Tax-Smart Retirement Planning and the Long-Term Return of Gold

0:04Choosing the right retirement account and the long-term return of gold. That and more on this Saturday personal finance edition of Motley Fool Money.

0:18I'm Robert Brokamp, and this week I speak with financial planner and CPA Sean Mullaney about why some investors should favor pre-tax traditional retirement accounts despite all the benefits of Roth accounts. But first, here are a few items from the news last week. First up, we turn to the latest weekly asset allocation review from Urien Timmer, director of Global Macro at Fidelity Investments, who writes that, quote, at least for now, the U.S. stock market is rebalancing in one of the best ways possible. The MAGACAP seemed to be taking a rest while the rest of the market breaks out. With the MAG7 now stuck in a range since November, the broader market has gone from narrow to broad, from 32 % of stocks trading above their 50-day moving average to now 73%.

1:01End of quote. Indeed, since Halloween, the S &P 500 has returned 0.5 % and the NASDAQ 100 has lost 2%. Meanwhile, small caps, value stocks and international stocks are up 10%, 7 % and 5 % respectively. As of this taping on the morning of January 22nd, Fidelity's Timber has labeled this, quote, a bullish broadening. But those returns are nothing compared to what we've seen from gold, which brings us to our second news item of the week. The Spider Gold Shares ETF, ticker GLD, was up 64 % last year and is up 12 % so far this year. This past week was the anniversary of gold hitting a then-record price of$850 in 1980, which was then followed by a slump that lasted more than two decades.

1:47If you had bought at the 1980 peak and held to today's price of$4 ,800, your average annualized return would be less than 4%. Meanwhile, if you invested$850 in the S &P 500 back in 1980 and held to today, you would have earned a total average annualized return of 12%, and your investment would have been worth more than$161 ,000, according to the S &P 500 calculator on the Of Dollars and Data blog. And now the number of the week, which is 96%. That's how much of the cost of tariffs that has been absorbed by consumers and importers, according to a recent study from the Keele Institute for the World Economy and highlighted in a Wall Street Journal article from this past week, foreign exporters absorbed only about 4 % by lowering their prices.

2:37That said, U.S. inflation has remained moderate so far, with Harvard research indicating that only about 20 % of the tariffs have fed into higher consumer prices within six months of implementation, as U.S. importers and retailers have absorbed much of the costs. We shall see if that continues in 2026. Next up, choosing the right retirement account when Motley Fool Money continues. The Civil War and Reconstruction was a pivotal era in American history. When a war was fought to save the Union and to free the slaves. And when the work to rebuild the nation after that war was over, turned into a struggle to guarantee liberty and justice for all Americans.

3:18I'm Tracy. And I'm Rich. And we want to invite you to join us as we take an in-depth look at this pivotal era in American history. Look for the Civil War and Reconstruction wherever you find your podcasts. Before you start stocking away money for retirement, you'll need to pick an account type. But choose wisely because it'll shape your tax bill today and potentially decades from now. Here to discuss how to choose the right account is financial planner and CPA Sean Mullaney, who writes the FI Tax Guy blog and is the co-author, along with Cody Garrett, of the book Tax Planning to and Through Early Retirement.

3:57Sean, welcome to Motley Fool Money. Robert, thanks so much for having me. So the title of your book highlights early retirement. So in your mind, what makes someone an early retiree? and what, if anything, should they be doing differently? To my mind, an early retiree is simply anyone who retires prior to being eligible to enroll in Medicare. That is, generally speaking, the first of the month you turn age 65. And indications are a majority of Americans do early retire. And there's plenty of reasons for that. Sometimes it's choice. Sometimes it's, we've got enough money saved up, so why are we still working?

4:36and sometimes it's a layoff or my job got obsoleted or whatever it might be. Early retirement tends to have advantages when it comes to tax planning. I say that because early retirement offers an opportunity to spread out income over a longer window of time. And in today's tax planning environment, the tax rules are telling you, they're yelling at you, spread income, spread out income, spread out income. So what I mean by that is we live in an era of a very high standard deduction. We live in an era of the 10 % tax bracket and the 12 % tax bracket. A married couple, especially in their 60s or 70s, could have well, well over$100 ,000 of income subject to only a 0 % tax bracket, which is essentially what the standard deduction is.

