Read The Transcript Below:

Steven (00:51):

Hello everyone and, welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals Edition. I’m your host, Steven Jarvis, CPA, and joining me today is a fan favorite and a recent guest on an RTS webinar, Micah Shilanski.

Micah (01:06):

Steven, thank you so much for having me. I’m super excited to be here and get to talk with everyone again today. Get with jam with You. I had a blast when we did that webinar. It was a ton of fun.

Steven (01:16):

Yeah, geez, that was a great one. We had something like 1100 people register for it. It was crazy. It was specifically about the tactical side of getting Roth conversions done. We just really transparently told everybody, we don’t have made up secrets and ideas about the Cayman Islands that we’re going to share online anyways.

Micah (01:33):

We’re going to share online. We do have ideas

Steven (01:35):

And there was so much great engagement, a lot of really specific questions, which Micah, I love it when people ask specific questions. I know

Micah (01:41):

They’re

Steven (01:41):

They are serious about getting it done and so we ended up with all of these questions. We wanted to make sure we actually came back and answered them all. So make sure you go back and find the webinar if you didn’t have a chance to listen to it. But either way, we’re going to cover some great stuff today.

Micah (01:54):

Steven, as a presenter, whether I’m talking to clients, I’m talking to financial advisors, et cetera, I love questions because instead of my theory on what people want to know, I actually know what they want to know and now we can really have a great meaningful conversation. And this is one thing for you advisors out there, especially if you’re doing a presentation, if you are not getting questions live in the audience, you’re doing it wrong. You have to present in a way where the audience feels encouraged to ask questions. Now I can build relationships and rapport. I’m not a school teacher lecturing them for 12 hours. I want to have a conversation with them. And that’s what you guys did. The 1100 people that registered did an amazing job within in shadow. It’s fricking blowing up with all these great questions. We got some of them answered, but Steven, we have a lot to answer today. So let’s jump into this.

Steven (02:38):

Yeah, we’re just going to start just knocking through this list. There’s going to be some common themes, but we’re going to get all the answers. So Micah, I’m going to let you go first. What’s the first question we should address?

Micah (02:46):

Alright, I’ve going to hijack this one. I got this that just came in from a CPA and I’m working with a client. It’s a little bit of a complex case, a lot of moving parts between businesses and other things, et cetera. So I went out to the CPA and was like, Hey, the client has paid X amount in year to date. We want to do a Roth conversion, but we don’t want to have them pay any more than what they’ve already paid in. How much of a Roth conversion should we do? And at first email back was like, eh, I don’t really run these numbers, it’s a lot of work. Can you do something? So I put together some numbers, which was probably my mistake, and I sent it to her. I was like, Hey, I need you to validate all of this. And she’s like, oh, well why don’t you do A, B and C and go rerun these numbers, but I’m sure they’ll be fine on the conversion. And so I can’t get Steven, I can’t get the CPA to answer the stinking question, which is how much of a Roth conversion should we do not to increase how much the client has already paid into taxes for their liability. So where am I going wrong with this?

Steven (03:37):

That’s a great question, Micah. I’m only laughing because unfortunately you and I see this all the time, this is the looking in the rear view mirror as opposed to the windshield. This is, I’m so focused on what happened last year and for a lot of CPAs that’s not just, hey, trying to file last year’s tax return, but it’s this mindset of I only want to deal with things that are certain. And so it definitely is really challenging and Micah, as you walk through that, I mean sometimes and this hopefully our listeners can resonate with us to some extent as well. When you work with other professionals, sometimes you get to a point where you’ve exhausted what is reasonable for you to do and then we kind of have to approach it from a, okay, but what do I do to make sure I’m still taking care of my client and that I’m not just creating a situation where we’re dealing with surprises and we’re dealing with a situation where I’m just going to get run over by the bus. Because if you had just told me, Hey, I’m having a hard time getting an answer from a CPA, I would’ve said, Hey, well what information can you provide for them?

(04:30):

What can you do on your side, which you’ve already done? You’ve already made it really clear. Here’s the pieces we can control and the pieces I’m not sure of, and here’s what the client’s goal is. This might sound a little bit flippant, but I mean it’s probably where I would end up in the situation of I would probably then go back to the other professional involved and say, Hey, great news. I reran the number. I still come up with the same answer that I had or the range that I had. Unless you want to tell me differently, I’m just go ahead and let the client know that you’re on board with this so that they know what to expect from tax time.

