What Is A Backdoor Roth IRA?

On This Episode

This week, we’re breaking down the Backdoor Roth IRA: the legal workaround that high earners use to get their money into a Roth and let it grow tax-free forever. We’ll walk you through exactly how it works, who it’s for, the one sneaky tax trap you need to watch out for, and whether it’s actually worth the extra steps. If you’ve ever been told you earn too much for a Roth, this episode is for you.

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Check out all the episodes by clicking here.

Disclaimer: PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

 

Marc:

This week on Retirement Planning Redefined, what is the backdoor Roth IRA? Let’s talk about it. Let’s break it down.

 

Hey everybody. Welcome into the program. This is Retirement Planning Redefined with John and Nick from PFG Private Wealth. And this week, guys, and actually the next two episodes, we’re going to talk about the backdoor Roth, even the mega backdoor Roth. And just kind of do some recapping on the Roth in general. Why would you want to do it? What is it? How do you set them up? Is it useful? All those kinds of things that might pertain to doing the backdoor Roth, which sounds like it’s not above board, but it completely is.

 

It’s an actual totally legal strategy that you can use, but it’s got that kind of weird name to it. So we’re going to kind of break that down for folks this week and help people learn a little bit more about that on this episode and next episode. So we’ll get into it right now. John, how you doing buddy? You doing all right?

 

John:

Hey, doing all right. After four months of a kitchen remodel, it’s almost done.

 

Marc:

Yeah, nice.

 

John:

So life almost going back to normal. So I will say there’s a little more pep in my step lately.

 

Marc:

Nice. You can get a brand new kitchen that you still won’t use because you’re so used to doing something else.

 

John:

You know what? I have been cooking quite a bit with my daughter.

 

Marc:

Oh, okay. Nice.

 

John:

I told myself I’m going to use this thing. So we got cookbooks and it’s pretty cool.

 

Marc:

Nice. Very cool. Very good. Well, Nick, how are you, my friend?

 

Nick:

Good, good. Just moved into new house this past weekend with my new wife. So a lot of new stuff going on last few months, but we’re excited and happy.

 

Marc:

Yeah. Well, that’s fantastic. And of course, it’s a busy time of the year too, right? Springtime, all that good stuff. And conversations around tax efficiency become a big deal, hence the conversation around Roths and Roth contributions and how to do them. So I guess let’s just dive in. What should somebody know? Why would someone want to do one? Nick, why don’t you start us off?

 

Nick:

Sure. So for a Roth IRA, there’s a couple kind of key elements to it that we tend to focus on with people. As a reminder, the conversation that we have with people is that there’s essentially kind of three phases of taxation for accounts. When the money goes in, is it taxed or tax deferred as it grows? Is it taxable each year or does it grow tax deferred? When you take out withdrawals, is that withdrawal going to be taxable or is it not going to be taxable? So with a Roth, you’re making contributions with after tax dollars, so you’re not getting a deduction. The money grows tax deferred, so you don’t get a 1099 each year. And then when you take out the money, it’s a tax-free withdrawal. A couple of the other kind of key factors to consider when you’re doing this is that one of the benefits of having a Roth account is that Roth accounts do not require RMDs or required minimum distributions.

 

When funds were in a Roth 401k, they used to require having minimum distributions, but they no longer do. So no Roth money is something that we don’t want clients to have. We want to make sure that clients end up having some Roth money in retirement. One other factor to take into consideration, because the upside on Roth accounts are tax-free, that’s oftentimes where we will suggest that clients put their more growth-oriented investments for their overall allocation. That makes a lot of sense when you have a tax-free upside.

 

Marc:

All right. So John, so now talk to us a little bit about, I guess the Roth conversion, maybe a little recap there, and then some things to ponder.

 

John:

Yeah. So part of the backdoor Roth IRA strategy is conversions. That’s a step in the process. And I know we’ve talked about this in the past, but it’s always good to recap. And I think people hearing things over and over again, it really sits well with them. So how it works with Roth conversions are there are, number one, no income limits. So anyone can do it. So whether you’re making 50,000 a year or 300,000 a year, or if you’re retired, you can go ahead and do a Roth conversion. So that’s caveat number one. Some people do think they’re limited because in the past there were, I think in the early 2000s, there was income limits and those no longer apply. And how that works is Nick talked about the different phases of money. So let’s say you have some money in an IRA and it was tax deferred, everything’s pre-tax, so you did a deduction going in.

 

You can basically convert it all to a Roth IRA and it now turns into tax-free. How that works is whatever amount that you convert in that year, that becomes taxable income to you. So if you decide that, hey, I’m going to convert 30,000, your taxable income goes up by 30,000 in that given year. So important to really look into tax planning. We’ve talked about all this in the past, but before you do anything like this, you want to look at, hey, what does this do for my tax bracket? If you’re under the age of 59 and a half, it bypasses a 10% penalty. So you can do a conversion basically when you’re 40 or 50. So you’re not subject to that 10% penalty when you do a conversion, which again, some people just might need to hear that because they might say, “Oh, I can’t do a conversion yet because I’m not above 59 and a half.” And then also to have a count in the current year, you have to do it by December 31st.

 

Marc:

Gotcha.

 

John:

And another caveat with Roths is the five-year rule. So whenever you do a conversion amount under the age of 59 and a half, it’s subject to the five-year rule, or if you’re converting to your first time having a Roth, it’s subject to the five-year rule. So things to really take into account other Roth rules even once you convert because they still do apply.

 

Marc:

Okay. All right. So we got some kind of background information there on these two pieces. So Nick, what’s the backdoor Roth? As I said a minute ago, it sounds like it’s sneaky, but it’s not. I mean, you could totally do it. So what’s the deal to know here?

 

Nick:

Yeah. So the biggest cause or reason or most prominent reason that somebody would take advantage of using this strategy would be because their income limits or their income from a household standpoint, or if they’re single, exceed the income limits on being able to make a contribution to a Roth IRA.

 

Marc:

Yeah. You usually hear that, right? We make too much, we can’t do it, right?

 

Nick:

Yep, exactly. So for a quick kind of recap, for 2025, married finally jointly, the full contribution was if you were making under $236,000 a year, married filing jointly, then there’s a phase out period. So you’re fully phased out above 246,000. All right. For single, those numbers are 150 and then 165 for the phase out. Those numbers went up a little bit in 2026. So now married filing jointly, the phase out starts at 242,000 and then it’s fully phased out 252, single 153K for the year and then phases out at 168. So the thought process is, all right, you’re diligently saving into different accounts and you are looking for additional places to save money into, and your income exceeds the limitations. So you thought you were kind of out of not having the ability to make the contribution to the account. And that’s kind of the triggers that people should keep in mind like, hey, does this make sense to me?

 

It’s like, I’m higher income. I’m looking for a place to put money. I make too much money to make a regular contribution to a Roth IRA. Hey, is this something that I might be able to do?

 

Marc:

Gotcha. Okay. So now you’ve got the limitations, the reasons why. So now you have that understanding of, okay, is the backdoor Roth right for me? John, what’s the strategy of how to do it?

 

John:

Yeah, so Nick went into the income limits. And something before I go into the strategy is people understanding what an after tax non-deductible contribution is to a regular IRA. And when I get into the strategy, I’ll explain why this is important to understand. So most people, when they make IRA contribution, they deduct it, which Nick talked about the three phases, and that’s kind of the perception. hey, I make an IRA contribution, I can deduct up to 7,000, whatever the number it is in that year.

 

Well, you can, no matter what your income is, make an after tax non-deductible contribution. So what that means is, let’s say if you put that 7,000 into the IRA, you don’t deduct it’s after tax, and any growth moving forward is tax deferred and subject to taxes when you pull it up, but your after tax dollars are not subject to taxes. So just wanted to clarify or explain that when we go into the strategy, because this is going to be an important factor of understanding how that works.

 

Marc:

Gotcha. Okay.

 

John:

So the strategy works like this. It’s kind of different phases. So phase one is you determine what Nick said, should I be doing this? I want to save some extra money. And then you look at, okay, let me go ahead and make a non-deductible contribution to a traditional IRA. And what I stated earlier, it doesn’t matter what your income is. You can make a non-deductible contribution up to the IRA contribution limits for that given year. All right. So that’s first step is that. Then before there’s any earnings at all, because I just went over where with a non-deductible contribution, any earnings are subject to taxes. So let’s say you put in 7,000. So really that day before it’s invested, even in a money market or cash, because there might be some earnings there, you convert it to a Roth IRA. So you basically transfer it into the Roth IRA account and there’s a conversion paperwork to do and stuff like that, but you just basically transfer it in.

