The Rules Change at Retirement — Here’s What Nobody Told You

The Rules Change at Retirement — Here’s What Nobody Told You – (0:00)

Alek Johnson: Good afternoon, and welcome everybody. I am excited to be here with you today to talk about some of the changes that come along with retirement.

So, I always appreciate you taking the time during your lunch hour. Hopefully, it’s not too long, and you can get a lot of good information out of it today.

For those of you who don’t know me, my name is Alek Johnson. I am a Certified Financial Planner™ and one of the senior advisors here at the firm.

As always, I just have a quick list of housekeeping items, and then we will get started here. So first and foremost, today’s presentation, I am hoping to keep it around 30 minutes. I am hoping we don’t go over that. I’ve been condensing. There’s just a lot out there, so hopefully, if we do go a little over, it’s well worth your time.

Next, if you have any questions throughout the presentation, you can feel free to use the Q&A feature here on Zoom. My colleague who’s with me today, Carson Johnson, you can probably see him with his camera on there. He’s another advisor here at the firm. He’ll be helping me out. He is the not as good-looking Johnson, but he’s a pretty smart cookie. So hopefully, he can help answer some of those questions.

Carson Johnson: Hey now. Hey, be careful.

Alek Johnson: At the end of the webinar, Carson will kind of be answering throughout, but if there’s any general questions that he feels like it’d be good for everyone to know, we’ll kind of hit on those with the last three to five minutes or so.

That being said, if you do have a more individualized question, please always feel free, if you’re a client of ours, reach out to your advisor. We’re happy to chat with you. If you’re not a client yet, please feel free. You can either shoot us an email or schedule a free consultation, and we just want to make sure we can help address those questions for you.

And then last but not least, just at the end of the webinar, kind of the status quo here, there will be a survey sent out that’ll give me some feedback and then allow you the opportunity to make some future suggestions for upcoming topics that you want to hear about. So please utilize that. It is very helpful for us as a firm to kind of see what you’re thinking.

All right. And a quick disclaimer here. Again, none of the things I’ll go over today should be really constituting investment, tax, legal advice, or anything like that. The big thing with today, I do have a few general recommendations, things that I have told clients before, but obviously, I don’t know your personal situation, so things may not particularly apply to you. So just kind of take it with a grain of salt, but hopefully, you can still glean a few gems today.

You Only Retire Once – (2:48)

All right, so to kick things off, I want to preface this webinar with why I feel so passionately about this topic. In my time as an advisor here, I would say a very common misconception I debunk a lot with my clients is that what got you here, meaning at this point to retirement, will likely not get you there, meaning through retirement.

Most people will spend 30, 40 years of their working careers. They’ll get really good at a specific set of financial rules. For example, in the accumulation phase of life, it’s all about saving consistently and investing for growth. Defer your taxes. Whatever the market does, you don’t really care. You just keep buying in, and those rules work. They work for 30 years during that phase of life, and they work really well.

But here’s what nobody likes to talk about, is that the moment you retire, those same rules that helped you build your wealth can start working against you. People who struggle in retirement aren’t oftentimes those necessarily who just saved or didn’t save enough, they saved wrong. It’s really those who kept doing what worked beyond the point of time where it stopped working.

And so in the distribution phase, the reason there is that the focus changes, right? The rules become about preserving your wealth, generating income, managing your taxes, and protecting against new risks that are coming your way.

So that gap between the strategies that got you here and the ones that will carry you through retirement, that is exactly where a lot of financial plans break down and fall apart. And so that’s what today is about. We’re just going to go through a few of those rules that change that hopefully will help you get through retirement just as successfully as you got to retirement.

And the big thing here I always just like to say is you only retire once, so let’s make sure that we do it right.

So our agenda today, what we’re going to talk about, kind of just four general areas, and there is a lot that we could go on and on for hours about. I’m just going to try and keep it to the 30 minutes as best we can. We’re going to talk about just kind of the psychology switch that happens upon entering the distribution phase of life. We’ll talk about some changes surrounding your investments, surrounding some tax planning, and then just your income in general.