Micah (04:59):

Yeah, I think that’s the only thing I’m going to bring. I think I’m going to do a slightly different approach. Lemme know how you thought on this one. I’m actually just going to go to the client and be like, Hey, I’m working with the CPAs really great. I’m not able to get a lot of exact numbers. She says there’s a lot of moving parts inside of here, so here’s the range and here’s the risk that we have. We can be conservative and do X and you’re probably going to be okay. We can be aggressive and do Y and here’s what I’m concerned about. Mr and Mrs. Client, which approach would you like to take? And I want to get the clients involved in this situation. Since I can’t get a clear answer and come up with a clear recommendation, I could shoot myself on the foot assuming that I know really what the client wants. So I think I’m going to give ’em these ranges A or B, and see what they want to do.

Steven (05:39):

I love that nuance, Micah, and taking it back to the client because that really just reinforces having those really informed conversations and making sure that we’re bringing our clients into it. I mean, as you well know, anytime we’re doing tax planning, any kind of planning for the future, there is always that uncertainty and I think a lot of advisors skip reinforcing to the client when there is uncertainty and what that uncertainty looks like.

Micah (06:00):

Yeah, amen to that. Alright, speaking of some more uncertainties, Andrew asked a good question says, if doing multiple Roth conversions over multiple years, how have you found the best way to track the five-year clock on the gains for each Roth conversion?

Steven (06:14):

Yeah, so Micah, I would love your thoughts on this one as well. To me this immediately goes to, okay, what have I seen in practice and what I have seen in practice is that I never have to deal with this.

Micah (06:24):

That’s going to be my answer.

Steven (06:25):

I get where the question’s coming from. We have two different sets of five-year rules around Roth accounts. So totally get, I mean Andrew probably read a great article about these detail. I mean I’ve written articles about this stuff, but in practice it almost never happens. So I mean you should be tracking your CRM for your 1099 letter, which we’ll talk about in a minute, what the amount of Roth conversions when they’re happening. And then if a question comes up, well, I would tell the advisor to go work the custodians. I don’t work with the custodians directly, I don’t manage the money. But then we’re going back to the custodian and saying, Hey, we need some help on what the gains were.

Micah (06:55):

And Steven, what are the rules? Let’s be on the same page with this. What are the rules on the Roth conversions for that five-year rule? There’s two different sets of them.

Steven (07:02):

So we have the five-year rule around just having a Roth account in general, and so sometimes you’ll hear the recommendation that if somebody doesn’t have a Roth account, great, let’s just set something up so that five-year clock starts ticking. The other five-year rule we have is on each conversion and what the five-year rules are getting at is when we get to a point where we can take this money out without paying any taxes or penalties on the growth of what’s in the account and in the case of a conversion, because what the IRS is trying to have us avoid is converting it to Roth and we don’t have to worry about if we’re under the age of 59 and a half, we don’t have to worry about any penalties. And so what they don’t want is a 55-year-old to come along and say, well, I converted to Roth six months ago and now I’m going to withdraw from my Roth account because that’s basis and I’m not subject to the penalty. Now is going to say, hold on a second. That’s why we have these timelines in there. There’s a bunch of different factors that have to be considered.

Micah (08:01):

So on the practical side, if a client’s over 59 and a half and they’re doing Roth conversions, this isn’t something that we need to worry about. So the practical side kind of goes out the window. So where would this come up, Andrew? In practicality side, if a client’s taking money out before 59 and a half, I would stop at my processes in which we do. If a client’s taking money from retirement account before 59 and a half, it’s a hard stop. They got to talk with the advisor. It’s not an automatic distribution. There’s a lot of what ifs in that case and that’s about it. That’s as much as we track it.

Steven (08:29):

Yeah, don’t track it until you have to. Ben asked the question, are mega backdoor Roth conversions reported the same as regular backdoor conversions on form 860 6? And this is a great question and the answer is no, they are not reported the same because the 8606 is specific to IRA dollars and when we do a mega backdoor Roth conversion that’s within an employer sponsored plan. And so if we look at our 1040 line four, the 1040 is IRAs, line five is pensions, annuities, there’s all this stuff. It doesn’t say employers plans, but that’s what they mean in there. The 8606 is specific to activity in IRAs.