 

Now, where this works is there’s no earnings to tax. So basically what you’re doing is you’re taking that after tax contribution in the IRA, transferring/converting it to a Roth. Now it’s in the Roth bucket, and now all those earnings become tax deferred and tax-free when you pull it out. So that’s kind of the whole preface of it is that, let me do this conversion immediately, and that’s the way that you kind of do the back door.

 

Marc:

Okay. Right. So you’ve gone through this process, you’re thinking about the strategy. What are some considerations, Nick, to ponder here?

 

Nick:

Yeah. So really the cleanest, easiest, most simple way to do a strategy like this is if you do not have funds in your own IRA. So there’s a rule called the pro rata rule. And if you have other pre-tax money in a traditional IRA, and you want to execute kind of the backdoor Roth via the conversion, there are limitations on the amount that you will be able to convert without having any tax implication. So the ideal person is, let’s just kind of use an example of a couple, maybe early to mid 40s income, household income exceeding like $275,000. They’re putting a chunk of money into their 401ks and they’ve got good savings, a reasonable mortgage, and they’re looking where to kind of divert some money because they don’t have any of their own IRAs. The process is we open up a traditional IRA, we open up a Roth IRA, make the contribution to the traditional IRA, and then immediately execute the conversion.

 

That with the fact of them not having any money inside of their traditional IRA avoids the pro rata rule, and we just use that traditional IRA account to fund the conversions on an annual basis. So as a reminder, the contribution limits apply. For 2025, the contribution limit under the age of 50 is 7,000 per year over the age of 50 with the catch-up is 8,000. 2026, those numbers bumped up a little bit, it’s 7,500, and then for some reason they decided to pick 8,600 instead of 8,500, because who knows, why not?

 

John:

Keeping you on your toes, Nick.

 

Nick:

Yeah. Yeah. Just why not have it 600 if you can? So one kind of way, especially this time of year, that ends up, if people have free cash sitting in the bank, done this a few times this year so far, where they can make the non-deductible IRA contribution for 2025 and 2026 so we can put in 14,500 to 16,600 a bigger chunk, immediately convert it right away, and then you have the bigger amount going in. So that can be a nice way to kind of front load it and get the ball rolling.

 

Marc:

Gotcha.

 

Nick:

A quick reminder on that too is you want to make sure you file a form 8606 to report non-deductible contributions and the conversion. So there’s a tax form when you do this.

 

Marc:

Gotcha. So John, ultimately, I think people kind of want to know, is something like this right for me? How do I know? How do I do it? I mean, I guess the first thing I would advise is you certainly probably don’t want to tackle this on your own. You want to probably talk to professionals to help you with this because from the standpoint of even if finding out if it’s right for you, not to mention you want to make sure you do it right.

 

John:

Yeah, that’s 100% because that pro rata rule Nick mentioned is very sneaky.

 

Marc:

No, the government’s sneaky. Get out of here.

 

John:

Yeah. It’ll mess with you because a lot of people aren’t aware of it. If you have 400,000 in IRA and you’re like, “Oh, let me do a backdoor Roth.” You do it and all of a sudden you get a penalty from the IRS and it’s like, hey, we got you. You didn’t follow our rules. So that is number one. Definitely work with a tax advisor, financial advisor when you’re doing this type of strategy to make sure that you’re doing this to make more money and have more flexibility, not have penalties. So just do it right and make sure it’s in line. That’s number one. And then the next step is the name of our podcast, retirement planning. You want to make sure that this fits in with your plan and it makes sense. Nick gave a great example of you have some savings that is maybe not getting the best tax advantages of it.

 

This is a nice way to shift some money and say, “Hey, let me be more tax efficient.” Just from experience, having no RMD and retirement can be a big deal for some people, that way it’s not really forced income to them, which is nice. Having that tax diversification of assets where it’s depending on what the tax environment is, you can determine, “Hey, this is what I want my tax bill to be in a given year.” And we’ve talked about the bill last year where you have certain deductions. So again, it’s nice to have flexibility. Big one, legacy planning, which I don’t think we’ve hit yet with the Roth accounts, your beneficiaries inherited tax-free. So they get it tax-free. And with that new IRA rule, inherited IRA rule where you only have 10 years to pull it out, it’s a pretty big deal. So there’s definitely a lot of benefits.

 

If it works for your situation, it’s a great strategy and definitely worth taking advantage of while you can.

 

Marc:

Yeah. And that’s the point is finding out, is it right for you? And to the point of the complication, the conversation, as you just mentioned, they eliminated the stretch IRA a number of years ago and the IRS just got around recently to identifying exactly what the rules around that were. So it takes them five years sometimes to settle on rules for things that they put in place 10 years ago.

 

So having the conversation with professionals who deal with this stuff day in and day out is very important to find out if it’s the right fit for you. Again, especially, I mean, Roth conversions and Roths out there in general have been around for quite a while and so has the back door. It’s just a matter of understanding if it’s the right situation for you based on earnings and all that good stuff.

 

So if you need some help, as John mentioned, the name of the podcast is Retirement Planning Redefined. Get on the calendar, have a conversation and redefine your strategy with the team at PFG Private Wealth. Again, pfgprivatewealth.com. That’s pfgprivatewealth.com. Or call them at 813-286-7776. And guys, what we’ll do is we’ll talk about on the next session, the mega backdoor Roth, because that sounds even crazier, and we’ll go from there and get into that chat. So guys, thanks for breaking it down. Nick, always appreciate your time, buddy.

 

Nick:

Thanks, Mark.

 

Marc:

John, as well, thank you so much. And enjoy that kitchen, man. Get in there and make something good.

 

John:

I will. I’ll keep you posted.

 

Marc:

All right. We’ll see you next time here on Retirement Planning Redefined with John and Nick.

 

2026 Money Updates You Can’t Ignore

On This Episode

What’s new in 2026 for retirees & pre-retirees? From Social Security and Medicare to tax breaks and retirement contributions, this year brings several updates that could quietly impact your cash flow, taxes, and savings strategy.

Subscribe On Your Favorite App

More Episodes

 

Check out all the episodes by clicking here.

Disclaimer: PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

 

Marc:

What’s new in 2026 for retirees and pre-retirees from Social Security and Medicare to tax breaks and retirement contributions? Let’s talk about some of the updates to the money matters that we cannot ignore on this episode of the podcast. Let’s get into it here on Retirement Planning-Redefined.

 

Hey everybody, welcome into the podcast with John, Ann, and Nick from PFG Private Wealth hanging out with me to talk about what’s new in 2026. No, they make little tweaks to things every calendar year and little updates. So we want to make sure we stay abreast of all that good stuff. So we’re going to talk with the guys about it this week. Nick, my friend, what’s going on buddy? How are you?

 

Nick:

Good. Got a cold snap going on here, but doing pretty good.

 

Marc:

Yeah. Well, that’s good. A cold snap to you guys is everybody else would take that in a heartbeat amongst-

 

Nick:

For sure.

 

Marc:

Most of the Northeast at this-

 

Nick:

It’s also a good reminder that I could never live in the cold again.

 

Marc:

Again. Yeah, for sure. I’m with you there as well. John, my friend, how are you?

 

John:

I’m doing all right. Not too much to complain about today.

 

Marc:

There you go. Well, that’s good.

 

John:

It is a little chilly for Florida but-

 

Marc:

That’s right. Yeah.

 

John:

Surviving here. And I have to mention here with my buddy, Nick, about the Patriots going to the Super Bowl here. So I’ve got a lot of angry texts this past weekend. So I don’t like to rub it in too much to him, but-

 

Marc:

Okay.

 

John:

I figured it was about time to let him know. I’ll send him some screenshots during the game.

 

Marc:

It still cracks me up that you guys are right there in Tampa and not Tampa fan, but it is what it is. Everybody’s got their fans. There’s fans for different reasons, so I get it. I grew up a fan of probably the most disliked team in the country because my dad was, but then we moved and I switched teams when I was a young kid. So I get it. So it’s always a fun little thing.

 

But with that aside, let’s talk about some of the financial stuff, some stuff we can agree on, whether we like those things or not either. But let’s talk about the COLA adjustments that are coming in for the new year guys. And my mom loves to make this joke. She’s 84. She’s on Social Security. She’s like, “It’s always a diet COLA because they give us a little something, then they take a little something away.” So what’s she talking about? Why don’t you guys break it down for us?

 

Nick:

Yeah. So made notice that there was a bit of a raise from the cost of living adjustment moving forward. It’s going to be 2.8%. So although it was an increase from previous, the increase is lower than it had been the previous couple of years, but really there’s been pretty substantial… When interest rates were really low through the 2014 through 2020 phase, there weren’t a lot of increases, but they’ve been pretty substantial now over the last four or five years. And our clients are really seeing the difference in how it impacts them from a cashflow standpoint. And obviously expenses have gone up as well, but at least it’s been close to keeping up.

