Cynthia de Fazio 0:24
Welcome to Retire Smart Maryland. My name is Cynthia DeFazio. Joined today by Prashant Sabapathi of Elite Income Advisors, and to our viewers at home, thank you for joining us each and every week. You know that this is the show to go to if you’re looking for advice in the retirement arena. If you’re getting ready to retire, if you’re not sure where to start, if you need to have a plan in place, this is the show for you. So again, thank you for being with us each and every week. We love having you, Prashant. How are you today?
Speaker 1 0:52
I’m doing excellent. This is always my favorite time of the week, being in studio, getting to talk to our audience, and spend some time with you. So this is this is going to be a fun one.
Cynthia de Fazio 1:02
It really, truly is going to be a fun one. It always is. Every week we have all kinds of interesting topics for retirees to be thinking about. And before we got on the set today, we were talking about just a lot of times you have people in the area that have these wonderful, beautiful homes that they’re just kind of sitting on them because they don’t want to sell, they don’t want to pay the taxes. Prashant, what is that looking like specifically right now in this area? Because I know we have a stat that I’d
Speaker 2 1:30
love to
Cynthia de Fazio 1:30
share. We’ve got the National Association of Realtors has actually said that 30-1.8% of Maryland homeowners now exceed the $250,000 capital gains exclusion for individual filers. Another 6.9% are over the 500,000 limit for married couples filing jointly. So, what does that tell you overall?
Speaker 1 1:53
Let’s break this down. Okay, there’s potentially taxes owed if you sell your primary residence and you’re harvesting more than either that 250 as an individual or $500,000 of capital gains. So I’ll give you an example. Let’s say you purchased your home for $200,000 way back when. Let’s say it’s decades ago, and obviously in Maryland we’ve seen property values skyrocket. Right? They’ve gone up a ton over the past several years, and so let’s say that $200,000 house is now worth $1.2 million today. You have a million dollars of appreciation on the market value of that house, even though it is your primary residence, because you are over the exclusion. Let’s say that you’re filing as a joint filer. You’re over that half a million dollar exclusion because you have a million dollars of appreciation. You’re going to potentially pay capital gains taxes when you go to sell that house. Yes. And so, why should retirees care? Is because of course, when we get closer to retirement, we’re finding that a lot of people want to downsize. They might want to move to a more tax-friendly state for retirement. They might just want to have a different type of house where we can be all on one level because the kids are out of the house, and now you’re transitioning into the next phase of life. But we see so many people who are afraid to sell their house because they don’t want to pay Uncle Sam along the way,
Cynthia de Fazio 3:25
right? And
Speaker 1 3:25
this becomes a huge, huge issue. Okay, you feel like you did the right thing. Maybe you paid off your mortgage, you sat on that property, and now it’s worth a lot more than where you started. But now Uncle Sam’s going to come get you if you’re over that exclusion, yes. Okay, it’s a huge issue. I have personal feelings on what I think the government should do to make the housing market a little bit more attractive. I mean, we know that younger generations have absolutely been priced out of the housing market, and I think that creates its own set of issues which we can talk about in a couple minutes here, but personally, what I think the government should do is I think they should raise the exclusion instead of only excluding half a million bucks for married couples. What happens if they increase that exclusion to a million dollars?
Cynthia de Fazio 4:19
Yeah,
Speaker 3 4:19
you know.
Cynthia de Fazio 4:19
Yeah,
Speaker 1 4:20
I think more inventory would probably come on the market.
Cynthia de Fazio 4:22
I agree,
Speaker 1 4:23
and that could that could make it more affordable in some ways. I mean, it could, and so you know, I think there’s several different things, and we can speculate about what the government may or may not do. But if you’re sitting there thinking, “Yeah, I’m in this situation. I purchased that house 20, 30 years ago. Am I going to owe taxes when I sell my primary residence? The answer could be yes, and so I think it’s something that merits a conversation with your advisor because I think a lot of people think that they won’t pay taxes. Well, that might not be the case.