The Psychology Switch – (5:20)

First item of business, let’s break down the psychological changes that come with retirement. Your whole life, you have been saving. You were told as a kid to save up your money for the candy bar or the toy that you wanted. You were told to save for that first car.

Upon entering the workforce, you were told you need to save for retirement, save for a rainy day, your kids’ college tuition, your kids’ weddings. I found out recently that my wife is pregnant with our third girl, so I really need to get a jump start on that whole wedding planning myself. But this is a good thing. It’s absolutely important to save.

Decades of saving, though, create a deeply ingrained habit. So for 30 years in that savings mindset, when you go to retire, it’s hard to turn that mindset off. You’ve done everything right, you have more than enough, and yet you are still anxious about spending.

Spending $5,000 on that vacation, spending money to fix the roof, spending money on the new car, whatever it may be, spending down the portfolio just feels wrong, even when it can be the right move.

The accumulation habit is save more, spend less. That discipline, left unchecked in retirement, actually does become a problem. People underspend in their healthy years, their go-go years, as we call them, kind of like the 60s through 70s, if you will, and they leave money on the table at the end.

But that psychological shift to go from saving to spending is much harder than it sounds, for sure.

In addition to the financial mindset changes, there’s oftentimes a more cumbersome emotional change. For example, things like restructuring your identity. Work is a primary source of how we identify ourselves. Without it, trying to come up with that new purpose, losing your structure, just kind of your day-to-day habits, finding a new rhythm. There’s a lot that goes into that.

Finding new social interactions. A lot of times work is where we socialize quite a bit, and so finding ways to keep that aspect of your life intact, and really just making sure you and your spouse’s relationship stays strong as well.

I often have the conversation with a spouse who was more of the homemaker role. They’ll come in and they’ll say, “I need you to figure out a way to get my recently retired spouse out of my hair.” And so there’s just a lot that kind of compounds on that psychological front.

Now, there are many things that you can do to help buffer this transition, but there’s three big common ones that I feel like I talk about quite a bit, and so I want to touch on those today.

Number one, you can set goals and make plans for all aspects of your life, obviously. But especially when it comes to spending your accumulated wealth, have a goal in mind.

I know my clients, they probably get sick of me saying this. I feel like I probably over say it, but I tell them constantly, someone somewhere is eventually going to be the end user of your wealth. Whether that’s you and your spouse, whether that’s your kids, your grandkids, your favorite charity, a church, and heaven forbid, if things just go terribly wrong, the government.

But somewhere, someone along the way is going to be the end user. And so mapping that out, who you want that to be that actually utilizes your wealth will help you adjust to that spending lifestyle instead of just that saving lifestyle.

To make it easier on the emotional side of things, retiring to something, not just from something, is huge. Those who retire to something, whether it’s community service, a senior mission by chance, new hobbies, anything out there, you tend to be happier retiring to something than those who don’t take action and just let retirement happen to them.

The last big one is if you have the flexibility to let go gradually, that can help you wrap your mind around those coming changes. And so a kind of like a phased retirement, getting into a part-time capacity, that’ll help you really kind of just transition, both emotionally and into that more spending mode as you gradually get out.

Investment Tweaks and Changes – (10:05)

All right, now let’s talk more about the financials and look at some just investment tweaks and changes that can come along with retirement.

So first, let’s talk about volatility. During the accumulation phase, market downturns, they can be unsettling, I know. But ultimately, they are really good buying opportunities.

The average bear market, which basically means the market dropped at least 20% from that high, historically, they last less than one year on average.

During that year, your retirement contributions that you’re putting into your 401K, your IRAs, they are working extra hard for you in the fact that they are buying that stock and those positions at a discount. When prices drop, your contribution is buying more shares.

In the distribution phase, the same mechanic works against you. When prices drop, you have to sell more shares to generate the same income that you need. The arithmetic literally inverts here. It’s the same volatility, but it just now has the opposite impact.

A bad first decade can permanently damage your plan if you don’t plan ahead and have a plan in place. Let me just show you what I mean by that.

At our firm, we use this pretty frequently. So if you’ve seen this, I apologize, but it’s a really good example here. So we like to talk about Mr. Green and Mr. Red.