 

Marc:

Yeah. And so they kind of do that little bit of an adjustment, right? And then where the diet side comes in, I guess that she’s always joking about, John, is it seems like they take away about half of it a lot of times with Medicare changes. So what’s happened there?

 

John:

Yeah. So unfortunately, although we did get a 2.8% increase on Social Security, the Medicare premiums for Part B did go up. So this coming up year, people are going to see when they get their Social Security payments, they’re going to see Medicare Part B deducted and it’ll be about $202.90, which is up about roughly $18 from the previous year, which if you’re looking at it’s actually the second-largest jump in the program history, which is pretty significant.

 

Marc:

Yeah. Yeah.

 

John:

So unfortunately people got their increase, but it was probably offset by the increase in Medicare premiums.

 

Marc:

Yeah. And everybody’s numbers are different, but I think I was reading that just on average, that if the average person across the country went up about $40, to your point, it took about 20 of it back. Right. So you’re only, not that much of a bump as compared to prior years. But again, they have their setups for that. So that’s some numbers you certainly want to be aware of. It shouldn’t make or break anything unless you’re on Social Security only, which obviously a lot of people are, but that’s not the retirement of your dreams. So you want to make sure you’re at least aware of those numbers.

 

Let’s talk about the catch-up contribution numbers too. This stuff does change every year, just about anyway, and especially from the workplace plan side, guys. There’s some interesting changes this year to be aware of. So I’ll let you guys jump in there. So talk to me about the catch-up contributions and the new super catch-up as well.

 

Nick:

Yeah. And the Congress is about another stage of infinite wisdom to try to make this as complicated as possible. So the straightforward part is that if you’re under 50 years old, the contribution to 401k or 403(b) went up $1,000 to 24,500. If you’re over 50, you can do an additional 8,000, which is considered a catch-up contribution. One thing for people to note is that a lot of plans do require a separate withholding declaration for the catch-up contributions. It doesn’t just… If you hit your cap on the regular, a lot of times, and in theory, from a dollar perspective, it would exceed that cap. You do still need to put a withholding percentage for most plans for the catch-up portion. So that’s important. We see people all the time kind of come in and like, “Oh, I thought I was maxing out.” And at the point that they’re over 50 and now it’s been a few years and they don’t realize that they’re not getting the catch-up.

 

So the super catch-up is for people age 60 through 63, they can do an additional 3,250, because why put round numbers if you can. So the total amount that they can do is 35,750. So one thing that we have found are that plan administrators for 401ks have done, from our experience, at least have done a poor job integrating this into their platform to allow people to make these additional super catch-up contributions.

 

So if it’s not allowing you to do it, or if you fall in that window, it may make sense to reach out to your HR department and make sure that they will allow you to do that. Again, it’s not necessarily a smooth transition from what we’ve seen for a lot of people. And then also something to watch out for, or at least to understand are that for people that are earning an excess of $150,000, and if they are making the catch-up contribution into the 401k, the plan is going to force them to allocate those dollars specifically to Roth dollars versus pre-tax dollars. So that’s something to understand.

 

Marc:

That’s an important piece right there as well. And John, basically, if you don’t have this available at work, you basically are out, right? You can’t take advantage of it.

 

John:

Correct. Yeah. So we manage a few 401k plans and what we had to do to start this year is contact the administrator and say, “Hey, are we going to be able to do this?” And if they said no, then basically the person that was higher or that’s trying to do a catch-up was unfortunately out of being able to do the catch-up. But luckily for the ones that we managed, they were able to adjust. And then on top of the administrator, this kind of is more for small businesses, but you also need to check with your payroll provider because the administrator’s going to do some of the amounts that go into their plans, but also your payroll provider needs to be able to switch over to a Roth contribution for some of these high earners.

 

And then also on the super catch-up, what Nick was referencing, it also needs to be able to allow for kind of bypassing the normal limits that are on there. So there’s definitely a workaround. So just check with your HR, whoever’s running the payroll on how it works for you when that time comes.

 

Marc:

Yeah, for sure. Yeah. So it’s an interesting little pro-tip there that you want to be aware of, especially if you’re making over 150, which again, a lot of people are, so you want to be aware of that. What about the IRA and Roth side of contributions? Any changes there?

 

John:

Yeah. So like Nick mentioned, these tend to go up every year. Some years they don’t, but more often than not, recently they have been kind of creeping up a little bit. So if you’re under the age of 50, your IRA contribution is 7,500. If you’re over 50, the catch-up went from 1,000 to 1,100, so your total amount is about 8,600 you could put into IRAs. And something that we don’t see it too often, but people just need to understand. That’s 8,600 between the two of them, whether it’s a pre-tax IRA/traditional IRA or a Roth IRA, you can’t do seven and seven to 14. You got to do 8,600 total if you’re above the age of 50. And as you know, people are doing some tax planning for 2025 still. Basically, you have until April 15th to make your 2025 IRA contribution, whether that’s going to be pre-tax, Roth, or potentially after tax contribution.

 

Marc:

Gotcha. Okay. What else is going on that we should be aware of? Any other updated numbers and things for the new calendar year, Nick?

 

Nick:

So for those that would like to contribute to the Roth, as a reminder, the rules when it comes to Roth, where it’s really differentiated between that and the pre-tax IRA are, it’s based solely on income limits. So those limits have gone up a little bit. For a single filer, the range is 153 to 168. For a married filing jointly, it’s 242 to 252.

 

Marc:

Okay.

 

Nick:

One thing that people oftentimes will use as an example are what’s called a backdoor Roth conversion. These can be a little bit tricky if you have existing IRAs, because it creates a ratio and just dictates on how much you can convert or not, but it’s something that if your income is in excess of the limits and you are looking for additional places to save, it’s worth having a conversation with your advisor on whether or not you can qualify and/or use a backdoor auth as an option to put money into that account.

 

Marc:

Gotcha. And you want to make sure that if you are a first-time RMD user, right, you want to make sure that you don’t miss that as well. Anyway, just you want to get that in place. You do have that ability, right, to kind of push it back, but then you kind of are stuck with two in the calendar year as well.

 

John:

Yeah. So we have come across sometimes where when someone in today’s numbers, once you hit 73, you have to take your first RMD out. And the IRS, they do allow for kind of like, “Hey, your first time doing it just in case you forget.” So we don’t want to hit you with the penalty they allow till April 1st the following year. If you don’t take it out by April 1st, there is a 25% penalty, which used to be 50. So it’s nice they actually drop that to 25% because I think 25 is high, but 50 is very high.

 

Marc:

True.

 

John:

But yeah, as you mentioned there, Mark, if you do take, like example, if you decide to defer your 2025 RMD or happen to forget it, you still have to take out, if you take it out by April 1st, you still have to take your 2026 RMD total. So you technically might have to take out two RMDs out of your IRAs.

 

Marc:

Yeah. And then you got to be careful if that bumps your tax bracket, right? So you have to, just want to make sure you’re managing all that, talk with your advisors. If you’re not working with some, again, and you’re checking this podcast out, make sure you reach out to John and Nick at pfgprivatewealth.com. What about HSA? It’s a great tool for those that have it. What’s some changes there?

 

Nick:

Yeah. So just as a reminder, to be able to contribute to an HSA, you need to have a high deductible plan at work. That is something that I would hope that they would change at some point, but-

 

Marc:

Right.

 

Nick:

That’s a different topic. So if it’s self-coverage only, the contribution limits are 4,400. If it’s family coverage, it’s 8,750. There is the $1,000 catch-up contribution, and you have until April 15th of the following year to make contributions for the previous year. A couple things to look out for that are a little bit different than like, for example, a 401k. HSA contributions, those limitations are both employee and employer contribution limits. So it’s a combined sum, which, for example, with a 401k, an employee can put in 235 or 245 with a new limit and the employer can put an additional money. It doesn’t count towards it. With an HSA, employer contributions count towards the limit. And if you are essentially 65 or older, you’re enrolled in Medicare, you are no longer, even if you’re in a high deductible plan, you’re no longer eligible to contribute to an HSA. So a couple things to look out for.

 

Marc:

Okay. And then final, John, any kind of little items we might have missed or any button up things we want to kind of touch on here before we go this week?

 

John:

Yeah. So with the HSA, it doesn’t have to be through work. You can get an individual plan. I unfortunately know that because my health insurance premiums went up way too much this past year, almost 44%. So I spent a lot of time at Florida Blue going through different options and it looks like they actually updated some of their plans to allow for HSAs on some of their plans with lower premiums to try to kind of boost it up with the… I don’t know if they did that to offset the rise and increase, but it did look like some new plans came out on their platform-

 

Marc:

Gotcha. Okay.

 

John:

With HSAs.

 

Marc:

All right. Well, that’s some good information to know. Any final thoughts? Any little tidbits we need to touch on before we go?

