Tax Tips To Beat The IRS By Age (Legally!)

19:23Bo Hanson:I want to make sure people don't get frustrated. You can still make it to step seven and eight, even if you don't make$145 ,000. You just need to pay attention to your 25%. That's what we want you to be at, a 25 % gross income savings rate. you're going to get beyond maxing out. But once you get through doing the Roth IRA contributions and you adding that as a percentage to seeing what your retirement with your employer is, then yes, you can actually move on to step seven and even step eight without hitting those annual contribution limits. It's more about, are you doing the 25 %? What I worry about is, because I don't worry about a person making$100 ,000 saving 25%.

20:04Bo Hanson:They're going to be A-OK because social security is going to cover a lot of retirement and other things. What I really worry about are you financial mutants that are getting out there and maybe your income is getting closer to$200 ,000 and you locked it in when you were making$100 ,000,$120 ,000. You've got to keep going up because the further you are from the social safety net, the more retirement falls on your shoulders. So you need to take advantage of what all these tax benefits and savings opportunities are so you don't get left behind in the future.

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21:25Brian Preston:So a lot of what we're talking about today is how do I save taxes today? How do I save taxes this year. But this next one is less about how much you pay in tax this year and more about how much you pay in tax over the lifetime of your financial plan. Because a lot of folks in their 40s, depending on the situation they're in, it might make sense to strategically begin converting some of your pre-tax assets, some of the assets that you accumulated in a higher tax scenario into Roth so that you can get those dollars growing tax-free for the long term.

21:57Bo Hanson:Yeah, I already said these, because it's funny how these decades start getting married to each other. Because I already said peak earning years were in your 40s or 50s. Well, I also think it's your 40s or 50s where you have the one-off life stuff or even early retirement that allows you to do these Roth conversion strategies. And that's the exact type of thing because we're looking to have arbitrage situations with the tax code to take advantage of unique things that we spot. And we had a great example of this. We did a making a millionaire, and Bo walked them through how did this case study work, and we saved literally millions of dollars by just structuring our taxes a certain way.

22:35Brian Preston:Yeah, Kerry and Robert were in this wonderful situation where they were retiring a little bit early, and they wanted to think about, okay, well, how should we structure our accounts, and what should we be thinking about? And so we said, okay, based on where you guys are, we laid out, here's what we anticipate your tax situation looking like for the rest of your life. And if you're out there listening to the podcast, what you can see on the screen is that every year is an individual tax year. There was one year around age 62 where there was an inherited IRA that was going to pay out, but pretty much they were in a really, really, really low tax bracket until required minimum distribution started at age 75 because a lot of their assets were in pre-tax assets.

23:16Brian Preston:They had this quote unquote tax bomb that was going to hit them later in life. They didn't need to pull the money out, but they were being forced to pull the money out because of the way that the tax code is written. So we said, all right, what if instead of waiting for that tax bomb to hit, what if we started doing some strategic Roth conversions now? And what if we just said, there's a little bit of room left in the 12 % tax bracket. What if we just max out the 12 % tax bracket every single year via Roth conversions until we get to RMD age. Well, by doing that, we were able to decrease, in theory, the total taxes they would pay over their lifetime by about$600 ,000.

23:59Brian Preston:Not only did we decrease that tax bill, but by having those dollars now grow tax-free, when we look at the terminal portfolio value that they would have ended up with, it was a million and a half dollars higher than it would have been had they not begun on this Roth conversion strategy.

24:16Bo Hanson:So this is one, I want everybody to think about your tax situation because it's weird from a tax plan to say, wait a minute, I'm going to take on more income now. That seems, why would I want to accelerate my income? Well, let us explain. Look, when you're in these low tax brackets, 12 % is pretty low. I mean, if you think about all, you know, where we are as a country and all the obligations and stuff, when you're paying 12%, that's a pretty low tax bracket. And you might be, I mean, leaving just tons of money on the table that, especially if you have a seven-figure retirement account, you need to kind of perk up in your chair a little bit when we say, look, all those dollars that are 12%, you're not maximizing.