5:28the 10 % bracket and the 12 % bracket. So that's sort of yelling and screaming, please spread out income over time. And that's part of the reason the early retiree has a tax advantage. He or she is going to have to live off their income over a longer window of time, which generally speaking helps from a tax planning perspective. These days we read a lot about the benefits of Roth accounts, which result in higher taxes today, but qualified withdrawals are tax-free in retirement. However, in your book, you make the case that many workers really should first turn to that pre-tax traditional work-based retirement account.

6:06Why is that? Well, for the simple reason that we ought to pay tax when we pay less tax. And it turns out that for the vast, vast, vast majority of Americans, I would contend even for the vast majority of affluent Americans, it turns out you pay more tax when you're working and you're getting up in the morning to generate taxable income than when you're retired. And so let's think about that for a second. You've got that Roth 401k or traditional deductible 401k at work. You get to deduct into that thing at your highest marginal rate. Maybe it's 22%, maybe it's 24%, maybe it's 32%. So that's an immediate tax benefit of 22 cents on the dollar, 24 cents on the dollar, 32 cents on the dollar.

6:49Okay, well, what's that going to look like when it comes back into income later on in your retirement? Well, you have that run back up the progressive tax brackets. Now, particularly for the early retiree, the 60s could be a great time to maybe get some of that money and either Roth convert it in your 60s or just live off of it in your 60s. And some of it will be sheltered by the standard deduction. I refer to that as the hidden Roth IRA. We took money from a retirement account and we didn't pay federal income tax. Isn't that a Roth IRA? Well, not in this case. That's what I refer to as a hidden Roth IRA.

7:24It's a Roth IRA that lurks, that hides inside your 401k. And I think a lot of Americans have to think long and hard before sacrificing the upfront tax deduction. Now, I will say it's usually beneficial to invest that tax savings in a Roth IRA or a taxable brokerage. But boy, that is a upfront benefit. And it turns out that the progressive nature of taxation going back up through the brackets means that it's very likely that on the way out, the marginal rate on that is going to be less than the rate that you enjoyed on the way into the traditional 401k. Now, Robert, I will say one thing, though.

8:03I'm not anti-Roth, particularly for those in the audience that have access to either the so-called backdoor Roth IRA or the mega backdoor Roth IRA. So these are transactions that allow higher income earners to get money into a Roth account. I tend to really like those once we've maxed out our traditional 401k, say, at work. For many workers, why do I say that? Trade-offs. Traditional 401k, that$24 ,500 in the year 2026. Well, the trade-off there is I either deduct at my highest marginal rate today or I put into the Roth 401k. The problem with that trade-off is I'm giving up a tax deduction at my highest marginal rate today.

8:50But the backdoor, whether it's the so-called backdoor Roth IRA or the mega backdoor Roth IRA, if you have that through your 401k or other plan at work, the trade-off profile is so much better because there's no sacrifice tax deduction. The money that goes into these backdoor Roths is money that would have otherwise gone into a taxable brokerage account. Now, that's not a terrible outcome to invest in a taxable brokerage account, particularly in a low-yield world with qualified dividend income rates, but there's still tax on the dividends, interest, future capital gains on that. versus if we can take advantage of one or both of these backdoor techniques, well, guess what?

9:32We've moved money that would have gone into a taxable brokerage account, would have spit out a 1099-DIV every year, and instead it's parked inside a Roth account, growing tax-free for the rest of our lives, potentially the rest of our spouse's lives, potentially 10 more years, assuming it goes to our adult child beneficiaries. So I'm certainly not anti-Roth, But I think you have to step back when you're in your accumulation years and think about the trade-offs. And are you really going to pay high taxes on most of that money in retirement if it's in a traditional retirement account? You have some great illustrations in the book of how folks who are retired, particularly over age 65, because they get the higher standard deduction, they got the new senior deduction from the one big, beautiful bill, how you could have a surprisingly high amount of income and pay a surprisingly low tax rate.

10:25You have particular illustrations of couples who are making, say,$250 ,000. And that puts them in, while they're working, say, the 24 % tax bracket. You contribute to that pre-tax account. You're getting that deduction on 24%. But then in retirement, their effective tax rate is like 12 % to 15%. So, of course, in that situation, it makes total sense to take the deduction sooner and then pay taxes at that lower rate in retirement. That's exactly right, Robert. And we live in sort of a golden age right now where you have the high standard deduction plus the senior deduction. Now, that is temporary, to be fair, although I think the politics are likely to play out that some form of that thing is likely but certainly not guaranteed to be extended in the future.