 

John:

So something we hit at the end of last year on our, I believe our last podcast of the year was the Big Beautiful Bill and the new deduction for anyone above the age of 65, where basically it’s a $6,000 deduction per person, and that’s through 2028. So it’s kind of recapping the numbers there. Single filer, if your AGI, adjusted gross income is above 75,000, you do not qualify it. So kind of recapping that. Anyone below 75,000 will qualify for that $6,000 deduction and married filing jointly, the number is 150,000.

 

Marc:

All right. So good stuff to think about. Again, whether it’s Social Security, Medicare, taxes, retirement, savings limits, whatever, there’s always little changes annually. Make sure that you’re running through that stuff. A quick review now can help make sure that 2026 works smoothly with the rest of your plan and works with it, not against it. So if you got some questions, need some help, reach out to John and Nick at pfgprivatewealth.com. That’s pfgprivatewealth.com to have a conversation and a consultation about your retirement journey and your financial numbers. The guys are here to help. Don’t forget, subscribe to us on Apple and Spotify and whatever app you enjoy using. And that’s going to do it this week for Retirement Planning-Redefined with John and Nick. We’ll see you next time.

 

 

 

Common Retirement Myths And Why They’re Dangerous

On This Episode

There’s no shortage of financial advice out there, and unfortunately, not all of it is good. Some of the most damaging retirement mistakes don’t come from reckless behavior, but from ideas that sound reasonable and get repeated often enough to feel true. Today, we’re busting some of the most common retirement planning myths and explaining why believing them can quietly derail an otherwise solid plan.

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Disclaimer: PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

 

Marc:

This week on Retirement Planning Redefined, we’re going to talk about some financial myths that can quietly wreck a retirement plan. There’s no shortage of advice out there, so let’s talk about some of it. Not all of it’s good, some of it is, and sometimes myths are just that, they’re just myths. Let’s get into it this week and see what the guys have to say.

 

Hey everybody. Welcome into the podcast. This is Retirement Planning Redefined with John and Nick from PFG Private Wealth. We’re going to have a little fun, make you guys myth busters this week here on the show and talk about some things that are out there that have been permeating the financial space for a long time. Again, some of it may be true or maybe came from a place that’s true, but maybe it doesn’t hold up under pressure anymore. We’re going to talk about some of that and get your guys’ response on these.

 

John, how you doing this week, my friend?

 

John:

Doing good. I’m doing good. Still cold over here for Florida, but hopefully warming up soon.

 

Marc:

Nice. Nice. We were laughing the other day talking about when it gets cold, it’s like what a weird defense mechanism that nature gave those iguanas down there when it gets cold and they just fall out of the trees.

 

John:

I know the feeling.

 

Marc:

You would think that, I don’t know, nature somehow would have their claws lock in or something, like some sort of a reflex where they would just dig in and go dormant or whatever. But nope, they just fall right out of the tree. So weird little defense mechanism.

 

Nick, how you doing buddy?

 

Nick:

Doing pretty good, thanks.

 

Marc:

You falling out of any trees lately or you doing all right?

 

Nick:

No. Some of the things that my football team’s doing is making me want to jump out of trees, but besides that, pretty good.

 

Marc:

No jumping out of windows or anything.

 

Nick:

No.

 

Marc:

No falling out of trees over the football, that’s right. All right. Well, let’s get into it, have some fun with these myths here.

 

Nick, I’ll start with you, buddy. “The more a financial plan weighs, the more valuable it is.” If you walk in, or walk out I should say, with a copy of War and Peace under your arm, boy, you must have a great financial plan.

 

Is that a myth or what?

 

Nick:

Yeah, I think I’d definitely put that in the myth category. I think probably one of the most common points of feedback that we get from clients that come over from working with other advisors are that oftentimes other advisors are in love with jargon, in love with making everything feel and seem really complicated to show value, including plans, including outlines of investments, all these different things.

 

And so, really that just dives into communication. You want it to be succinct, direct. You want things to be easy for clients to understand so that they can take action. That’s really something that we focus on, but we’ve seen that as a huge issue for clients working with other people.

 

Marc:

Okay. All right. So definitely a myth in that one.

 

John, what about, “My life is simple, so a Will is all I’ll need.” We actually even had the attorneys on with us a few episodes back talking about some of this as well. What’s your thoughts on this one?

 

John:

Yeah, this one we hear quite a bit because I think a lot of people think that things are easy and, “Hey, all I need is a Will.” I’ll tell you from just personal experience dealing with my father-in-law’s estate and helping out my wife because she was the executor, it is not that simple. This just came up recently with a client meeting where all she had was a Will.

 

As I started going through scenarios of looking, reviewing beneficiaries and asking some questions, it was like, huh, I might need to consider updating some of my stuff here. It kind of triggered for her to go see an attorney when you start really doing that navigation of, what if X happens in this scenario? Where do I want my assets to go?

 

As someone’s assets get bigger and things get a little bit more complex, you start looking at it a little differently and saying, “Yeah, well, if this happens, this is how I’d want it to be.” And nevermind the other Living Will, healthcare surrogate, power of attorney, all those documents are very important as well. I’d say more often than not, you need more than a Will to make sure things are done correctly.

 

Marc:

Okay. All right. So yeah, I mean, I think that one probably is the case too. Simple is great, but I mean… And a Will’s fantastic for the basic stuff, but there’s still a lot more things you want to check off. You might require some more things than that.

 

Number three here, “My spouse will be fine when I’m gone. They’ll only need about half as much income.” This is definitely an old myth here, I think.

 

Nick, what say you?

 

Nick:

Yeah, definitely an old myth. Oftentimes, not something that is said in the presence of the other spouse, if it is said. I would say I’ve seen this less and less probably over the last five to 10 years, especially when you’re focusing on planning as you get closer to retirement, that sort of thing.

 

Between the fact that one of the Social Securities goes away, that is oftentimes just when you explain that to a client and they realize that that one sole benefit, having a substantial difference in household income really exemplifies the need to be planning for longevity for both.

 

With the exercises that we do with clients for things like expenses and that sort of thing, they see that there’s a lot of fixed expenses that stay even if there’s only one client. Luckily, I think that that’s something that is less prevalent than it used to be, but it is still out there and we definitely address a fair amount.

 

Marc:

Okay. Yeah. I think the spouse doesn’t want to be sitting there going, “No, I don’t want half. I don’t want to get cut in half.” The rule of thumb is probably 85% roughly, but I mean, everybody’s life is different, so you want to run those numbers.

 

John, what about this one, “When I retire, I need to dramatically shift from stocks to bonds.” This was probably true once upon a time.

 

John:

Yeah, I think at one point this kind of was the thought process, but I think what we’ve seen the past five years or so, really post COVID, is expenses and inflation has gone crazy. With that, if you look historically, the best way to outpace inflation is being in stocks versus bonds.

 

Depending on your risk tolerance, and caveat everyone’s situation’s different and how things work, but ultimately it is important to have some stock exposure to outpace inflation. So just going all to bonds or whatever you call dramatic, may need a second look at it because you want a nice balance of something to outpace inflation.

 

Marc:

Yeah, for sure. Once upon a time, again, this probably was doing the standard 60/40, all that kind of stuff. But again, there’s so many different things out there now and the rules have changed. It may be worthwhile to rethink that.

 

John:

Yeah. What we’ve… Actually, Nick and I have come across this in the past, and I came across it a few times, is that old adage of just staying and living off of your income and your interest in dividends. I ran into a client where she had everything in fixed income. It was pretty interesting. A neighbor or an old boyfriend or something picked her allocation.

 

When I started evaluating, it was all high… Well, not all, but a majority of high yield bonds that were junk bonds. When we started looking at it and I was kind of showing her stress testing during different market downturns, it was just as risky as some stocks. It was important to really take a look at that and her situation, rebalance her to have some stock exposure that was provided, maybe some dividends in this person’s case.

 

It worked out well for her because she had some appreciation, but it was definitely interesting, the thought process of, “I need all bonds now to provide me income.”

 

Marc:

Gotcha. Yeah, great point there as well.

 

All right, moving along here on our myth buster episode here of the podcast. Nick, “If the market crashes, I’ll just stop spending until it recovers.”

 

Nick:

Yep. That doesn’t really work out too well for people. We do tend to have conversations with clients where dependent upon their level of comfort with the market, we’ll look at their annual burn or the annual amount that they need from investments to covering expenses and come up with a multiple of how much of that do we want to keep in cash.

 

In theory, I think the one pseudo interpretation of this is maybe not take out investments from growth assets when something like that happens, which is possible. But yeah, just usually that’s just a defense mechanism from the standpoint of, “Hey, I’ll just turn off the faucet.” The reality is that that doesn’t work. If anything, when things are going poorly… You can’t stop when the AC goes out, or if you got a hole in your roof and you need a new roof, there’s absolutely things that still need to… dollars that still need to be spent.