24:58Bo Hanson:You might be leaving something in the future behind on this. And so much so that if you think 12 % is great, we've even had clients that we said, well, look, 12 % is definitely historically a really good low tax rate, but because we think you have such a big tax bomb, and definitely Terry and Kerry fell into this standpoint, we're like, you might even want to go into the next tier and actually 22 % bring that forward so that you're not paying 35 % in the future, because that's when taxes can get really expensive, and we try to get proactive. But I understand it's a delicate balance, and I'll let you go through the case study some more because nobody likes to pay taxes, but we are trying to think, we're thinking long-term and we're beginning with the end in mind, but we're also thinking about today.

25:45Bo Hanson:And there's a delicate balance on how much taxes do you pay now versus wait for it to grow and develop into this bomb. That's what we do as financial planners to try to help you stick the landing so you don't have regrets later.

25:58Brian Preston:Yeah. With Kerry and Robert, we said, hey, if you guys don't just max out the 12 % bracket, but if we just max out the 22 % bracket up until the time that your inherited IRA pays out, by doing that, we're going to be able to make sure that none of your RMDs later in life fall into that 32 % bracket. We're going to be able to keep everything in the 24%. Well, when we did that, if we consider the base case of them doing nothing, we were able to decrease their cumulative lifetime tax bill by about$1.3 million. And in saving that$1.3 million in taxes and allowing those dollars to grow tax-free, they actually ended up with almost$3.5 million more at the end of their plan.

26:46Brian Preston:Now, in reality, this is not prescriptive. This isn't exactly the way that financial plans lay out. But this shows if you can be strategic by thinking about shifting these dollars earlier on in your financial journey, it can have huge six and seven figure impacts later on in your financial life.

27:04Bo Hanson:I even think it goes beyond just the taxes because the taxes are a huge part of it. Another is what's the legacy that gets passed on to your loved ones? Believe me, a lot of you have huge seven figure retirement accounts. You realize somebody's going to pay the taxes on that. And it's still a blessing when you, you know, it makes a bad situation. Nobody wants to lose a loved one, but at least when you know, when inheritance has come, you know, somebody's got to pay the taxes on that. And I always think about from when I'm doing legacy planning, I love Roth accounts because you know that not only are they, when they pull them out tax-free, you even have the opportunity potentially to let it grow, continue for another 10 years before you have to pull the money out.

27:44Bo Hanson:If we do the right strategic tax planning, not only are we going to minimize the long-term impact on you on those required minimum distributions, but we're also going to allow more of your beneficiaries to inherit assets that have more Roth assets. So it's not more of a tax bomb for them. It's more of these are assets they're going to be able to use for the future and for their own legacy too.

28:07Brian Preston:Another thing that's likely happened in your 40s is your accounts have gotten larger in size. And what may have not been an opportunity available to you in your 20s and 30s might begin to look attractive in your 40s. And one of those is when we have bouts of volatility, when we see the market begin to have some cracks in the wall of worry and have some downturns, you might be someone at this stage of your financial journey that can take advantage of tax loss harvesting, where essentially you sell a loss position, you lock in those losses, you go redeploy those dollars into a similar but but not identical type investment.

28:45Brian Preston:You maintain the same investment posture, but now you have this huge tax benefit that you get to carry on into future years.

28:52Bo Hanson:Yeah, always, this is one of those, find the silver lining in a bad situation, Bo. Whenever there's volatile periods, we're definitely turning lemons into that lemonade that can help you from a tax planning standpoint. And I don't know if you go on the other side of the coin, because that was, you know, consider tax loss harvesting. Another one we like to talk about is accelerate your gains. And you're like, wait a minute, you guys are telling me there's actually some benefits to taking gains before I need the money? We're saying absolutely. Our tax policy has some unique quirks in it. Y 'all realize if your income's below a certain threshold, there's actually what's called a 0 % capital gains tax.

29:28Bo Hanson:That's right. If your income is below, for married couples, I believe it's right around$97 ,000, you don't pay taxes on your capital gains. So you can imagine if you're one of these people that you leave the workforce early, or you have a year that maybe you're unemployed or your spouse has stayed home with the kids, and you look at your income and you go, holy cow, we qualify for this 0 % capital gains. You should not sleep on that. We could reset your basis higher by going ahead and taking advantage of this quirk of the tax code.