Cynthia de Fazio 4:54
Yes, and it all comes down to tax planning. I’m so glad that we’re talking about this piece today because we talked. About this in the past, if you will, about how proper tax planning is critical in the retirement years, especially when you’re looking at all these different facets, Prashant. And I know that you specialize in that, and you’re passionate about it with your clients, making sure that they have a tax plan, especially if you’re dealing with one that could potentially be real estate involved as well.
Speaker 1 5:20
Yeah, and I think that’s important. I think we’re conditioned to just think of taxes from an income tax standpoint. But what about the capital gains and investment tax standpoint as well? Let’s say you’ve been putting money away in an investment account after taxes, like a brokerage account. Well, a brokerage account that’s not necessarily going to be tax-free. You still have to pay taxes on things like dividends, interest, capital gains when you buy and sell investments. You could pay long-term. You could pay short-term. The tax code is just so darn complicated in this day and age. It’s really difficult to make sense of all of it, which is why I think you should partner with a professional. You should have a really good financial professional who understands tax strategies to help you mitigate both your current and potentially future tax responsibility. But I also think that you should partner with a qualified CPA or a tax advisor. Yes, and that tax advisor’s role is to get into the nitty gritty into the tax code to figure out how you can manipulate the tax code legally to your advantage to hopefully pay the least amount of taxes possible. And then the third thing is that the financial professional and the tax professional they need to work together. Yes, you don’t want the advice of one to jeopardize the advice of the other. Okay, we want to make sure that we have a comprehensive and coordinated plan. This is what I see so often. I’ve talked to clients about this idea of maybe doing something like a Roth conversion when you take your before tax money in a retirement account, you convert it to a Roth, and now all your growth for the future is potentially going to be tax-free forever, and then they go and take it to their tax accountant and say, “Hey, my financial advisor recommended I do a Roth conversion, mr. mrs. Accountant. What do you think about it? An accountant says, “I don’t think you should do that.
Cynthia de Fazio 7:17
Interesting.
Speaker 1 7:18
Why is that? Well, it’s because the tax accountant’s idea is to look at how to minimize paying taxes just in the current year.
Cynthia de Fazio 7:27
Yes,
Speaker 1 7:27
and this is the difference between tax preparation and tax planning. Yes, tax planning is forward-looking and it’s comprehensive. It’s not only looking at your income; it’s looking at your dividends, your interest, your capital gains, your capital losses, your write-offs, deductions, credits-it’s putting all that stuff together to create a forward-looking tax plan that’s going to help you optimize both your income and your finances over the long term.
Cynthia de Fazio 7:55
And I think we have to talk about why this is so important for retirees overall when we’re speaking about the difference of tax preparation and true tax planning, talk a little bit about what happens in the retirement years if you don’t have a tax plan in place. What could go wrong, Prashant? Before we take our commercial break,
Speaker 1 8:12
well, look, I always say you can’t spend gross; you can only spend net. Well, what happens if tax rates go up in the future, and your net income goes down. What would that do to your quality of lifestyle? Would you have to sacrifice something that you were looking forward to in retirement simply because you didn’t have as much income as you did the year before, only because your tax rate went up? Now we don’t know with certainty what’s going to happen to the tax code? But we absolutely have control over what we do with our money today to weather different market and tax conditions. Okay, you need to be forward-looking about this because if your income goes down in the future, if your net income goes down, excuse me, in the future because your tax rate went up. I don’t want you to have a difference in the quality of your lifestyle. So pick up the phone, folks. Give us a call. It’s 833308 5200 That’s 833308 5200 If you’re unsure as to whether or not you are at risk of being in potentially a higher tax bracket in retirement. If your advisors never talk to you about that, or you feel like maybe you don’t have a comprehensive and coordinated financial and tax plan, it’s a great chance to just have a conversation. And that is all it is. When you come in, it is totally free of cost. You leave the credit card at home, is what I always say. We’re not going to ask for a payment or anything like that, it’s just a conversation to see whether or not me and my team are even the right fit to continue that conversation. It’s about an hour of your time to come in and visit 833308 5200
Cynthia de Fazio 9:54
Prashant, thank you so much. To the viewers at home, the number to call is 833-308-5200 833-308-5200 Again, this is completely complimentary. There’s no obligation whatsoever. And what is the harm of having a conversation? Literally nothing. Don’t miss the opportunity. Once again, 833-308-5200 or we made it even simpler. You can click the QR code at the bottom corner of your screen-that’s the fast track to get on the schedule of elite income advisors. This is completely this is no obligation, completely complimentary. We’re going to take a very short commercial break. When we come back, I want to talk to Prashant a little bit further in taxes about taxes, and I want to also talk about testmytaxes.com. That’s coming up in this next segment. Stay tuned.