 

Without having a comprehensive income plan, that is a recipe for disaster.

 

Marc:

Yeah.

 

John:

I’ll add to that, if my wife continues her spending habits, that will definitely not work for me in retirement because the spending will continue regardless what the market’s doing.

 

Marc:

Exactly. I mean, it’s not optional. We still have to maintain our lifestyle. And yeah, maybe you could trim a little bit, and people certainly do when we have market downturns. Again, it’s kind of like the half the income myth where it’s like you still want to try to have some contingencies in place to hopefully offset some of that stuff.

 

All right, John, back to you. Number six, “Social Security will take care of most of my retirement income.” I mean, it’s a big chunk of money for a lot of people, but I don’t know, what do you think?

 

John:

Yeah, it is a big chunk of money for a lot of people, but it’s typically a foundation for someone’s financial plan of saying, “Hey, I have this baseline income.” In some cases, not all, it might cover some baseline fixed expenses, and it has a nice cost living adjustment, which we’ve discussed in previous sessions. But typically, we don’t see it covering most of someone’s retirement income need. Maybe 30 to 40% might be the average.

 

Again, everything depends on the household, but this wouldn’t be something you want to plan for at all. Not to dive into it on this session, if no changes are made, I think it’s 2033 or 2034, people will see a reduction in their benefit.

 

Marc:

Right. Yeah. That’s a whole hot potato, right? We’ll see how that shakes out. They’ll wait until the last minute on that, as we all know. You certainly want to have a strategy in place. Again, you want to be effective with Social Security, not just taking in a vacuum because it can’t be a lot of money. That is a pretty substantial piece of many people’s retirement. But to say it’s going to take care of most of everything, again, not the ideal… Probably not the… Could it? Sure. Is it the retirement you want? Probably not.

 

All right. Let’s see. Where are we at? Number seven. Nick, “I’ll be in a much lower tax bracket once I retire.” Again, this probably was true once upon a time.

 

Nick:

Yeah. I mean, there was a perception for a lot of people that that would be the case. I would say that ideally the goal is that you’re not, from the standpoint of hopefully while you’re working, you’re saving enough money to maintain a similar lifestyle through retirement and which effectively would put you at a similar income threshold and that sort of thing.

 

Also, what we found is those middle brackets between that 18 and 24%, that such a huge majority of people live in that space where it can just be the difference of a certain deduction one year or the other. The variance is not nearly what a lot of people expect. There have been things done. Example, the new credit for dependent upon income on whether or not you can get a tax credit on Social Security income, stuff like that.

 

The Baby Boomer generation does tend to have a fair amount of tax benefits geared towards retirement that can help reduce it. Really, the key with this whole aspect of things and what we tell people is that your goal should really, number one, to be in a similar tax bracket from the aspect of having similar income, but to give yourself the ability to adapt and pivot by having the three buckets of income from investments, meaning pre-tax, Roth, and non-qualified income that are subject to dividends and capital gains.

 

So yeah, just assuming that you’re going to be in a much lower tax bracket is often another recipe for disaster.

 

Marc:

Yeah, for sure.

 

Hey, John, number eight, “I don’t need a written plan because I know my numbers.” What do you think about this one?

 

John:

Yeah, so knowing your numbers and balances is one thing. Knowing how that’s going to produce income and last throughout your lifetime is another. So just knowing what you have as far as balances, and even if you’re like, “Hey, I know what my income number is,” you got to take account things that are going to happen that you don’t know. Inflation kicking up. What if the market drops? What if you have a health event, whatever it is.

 

It’s important to understand how these dollars work, how it produces income, and how do you… Nick just mentioned it very well there. How do you adjust depending on what happens and being flexible to adapt?

 

Marc:

Yeah. I think seeing that stuff on a regular basis not only helps you, but helps your spouse, your loved one, and what happens if something happens to one of you. So again, having that written plan goes a long way to, I think, adding some peace of mind.

 

John:

Yeah. And also, just knowing your numbers isn’t enough to know. What if you could spend more money and enjoy your time a little bit more?

 

Marc:

Sure, yeah.

 

John:

We do come across that where people are kind of nervous and they’re really, quite frankly, underspending in retirement. When you show them like, “Hey, you could beef this up a little bit or your beneficiaries is going to be a little bit happier when you pass away,” and people see that. We’ve had scenarios where people are very appreciative of saying, “Hey, thank you for putting my mind at ease and I’m going to go travel a little bit more during these couple years.”

 

Marc:

There you go. Exactly.

 

Nick, number nine, “I can always work a little longer if things don’t go as planned.” I kind of feel like this one goes along with that written, “I know my numbers kind of thing.”

 

Nick:

Yeah, it does. But I would even say further than that, and we’re starting to see it in the employment cycle now, is there’s all sorts of data out there that shows people expect to retire later than they actually do. Some of the underlying causes of them retiring are either some sort of health event and/or issues with employment, being downsized from a company. They’re not allowed to downsize based upon age, but there’s all sorts of ways around that.

 

Oftentimes, people are at their highest income earning years in those 60 to 65 range. We’ve seen people get downsized quite a bit and then be underemployed if they can get work. I have different contacts that this exact sort of thing happened to. To be able to get a new position, their income was going to be 30% of what they were used to making. Luckily, their plan had been pretty good leading up to that, but that is an assumption that is a really risky one to test.

 

Marc:

Yeah, definitely. Yeah. You don’t know what’s going to happen. You don’t know what your body’s going to say. At some point, your body might say, “Yeah, you might want to work, but you ain’t going to.” A lot of different things there.

 

Final one, John, “Once I retire, my financial decisions will get easier.” I feel like this one’s a little bit of a tricky one. What you think? What’s your thoughts?

 

John:

Yeah, I tend to say they’re reverse. I feel like they get more complex. Just because you don’t have a paycheck coming in anymore, now it’s a little harder to determine what do you spend your money on? Again, the whole, how long is my money going to last? When you have a paycheck coming in consistently, it’s kind of easier to say, “Hey, I’m going to buy this.”

 

Maybe some of it gets easier as far as maybe you’re not spending as much or buying as many things, assuming mortgage is paid off and things like that, and kids are off the payroll. Maybe that part of it gets easier. But as far as determining your spend, I think that gets a little bit more stressful, I’d probably say.

 

Marc:

Yeah. I’m with you on that. I think there’s facets of it where you think… In theory, you kind of go, “Well, it should get easier, doesn’t it?” You feel like it could, or why wouldn’t it? But there’s so many more moving parts now in retirement and things you need to be aware of. Again, that’s where it can get more complex.

 

Of course, I guess it would be easier if you had somebody handling that for you, which is where you turn to financial professionals and say, “Look, I don’t want to have to deal with all this minutia, but I do want to know what’s going on.” So reach out to John and Nick and have a conversation and get some help when it comes to getting someone to help you with your strategy for retirement at pfgprivatewealth.com. Go ahead, man.

 

John:

Yeah. Actually to add to that, and I think Nick will probably laugh internally and relate to this, but I think a lot of stuff that we end up doing in retirement, we’re kind of a financial soundboard quite a bit for some expenses where we even tell our clients like, “Hey, if you have an expense coming up, don’t hesitate to reach out to us.” It’s kind of like, “Hey, this is what I want to do. I ran my numbers. I think it’s a good decision. I feel like I can do it, but I just want to see if I’m missing anything.”

 

That tends to happen quite a bit where people will ask us like, “Hey, what do you think about this? “

 

Marc:

Yeah, and what does it do to my portfolio? Where you’re pulling money from, how it affects things. Not that you guys are the money police, but again, it is your job to say, “Okay, look, let’s talk about this. Let’s run these. Let’s do some stress testing and see what this does to your plan and your overall setup.”

 

Again, that’s the whole point. If you got a plan, that makes things a little bit easier to know those numbers and to have some confidence in the different things you want to try to do. But it also does give you that sounding board piece, as John said, one of the big takeaways from working with financial professionals, and I talk to them all across the country, is that behavioral management side of things, just having that person to talk you off the ledge or on the ledge, depending on what the plan needs.

 

Reach out to John and Nick and get started today at pfgprivatewealth.com. That’s pfgprivatewealth.com, and subscribe to us on Apple or Spotify, or whatever podcasting app you enjoy using.

 

Nick, thanks for your time, my friend. I always appreciate it.

 

Nick:

Thanks, Mark.

 

Marc:

John, appreciate you, my friend. Have a great week. We’ll see you next time.

 

John:

You too. Have a good one.

 

Marc:

We’ll catch you later here on Retirement Planning Redefined with John and Nick from PFG Private Wealth.

What Is Net Unrealized Appreciation (NUA)?