Micah (09:08):

So how to track, this is one of the things before we do any type of transfer in a client account, never use that nasty R word as a rollover, always a transfer. We always check for this in our checklist, regardless of where the money is coming from, including TSP money you can have after tax money in a TSP, we’re always asking about this money before we do any transfers to make sure we don’t lose this opportunity with a client or just miss it in all that money gets co-mingled or pre-tax money, right?

Steven (09:34):

Yeah, yeah. Love that approach. Question from Bereket. He says, how do you handle the conversion when the client’s tax pro doesn’t agree. Get a new tax pro? So Micah, what happens when they don’t agree?

Micah (09:45):

 This needs to be a guided discovery and we do run into this. We have a couple of CPAs they actually have coming around to an in town, but I know if a client has a CPA, they’re going to be against the Roth conversion. So one of the things, I’m always going to plant the seed that will work with anyone who’s a team player and it’s great language with a client because now when I start getting pushback, the CPA won’t talk to me, the attorney won’t talk to me. The clients are like, oh, well I guess they’re really not being a team player. Are they Like, oh, it’s kind of a problem and then it kind of evolves defining out its own solution. So the first thing I want to do if a tax pro doesn’t agree is go into with earnest questions, why don’t they agree?

(10:16):

Is there a legitimate reason that they don’t agree? I had one tax pro tell me they think taxes will be lower in the future, maybe they will be. And so they didn’t think that the client should do Roth conversions in this case, when I disagree with a professional, I’m going to lay out, like we were talking about almost at the beginning of this, I’m going to lay out the options and the risks, then I’m going to go to the client and I’m going to say, Hey, here are the options that we have. Here’s my position, here’s the CPA’s position. This is why I think you should do it and this is why I think it’s going to make the most sense and the client’s going to make that decision. This is not, I have never seen a Roth conversion be a make or break for financial independence and success. Roth conversions are a luxury, right? They’re not a requirement that you have to do to be financially independent. So I am not going to die on this hill if a client and a CPA doesn’t want to do a Roth conversion, it doesn’t blow up their financial plan, it’s their money.

Steven (11:01):

Well, so Micah, that really ties right into the next question, which is if you pull funds from a taxable account to pay taxes for the conversion, do you withhold taxes on that withdrawal as well? And we have some other related questions of, Hey, is that a deal breaker if you have to withhold it from the Roth conversion? And I think a lot of this comes back to what you said about, I like that phrasing, Roth conversions are a luxury. It can give us more control and power over our money to accomplish the goals we want to. This doesn’t change the outcome of whether I can retire and I think that’s an important framing for how the taxes get paid because the mathematically optimal outcome yes, would tell us we’re paying it with outside dollars, but that doesn’t mean that’s the only way we can get it done.

Micah (11:37):

Yeah, I definitely think there’s multiple ways that you could do this. My requirements, Steven and this working with our clients is that if an investment generates a tax bill, the investment should pay the taxes and the taxes get paid from the investment account right away. There’s a few exceptions to that, which clients will want to pay their money separately. We still help with that and we track it, but you got to pay the taxes right away. I’m not in this camp that says wait until April 15th of the next year and figure it out. Clients are always frustrated when that happens, so we pay the taxes right away. If it comes from a taxable account, we gross it up and we have taxes withheld and we move on.

Steven (12:09):

Yeah, that certainly makes my life a lot easier. So I appreciate that you do that with your clients.

Micah (12:12):

Oh, you’re welcome.

Steven (12:13):

Last question from Bereket here. We obviously sorted these alphabetically by name said I didn’t know you guys do tax return reviews. I have a client who DIY his 2023 tax return and I’ve seen some red flags. It’d be great to double check and I think we covered this for him, but yes, that’s one of the many benefits we offer to our RTS members. So I love doing those tax returns reviews. I’ll actually be doing some more of those this week. It can be hard to find somebody to give you a second opinion, which is why we love doing it.

Micah (12:36):

Amen. Hey, this is a fun question from Brandi and I get this quite often every year actually from clients and it says, any idea or what went wrong on how to fix a client’s TurboTax file on their tax return doesn’t reflect Roth conversions. We did last year. No, 8606. Great news, Brandy, if you didn’t report it correctly, the IRS is just going to help you. You can just do nothing and in a couple of years you’re going to get a letter from Aunt IRS. Okay, that’s not what to do. Sorry.