Both of these investors are age 65. They’ve both saved up the exact amount of a million dollars for retirement. They both want to take out 5% of their initial balance each year to have an annual income of $50,000 from their investments. Both are going to have an average yearly return of 6% over their 25-year retirement.

Now, Mr. Green is going to experience overall positive returns at the beginning of his retirement and a string of negative returns at the end. Mr. Red is going to experience the exact same returns only inverse.

Again, both investors will average that same 6% return over their 25 years of retirement. The sequence of those returns is the only difference here. You can see how much of a difference this is going to make.

Mr. Green will end up with more than two and a half million at the end of his 25-year retirement to pass on to his heirs after he passes away, while Mr. Red is going to run out of money a little over halfway through his retirement. Again, every aspect of their retirement experience was the same and identical except for one thing, which was the sequence in which they experienced those returns.

During accumulation, time is your greatest asset, right? A bad year will be smoothed out over time. In distribution, time is finite and shrinking. Every year that passes is one fewer years for the portfolio to recover from that bad sequence. So the emotional weight of a market drop changes completely. You’re no longer just waiting it out while you live off of your paycheck. It becomes a lot more real.

So that being said, let me just walk you through a few common problems I see as people are approaching retirement.

Number one is they are all in on equities. What I mean by this is there are many clients that walk through our door, they are invested in 100% stock, and they may be retiring tomorrow. Over the years, they have seen just tremendous amount of growth in the markets, and they cannot bear the thought of getting conservative.

Common things that I’ll hear is, “Well, bonds don’t earn anything compared to stocks,” and, “Why would I settle for CD rates when the S&P 500 will get me 11%?” Again, what worked to get you to retirement may not work to get you through retirement. Remember that the focus has changed. You now need an income, and if the markets were to drop 30% to 40%, you would be forced to sell those stock positions at a low.

On the opposite side of things, many people will get too conservative too early. Today’s retiree is likely going to need money that will last them for 20, 25, 30 years. Getting too conservative too soon creates inflation risk, losing your purchasing power. Growth still matters, so we can’t just avoid equities altogether. You need part of your portfolio compounding over the long term, even while you’re drawing on your income.

Another big one is target date funds. Many people, for better or worse, just say, “Hey, this is too much to think about. I am just going to stick with my target date fund and call it good.” Well, target date funds can work great in the accumulation phase, and they do a good job getting you to retirement, but they are not ideal in getting you through retirement. Let me show you what I mean.

What I’m showing you is the asset allocation of three different 2025 target date funds from Vanguard, T. Rowe Price, and State Street. A 2025 target date fund would be for someone who had just entered into retirement last year.

Now, as a rule of thumb, it is generally recommended to be around a 60% stock, 40% bond portfolio, upon retirement. You can see here, I’ll grab my laser pointer, that the highest is Vanguard’s at 48%, and it gets a little bit lower as you go, 42% in T. Rowe, 39% in State Street.

They tend to be more conservative, and they will continue to get more conservative even as time goes on. This is not ideal if you want to be keeping up with inflation.

The other issue with target date funds is that if you are withdrawing your income in retirement from one of these funds, every single time the market drops, you are systematically selling stocks at a loss.

Again, the target date fund is just one fund. It’s one ticker symbol that you own. And so if the market drops, if you had Vanguard’s, for example, that fund, you would systematically be selling 48% stock every time you need that for your income. That is not ideal if you want to avoid that bad sequence of returns.

So here’s a few common recommendations I make as my clients approach retirement.

Number one is just to check in on your current asset allocation and make any changes as needed. Now, again, please remember, this is not investment advice, but a general rule of thumb I would consider is that at 10 years out from retirement, you’re in about an 80% stock, 20% bond portfolio.

When you’re about five years out, that gets a little bit more conservative at about 70% stock, 30% bonds. And upon retirement, we’re hitting that 60% stock, 40% bond allocation.

Number two is to know what you are invested in. If it’s a target date fund, consider tweaking that investment before you actually retire. If you’re not in a target date fund, it’s still important that you know exactly what you’re in.