On This Episode

This episode takes a deep dive into Net Unrealized Appreciation (NUA), a little-known tax strategy that could significantly reduce taxes on company stock held inside a 401(k). John and Nick explain how NUA works, who it’s best suited for, and the key rules and timing considerations that can make or break the strategy. If you’ve accumulated employer stock and want to be more tax-efficient heading into retirement, this conversation will help you decide whether NUA deserves a closer look.

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Disclaimer: PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

 

Marc:

This week on Retirement Planning Redefined, we’re going to discuss net unrealized appreciation. If you don’t know what it is, stay tuned. Hey, buddy, welcome into the podcast. Let’s break down the conversation this week with John and Nick here on the show, as we talk about a topic that I guess tax strategies you might not be aware of. So the guys are going to help us out here a little bit with a topic that maybe doesn’t get as much attention or maybe people just aren’t realizing and understanding. I’m going to slide that right in there, unrealized. It’s the net unrealized appreciation tactic. So I guess, guys, we’ll dive in here in a second. Nick, you want to kind of set this up with what it is?

 

Nick:

Part of the reason that we wanted to talk about this is because we’ve been working with some clients over the past year where this was applicable. This isn’t something that we run across all the time. And essentially, it’s for somebody that is working for a publicly traded company that has the company stock inside of their 401k plan, sometimes also in like an ESOP, depending upon the structure of it, but has the company stock within the plan. Maybe they’re in a higher tax bracket and/or maybe they don’t currently have a good balance of non-qualified assets to qualified assets. And what net unrealized appreciation does is essentially a strategy that lets us extract the company stock out of the plan, out of the 401k plan and use capital gains tax rules versus ordinary income tax rules, is kind of the overview.

 

So for those, who does it benefit? Really, it’s somebody that works for a publicly traded company and wants to be able to take advantage of capital gains tax rules. Oftentimes the stock has appreciated substantially if they’ve worked there for a long time. And it’s a strategy that we found to be extremely effective in the right situation.

 

Marc:

Okay. All right. So that’s a good setup there. John, what’s the mission today with the podcast? Just to try to explain this a little bit better for folks?

 

John:

Yeah. As Nick mentioned, this has come up and we’ve noticed that clients, some aren’t aware of it at all, or if they are aware of it, they don’t really understand how it works or how to do it. So we decided, hey, let’s kind of do a deep dive into this and explain it to our listeners, that maybe they have the stock in their plan and they’re not aware of this. And maybe it’s going to raise some questions, where, “How can I be tax efficient and does this work for me?” So we’ll go through some details of, as Nick just mentioned, what it is. We’ll dive into that, give you some examples, who it benefits, who it doesn’t benefit. So the whole goal of today is try to unpack this as best we can.

 

Marc:

Well, can you give us an example? Maybe that’ll help highlight that a little bit.

 

John:

Yeah. So as Nick mentioned, this is a stock that you have in your employer plan. And what the net unrealized appreciation is, so short, you’re going to hear us say NUA for short. As you start to say that word, that phrase more and more, it’s kind of a tongue twister it’s turning into for all of us. But what that is, it’s growth on your money or growth on the stock above what your cost basis is. And your cost basis is your contribution to that stock. So an example would be, let’s say you have a company stock and you’ve put $50,000 into it. So your contribution to that stock is 50.

 

Over the years, you’ve had some appreciation. Now that stock, when you get your statement, it’s 250,000. So your basis is 50. The stock total value is 250. So your NUA is 200,000, the appreciation above what your cost basis is, and this example is 50. So how that gets treated is when you do this, and Nick’s going to talk about some triggering events and how you qualify to do it. But one of the things you need to understand is when you do this, you transfer the money out and Nick’s going to go over how that happens, but the $200,000 NUA will be treated as long-term capital gains. You don’t pay taxes on that 200,000 until you sell it, which is one of the benefits. And we’ll dive into when that makes sense and how you do it.

 

The 50,000, whenever you transfer it out, is taxed immediately. So that will be considered part of your ordinary income taxes. So let’s say you do this in 2025, in this example, you take out the 250, the 50,000 will be immediately considered taxable income in that year. So it’s very important that if you do this, you time it correctly and you make sure that you do in a year where maybe your tax is a little bit lower or you need that money anyway, so you might as well just do it.

 

Marc:

Gotcha. Okay. So Nick, what are those requirements then?

 

Nick:

There’s essentially a triggering event. So the four triggering events to be able to execute the NUA would be attaining age 59 and a half or retirement or separation from service, total disability, or the last one is death of a shareholder. So one of those four trigger events allow you to take advantage of the rules in the way that John kind of laid it out. And one important thing to note is that you’re only able to do it one time per each of those triggering events. So this isn’t something, I think the key takeaway, and this isn’t a tutorial on exactly how to execute it properly. This is an overview to introduce the concept to help you understand that, hey, if you do work for a company that has publicly traded stock and you hold it in your 401k, you need some help to talk to people, because there’s a lot of nuance to it.

 

Marc:

Sounds like it.

 

Nick:

And so, yeah. So if you do attain one of those triggering events and you are looking to execute it, you would do what’s called an in kind transfer. So essentially you are transferring the stock out of the plan into a brokerage account in kind. So you’re not selling anything. You don’t want to sell it inside of the plan. That’s really kind of the key takeaway for people is if you go ahead and do a reallocation in your 401k, because for whatever reason you want to make this a change inside of the 401k and you shift that money out of the company stock, you’re losing track of your cost basis and you’re reducing the benefits of the anyway. So you do the in kind transfer and it has to be done as a lump sum from a distribution standpoint. So the entire balance that’s inside of the account needs to be transferred out.

 

So again, there’s a lot of nuance to this and how it needs to be done, and timing on making sure that these things happen in the proper tax year, which are all things that we can help you with, but it is something where the tax benefits can be substantial and can allow you to then diversify that concentrated position outside of the account and use capital gains rules versus ordinary income rules.

 

Marc:

So kind of a summary on that, right? What’s an easy summary for people to think of?

 

John:

In summary, how this works, and Nick mentioned, you have the triggering event, which allows you to do this. Then as far as doing it in kind transfer of the stock itself, and as far as the lump sum distribution that Nick mentioned, let’s say you have the company stock and then you have some other investments outside of that. When you clear those out, those have to get out of the account, as he mentioned, and your options, the best options typically are you want to roll that into an IRA or another employer plan, so you don’t get taxed on that amount.

 

Marc:

Gotcha.

 

John:

So if you’re going to do something like this, work with a professional, work with an advisor, a CPA, or someone at the plan that knows what they’re doing, because we have had conversations with some employees that are like, “Huh, what’s that? What are you talking about?”

 

And it’s like, “Let me talk to your manager real quick.” So when the account’s cleared out, the stock goes to a taxable account and everything else, best practice is typically to go into another retirement plan, but it has to be cleared out.

 

Marc:

Okay. So I mean, a lot of people may be listening and going, “Okay, this sounds a little complicated,” so to the point of talking with somebody, but they’re also probably thinking, “What’s the real benefits here? What’s the benefits to me?” So John, can you highlight some benefits for us?

 

John:

Yeah, so we’re looking at one of them, and the big one is the tax rate conversion. So as Nick mentioned in the intro, what we’re doing here really is we’re having that stock be taxed as capital gains versus ordinary income. And now this doesn’t work for everybody, so it’s important to look back at your plan, but ordinary income tax, depending on your bracket, it could be 20% or higher. Again, we don’t know until you pull the money out and this is where proper planning is required, but with long-term capital gains rate, it could be zero, 15 or 20. So the tax rate conversion is a big deal. And to find out if this makes sense for you, you should know how the plan looks and where you’re at. And the next benefit would be the deferral. So when it transfers out, you have the option of when you sell it.

 

Well, depending on if you don’t need the income for that particular holding, but you can kind of control when you sell it. So if you have a year where your income’s pretty low and you look at it and say, “Hey, I might be able to sell this and have 0% tax rate.” You can do that, or maybe it’s 15, but you have the deferral aspect and a little more control to say, “Hey, I’m going to dictate when this actually gets sold to lower my income taxes.”

 

Marc:

Gotcha. Okay. So Nick, what’s some other things here for benefits?

 

Nick:

One of the things is conceptually, and one of the scenarios that we had to run into with a client is they had a substantial amount of money in their pre-tax accounts. So when we looked at the withdrawals that they were going to have to take in retirement, once they were eligible for the RMDs, that amount was substantially higher than they needed to take, which was really going to bump them up. So our thought process was let’s reduce the qualified bucket per se, which will then allow us to reduce the RMD as well, and take better advantage of having a more balanced overall kind of nest egg. So being able to lower those potential RMDs in retirement’s a big deal. And then I would say from the standpoint of from an estate tax perspective, anytime you are now with the changes that happen in SECURE Act 2.0, when somebody inherits qualified funds, pre-tax retirement funds, they have to withdraw those funds over a 10-year period.