Steven (12:59):

DIYers are just lovely to deal with sometimes because there’s a lot of situations where DIYing can make a lot of sense. If you have a relatively simple tax situation, great, save a few hundred bucks, stay in touch with your own situation, totally get it. But this is one we see get missed real often with DIYers and I think a big part of it is that TurboTax isn’t trying to make them tax professionals. They’re trying to quickly get them through it and get them a giant refund. So TurboTax is going to push people towards things that help get them a big refund, how TurboTax feels like they’re winning. And so we see this problem all the time as far as once the problem’s already happened, how do we fix it? You actually can file an 8606 separate from a tax return so you could help them to go file just the 8606 if they did the rest of the conversion correctly, as in they paid taxes on it and it just didn’t get reported on the 8606, that’s probably the best way to solve it. But really I would stop a step before that and use this as a reason to the client to identify, hey, your tax situation is getting more complicated. It’s time to work with a professional,

Micah (14:01):

And this is an area of financial advisors I think should get TurboTax go through several of the screens every year. Steven’s eyes are wide right now.

Steven (14:08):

No, I love it

Micah (14:08):

Because these are questions that we get from clients. Like if a client makes an after-tax contribution to an IRA, TurboTax pops up immediately and throws a warning and the warning says it’s not deductible. The client reads it that they can’t do it right?

Steven (14:24):

Mhm..

Micah (14:24):

The only reason I found this is because going through TurboTax how to report the 8606, you should know this. Am I saying that you should give tax advice and violate your compliance? No, I’m saying you should be aware of the tools the client is using and you should use them yourself. I play with TurboTax because clients use TurboTax. That doesn’t mean I file my taxes with TurboTax, but I want to see what their experience is going to be like.

Steven (14:44):

Yeah, Micah, no, I love that I’m taking notes here because I’m nerding out about things we can do in 2025 for advisors to help ’em with things that.

Micah (14:51):

Ooh, that’s a good idea.

Steven (14:52):

Yeah, we’ll come back to that later.

Micah (14:54):

Alright, got another question says based on a recommendation on what marginal tax rate will the conversion push the client into? Okay, so I guess we’re given some example, but one of the things I’m going to read this and Steven lemme know your thoughts, is

(15:07):

I am focused on where the client’s taxes going to be in the future. Number one, what’s their future tax rate going to be? Marginal rate number two, do we have a diversification of different pots of money? Those are the two reasons I like doing Roth conversions, so I’m less concerned on a marginal tax rate today or a rule of thumb for it. My only rule of thumb is where are they’re going to be in the next 10 years? Is it ahead or underneath where we’re currently at? That might help guide me on a Roth conversion. I don’t get too focused on what their current marginal rate is. Besides that though, what do you look at Steven?

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Steven (16:00):

I’m pretty sure I’ve done a conversion in every tax bracket. So for me, and this ties into a follow-up question from Brett as well of is there a marginal rate that is too high for conversions? And so Mike gets back to your point of where do we expect the client to be in the future? Because there are some clients where absolutely, there’s no way I’m doing a conversion in the 37% bracket because they have one time income this year and we know it’s not going to repeat and it would be silly to be irresponsible of us to get them doing big Roth conversions in this one-time, massive income year. But there’s other clients who are in the 37% bracket and always will be and are still concerned that tax rates might go up from there. So yeah, let’s do ’em in that range. The one thing that this brings to mind that I do try to make sure I’m reinforcing to clients when tax rates come up and Roth conversions is making sure we’ve covered that education piece of, Hey, if we accidentally go into the next bracket, it’s not going to blow up your whole tax bill.

(16:51):

It’s not going to go back and make all of your income subject to that next level. And you’d be surprised at the reaction from some clients because some of them do have that fear of, Hey, I know my advisor talked about doing X, Y and Z, I’d really like to do half that much. I’m really worried about if we accidentally go into the next bracket and then when I explain, oh hey, great news, if we go a thousand dollars into the 32% bracket, it’s only that a thousand dollars that gets taxed at 32% and they’re like, oh, I didn’t realize that before.