How will those funds perform if the market drops? Do you have conservative monies? Do you have aggressive monies? You want to make sure you just know exactly where you’re at.

And third is just to stress test your scenarios before you actually retire. I can promise you, if your plan will work when the markets are down 20%, it will absolutely work when the market doesn’t drop.

And so just stress testing your plan ahead of time, making sure that, hey, if things do go down, am I going to be okay, is a really good thing to know before you actually get to retirement.

Tax Planning: Year-Round, Not Year-End – (18:23)

All right. There’s plenty more with investments, but for the sake of time, we’re going to move on here. We’re going to talk about some tax planning ideas.

So, during accumulation, I promise you, no one likes paying more than their fair share of taxes, and so the goal is often to defer your tax burden, and you’ll utilize those pre-tax retirement accounts, whether it’s traditional IRA or your traditional pre-tax 401k, you throw it in there to get that deduction.

The irony of distribution is that many people deferred too well, and now they are staring at a serious problem. So before I address that problem, let me just quickly show you this slide. I’m just going to buzz through here, and I’ll grab my laser pointer again.

Some of you have seen this before. I know I spoke about it just recently in my December webinar, which was all about end-of-year tax planning. You can feel free to look at that if you want a little bit more in-depth, but I’m just going to keep it high level today.

So at a high level, you have three different types of accounts. This first one is your pre-tax or tax-deferred accounts. Again, this is where you get the deduction right now. Upon retirement, all of your withdrawals are going to be taxed at your ordinary income level.

Second, you have your tax-free. This is going to be made with after-tax contributions, which means you don’t get a deduction, but the upside is it will grow completely tax-free from this point on.

And then the third one is your taxable accounts. There’s no tax deduction, there’s really no tax sheltering at all, but there’s a lot of flexibility as far as there’s no penalties, things like that surrounding these accounts.

Now, the question isn’t really which is better. The question is which is better for you given your current and your expected retirement tax rates? I will tell you, many people have never modeled this comparison. What am I being taxed at now? What will I be taxed at in retirement? That, in my mind, is probably a planning gap that’s worth closing.

That being said, most retirees, they do have the majority of their wealth in bucket number one, this pre-tax bucket. And why is that problematic? Well, let me show you.

At age 73, the IRS stops letting you decide when you want to take money out of your pre-tax accounts, and they decide for you. They require it. So every year, whether you need the income or not, you have to start withdrawing a minimum amount, and it’s called your Required Minimum Distribution, or a RMD for short.

Now, where it becomes a problem is you have spent 30 years maxing out your 401k, your IRAs, doing exactly what every financial article told you to do, whatever advisor recommended, and you have built up a very large pre-tax balance.

When the IRS forces you to start pulling from it, those withdrawals will be taxed as ordinary income. That can push you, unnecessarily most of the time, into a higher tax bracket. It can trigger Medicare premiums and surcharges that you weren’t really expecting, and it could potentially even increase the portion of your own Social Security benefits that are taxed.

Now, the good news is this is entirely solvable, but only if you plan before it arrives. By the time your RMDs start at age 73, your options are going to be limited. So the window to act is up until that time, and that’s where I want to focus on.

Now, again, here, I’m not going to go into too much detail today on Roth conversions. You can look at that same December webinar, or I’ve actually done a webinar in the past, I know, specifically on Roth conversions, where I spent a ton of time going through them. But that being said, just to give you a high level, a Roth conversion allows you to take money out of your pre-tax accounts, like your IRA, and convert it into a post-tax Roth account, where it will continue to grow tax-free.

So essentially, you’re taking it from this taxable account over here and putting it in this tax-free account over here.

Now, the biggest catch here is that any time you make that conversion, that is taxable to you in the year that conversion was performed. As you are taking it out of the account to convert it, you are literally creating a tax liability at that moment.

Now, there’s a lot of dos and don’ts surrounding conversions, but if it makes sense for you, the golden window of when you want to do them is in the years between retirement and leading up to age 73, your RMD age. That time frame is usually, basically, call it age 60 to 73, just depending on when you retire.

That time of life after you’ve officially hung up the cape represents some of your lower income-earning years. It’ll make conversions a lot more affordable at that point in time.

