With tax season here, let’s discuss what we call the Smart Money Retirement Order.
1. Free Money: This is the best kind of money. Given as a gift, perhaps an inheritance or even a lottery winning.
2. Taxable Money: The worst kind of money but necessary. Our wages, bank accounts and brokerage accounts. Every year we pay taxes on our wages, Social Security, pensions, interest earned on bank accounts and capital gains tax in a brokerage account. There is no tax advantage to any of this money.
3. Tax-Deferred Money: This is where most Americans have most of their life’s savings. Most of us bought into what we believe is one of the biggest myths of retirement planning, that when we retire, we’ll be in a lower tax bracket and because of this most of us have maxed out TSP’s, 401K’s, 403B’s, SEP’s, and Traditional IRA’s. We’re hoping that we’re in a lower bracket when we retire because if we’re not, all of this money is pre-taxed and will be taxed at whatever your ordinary income tax bracket is down the road. The problems are that when you’re retired, you’re not maxing out your employer retirement plans anymore. The primary house is often times paid off so we’ve lost the interest deduction there and hopefully kids are out of the home. We could be retired with higher incomes and fewer deductions and then what if the tax code changes and tax rates and brackets go up?
4. Tax-Free Money: Permanent life insurance policies to include whole life and universal life, Roth IRA’s and municipal bonds are the only three places to have tax-free money. The Roth IRA was created in 1997 and is still around to contribute to for those who qualify and/or convert into. Many also have a 401K Roth or TSP Roth option available. These are big tools in the arsenal available for those that want to sock money away and grow it free from future taxation. If you are concerned with tax rates and brackets going up — as they are scheduled to do so on 1/1/2026 — and you have a lot of money in section #3 and want to do something about it, shouldn’t we be considering shifting as much money as possible into #4?
Having a tax plan in a comprehensive retirement plan is critical. Taxes will more than likely be our biggest expense in retirement. Would you rather pay taxes on the seed or the harvest? If you already have a harvest and are approaching retirement or already in retirement, we can run tax projections for you. This is part of our planning. The tax projection will consider all of your current income streams, populate that information into our tax planning software to show us which bracket you are currently in, and how much room, if any, we have to consider strategic tax planning and the purposeful shifting of retirement dollars across the threshold from the pre-taxed bucket into the post-tax bucket, i.e. the Roth IRA and other tax-free vehicles and accounts.
If you are a client, reply to this email to have a review setup to discuss this. If you are not a client, reply to this email or call us at (571) 577-9968 and we can begin to have this conversation with you as well.
As always, any and all questions are welcome. We are here for you.
All our best,
Abe Abich & the Abich Financial Team
This past weekend, the Abich Financial Team got together and took a trip into D.C. to watch a Capitals game. Though the Caps fell short of winning by a score of 4-2, we all had a great time together and took home a moral victory!