Micah (17:16):

That’s huge. I would never, for most of my clients we did this, I never want to leave them in a 12% bracket doing a Roth conversion. I always push them into 22% but push ’em by like a thousand bucks, right? You’re talking a hundred dollars difference and we maxed out that bracket. It’s not that much money, but here’s the important part where percentages get confusing. Steven and I love what you did. You gave a dollar amount example and applied the percentages to it, right? You got to do the math for clients and I draw this out and says, great news, this is how much taxes you’ll pay on this money and then this little bit of money right here, this extra thousand dollars, this is where we’re going to pay the extra and I tell ’em what the extra dollar amount is then like, oh, that’s not a big deal and especially if it’s not a friendly CPA, I really want to articulate this. The experience has been with my clients for non-friendly CPA is, wow, your advisor just pushed you into what’s the highest tax bracket that Roth conversion. Now the client’s like, what the heck did myah do? So really lead with this setting good expectations.

Steven (18:08):

Love that. Micah, the next question from Ed, remind me of the timing of sending your 1099 letter. We referenced it quickly, but you talk about how this works in your office.

Micah (18:17):

Yeah, the 1099 letter is a must do. It’s a value add we send out to our clients every single year. The perfect RIA has a lot of information on it. Steven, I know you did with retirement tax services is due as well. And basically what our 1099 letter is, we’re starting now in December getting ready for pulling all the information, getting ready, kind of a dry run and then in January we’re going to send this out. In my world, this can be kind of simple. Ours over the years has evolved more complex. The simple is, hey, what are all the client’s investment accounts and what tax form should they be expecting from these accounts? And CPAs love this letter because they get to know what that money is going to be coming in, what should they be expecting? I mean, Steven, I know you and I have talked and you get bit sometimes because a client didn’t give you all their statements and it’s so funny when you don’t know about something, you can’t put it on the tax return and so this helps reduce amended returns.

(19:04):

We also put in here QCDs, qualified charitable distributions. We put Roth conversions, we put estimated tax payments on ours, we put transfers in our accounts. So if a client moved money from the TSP to an IRA, we’re going to put that on there. So again, don’t start with that. That’s a lot just we keep tweaking it a little bit more every year and we do that based on how would we have prevented this problem when I see a tax return and be like, aha, here’s a problem. How could we have prevented that? I love that.

Steven (19:27):

Yeah. And then Micah, I know there’s a little bit of differences in practice between different advisors. How strongly do you feel about the exact timing of that 1099 letter?

Micah (19:36):

It should come out before your information goes to the tax preparer, right? That’s when it should be coming out. So that’s probably early February. Late January is when the clients should be getting it.

Steven (19:47):

Okay, love that Micah. The next question I’m going to jump to is from Garrett. He says, what is the cream in the

Micah (19:51):

Coffee? Ooh, that’s a good one. So a cream in a coffee is something, boy, I want to say Ed slot coined that term. I could be wrong with that.

Steven (19:59):

Yeah.

Micah (19:59):

Basically what it talks about is when you have pre-tax money and after tax money in an IRA account, and so basically what the IRS says, if I have a hundred thousand dollars IRA and $6,000 of that is post-tax after tax contribution, that means 94,000 ish. Well, when I take any money out of that, IRA I got to go with the pro rata rule. So 94% of any distribution is taxable pre-tax and 6% is tax free. I can’t just pull out my tax free money in that as doing a backdoor Roth IRA contribution. So that’s the cream in the coffee concept. And so once you dilute that money, it’s really, really hard to separate it except for in one circumstance, our one circumstance is we can separate out the cream from the coffee when we have an employer account that will accept pre-tax money, we can then the pre-tax portion of an IRA balance into 401K TSP. Then all that’s left is the after tax money. Then we can do that Roth conversion of that after tax and pay little to no taxes on that. But there’s a lot of timing, a lot of moving pieces with this.

Steven (21:02):

Yeah, Micah, that’s why we put together an entire masterclass on this topic because if it’s a route you’re going to go down totally valid and can be very valuable, but you’ve got to make sure you’re dotting your I’s and crossing your T’s. The other reminder I try to make sure we always throw out when we’re talking about cream in the coffee is that you made the distinction of the employer sponsored plan TSP 401k versus the IRA, but the IRS, when they say IRA, they mean traditional IRA. They mean simple IRA, they mean SEP IRA and the SEP seems to be the one that gets people up. Well, it’s an employer plan,

Micah (21:33):

It’s an employer plan, an employer pension,

Steven (21:35):

But for tax purposes it’s not. And so it gets lumped together and you still have that cream in the coffee.