Speaker 1 10:49
Everybody in my family is in medicine, so my parents were both doctors. My brother’s a doctor. Everyone in my extended family is in medicine, but science was never really my thing. I was always about numbers, and money was always really intriguing to me. I went to University of Maryland. I was economics and finance, and I was fortunate enough to work for one of the big box retailers in the insurance advisory world right out of college, and that’s where I met Ozzy, and that’s how I got started as as kind of a new guy in the business, I kind of learned the ropes there. But it became pretty clear in 2014 that we wanted to go independent and have a little bit more control over how we deal with our clients and give them good advice. There’s no feeling quite like watching your clients get to do everything that they wanted to do, work doesn’t feel like work to us. We get to help people plan for their next phase of life. Being able to to help people do what they want to do, and being able to make a pretty good living out of it makes it all worthwhile and truly fulfilling for us. It truly doesn’t feel like work.
Cynthia de Fazio 12:07
Welcome back to Retire Smart Maryland. My name is Cynthia DeFazio. Joined today by Prashant Sabapathi of Elite Income Advisors, and we’re talking all about the importance of tax planning, especially in the retirement years. So thank you for being with us today, Prashant, I think taxes is always something that is so easy to relate to with the audience because everyone’s thinking about taxes. They’re wondering if the rates are going to go up, and really, tax planning is the most advantageous way to take control of the situation. So we’ve got buckets on the table again. I’m excited about this. Let’s talk about those different buckets.
Speaker 1 12:42
So what I would say is not all money, in my opinion, is treated equally.
Cynthia de Fazio 12:48
Okay.
Speaker 1 12:48
Okay. So we have three distinct buckets here. We have taxed never bucket, which by the way, this one is my favorite bucket. Yes. Okay. The bucket that is taxed never is my favorite. What we’re finding though is people have the least amount of money, typically, in this bucket. We’ll come back to that. This bucket is going to be called your tax-always bucket.
Cynthia de Fazio 13:08
Okay.
Speaker 1 13:08
Think about accounts like your 401k account, your thrift savings plan, traditional, your 403b account. You’re putting money into this account on an ongoing basis while you’re working, and when you put money into your tax always account, you actually get a tax deduction for putting the money in. But then in the future, it’s always going to be taxed coming out. You got to pay federal if you live in a state that taxes income like Maryland. You’ll potentially have to pay state taxes on that as well. And then we have what’s called our taxed now bucket. Remember, I was talking about the brokerage account. The brokerage account is after-tax savings, where now you’re going to pay taxes on a year-to-year basis on things like dividends, interest, capital gains. Okay, and so advisors talk about diversification so often, but I think when they talk about diversification, what they are referring to is diversifying your investments. And by the way, very important to diversify your investments. I’m a big believer in that, but I think not enough advisors are talking about diversifying your taxes. If you add all of your retirement savings in a taxed always bucket, a pre-tax retirement account. Every single time you take money out of this bucket to fund your lifestyle, you’re paying federal and potentially you’re paying state.
Cynthia de Fazio 14:30
Wow. Okay. That’s a tough position
Speaker 1 14:32
to be in.