11:10But you see, we have examples of what we call tactical taxable Roth conversions, where we have a married couple in their mid to late 60s. They have$101 ,000 of income before any Roth conversion. And that's mostly capital gains income. It's spending down the taxable accounts first. And then we add a$40 ,700 Roth conversion. And I've done this at a conference. So I say, oh no, this couple's got$141 ,700 of adjusted gross income. They're going to be taxed, right? And I asked the audience, just mentally in your mind, picture what's their tax rate going to be? How much federal income tax are they going to pay?

11:51And of course, the surprise is they pay zero federal income tax. Well, how can that be? Well, the Roth conversion is essentially wiped out by the standard deduction and the senior deduction. You structure your affairs so that you have low yield equities in the taxable account, maybe a small bank account, generating some interest income. But essentially, the ordinary income, the Roth conversion, the non-qualified dividends, the interest income can be kept at the senior deduction plus the standard deduction. So that wipes away the tax on that. And then you can have significant capital gains that you're essentially, you're in your brokerage account, you sell those brokerage account mutual funds or ETFs and trigger capital gains.

12:37But recall, we have the 0 % long-term capital gains tax bracket. I believe for a married couple in the year 2026, that thing goes up to$98 ,900 of taxable income. So that's after we put in the senior deduction, if we're 65 or older, we're married, that's$12 ,000. If we're both 65 or older this year, that's fantastic, plus the high standard deduction. So that goes back to my point that retirement is a time that if we structure our drawdown and our Roth conversion strategy, in the first part of our retirement, we might be paying very low taxes. And then, yes, maybe later on in retirement, as we spend down those brokerage accounts, we then get into our traditional IRA.

13:18We eventually get to RMDs. Although, by the way, if you're born in 1960 or later, that RMD doesn't start till 875 later in life anyway. So, yeah, Robert, there are so many good little planning opportunities out there. And I think we have to step back and say fear of taxation and retirement is not justified in today's environment based on the rules, based on the incentives of the politicians, based on what the recent history. In the book, we have a little table and it goes through a decade's worth of tax cut after tax cut after tax cut for retirees. retirees, even though many commentators are saying, you know, they're going to be increasing taxes on retirees.

13:58The problem with those predictions is the future keeps happening and those tax increases don't materialize. And what has materialized are tax cuts after tax cuts for retirees. Now, I'm not here to say that that's going to continue, meaning I do think there's some risk that may be small, incremental, minor tax increases. And I'm certainly not going to bet on continued tax cuts on retirees. But I think the history, the politicians' motivations, today's rates sort of come out with this message of taxation in the future for retirees is likely to be relatively modest. That's certainly not guaranteed.

14:36And look, I'm not here to say you shouldn't think about some tactics like some smaller Roth conversions, maybe doing the back door Roth while you're working. There are different things you can do to help mitigate that risk. But I just don't think that fear of taxation and retirement is that justified in today's environment and looking into the future. You highlight a couple of things that people often will bring up as a reason to have more Roth assets. One is RMDs, required minimum distributions. The other is IRMA, income-related monthly adjustment amount for Medicare. But as you point out at the book, when you actually calculate those amounts as a percentage of the overall portfolio and the withdrawal, they're probably more of a nuisance than anything else.

15:19Yes. So, Irma, let's talk about that one. That is an increase in Medicare Part B and Part D premiums. And it's based on your income from the two years previous. Now, when you run the numbers, two things sort of emerge. One is IRMA tends to be a tax on affluent singles and widows. So if you look at when IRMA kicks in, it's over$200 ,000 of income for a married couple. Even very affluent married couples, when they're no longer working, often have a difficult time reporting$200 ,000 or more of income on a tax return in retirement. That's partly because of basis recovery with capital gains transactions.

15:59By the way, in retirement, our spending tends to form a natural ceiling on our taxable income in a way it did not during our accumulation years. That's an important insight. So when we're married, Irma tends to barely bite. Now, I will say Irma starts biting when we become single. Either we're single going into retirement or become a widow. And that's when Irma can bite. But like you were saying, Robert, it tends to be more of a nuisance. It tends to be a tax on affluent single retirees. just the way it functions. That's just how it breaks down. But even then, Irma tends to be an indication that things, generally speaking, worked out well in your financial life.

