):

Well, and that’s the key. You just want to be the exemplar and it’s easy to poke at other people. Look at me. I mean, I’m the Retirement Answer Man. I had no clue what you’re talking about with Social Security withholding. I don’t have any in my process at all. It’s not like I know everything, but I have over 500 episodes on the show and in my practice, I am constantly curious and improving and that’s all we can do. 

Steven (22:49):

I love that- constantly curious and improving. That’s the other people who always say always those people scare me. People who don’t think they have anything left to learn, those are people that scare me as well. If you can’t tell me the last time you changed a process or improved a system or learned something new, then that’s worrisome to me.

Roger (23:07):

I’ll give you a really funny, I think it’s a funny example. So earlier this year I answered a question related to the five-year old, five-year-old related to Roth conversions and Roth contributions, and I answered it incorrectly, and I have wonderful listeners who are very kind to tell me that when I answer something incorrectly and I looked at it when I got the emails, I made the correction on the show. But then what I did was the next month I did an entire month-long series on thinking through the Roth opportunity going from what is the opportunity, what are the ways to get money into a Roth, how do withdrawal rules work with the five-year rule, and then how do you have a framework to make a decision for yourself? So I used it as an opportunity. I’m like, basically what I said to myself, well, crap, obviously I need to revisit this because I was wrong and I got to be careful about that. So I use it as an opportunity to think through a subject in an organized way and reequate myself. I think that’s what you have to do.

Steven (24:05):

I love that approach. There’s so much value in that, and there are multiple financial planning areas that this is true, but it’s definitely true in taxes that there’s too much to commit to memory and to have perfected all the time.

Roger (24:18):

We all can’t be Michael Kitches and just have total recall. Right. It’s annoying. I love Michael and others like Michael, but I’m just not that guy.

Steven (24:28):

Yeah. Nor do I strive to be that guy, but I do. He is my go-to for a lot of things. Well, Roger, I always like to make sure that people are taking the information on this podcast and turning into value, which in my mind means taking action. So as you think about what we’ve talked about today and you think about the advisors listening, what are actions you would recommend to people who are looking to do more for their clients around tax planning?

Roger (24:51):

The action I think you need to take is the problem is we come from the bottom up rather than top down because clients want to get to those tactical things really quickly, and we want to as well. We got to slow down it, and we have four pillars that we build out with every client, and we take every decision related to tax planning or retirement planning and put them in one of those four pillars. And this keeps everything in its proper place, which is number one, what do I want? Have a vision for retirement and obviously that transitions to goal then have a feasible plan of record. This is what do I want to accomplish? These are the resources I have. Is this feasible that I could do this race and then make it resilient, which is cashflow planning? If it’s feasible for me to do this race, how can I make it sure that I don’t get knocked off course when a storm comes in?

(25:46):

Then think about optimization. How do I bling up this journey? When I think of tax planning, I think of that as something in the optimization pillar. But if you start to put tax planning ahead of vision or ahead of feasible or ahead of resilient, you’re going to get yourself in trouble because you can’t figure any of these things out. And if you do it in this order, all of these tax planning opportunities and risks that we think of actually become a lot easier to solve if you follow things in that order. So I would focus on those things.

Steven (26:18):

Yeah, I love that. That’s a much more eloquent way to describe that. I tell people all the time that we need to make good life decisions and then figure out how to do ’em tax efficiently. But yeah, I love that pillar idea, but making sure you have a process you’re following that we don’t immediately jump to tactical and I get the appeal. It feels more powerful to be able to immediately say, okay, here’s the action you can take. But again, we wrap up these episodes with action items. We don’t lead with action items. We’ve got to go through the process and then talk about the implementation, the optimization.

Roger (26:51):

Yeah. The cool part of our taxes is let’s do this. I saved you X amount. That’s really nice in retirement planning. There’s not much we can say that we do that has that direct result that we can eat that day. So that can lead us to want to focus there before we get the basics.

Steven (27:08):

Well, Roger, I really appreciate your time. For everyone listening to Retirement Answer Man, that’s where you can go follow Roger. Everyone tells me that people listen to lots of podcasts, so you can listen to both. Roger, again, appreciate your time here. I’ll look forward to the next time we get to see each other in person.

Roger (27:22):

You too, man. Good luck with your race.

Steven (27:23):

Thank you. And to everyone listening, until next time, good luck out there. And remember to tip your server, not the IRS.