Now, Roth conversions, I will just say, they require careful planning around your tax brackets, Medicare thresholds, other income sources, your pension, Social Security benefits. It can’t be done with guesswork. You need to be very mindful about doing them.

Another big change is juggling multiple streams of income. So in the accumulation phase, your liability for taxes is largely determined by one source of income, generally your wages.

In retirement, you’re going to have multiple sources. You’re going to have Social Security, pensions, rental properties maybe, and investment income.

When it comes to investment income, most people think of it as just one big pool of money. But the reality is you likely have several different buckets, maybe a brokerage account, your 401k, a Roth IRA, and the order from which you pull money out of those different accounts will matter tremendously for your overall tax liability throughout retirement.

Which account you should draw from this year to stay in the lower tax bracket, whether you should do a Roth conversion, how a larger withdrawal will affect Medicare premiums. The tax dimension of every financial decision starts multiplying.

Now, a general framework, again, this isn’t for everyone, may go something like this, though. You may have your taxable accounts first, then your pre-tax accounts, and then your Roth accounts. The logic is, hey, let’s let the Roth accounts grow tax-free, kind of have them at the end, capture a lot of the growth there.

We’re going to be taxed on the pre-tax stuff anyway. We’re going to have those RMDs start, so it makes sense to take an income, and if you have some taxable accounts, maybe you’re living off that upfront to maybe do some of those Roth conversions.

But again, this is a starting point. It’s not a rule. Your specific situation may be different based on when you retire, when you’re taking Social Security, how large your RMDs are going to be. All of that affects which account you should actually be withdrawing your income from and when.

And this is where I will just say from experience, a lot of people get into trouble. They will make each of these decisions in isolation, right? Picking when they’re going to claim Social Security without thinking about how it affects their tax brackets or how it’ll affect their long-term ability to do Roth conversions. Everything kind of feels like it should be its own decision, but they’re deeply connected in the long run.

Now, one thing I’ll just kind of say on a positive note is getting the sequence right isn’t that complicated once you have a plan in place. But without one, you’re leaving real money on the table, and more than likely, you won’t ever know about it.

So a few common recommendations I make as my clients approach retirement.

Number one is to audit your accounts. Know how much money you have in pre-tax, how much money is in Roth, how much money you have in those taxable accounts. This will help you begin to strategize what order you want to start withdrawing from.

Next is to determine where you should be making contributions for retirement. So right now, in your working years, where should you be putting money? Is it Roth? Is it the pre-tax accounts? One of the biggest knee-jerk reactions, I will tell you, whenever I talk about RMDs is people just say, “Well, I want to avoid that. I’m going to start contributing to my Roth right now.”

The reality is, if you’re at the end of your career, you’re likely in one of the highest tax brackets you’ve ever been, making more money than you ever have, and that is exactly when you actually want to be contributing to those pre-tax accounts, avoiding that highest tax bracket, knowing that in retirement, likely it’ll kind of decrease from there.

So just take caution in making any swift changes there, but just kind of analyze where you’re at.

Next, I always just recommend forecast that required minimum distribution problem. Many times it’s not years one, two, or even three that are dramatic shifts. It’s going to be those later years. Years seven, eight, nine, ten, where every single year as you’re getting older, the government requires you to take more and more out of the account because they want that tax revenue.

So just forecast that out and know how that’s going to kind of play out during your own retirement.

And last, create a plan for when you might consider those Roth conversions. Just know your window of time when you can operate and start planning on that.

Income in Retirement: A Different Problem Entirely – (28:21)

All right. Now, I just want to briefly talk about the income problem. We’re at 29 minutes, so hopefully I can wrap up here within the next five or 10, but the biggest problem here is your paycheck is gone.

For your entire working life, your paycheck solved the most of your financial problems. It covered your expenses, funded your lifestyle, and it kept coming in even when the markets went down 30, 40%. You didn’t have to think about it.

In retirement, that paycheck is gone, and nothing automatically replaces it. A large portfolio sounds like the answer, but I will tell you, a big number sitting in your IRA account is not the same as a reliable source of income. You have to build it. You have to create it. That gap is really the central challenge in all of retirement planning.

