Get to Zero Tax – Part 4, Social Security

Mark is back with an exhilarating new Weekly Webinar encompassing Slott Group insights, market updates, a recap of recent economic developments, and a focused portion on financial planning aimed at boosting your retirement preparedness. This week’s episode wraps up a four-part series on Getting to Zero Tax in Retirement, with the focus of the Financial Fifteen on Social Security.

As always, Mark begins with updates from the Slott Group. This week, he discusses how the IRS created confusion by releasing proposed regulations related to the Secure Act. These regulations required beneficiaries of inherited IRAs to take required minimum distributions (RMDs) during the 10-year payout period. To address the confusion, the IRS issued notice 2022-53, waiving penalties for missed RMDs in 2021 and 2022. Later, notice 2023-54 extended this penalty waiver to cover missed 2023 RMDs for deaths in 2020 or 2021.

However, Mark emphasizes that this forgiveness doesn’t apply to individual RMDs and suggests that beneficiaries consider not skipping RMDs entirely, as delaying distributions might lead to larger tax bills due to future tax increases. He also discusses anomalies in the tax code, such as excess contribution rules, restrictions on converting inherited IRAs to inherited Roth IRAs, and limitations on rolling over Roth and after-tax non-Roth money from an IRA to a work plan. Mark finds these irregularities perplexing and unexplained and includes practical examples and interpretations from different experts.

Mark then delves into recent market developments. The Consumer Price Index was released, indicating that inflation had grown at a slower rate than anticipated, though it was higher than the previous month. Year-over-year inflation reached 3.2%, up from 3% in June. Analysts’ reactions varied: those favoring lower interest rates highlighted the headline number as a sign of inflation’s control, suggesting the Fed should cease rate hikes. Conversely, those advocating for rate increases pointed to the still-elevated core rate, around 4.7%, as a reason for continued hikes. Mark addresses the core rate of inflation, which also rose 0.2% month-over-month and reached 4.7% year-over-year. Despite discussing the differences in reporting the Consumer Price Index in previous sessions, Mark underscores that labor needs to weaken significantly for the core number to see substantial declines. Additionally, the Producer Price Index for wholesale levels showed a greater-than-expected gain of 0.8% year-over-year, up from 0.2% in June.

Mark remains cautiously optimistic, suggesting the report is “slightly hot” but not a cause for major concern at present. He reflects a growing worry about persistent inflation and the potential for a more severe economic downturn. Mark then touches on upcoming market events, such as retail sales and the Federal Open Market Committee (FOMC) meeting. He anticipates learning more about the Fed’s stance on raising rates. A brief market overview is provided, indicating that most markets were negative due to the discussed data.

Mark shifts towards addressing the uncertainty in the market and how to navigate it. He emphasizes that investor decisions should be driven by their financial plan, with the plan’s three pillars—asset allocation, principal protection, and account segmentation—forming a sturdy foundation. Drawing an analogy to buildings constructed with varying foundations to withstand earthquakes, Mark likens the investment strategy to these structures, suggesting that while market challenges might cause “cracks,” the plan should not entirely collapse. The focus should remain on a well-thought-out, detailed, and holistic plan that ensures financial security during uncertain times.

Getting to Zero Tax – Part 4, Social Security

For this week’s Financial Fifteen, Mark discusses the taxation of Social Security benefits based on a calculation called provisional income. He explains that not all Social Security benefits are taxed at 85 percent, contrary to a common misconception. Mark then goes on to explain how the tax is calculated based on different provisional income brackets. Using numerical examples and a tax chart showing the tax rates at different income ranges, Mark emphasizes that these provisional income brackets have not been updated for some time and do not account for inflation increases in tax brackets, which can lead to more Social Security benefits being subject to tax over time. Additionally, Mark highlights the importance of tax-efficient planning to minimize the impact of Social Security taxation and suggests consulting tax professionals for personalized advice.

Mark discusses tax-efficient retirement planning strategies in relation to various sources of income, such as Roth accounts, taxable accounts, pensions, and Social Security benefits. He emphasizes the importance of minimizing taxes on retirement income by strategically managing different income sources. The key points covered include:

• Income Streams: Mark introduces four income streams that affect retirement planning: Roth accounts, taxable accounts, pensions, and Social Security benefits.
• Provisional Income: Provisional income is explained as the basis on which the taxation of Social Security benefits is calculated. It includes various income sources such as earned income, pension income, rental income, interest, dividends, capital gains, and half of Social Security benefits.
• Tax Impact: Different levels of provisional income determine the percentage of Social Security benefits subject to taxation. Mark explains the tax brackets and the increasing tax rates applied to different income ranges.
• Optimizing Tax Efficiency: Mark suggests strategies to minimize taxation on Social Security benefits. These strategies include shifting funds to Roth accounts, structuring distributions from life insurance policies, and proper planning of withdrawals from taxable and tax-deferred accounts.
• Tax-Free and Tax-Advantaged Accounts: Mark highlights the importance of Roth accounts and properly structured cash-value life insurance policies (life insurance retirement plans) as effective tools for tax-free or tax-advantaged income. Distributions from these sources do not count as provisional income.
• Tax Planning for Couples and Inheritance: Mark addresses potential changes in taxation for couples when one spouse passes away, causing changes in tax brackets for the surviving spouse. Additionally, he touches on the potential benefits of Roth conversions and inherited IRA distributions.
• Lump Sum Pension Options: Mark suggests that if individuals have the option to take a lump sum pension payout, they might consider rolling it over into an IRA and strategically converting those IRA funds into Roth accounts to reduce future taxes.
• Zero Tax Strategy: Mark revisits the concept of reaching “zero tax” on retirement income, where taxes are strategically minimized or eliminated. The idea is to balance different income sources to achieve the most tax-efficient outcome.
• Individualized Approach: Mark emphasizes the need for individualized retirement planning based on specific circumstances, financial goals, and tax situations. Making informed decisions based on personal factors is key to effective tax-efficient planning.

Tune in for an in-depth explanation of tax-efficient retirement planning, and to learn strategies to maximize income and minimize taxes in retirement.

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The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Attleboro Wealth Management, LLC is a Registered Investment Adviser. This program is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Attleboro Wealth Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Attleboro Wealth Management, LLC unless a client service agreement is in place.

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0:00 – Introduction & Upcoming
05:13 – Slott Update
15:37 – Market Update
22:18 – The Financial 15: Get to Zero Tax, Part 4