Cynthia de Fazio 14:33
Absolutely. And the
Speaker 1 14:34
reason it’s a tough position is because we don’t have a clue what’s going to happen with future tax rates. I wish that I had a crystal ball to know exactly what would happen to the tax code five, 710, 15 years from now, but I don’t. Okay, I think I’m pretty good, but I’m not that good. Okay, like I don’t know what’s going to happen in the future, and so my fear is what happens if taxes go up? All of the money that you have saved in this. Bucket is potentially potentially subjected to a higher tax rate in the future.
Cynthia de Fazio 15:05
Wow, that’s a concern. It’s very important to know.
Speaker 1 15:08
And so, what we’re talking with clients about is the idea of taking money proactively from your taxed always bucket and putting it into things like your taxed never bucket. Okay, this is going to be things like your Roth IRA. Okay. By doing a Roth conversion, you can actually take money from your tax always, move it to your tax never bucket. What’s the downside to it? The downside is when I make that move, I have to pay all those taxes as income in the year that I convert it.
Cynthia de Fazio 15:39
Okay. Can you do it in small amounts.
Speaker 1 15:41
That’s a great point. You can do it in any increment you want, so long as you’re comfortable paying the IRS. Okay. Okay. The IRS is always going to get their share. The question is, when do you want them to get it? Do you want to pay them now and break up forever, or do you want to kick it out into the future where they could potentially change the rules? And you know, at my previous career, my manager told me something very important. He told me very early on when I first started my career that when they change the rules, they rarely do it in your best interest. Okay, they do it in their own best interest. Now, of course, we don’t know exactly what’s going to happen with taxes, but if tax rates go up, I would have rather you paid those taxes up front at the lowest possible rate that you could have paid potentially at a known rate. That’s exactly right. And so what we’re finding is people are taking money from your tax always bucket; they’re moving it to tax never. Some people move it to this bucket, the tax now, and that gives them diversification. Okay, and I’m not saying that you should have all your money in any one of these buckets, but I think we should all explore the idea of creating diversification, not just with our investments, but with the the way that our investments are taxed in the future.
Cynthia de Fazio 16:56
Okay, it’s so important because I think in the viewing audience today, you probably have a lot of your money amassed a nest egg, if you will, in one of these types of account, whether it be a 401k, a 403b. What you have to realize is that you do have a silent partner in those accounts. You do have Uncle Sam, and he’s going to come knocking. Just have to figure out when. And if you can control when, isn’t that the best case scenario? And Prashant, I like the idea of breaking up forever, actually, I do
Speaker 4 17:23
too.
Cynthia de Fazio 17:23
I’m thinking that’s a good point right there.
Speaker 1 17:25
Yeah, absolutely. Because look, what is going to happen is if you have a lot of money in these pre-tax retirement accounts, really, if you have any money in these pre-tax retirement accounts, there’s going to be a point in time where Uncle Sam and the IRS forces you to actually take money from this account. Yes, and that’s going to be through what’s called the required minimum distribution. When you attain a certain age, for most people it’ll be age 73. For some people who are born in 1960 or later, it’s going to scale up to 75 years old. They’re going to force you to take money out of your your pre-tax retirement accounts. Well, why do you think that is? They want you to pay the income tax at that point. They say you’ve deferred the taxes for far too long. We’re going to make you take a piece of that money out each and every year. It’s going to count as income. You’re going to have to report it, and you’re going to have to pay taxes on it, both federal and state. It could potentially increase your tax bracket. It could potentially increase the amount of your Social Security that is subjected to income tax. It could even potentially increase the cost, Cynthia, of your Medicare Part B premium.