Your portfolio has spent decades doing one thing: grow. All you’ve been doing while you’ve been getting your paycheck is putting it in, let it grow.

Now, in distribution phase of life, we are going to ask it to do something completely different. We’re going to ask it to generate a consistent income stream for your whole life. We want it to fight volatility. We want it to protect you against inflation. We want it to manage your sequence risk, making sure that you can avoid a rough decade to start, if that would be the case. We want to provide account withdrawal structure. Which account are you going to take from? We want to account for your other income sources to keep your total income consistent. You have Social Security coming in. You have pensions. How do we keep your total income the same as you’re also claiming those different benefits? And at the end of it all, we want to leave something behind.

Now, I will tell you, those objectives, they do not cooperate easily. This is why distribution requires that structure that accumulation never did.

Ultimately, I will tell you, we want to answer this question: How much can you confidently spend? And the answer, I will tell you, you

probably know exactly where I’m going with this, is you need a plan. In order to answer that question, in order to structure your portfolio properly, you absolutely 100% need a retirement income plan.

Without a plan in place, I don’t know how you would retire confidently. I don’t know how you would have peace of mind and sleep at night. It’s really let alone do any like good investment or tax planning. It would be very difficult.

At our firm, we utilize, as many of you know, the Perennial Income Model™, for our clients. It’s a time-segmented approach that helps accommodate all of those big asks that we’re requiring out of your portfolio. It helps create that peace of mind. It gives you the confidence that you need in spending your money and in making sure really that you don’t underspend as well, kind of that transition again. It’s an antidote to panic. When we see a bad sequence of returns, we know we’re not going to panic at all, and it’s just very logical to help you understand how we want to invest and how we want to do good tax planning.

So what can you do now to start to build out that plan? Again, a few common recommendations I make.

First, just begin finding out the specific information for your other income sources, your pension, your Social Security benefits. If you have rental properties, really dial in your numbers so you know exactly what you’re working with.

Next, I always recommend you just create a spending plan with some guardrails. The biggest thing is to know your essential or your fixed, if you will, versus your discretionary expenses. Just knowing that helps give you a lot of flexibility as you build out a retirement income plan.

Third is to start thinking now about which accounts you’re going to draw from and in what order. I will tell you, you do not want to be making that decision under pressure, under the gun in year one of retirement. Start planning now knowing, hey, this is where I’m going to be pulling from and why.

And last is really just determine whether you’re going to work with an advisor who can help you build this out. If you feel strongly you can do it on your own, that’s awesome. Just start begin putting the pieces together so that you can go into it well-prepared. If you don’t feel strongly you can manage it on your own, or sometimes even more importantly, you don’t want to manage it on your own, I recommend beginning now, earlier than day one of retirement, to begin looking for that financial advisor.

Wrapping Up – (33:06)

Okay, that was a lot. We’re not too far over here, and hopefully it was helpful. So just to recap, we talked about those psychological changes that come with retirement, some investment tweaks that can be made differing from that accumulation phase of life, tax planning items that can be utilized and why, and then kind of that need for an entirely new income stream.

If you don’t have one already, I will tell you, it’s easy to go through and kind of, I guess I should say, it’s difficult to go through 30 minutes and tell you all you need to know about retirement. Please get a copy of this book if you don’t have one already. It’s completely free.

It’s written by our founder, Scott Peterson, and it’s really just going to go through sound investment knowledge, how we recommend putting together that retirement income plan, and what tax planning moves can be made when you have that plan in place.

So we usually get a few requests after each webinar. If you don’t have one yet, please just feel free to reach it out. We’ll get one sent out to you. You can get a lot more detail there than you can in our webinar.

Also, if you want to share it, just let us know. You can email us or even– and we can send it to you, or you can send their name and address, and we can send it over directly to a friend or a family member as well.

Okay. Before I turn it over to Carson, for any questions here, I just want to, again, one real quick, just thank you all for attending today. I know it’s not easy during a lunch break sometimes to want to jump on and hear about us nerds talking finances and taxes.