 

So if it’s a non-spouse and let’s say that they’re in a good tax position, being forced to withdraw a substantial amount of money over a 10-year period could really change their overall tax perspective like, hey, yeah, obviously it’s money, but the goal is to pay the least amount of taxes as possible. So the benefits of the provision in brokerage accounts, which is a step-up in cost basis on a holding like this could be substantial. So from an estate planning perspective, that’s also a very good way to be able to manage it and take advantage in why this can be beneficial and helpful for somebody.

 

John:

So one more actually tax benefits of this, and we don’t see this too often with the way the market’s been lately with all the gains, but we run across some people that have some carryover losses, and this could be a great way to offset some gains with those carryover losses. Again, we are not tax advisors, so meet with your tax advisor when you’re kind of doing some of this planning, but we could definitely help guide clients and ask the right questions to their CPA or accountant.

 

Marc:

Okay. All right. Yeah. So as always, any financial vehicles, especially when you’re not used to, you certainly want to get guidance along the way. So let’s kind of finish this off guys with a who does it work for and maybe who shouldn’t be doing it, right? So whoever wants to start, give me who does it work for kind of idea.

 

Nick:

Yeah. So I would say we tend to look at things a lot of times from like a two-part decision-making process. So number one, your radar should go up big time, if you are somebody that works at a publicly traded company that allows you to invest in the company stock in the 401k plan. That is the number one reason to evaluate it. And then if you fall into that bucket and you have been somebody that has been consistently investing for a long time into that company stock, and you have a substantial position in the plan, which we do see quite a bit happen, especially somebody that really believes in the company and they’ve been able to kind of take advantage of it, figuring out what the cost basis is, so how much you’ve invested over time and understanding the gap between that cost basis and what the true value of that holding is, especially with the substantial run up in the market over the last 10 years, that is another thing to kind of take in mind and consider.

 

And then, if you are somebody that maybe doesn’t have much balance in your overall nest egg from kind of like your buckets or account types, so maybe you’re very heavy and all your money’s in pre-tax, and you haven’t saved much money in non-qualified accounts, and that this is a way to immediately create a bucket of non-qualified money, that’s also a situation that would be very beneficial for somebody.

 

Marc:

Okay. So then John, I guess give us some people who maybe don’t want to consider doing this, right?

 

John:

Yeah. So let’s say we talked about this being a portion of your retirement plan. Let’s say it’s 80% of your retirement assets, then you might want to look at this and say, “Hey, that might be too much to really do this with.” So if you have a high concentrates in that stock, it might be prudent to diversify it.

 

Marc:

Gotcha.

 

John:

So you want to take a look at what’s your situation and although it’s great to avoid taxes, you don’t want to just completely focus on that and not be prudent, and especially going to retirement, where you need these funds to live off of. So with the cost basis, you wouldn’t want to do it or it might not make sense to do it if your cost basis is high. So in that example where the 50,000 was the person’s cost basis and the account value is 250, let’s say your cost basis is 200,000. I would consider that high in reference to the account balance being 250. So in that situation, it might not be the best strategy, because there’s really not a ton of tax savings when you look at the overall picture, and actually you might be creating a bigger tax bomb if you do that transfer and all 200,000 is taxable in that given year.

 

Taxes make your situation, depending on taxes, how much money you need, death benefit, beneficiaries, it’s all part of the puzzle of what makes sense for you to do. And we always say this, it goes back to the plan. Does it make sense for your situation? If it does, this can be a really amazing tool to use. If it doesn’t, it’s good to do your due diligence to make sure is it a benefit for me.

 

Marc:

Gotcha. So like any financial vehicle, right? Look at the plan, your timeline, what makes sense, your tax strategy, all those kinds of things, and work with somebody to pull this stuff together. So if you’ve got some questions around this, and you probably do, make sure that you’re reaching out to John and Nick for a more detailed conversation about your specific situation at pfgprivatewealth.com. That’s pfgprivatewealth.com. And don’t forget to subscribe to the podcast on Apple, Spotify, or whatever app you enjoy using. Guys, that’s going to wrap it up for us here. So thank you so much for tackling this one. I’m sure we’ll get some questions or we might even have to do another dive into this a little bit, just because it is an interesting topic that doesn’t maybe get as much conversation. So Nick, thanks for hanging out and breaking it down, my friend.

 

Nick:

Yeah, no problem.

 

Marc:

All right. And John, thank you my friend for hanging out and talking with us. We appreciate the time as always. For John and Nick, I’ll catch you next time here on the show. This is Retirement Planning Redefined.

The 5 Must-Do’s In Year One of Retirement

On This Episode

Well, you’re retired. Now what? Some people subscribe to the “first year rule” which says that the majority of your best retirement months will all take place in the first year of retirement. So how can you be strategic during that first year and set the tone in the right way, both emotionally and financially?

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Disclaimer: PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

 

Marc Killian:

Well, you’re retired. Now what? Some people subscribe to the first year rule, which says that the majority of your best retirement months will take place in that first year. So how can we be strategic during the first year and set the tone the right way, both emotionally and financially? Let’s talk about it this week here on Retirement Planning Redefined.

 

Hey everybody, welcome in once again to another edition of the podcast with John and Nick from PFG Private Wealth, as we talk about the five must do categories in year one, or things at least to be thinking about when we get to that first year of retirement. John and Nick have helped many families get to and through retirement, so it’s a good conversation for us to have and get some insight from the fellows this week. If you need some help, go to pfgprivatewealth.com. That’s pfgprivatewealth.com. Nick, what’s going on, buddy? How are you?

 

Nick:

Good, good. Just staying busy. Can’t believe it’s already almost October, so time flies.

 

Marc Killian:

Yeah. By the time we drop this, it might be closer to November, so time definitely flies for sure. John, my friend, how are you doing? Are you hanging in there with the family?

 

John:

Yeah, doing well, doing well. Family’s good, the girls are getting back into gymnastics, I’m trying to get them into basketball, so having some fun.

 

Marc Killian:

Okay, nice.

 

John:

Got some solar panels put up on the house before the tax credit goes away, and I’m excited to try those out, I’ll keep you posted.

 

Marc Killian:

Nice. Yeah, look at that, being efficient. So share some of that information with the listeners out there in case they want to, because that’s a great point, the tax credit may be going away, I think pretty soon, so maybe something worthwhile.

 

John:

Yes, end of the year.

 

Marc Killian:

Yeah. Well, let’s get into this first year conversation, guys. We’ll start with some financial, then we’ll transition to the more touchy-feely side of things, although it’s not that touchy-feely, it’s just important stuff to think about. But I guess you’ve got to learn how to adapt, that’s going to be probably the overarching theme, that first year is a heck of a gear change from the working life to the retired life, so learn how to adjust financially, I suppose. John, you want to start?

 

John:

Yeah. So the first few years, I’d have to say, are typically the most difficult for retirees to adjust. I just had a meeting actually yesterday, and the person did a great job saving, actually had a pension, good retirement accounts, and there was this fear of how much should I be spending, what should I be doing? So it was that one month, two month shock of, all right, how do I get a paycheck and what should I be doing with my time? So it’s important to take a look at what was on your bucket list, what do you want to accomplish, and like we say with anything, and I know Nick’s going to jump into this a little bit more, what’s your strategy for income moving forward?

 

Nick:

Yeah. Especially the first year, clients tend to break into A or B as far as the structure of how they like income. So for example, we’ll go through the exercise, get the expenses on paper, go through the plan so we’ve got a pretty good idea of what the expenses are going to look like, and then create their distribution schedule for the first year. And some people like to look at the numbers and say, let’s just say that their number works out to them needing income from their investments at 8,000 a month, so some of them, and it’s interesting because you kind of see the mindset, some of them will start to say, “All right, well, hey, we built in a bunch of buffers in there, I want to make sure we’re not spending too much money, so let’s start at 6,000 a month and let’s see how that plays out over the first year.”

 

And so, one of the first questions that John and I will ask them is, “Will that prevent you from having any fun or doing any of the things that you want to do?” And if it will, then we’ll oftentimes suggest that they do the 8,000, and then let’s review it at the end of the year and see, hey, did savings go up, did savings go down over that period of time?

 

Marc Killian:

Yeah, that makes sense, because people will often say, “Hey, let me retire on less just so I can make the numbers work,” and then it’s like, well, maybe you should try that for a few months too, maybe even while you’re still working.

 

Nick:

Yeah. We really look at that first year as the test period, and even to the extent a suggestion that we’ll make is, especially if they’ve got maybe multiple credit cards they’ve used for different things, “Hey, consolidate the house down to one card, you can have the same account for both of you, put all your expenses on there so it’s easy for us to track. We’ll do a data dump at the end of the year, seeing where the money’s actually going.” And then, all we’ve got to do is we look at, all right, the total withdrawals that we took, did the savings go up or did it go down? And we look at the report on that credit card, and then we can mirror the expenses moving forward on that, and we use that as a test drive.