Cynthia de Fazio 18:34
Oh my God! It is
Speaker 1 18:34
this nasty, nasty domino effect. And if we can get out ahead of that, for a lot of folks that could be the missing piece to help you create an efficient retirement plan. A lot of people will find that’s a great strategy to start moving money between the buckets. Some of you might find that it’s not the right fit for you, but if you’ve never explored it, it’s worth exploring today. 833308 5200 I also write about this in my book. The book is called Fiscal Health Retirement Wealth. The last chapter of this book is called Rescue Your IRA. I want you to pick up a free copy of this book. Just visit retiremaryland.com, or you can scan the QR code. We’ll send you a free copy of the book. Check out that last chapter on rescuing your IRA from taxes, and then after you read it, come on in and visit with us. Let me hear your thoughts on it. Let me hear what you agree with. Let me hear what you potentially might disagree with. But let’s have a conversation. 833308 5200
Cynthia de Fazio 19:31
Prashant, thank you so much to the viewers once again. The number to call is 83330852008333085200 You’re being invited into the office today of Elite Income Advisors. Let them get to know you one-on-one. As you can see from today’s show, tax planning is a critical part of the retirement years. And if you can have a consultation with no obligation, completely complimentary, what’s to lose? Nothing at all. Call in 833308520 Again, you get a free copy of Prashant’s book, Fiscal Health, Retirement Wealth, or click the QR code at the bottom corner of your screen. We’re going to take a very short commercial break. When we come back, I’m going to ask Prashant a very important question about testmytaxes.com. Why is this an interesting website? Wait to hear his response. We’ll be right back momentarily. The
Speaker 3 20:27
work never seems to end until the day it finally does. After nearly a lifetime on the job, you should be rewarded for all the time you spent working, whether that’s crossing off items on your bucket list, learning a new passion, or rekindling the love of an old one. After all, life isn’t over when you stop working. It’s the start of an all-new chapter, the one where you’re the writer and you get to choose how your story will go. A way to achieve that is by having a clear financial plan to sustain your golden years. The biggest fear most retirees have is if they’ll have enough money to maintain the lifestyle they’ve always enjoyed. Having a plan to help protect you against the curveballs life often throws will help to maintain your lifestyle. Call today to get your free written financial plan so you may live every day to the fullest and enjoy the retirement of your dreams.
Cynthia de Fazio 21:18
Welcome back to Retire Smart Maryland. My name is Cynthia DeFazio. Joined today by Prashant Sabapathi of Elite Income Advisors, and we’re talking about the importance of retirement planning, of course, but most specifically the importance of tax planning. So thank you for being with us today. Well, Prashant, I know that you and your team are so passionate about helping your clients really navigate the retirement years, especially when it comes to tax planning, and you’ve even come up with a website. Yeah, and I love this website. Texttestmytaxes.com. Yeah, testmytaxes.com. Explain a little bit of what happens when our viewers at home right now they’re opening up that camera app. They’re clicking on that QR code. Where do they expect to land? What happens?
Speaker 1 22:00
So testmytaxes.com. Our team invested a lot of time and effort into creating this great free tax calculator. Cynthia, I love freebies. Okay, and I know our audience does too. So testmytaxes.com. Totally free. It’s a tax projection calculator. If you’re unsure about what your future tax bill could look like on that pre-tax retirement account, like an IRA, a 401k, a Thrift Savings Plan. This tax calculator is going to give you a really unique tool to help you start to think about what your overall lifetime tax bill could look like. Now, this is not tax advice, so when you run this report, make sure that you go seek help from the appropriate professionals in acting on it. But if you’ve never evaluated what your future tax liability could look like, visit testmytaxes.com. You’ll go through a short questionnaire. You can actually play with the different assumptions: how much money’s in the account, what the assumed rate of return is, what the assumed tax rate is for the future, and it’ll actually show you a potential side-by-side comparison of how much tax you could owe if you take no action versus the lifetime taxes that you might be able to actually save by taking action and reallocating into something tax-free, something like a Roth IRA, for example. So it’s a great tool, totally free. You can actually use it as many times as you’d like. You get a personalized report for you to look through, and then once you get that report, give our office a call. I’m sure that you’re going to have questions when you see that report. Give our office a call, schedule a confidential conversation with our team, and let’s sit down and talk about what could be the right fit for you. 833308 5200 is the number to dial, but visit testmytaxes.com. Totally free tax projection calculator.