30:03Brian Preston:Yeah, if we think about this in a practical case study sense, again, let's take Manny the Mutant. Let's say that Manny had a$20 ,000 investment that had performed really well, and now it's turned into$50 ,000. And Manny's trying to figure out, okay, what's the right time? How do I think about divesting out of this position? Well, let's say that something happens, job change, single-income household, and he is in a situation where the taxable income for his household is$65 ,000. He could then sell this entire position, recognize that$30 ,000 capital gain, and it's still going to fall inside that 0 % capital gains rate, meaning the tax due on the sell of this holding is going to be zero.

30:47Brian Preston:But if, however, he were to wait and maybe he goes to a two-income household or he changes jobs or he has some or their income source kick in and the taxable income now goes to$100 ,000 and he decides he wants to then sell this investment, well now all $30 ,000 of that long-term capital gain is subject to the 15 % capital gains tax rate, where he could have sold it a year before and paid no taxes. This year, he has to pay$4 ,500 in taxes. The timing of when you sell your investments and when you take advantage of these unique opportunities can have thousands, if not tens of thousands of dollars of savings available to you.

31:29Bo Hanson:So you can start to see the quirks of the tax code is because this isn't something you want to find out when you go get your taxes and go, man, I could have done more. This is why you need to be proactive. And this is the part where I always say life gets complicated as you start figuring out how do I actually get access to all this money I've been building up in the background. That's where we kind of come in and help people navigate these situations. So that, Bo, that wraps up the 40s.

31:53Brian Preston:One other thing I just want to throw in this, because we get this question all the time. What if I don't want to sell the investment? What if I don't want to get rid of it? One of the things, this is why it makes sense. You hear all the time, we talk about loss harvesting. There's the idea called the wash rule. I can't sell something at a loss and then go buy back. That does not apply to gain. So one of the things you can do is even if Manny were to sell this holding, he could go back today and buy the exact same holding at$50 ,000, resetting his cost basis for the future. So this isn't just something that you should consider.

32:23Brian Preston:You should think about if you were in a low income tax year, it makes sense to review every position in your portfolio to see if this is something you can take advantage of because there's a really good chance that your future self will thank you for that planning.

32:37Bo Hanson:What a great planning opportunity that creates.

32:39Brian Preston:All right, Brian. Now let's talk about the next stage. We've talked about 20s, 30s, 40s. Let's talk about the 50s and how do we go about beating the IRS in our 50s?

32:50Bo Hanson:Well, this is one of those things where hopefully at this point you're getting to the stage where, yes, you're going to have money for financial independence, but you're also thinking more of legacy of what are their organizations I want to support. And the first thing we know that being charitable is definitely rewarding and we want you to be generous. So bunching charitable contributions is the first thing you can consider. Remember how earlier I said that the majority of Americans are taking standard deductions. Well, that's because if you add up the deductions for most people, they just don't add up to enough to do itemized deductions.

33:22Bo Hanson:Well, if you're charitably minded, there's a good chance that maybe you can bunch your charitable contributions, cross into that itemized in a key year, and then spread out how you give to those charities in the future. There's nothing wrong with you taking advantage of that.

33:38Brian Preston:A great tool that you can use if you're bunching, or maybe you're not bunching, you're just giving annually, you can think about using a donor advised fund where not only can you use it as a mechanism to bunch your contributions where, okay, I'm going to put$25 ,000 into the charitable gift fund this year and get the deduction, but I'm going to give$5 ,000 to an organization each of the next five years, but I can also now gift highly appreciated securities. Maybe I have that$20 ,000 investment that turned into$50 ,000 and rather than having to sell it and recognize that capital gain, I can just donate that to my charitable giving account, get the full tax deduction on the full market value of that holding, then all those capital gains disappear forever.

34:21Bo Hanson:Earlier, I was talking about always look for those silver lining moments where you turn a negative into a positive or lemons into lemonade. This next one is definitely one of those. Take advantage of catch-up contributions. Look, it stinks. I'm in this. Once you get to a certain age, you're like, man, I'm getting old. I wish the birthdays would keep coming. But when you cross into 50, you at least now the government says, hey, you're old enough that you're probably thinking about retirement. So you're thinking about enough that you're even having regrets that should have saved even more in the past.