But, hopefully it was helpful, and then one more quick plug I’ll just put in for that survey. So as soon as we end here, you’ll get that link. If you wouldn’t mind filling that out, it’s always helpful for us to get a lot of your feedback. So that being said, thank you, and I’ll turn it to Carson.

Question and Answer – (34:53)

Yeah. Awesome. Great job, Alek. So a couple of questions here that we got is:

Q: can you contribute to a Roth while you are still working? Maybe if you can elaborate on that.

A: Yeah, absolutely. You can definitely contribute to a Roth. What’s generally simplest is if you have access to a Roth 401k, you can just start contributing into there. With a Roth IRA, there can be income limits surrounding that, and so you just want to make sure– I’d reach out specifically if you want to talk through like where you fall on the income level, if that’s going to work for you. But you can absolutely be contributing while you’re working, for sure, to a Roth.

Q: And then, Alek, what are some common mistakes you see people make a couple of years away from retirement?

A: Yeah. The most common is, I would say, I would focus in on the investments. Many people just think that they’ll kind of take care of it when they get to retirement, and the day of retirement is probably too late to be making those changes.

If you happen to retire the day the markets drop 20%, you do not want to be scrambling trying to find where your conservative money is located. And so a lot of times what we’ll see, people are going to be invested in those target date funds like I mentioned in the webinar.

They’re really good to help you kind of get a baseline start of where you want to be, but they don’t do as much service throughout distribution. And so just making sure you kind of tweak the 401k investments and analyze just where you’re at there. That is something I spend a lot of time with my clients before they officially come on board, is just helping them get that set up correctly.

Q: Can you do Roth conversions even if you have started Required Minimum Distributions?

A: Okay, great question. So the answer is yes, but it’s complicated. And what I mean by that, the IRS, the government, they essentially force you to take your distribution first, your Required Minimum Distribution first, and then you can convert in excess of that. Okay?

So that first chunk, you cannot convert. You can do a Qualified Charitable Distribution. So you can still donate it, you can take it as income, but they do not let you take that piece and convert that.

Once you have done that, absolutely. Anything in excess of that, you can continue to do those conversions. I have several clients that have started their Required Minimum Distributions, and were doing those Roth conversions. But a lot of times it stops making sense when you hit your RMD age because they don’t allow you to convert that initial chunk. You have to take that as income.

Q: And then the last one I think we’ll end on here is, you talked about the different types of accounts. You kind of alluded to it and explained this, but maybe just emphasize a little bit more on why is it so important to understand the different types of accounts that you may have, and why does that have a big impact on your taxes in retirement?

A: Yeah, that’s a great question. So those three accounts will have different tax ramifications, right? That pre-tax account, it will be taxed at ordinary income rates, which is the highest tax rates we have. Then you’ll have that taxable account, which is money that you’ve already paid taxes on before, so only the growth is really ever going to be taxed, and a lot of that will be taxed at more favorable rates, and when you sell investments at capital gains rates, which is just lower than those ordinary income rates. And then obviously, you have the tax-free with the Roth.

Putting those pieces of the puzzle together is pretty important as you are going into your retirement income plan. For example, I’ll just tell you, a lot of my clients, what we’ll do is we’ll live off that taxable money, where they’ve already paid taxes on the majority of it for their income, so it doesn’t touch their tax return. And while they’re living off of that, we can do conversions from that first bucket into the Roth account at a much lower ordinary income tax rate than if we were living off the IRA and then also converting on top of that.

So there’s a lot of flexibility each account provides, and it’s just really important to know the differences so that you can build out a plan that works well for you.

Well, I think that covers everything. So I know that some of you may have a little bit more unique questions, maybe pertaining to your situation. So if we didn’t answer your questions together today, please feel free to send Alek an email there. You’ve got his email. Or give us a call and we’d be happy to go over your situation with you a little bit more in detail.

That might be more helpful for some of those more specific questions. But I think that covers it.

Okay, awesome. Thank you, Carson. Again, thank you all for jumping on. We’ll end it now, and you should get that link to the survey. If you would fill it out, that’d be so helpful. Thank you so much, and we’ll talk again here soon.