Cynthia de Fazio 23:52
I love it, and it’s so much fun. I actually visited the website myself, and I played around with a couple different numbers, couple different tax brackets. It does not take long at all. Completely free. There’s no obligation, but the information that you receive is priceless. It allows you to see just making a few changes. What could that look like? And again, I want to stress it’s testmytaxes.com. Testmytaxes.com. Prashant, I love that we’re talking about this today because obviously taxes is one part of the component that retirees face. The other thing we were going to talk about in this segment is that there’s often the retirement spending illusion. A lot of people feel that they’re going to need to spend less in their retirement years. Why is that?
Speaker 1 24:35
I think what I found anecdotally is that people are scared to overspend, and I get that.
Cynthia de Fazio 24:41
Yes, right.
Speaker 1 24:42
Like while we’re working, we’re putting money away into our retirement accounts, and we’re paying ourselves first by saving our money, and that’s a big mindset shift to overcome when we transition into retirement. Now, of course, we should be worried about overspending, but for a lot of our clients, at least on an. Anecdotal basis, what we’re finding is that the issue isn’t overspending, Cynthia. It’s actually underspending. Okay, and what I mean by that is people do such a great job saving money. We put together a financial plan, and hopefully that plan addresses things like taxes, income, social security planning, legacy planning, long-term care, and when you have that plan in place, I found that it gives you permission to spend more money.
Cynthia de Fazio 25:26
Yes.
Speaker 1 25:26
But when you have that mindset of being a saver, which is how you accumulated all this money in the first place, it’s really difficult to start spending. It is. And so some of the most fun conversations I’ve had with clients when we’re doing their reviews and their maintenance meetings. It’s really to talk about all the different ways that they should be spending their money to enjoy retirement in the way that I believe, quite frankly, they deserve after three or four decades of hard work. Yes, you know how often do you hear this? I’m sure you know you’ve heard this before. Is when I retire, I should be able to retire on 60 or maybe 70% of what I was bringing home while I was working.
Cynthia de Fazio 26:07
Yes, I’ve heard that before, and that sounds depressing to me. Like I think you want to enjoy your retirement. I couldn’t
Speaker 1 26:12
agree with you more. If I’m going to sacrifice my life to some job for 30 or 40 years, I missed out on being able to do all the things that I wanted to do because the job got in the way, and now I’m going to get to retirement, and you’re going to tell me that I’m supposed to have 30 less when I get to the phase of my life where I should be able to do all the things that I missed out on. No, that doesn’t work for me personally. And you know what? For most of the people that come in to visit, it doesn’t work for them. If your advisor has told you that you can only live on 60% or 70% I think you owe it to yourself to figure out whether or not that’s accurate. Okay. Hopefully, you’ll find that you should be able to get to a higher income in retirement. Now, it won’t be the case for every single person out there, but I think you owe it to yourself to determine whether or not there’s an opportunity for you to have more income than what you currently have coming in, some of you will find that that answer is yes. And if it is, that is empowerment. Yes, that’s permission to go spend your money and do the things that you never got to do because your job got in the way. It’s something that I talk about in chapter one of my book, chapter one of the book is called “The Holistic Retirement. This book is called “Fiscal Health Retirement Wealth. I’m going to give you a free copy of this book. All you have to do is go to retiremaryland.com. That’s retiremaryland.com, or scan the QR code at the bottom of the screen. It’s fiscal health retirement wealth. It’s your prescription for income generation, tax management, and financial peace of mind.
Cynthia de Fazio 27:43
To our viewers at home, once again, 833-308-5200 to grab a copy of Prashant’s book, Fiscal Health, Retirement Wealth. Be safe, be happy, and be blessed. We’ll see you back one week from today on Retire Smart Maryland. Take care.