Micah (21:40):

Yeah, you got to be careful in this one where this has bit me in the past is when clients get too helpful and they try to do things on their own and then we find out afterwards with it, we talk about a great idea and then they call and execute on it. So be careful when you’re talking to clients about things as well and how you’re helping out. We’re big control freaks now. We like to help with everything or nothing for those reasons.

Steven (22:00):

So let’s jump to Johnny’s question. Is there an age target for Roth conversions? This is one Micah where things seem to go in kind of themes. Maybe everyone’s reading the same articles, but I’ve gotten several questions lately that make me think of this related to the break even point on timeline of when Roth conversions make sense of how many years do I knew to have done a Roth conversion before I break even? And so it’s one of those things we’ve got to remember that Roth conversions create tax savings when tax rates change. Now tax savings is not the only reason we do a Roth conversion because it creates a lot of flexibility. There’s some other things there, but actual tax savings is tax rate. In the year I did the conversion versus tax rate in the year I otherwise would’ve used the money.

Micah (22:44):

Whoa, whoa, whoa. I thought we were just trying to help balance the budget. That was the whole concept of this. We’re doing massive Roth conversions, paying more taxes to balance. That wasn’t what the plan was. I missed that memo.

Steven (22:52):

That’s not what my plan was. That is what congress’ plan was.

Micah (22:55):

So yeah, I totally agree. There’s not an age that’s too old or too young to do it. The question is what’s the intent behind it? What are you trying to do? I have some clients that really don’t need to do Roth conversions, but they want to leave their kids tax free money and they’re like, you know what? I’d rather pay the taxes on it now because I’m not using it anyways and give them tax free money. Sweet. Again, does that blow up their financial plan? No. Is that the most cost effective thing to do? No. They could probably buy life insurance as a better option, but there’s other options. But this is what the client wants to do. Rock on. We can do a Roth conversion on an 80-year-old. That doesn’t bother me. I’m trying to really remove the penalty of the RMD now I’m getting RMD penalty. I’m using it in the census. It was too much money of an RMD, which kicked you into a higher tax bracket. It’s a punitive RMD and that’s one of the focuses on these Roth conversions. I’m trying to get clients below that so that’s not an issue.

Steven (23:42):

Well, and then Mike, on the other end of the spectrum, I have also done Roth conversions for people in their thirties. Now I’m not going to every client that I have that’s in their working years and advocating, Hey, we need to aggressively do Roth conversions. But there’s been situations, the most recent one that came up is a couple that are in their thirties that are really, they’re in their peak earning years other than this year they’re doing a transition between employment and self-employment and they’re taking some time to do that. So we suddenly randomly almost have this year where they’re going to be in the 10 or 12% bracket compared to they’re usually in the 32% bracket and probably forever will be. Amen. So fantastic. Let’s take a look at taking advantage of that. So it’s more the exception in those younger ages for me, but there’s not a hard line on either direction..

Micah (24:25):

 Here’s the hard line. You got to have the conversation with every client because if you don’t, I will, and I’ll ask the question with your client, which is my prospect, and I’ll like, wow. It’s like why hasn’t your advisor talked to you about Roth conversions before? And so you could save all this money tax free and now you’re going to have a bigger relationship problem. So you have to have these conversations.

Steven (24:44):

A hundred percent.

Micah (24:44):

Kurt, ask a good one. Are you reviewing a client’s tax return before it is filed? Kurt, that is my preference. Steven definitely is, right, because he has to sign, but it is my preference to review tax returns before they’re filed. It is much easier to fix mistakes than it is to amend returns. So I love to see ’em. We do ask a client with a sliding scale the closer they get to April 15th, kind of the longer it takes us to review them, unfortunately when we get a lot of them in, but we try to get it for at least a week before it’s going to be filed. We go through the 37 point checklist, which Steve, I know you guys have on your website, which is fabulous and our team uses that.

Steven (25:18):

Yeah, like you said, Micah, I obviously review your tax returns before I sign them. My name goes on them. There’s some liability associated, some professional integrity, all those kinds of things. But we also provide this opportunity for all of the advisors we work with because on the CPA side, there’s a lot of value too. It ultimately all benefits the client. And so Micah, I know you’ve had to work really hard to develop relationships with CPAs. It’s taken years outside of the clients that you work with for RTS to get people on board with that. But where it’s possible, it’s incredibly valuable. And so we share those draft returns with advisors every single time because there’s going to be that, you mentioned it before, the 1099 letter. There’s just times where clients forget to tell the CPA things and it’s so much easier to hold off on the filing a little bit as opposed to being really anxious to get across the finish line for the prize that you don’t get and then having to amend.