34:48Bo Hanson:The government gives you that opportunity by giving you access to additional catch-up contributions.

34:54Brian Preston:Yeah. And even it depends on the account and even unique to this year, depends on your age. If you're in a 401k, 403b, 457, the catch-up amount for those over 50 in 2026 is$8 ,000. But there's even a super catch-up for those that are age 60 to 63, which is $11 ,250. For a simple 401k, the catch-up is$4 ,000. The super catch-up is$5 ,250. And then if you're someone contributing to an IRA and you're over 50, in addition to the normal contribution you can do, you can do a catch-up of$1 ,100. And if you're participating in HSA and you're over the age of 55, you can do$1 ,000 as a catch-up contribution to a health savings account.

35:37Bo Hanson:All right. We're talking about 50s and beyond. This is also the culmination where people actually, you're transitioning from saver to now consumer are starting to spend down your resources. You've got to optimize your retirement withdrawal strategy. You know, we were all throughout this entire show. We've walked through the three buckets. We've walked through all the different ways you need to fund your retirement. This is the moment where it really kind of, this is game time. You know, it's probably the biggest thing is because now if you can pull in the right optimized strategy. It really is that choose your own adventure where you get to, in a creative, very legal way, kind of work through how much in taxes you will pay and how much of a headwind it's going to be on your retirement.

36:20Brian Preston:Yeah, we have the financial order of operations, and it's a great mechanism for helping you figure out how do I accumulate, how do I build, how do I save super efficiently? Well, we get guests all the time, guys, why don't you do a financial order of operations for withdrawal, for distribution? And that's because it gets so nuanced and it's so specific and it is not a one size fits all. When you retire, when you get to financial independence, when you start living off of your assets, the way that you do it is going to be very unique to your situation, your risk tolerance, your time horizon, your account structure, your goals.

36:54Brian Preston:You want to make sure that you think through it well because the decisions you make early on in retirement can have huge implications later on.

37:02Bo Hanson:Well, let me just go ahead and throw out some terms that you're going to start hearing a lot. Required minimum distribution. If you're charitably minded, qualified charitable distributions, QCDs. There's also Irma. If you're thinking about Medicare, if you think about the taxability of your social security, do you see how all this stuff kind of starts coming to a head? And that's why I always tell people, look, this is why we can love on you, give you all the free advice in the world and even tell you go to moneyguy.com slash resources. We're going to accelerate your path to creating success. And we really don't ask anything of you.

37:37Bo Hanson:Matter of fact, we have some big plans that we're even going to turn some things that are behind paywalls. Turn those even into free resources for you soon. More to come on that. But a lot of this, no matter how much we love and give you, you're going to see the fruit of our system is the success, which leads to the complication. And as I think you could hear on doing an entire show on taxes by age, you guys represent and you resemble a lot of these things, and you're probably saying, look, I don't know what I don't know. I don't know where my blind spots are. I've only got one retirement. I wish I had somebody who's done this hundreds if not thousands of times.

38:13Bo Hanson:That's where we'll leave the porch light on for you. We'd love for you to consider becoming a client. Let us help you live your best financial life. Exactly what Bo said. We have a financial order of operations to help you through all those things as you're building assets. There's not one for retirement because everybody is so personalized. We had a studio tour just come through, and they were asking about a specific financial product. And I was like, the reason I've never done content on that is because there's just too many variables that I have to see your taxes, I have to see your age, I have to see your risk profile.

38:44Bo Hanson:I couldn't do a good job with doing that, but I can do that for specific clients. And we will write that plan for you. We will make sure it represents and lets you live your best life. Because money is nothing more than a tool. We just want to make sure that we maximize that very important element so you live your best life. I'm your host, Brian. Joined by Mr. Bo, Money Guy team. Out.

39:10Brian Preston:The Money Guy Show is hosted by Brian Preston and Bo Hanson. Brian and Bo are partners with Abound Wealth Management. Abound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities laws and regulations. A Bound Wealth Management does not render or offer to render personalized investment or tax advice through The Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment, or legal advice.

39:39Brian Preston:All investments involve a degree of risk, including the risk of loss.