 

Others would say, “Hey, no, I feel very comfortable, I’ll still do the things that you want to do. As long as you’re okay with me sending you an email and saying, ‘Hey, we need 10,000 for a trip,’ I’d rather manage the day-to-day expenses coming from that lower amount. And then, if we need bigger chunks to come out for different specific reasons, then we’ll just message you and have you send the money.”

 

Marc Killian:

Yeah, that’s a great point. So that first two pieces, really, these five things we’re talking about is you’ve got to learn how to adapt, learn how to adjust financially to that gear change, and then establish that income plan with that withdrawal strategy so that you’re giving yourself the salary really is what I’m hearing, Nick. So some people… Because I was talking with somebody not too long ago about this and they were like, “My wife is super frugal, and so she’s scared in that first year to spend anything.” And I talked to them a little later on, and it was like, “Yeah, after seeing the salary come in from the nest egg every two weeks or once a month or whatever it was, after a couple of months, she got comfortable.”

 

“Okay, well, now we can roll, now I feel better about spending.”

 

So that’s a great point on how to just watch that over that first year.

 

All right. So then, John, then I guess the next piece would be to maybe start to shift a little bit and start thinking about the purpose. Again, we talk about this being a gear shift in that first year, you’re working, you’ve got your job, you’ve got your career, many people are all about who they are at work, so what are you retiring to? What is your purpose in retirement? That’s a struggle for folks.

 

John:

It is, it is, because you’re trying to figure out, where do I fit now?

 

Marc Killian:

Who am I now, kind of thing?

 

John:

Yeah. I can tell you where my parents fit, they fit watching my kids, which they tend to enjoy, so that’s where some grandparents are.

 

Marc Killian:

That’s where many are, sure, yeah.

 

John:

[inaudible 00:06:27] conversations that Nick and I have, it’s like, “Hey, I’m going to spend some time with the grandkids and take them on vacations and watch them,” so that’s perfectly fine and that’s where some people do find where they want to start going.

 

We have others where they look at the first 10 years of retirement as these are the years we’re going to go travel and do the things we really want to do while we’re healthy enough to do it, whether it’s go sightseeing, go to national parks, you’re going to have more energy, you can go hiking, you can do things like that, so that could be the purpose is just enjoying the next five to 10 years of really doing some physical activity vacations. Then we have some others that will join some charities that they had an affinity towards, but now they have more time to volunteer and dedicate some time to or build something or just some hobbies. I think Nick, in our classes, does a great job of talking about some different activities people can get into and some resources of now what, what do you do now when it’s not time to go to work anymore?

 

Marc Killian:

Right, yep.

 

John:

I’d say the most important thing is just building a routine, so you have a purpose, you have things to do, so you’re not just sitting around watching the news all day, driving yourself crazy, because I’ll tell you, I think I spent… One time, I wasn’t feeling too well, so I had to take a break, I put on the news and I’m like, “Uh-uh, I can’t do this.”

 

Marc Killian:

No. And if you’re doing that with a stock ticker or any of those financial shows, that is not good either. As a person with ticker problems of my own, that’s the last thing I want to watch on a daily basis is the stock ticker. So Nick, he set you up for this next one, really the fourth piece is take stock of your health. It’s the perfect time in that first year, if you didn’t have time to maybe better your health as your career was winding down, man, get on it that first year retirement so you can do the go-go stuff.

 

Nick:

Yeah. And a couple of things, and I’ll actually bridge the purpose one and then the health almost from a mental health standpoint, one thing that I’ve realized recently, and even a little bit with my parents, especially because we’re down here in Florida and so many people here are from somewhere else and they’ve got siblings, kids, whatever, in other areas… I had a conversation with my mom maybe two weekends ago, and her older brother was going to turn 70, he’s still up in Rochester, and she was thinking about going up for the birthday to get together, see my grandmother, see family, all that kind of stuff, and then she started complaining about the plane ticket. And I was like, “What are we talking about, $70? Is it $70 more than you thought it was going to be?” Which now is dinner at Chipotle. So the-

 

John:

Don’t get me started on it, Nick, I just had dinner at Chipotle and it was about $70.

 

Nick:

Yeah, it comes from somewhere. And the point being is oftentimes when people have moved away, they’re used to the day-to-day, they’re used to working, they live within their means, they’re frugal with their money, they’ve come to a peace and understanding of, hey, I’m not going to see my family that live in different parts of the country as much, that’s just part of how it is, all these sorts of things. And a one-week trip or a five-day trip or just going for a weekend, these little trips and times that you can go and spend and make memories with people oftentimes put you in a much better mindset, from a mental health standpoint, from a, hey, feeling more purpose, like, okay, yeah, I can do these things, I can spend those important times, because… And what I told her was, “You’re not going to remember the $70 in six months, you’re going to remember the time that you spent at the party, so just go and do it.” And so, doing those things are important.

 

I would say one of the biggest positives that I’ll see people do for their health as they transition into retirement is having a dog, from the social aspect, from the exercise aspect, getting out, seeing people. I think these days, the kids call it touching grass, and just there’s a social aspect to it where you’re interacting, because it’s funny how an eight-hour day can go by quicker sitting at home on the computer or watching TV than it did when you were going to the office.

 

Marc Killian:

Yeah. And as an animal lover in that regard too, it certainly can help that population, so adopting a dog or whatever can go a long way to helping that kind of stuff, just because you’ve got the time now. So if you’re in the right position to take care of one, that’s a great way to have some… Don’t be like my in-laws, my in-laws did it and they barely spent any time with the dog, so don’t be that way. Do it if you’re going to do it, do it right. But that’s a great point.

 

Nick:

Yeah. And maybe the concern is by getting a dog that you’re worried that it’ll prevent you from travel or doing different things, so number one, oftentimes there’s options for that, doggy daycare, all that kind of stuff, or number two is maybe it really isn’t a good fit to get a dog.

 

Marc Killian:

Maybe not, right.

 

Nick:

But I can tell you there’s all sorts of charity, diving into the charity aspect, where I’ve got friends and/or clients that will go and walk dogs at-

 

Marc Killian:

Volunteer, yeah.

 

Nick:

Yeah, volunteer, go walk the dogs for a day, you’re sure to come home in a better mood, that sort of thing. So yeah, there’s opportunities. We used to joke, kids and dogs, for the most part, even if they’re not your own, usually those are things that people will like and you’ll feel better.

 

Marc Killian:

And that’s why they’re cute, because that way, you don’t take them out when they’re little. Keep them cute, right, John? All right, John, last piece here real quick, so basically just what I’m hearing is the fifth piece is just test drive the plans, whatever they might be, whether it’s a downsizing conversation or relocating or doing the snowbird thing or living on less, whatever’s potentially on your radar, test drive it out, and that way, you’ve got a long-term plan that you have now vetted it a little bit.

 

John:

Yeah, that’s really important. I think we talked about that a little bit at the beginning, is just the first year as an experiment to figure out what makes sense, what is your spending going to be, how are you adapting to that paycheck? To give you some examples of what we’ve seen, where people may want to move to a different area, and it’s, hey, why don’t you spend a summer there, do a Vrbo for two or three months and see if you like it before you make a big move? Because I’ll tell you, from things we’ve seen, you might make a move, there’s a lot of cost to moving and buying something, closing costs, furniture, and all of a sudden, it’s like, hey, this isn’t for me. It’s hard to adjust to those mistakes, so just do a trial run of things. If you can afford it, definitely do it. And even if you can’t afford it, just try to figure out a way to do the trial run before you make it permanent.

 

Marc Killian:

Yeah, don’t buy the $70,000 RV if you’re only going to like the RV life for about a month, maybe just rent one first and see how you like it.

 

John:

Exactly, yeah. If you find out, hey, after about six hours of driving, I can’t really take this, or parking this thing, I’m hitting things.

 

Marc Killian:

Exactly.

 

John:

You’ve got to figure out exactly what works for you and what doesn’t, and can’t stress that enough is that do your plan, try things out and figure out what makes sense.

 

Marc Killian:

Indeed. Well, the habits, the routines, the choices you make early in retirement will echo through the remaining years as they roll down, so be intentional with your strategy and get a strategy. Reach out to John and Nick and get started today at PFG Private Wealth, that’s pfgprivatewealth.com, and get some time onto the calendar, subscribe to the podcast, all that good stuff, so that you catch new episodes when they come out. But certainly, you want to talk about your unique situation, so reach out to them again at pfgprivatewealth.com for John and Nick. I’m your host, Marc Killian. We’ll see you next time here on Retirement Planning Redefined. Have a great day.