Micah (26:07):

It is. So set those expectations with the clients, how long it takes to review it, what your process says. Also be clear with the client what you are going to review and what you’re not going to review.

(26:16):

Right? That’s one of the reasons I love the 37 point checklist is I get to say, Hey, great, here’s the 37 things that we’re reviewing, and this also means I’m not reviewing other things. Sometimes clients will come in with K one income or other dividend income and be like, Hey, this could be out of my caliber. I’m not seeing those business returns. I can’t review this to say, was this done correctly? Right? I can say, okay, was the K one put on your tax return correctly? Sure, I might be able to say that, but I can’t validate those documents that come in. That’s another reason we really want all of our clients to require when we can all of their assets at Schwab under our management. So I can see what those forms are. We have seen incorrect 1099s come from custodians and Schwab has done it too, by the way. It’s very rare, but sometimes that will happen. But the great news is when it does, we can say, Hey, this doesn’t match our records, and we get to come back and say, Hey, there needs to be an adjustment or a fix or something of that nature. Again, extremely rare, but it’s really cool to be able to see that and to be able to help a client with it.

Steven (27:07):

Well, and I appreciate you highlighting that, Micah, because these things do happen and that’s why we talk about so many of the simple things so often because they feel simple. I’ll use air quotes on that. If we go into the deep dark corners of the tax literature, yes, they are relatively simple, but there’s so many things that can go wrong if we don’t have a repeatable process. I’ve probably shared on the podcast already, but earlier this year we had a taxpayer download our 37 point checklist just to review his own situation.

Micah (27:33):

That’s right.

Steven (27:33):

It flipped him from having a payment to a rather large refund because of things that got missed. So the checklist is not how much of your money is taxed at 4% because you’re based in Puerto Rico. It’s Hey, do these things match? Do they feel accurate to what happened this last year? Have you checked with your custodian? Do these things make sense to what we’ve actually experienced in life?

Micah (27:53):

A hundred percent. Steven, how are we doing on time? Do we have time for a few more? Do we need to wrap up?

Steven (27:57):

Oh, Micah, let’s do a couple more. Yeah, let’s do this.

Micah (28:00):

Well, I’ll give this one to you then. Mark says, explain IRMAA, what is IRMAA and why does she want so much of my money?

Steven (28:07):

IRMAA is just a clever way to charge you more taxes. No, IRMAA, the income related monthly adjustment amount. This is the extra premium that you get to pay on Medicare if you make too much money according to the IRS. So we have all of our aunts working against us. So aunt IRS wants aunt IRMAA to take more of your money if this arbitrary decision about what too much money is reached. So there’s a couple really important things we’ve got to remember about this income related monthly adjustment amount. This IRMAA one is that it is unlike our marginal rates we talked about before where if you go a thousand dollars over into the 32% bracket, we’re only paying $320 in taxes. With IRMAA you go a dollar into the next bracket and you have to pay the entire next premium chunk. So that’s one piece of it.

(28:55):

So our good friend Ben Brandt, he refers to this as in for a penny in for a pound. Another piece we’ve got to remember is that there is a two year lag on your premiums going up based on the timing of your income. And part of the reason this is so important to remember is that especially if we’re helping clients with Roth conversions and we know they’re going to get into a higher Irma bracket, we need to remind them down the road that, Hey, remember this is why we did this and why it made sense. Micah, back to your point about quantifying the impact. It can make a lot of sense to do a Roth conversion into IRMAA, but we need to know what that dollar amount is. It could increase their IRMAA premiums by $3,000 a year, and if an extra $3,000 still makes the Roth conversion worth it, great, but let’s remind the client and reestablish that expectation.

Micah (29:38):

And be careful with that one too. Because IRMAA, money is money, right? What does that mean? That means if you increase a client’s Medicare bracket, they will get very fussy with you. So it’s not a pencil. Steven, I’m just trying to push back on you. I agree with a hundred percent what you said, right? It is one stage is definitely a math equation. The other stage is an emotional equation.