16:39And perhaps you had some tax inefficiencies in the later part of your life when they don't impact you as much. This is one of the lessons of the book is that when we think about taxes, we should think about when are they the most impactful? I would argue that the most impactful when you're 40 years old, you got two kids at home, you got a spouse at home, and you haven't built up sufficient assets to be financially independent or whatever you want to call it. Boy, paying taxes then isn't that great because you got two mouths to feed, you have a spouse, you haven't built up all this financial wealth.

17:12And even early retirement, the beginning of retirement isn't the greatest time to pay taxes either because look, you might have 30 or 40 years of retirement you have to fund. And paying some money to Uncle Sam at that point isn't that great because now, you know, that's money that could have been invested for your financial future. You know, to the extent people worry about sequence of returns risks, not something I worry a whole lot about, but it's not a nothing concern. Paying taxes up front in the early part of retirement is not a great thing to do. So if we're going to have, say, Irma in the later years of our retirement, because we did traditional retirement accounts a little too much, say, well, you've essentially picked a really good time to pay tax.

17:53Because at that point, it can't be as impactful to your financial future. At that point, these inefficiencies, sometimes I refer to these inefficiencies as garbage time touchdowns, right? You use these traditional retirement accounts. You won against the IRS when you were working. You then spent down taxable brokerage accounts early in the first part of retirement. You won against the IRS. And then maybe later in life, you have these inefficiencies that come after decades of defeating the IRS. Maybe what you've done is you picked a pretty good time to pay taxes. Because at that point, one of two things is true.

18:31If you're paying Irma, you're financially affluent. You're well above most Americans in terms of financial success. So you're paying the surcharge or maybe a little incremental tax on the income tax side at a time where you're already wealthier than most of your cohorts in that age group and overall Americans. So you've done really well and you have a few tax inefficiencies. That's an outcome most Americans would gladly sign up for. And these inefficiencies come after decades of defeating the IRS. I am a lifelong, almost lifelong New York Jets fan, and I've seen plenty of garbage time touchdowns.

19:06There's scores by the other side that ultimately are not determinative of the ultimate outcome. And that's what we're looking for is financial success. As much as we're trying to reduce taxes, that's an important priority. But the ultimate priority is financial success. And I've seen my Jets score too many touchdowns to not be pretty knowledgeable about this subject. And so I think what happens is if you use these traditional retirement accounts to build up retirement savings, maybe build up some taxable brokerage accounts, maybe build up backdoor Roth IRAs because you deducted, you saved money, you invested it during your working years.

19:40All right, maybe at the end of the game, we have some RMDs that go out at the 32 % when we're already affluent and we don't have the energy to be spending that money anyway, or maybe we're in long-term care, a whole other conversation. A lot of times, a lot of these long-term care expenses can be subject to, It could be medical deductions, and we can essentially deduct away most of our taxable income. So it's actually an efficient use for a traditional IRA, not a desired use, but an efficient use. So, yeah, that's sort of my approach when I think about this. Not that Roth conversions can't play a good role, can't be beneficial, but rarely are the Roth conversions needed.

20:17Well, this has been a great conversation, Sean. Thanks so much for joining us. Robert, thanks so much for having me. It's time to get it done, fools. and this week I encourage you to do something that I encourage everyone to do every January. And that is to think about what you'll need from your portfolio in the next three to five years and protect that money by moving it to cash or bonds. On average, the stock market drops 20 % or more every four years. And in the first decade of the century, it dropped more than 50 % twice. Since 1928, the stock market has been profitable over 83 % of three-year holding periods, 88 % of five-year holding periods, and 94 % of 10-year periods.

20:54So we think protecting money you need the next three to five years is a reasonable goal, but you should always adjust for your own risk tolerance and circumstances. So if you plan to make a big purchase soon or maybe send to high school or to college or create or restuff your retirement income cushion, now's a good time to move that money from stocks to higher yielding cash, CDs, treasury bills, or short-term bonds. To find higher yielding banking options, visit the other Motley Fool money, not the podcast, but the Motley Fool website that rates and reviews credit cards, mortgages, brokers, and banks.

21:27And that, my friends, is the show. Thanks for listening. And thanks, as always, to Bart Shannon, who is a magician and the engineer for this episode. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for the informational purposes only. To see our full advertising disclosure, please check out our show notes.

22:00I'm Robert Brokamp. Bull on, everybody.