(29:57):

And let’s make sure you get that client buy-in. More often than not, I will have clients not want the IRMAA increase. They don’t care about the math. They cannot stand paying that higher IRMAA amount. Now the point to be careful on with the math side is, okay, we could delay that, but once 73 happens, you have RMDs, you’re going to be in this for the rest of your life. So we might have to bite that bullet of Irma and do bigger Roth conversions now to get you out of Irma for the rest of your life. So it’s that balance we need to look at. But yeah, it’s an emotional one.

Steven (30:25):

And then one more point on IRMAA in contrast, or maybe along with what we were talking about before about pulling levers on what the Roth conversion amount’s going to be, we also got to remember that the marginal tax bracket we’re in is dependent on our taxable income. Irma is dependent on modified adjusted gross income, modified AGI, which are not the same number, not the same. Most of the time modified AGI is the same as a GI. There’s very few things that change that. So that’s line 11 of the tax return, but that is different than taxable income.

Micah (30:53):

And the fun part about it too is takes ’em two years to know what the tax brackets are going to be. So it’s a bit of a guessing game. And I explain this to clients, Steven, I know you do as well because I want them to know that we’re making a swag at what we think these brackets are going to be in two years because we do not know what they are. And so we’re going to get our best guess we can.

Steven (31:12):

Micah, why don’t you pick one more question for us to knock out here as we wrap up this conversation.

Micah (31:16):

Mike asked about estimated tax payments. So I think this is a really good question about when should you make estimated tax payments, especially if you’re doing a Roth conversion. Do you just do the safe harbor rule? What do you do?

Steven (31:27):

Well, Micah, you already told us your stance of, hey, the taxes get paid from the source that’s creating the income and they get paid at the time the income is generated. And as the CPA is a tax repairer, I love that approach. It’s the most straightforward, it’s the easiest for the client to remember and it’s the least likely to create problems. Quite often when I get these questions, people are trying to more tow this line of, well, but how long can I help them keep on a hold of their money so they can hold onto the interest in all of these things? Again, from a simplicity standpoint, when it happens right away from the dollars creating it, so Mike, you absolutely can look at the safe harbor rules, particularly if we’ve had lower income years and now we’re spiking their income up. There are a few different ways to do that.

(32:07):

I would say from a practicality standpoint, as I talk to taxpayers at tax time, what really counts is how clearly and effectively you have communicated that plan to the client. Because I do have clients at tax time who are totally on board with and will brag about how their advisor helped them with the safe harbor amount and they know the rest is due now and they’re totally good with that, but that’s the exception because it’s a more complicated plan. More often than not, where clients have a great experience at tax time is when they can say, oh yeah, I know Micah took care of that when we talked about doing the Roth conversion. I’m so excited we’re filling up our tax free bucket.

Micah (32:43):

Making sure they know where the taxes are going to get paid, and more importantly, not out of their checkbook, right? This is where clients get fussies when it has to come out of their checkbook, not the investment accounts. So we always tell our clients, Steven, as you said, echo it again, the language I use with clients, if your investments generate a tax bill, your investment should pay the tax bill. Right? Now we have discretion as to where that tax bill gets paid from, but it’s from the investment accounts. The other thing to think about is if I know I’m going to do a Roth conversion in a big one in December, I’m not making quarterly payments with the clients based on that, we’ll make a Q4 payment, which is in December, not January, by the way. We’ll make that Q4 payment in December and then I need to make sure I’m communicating with the CPA if it’s not Steven, to make sure that if there’s a penalty we can apply for that exemption because all the income came at one point in time, then we paid the taxes when that income came in.

Steven (33:30):

Yeah, that’s form 2210. That’s a really important one to have in mind if you’re going to do that. Well, Micah, as always, I really appreciate your time and sharing all your insight. These conversations are so fun and so valuable to all of our listeners, so thanks for being here.

Micah (33:41):

Steven, thank you so much. I really enjoy the RTS community. It’s fantastic. I love the advisors, the questions that we get. Really appreciate to be part of it. So thank you.

Steven (33:48):

And for everyone listening to learn more about those resources that Micah is mentioning, go out to retirement tax services.com. Super excited about adding more members to that community and what we have planned for 2025, some really big things coming, so join in so you get to benefit from all of that. And until next time, good luck out there. And remember to tip your server, not the IRS.