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.

 

 

 

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.

Big Beautiful Bill Myths Debunked

On This Episode

Big tax law changes always bring big rumors. But before you assume Social Security is now tax-free or that you’re getting a $40K deduction just for breathing, let’s set the record straight on what this new bill didn’t actually do.

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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.

 

Speaker 1:

The big tax law changes always bring rumors, so before you get too hyped up or worried about anything, we thought we’d have a little fun and debunk some of the Big Beautiful Bill myths this week on the podcast. Let’s get into it.

 

Hey everybody, welcome into Retirement Planning – Redefined with John and Nick from PFG Private Wealth. And one more time, we thought we would revisit the Big Beautiful Bill, the OBBBA conversation. I like saying OBBBA, it’s just fun. The One Big Beautiful Bill Act. Guys, just kind of hopefully maybe dispel some of these things, continue to have questions all throughout the year as we’re closing out the year we’re just trying to knock down some of those worries or some of those fears that people still have. So let’s set the record straight a little bit. We’ll have some fun with this. You guys can be myth busters on this episode, if you will. John, what’s going on my friend? How are you?

 

John Teixeira:

Not too much. Just wondering if Nick gave my phone number to a list because all of a sudden today I’m getting bombarded with, “Do you need a driveway cleaned?” And some random stuff. So I think I’m getting punked.

 

Speaker 1:

Oh man, it’s that time of the year. It seems like spam calls have gone just through the roof for the last couple of months, so I don’t know.

 

Nick  McDevitt:

My hypothesis on that is I feel like businesses are slowing down and they’re kind of going back to their-

 

Speaker 1:

They’re getting creative too.

 

Nick  McDevitt:

Yeah, they’re going back to their list client lists or different marketing tools. I feel like I’ve gotten re-added or added to a hundred new email lists in the last three weeks. So it’s interesting.

 

Speaker 1:

Yeah, it’s a weird thing. And the text thing and the email, it’s like they have so much access to you. Constantly getting stuff and of course the phones are always listening, so you just get all this weird stuff. But I’m with you, John, same thing. Would you like to sell your house?

 

John Teixeira:

No. Nick complained about it a couple of weeks ago and I was like, “I’m not getting too much.” And all of a sudden I think he’s like, “Well, if I got to deal with it, John’s got it too.” So.

 

Speaker 1:

Either that or your phone was listening and said, “Oh, you’re not getting it? We’ll get one, then. Here it goes.”

 

John Teixeira:

It could be that one too.

 

Speaker 1:

All right, let’s jump into a few myths. We’ll have some fun here. Myth number one, Nick, Social Security is no longer taxed.

 

Nick  McDevitt:

Kind of for some. So just like most things, there’s nuance to it. If your income falls within the threshold of where single or married filing jointly and singles, I think the 75,000 married filing jointly is the 150, then you actually get a $6,000 tax credit to help offset taxes that you may owe on your social security income. But it’s not something that line item wise is gone. So for most people, up to 85% of their social security income is includeable in their overall taxable income. So this is a way that that amount can get reduced dependent upon the overall situation.

 

Speaker 1:

So technically no, they did not remove social security tax, but they’re for certain brackets in certain age groups for a couple of years, you can definitely reap a benefit. So do that. But yeah, it didn’t go away unfortunately. Myth number two, John, the new tax law means tax cuts for everybody.

 

John Teixeira:

Unfortunately not for everybody. Like we talked about in the last episode, the senior citizen tax deduction above the age of 65 is those single will get six, joint will get 12, but that’s not even for everyone above 65. Well, because if you income level’s too high, you also don’t qualify. So not for everybody. And then even the SALT deduction, which Nick went into last episode as well, if your state doesn’t have income tax, certain situations work for you, certain situations, and everyone’s a case-by-case scenario here. So not for everybody. Some people might not see any tax benefits from this, but some people might see quite a bit.

 

Speaker 1:

Okay. All right. Nick, myth number three, the tax brackets are permanent, so I’m groovy. We’re going to stay in this low tax bracket forever.

 

Nick  McDevitt:

Yeah, it’d be nice if things work that way, but as we know when it comes to taxes or really anything involving government or legislation, we can count on there being change at some point in the future. So although if people read through documents and they see, hey, this adjustment in brackets is now permanent, that’s just kind of referring back to when they were originally reduced. There was a sunset provision that it had to get renewed at a period of time in the future. And so that’s what happened is it was essentially renewed and locked into place, but a new president or a new Congress can adjust that and change that in the future. And based upon debt and all that kind of stuff, were of the opinion that at a certain point in time there will definitely be some changes. And the reality is that most likely they will be higher taxes.

 

Speaker 1:

Yeah, they changed their mind as the wind blows and what they do with it. Right? So, all right, myth number four, John, we didn’t really talk about the estate tax too much on that prior episode where we talked about some things, but they actually raised it up a tick, made it a nice even number. So it’s a $15 million estate tax exemption, which means estate planning doesn’t much matter anymore because most people aren’t going to get to that level. What’s your thoughts?

 

John Teixeira:

Yeah, so it’s nice they made it a nice even number, just like when they changed the RMDH from a 70 and a half to a nice even number there. So we like simplicity here. But yeah, it doesn’t mean estate tax planning doesn’t matter anymore because certain states do have their own estate tax themselves. We live in Florida here.

 

Speaker 1:

Good point.

 

John Teixeira:

So we don’t have to worry about that. But depending on the state you live in, important to understand what those estate taxes are.

 

Speaker 1:

Yeah, that’s a federal estate. Yeah, that’s a great point. Yep.

 

John Teixeira:

Yep. So that’s the federal level there, 15 million. So yeah, just make sure you understand where it is. And just because the exemption went up doesn’t mean you don’t need estate planning because we’ve come across some people that definitely needed to structure their assets correctly to make sure that Uncle Sam doesn’t get all of it and also it goes to the right places. So.

 

Speaker 1:

Yeah, it’s much more than just the tax is a good estate plan, so definitely you want to have the other pieces covered as well. So just because the number’s high doesn’t mean you don’t need an estate plan. And you don’t have to be a Rockefeller to need estate plan. A lot of people kind of surprised by the fact of what an estate plan can do for them. Just average everyday folks, it can still be very beneficial. So something to certainly consider.

 

Nick, we talked a little bit about the car loan interest on that prior one, but so I googled basically just common misconceptions about this, and that’s how I’m wording these based on how some of these questions came up. So it’s like, “Car loan interest is now fully deductible,” and that’s how with the internet and everything, that’s how things get run amok. People think, “Oh, no, no, I totally saw that. Car loan interest is fully deductible. So great, I’m going to go out and buy a car and be able to write off the interest.” But that’s not the whole story.

 

Nick  McDevitt:

For sure. There are definitely… So there’s a cap as far as the amount that can be deducted, it’s about $10,000. From a deductibility standpoint, it is a temporary thing and there are certain thresholds from the perspective of income can’t exceed a hundred thousand. And then the rules about the final assembly being the US for the vehicle. So it’s not a blanket something that, just like anything else when it comes to rules and laws, especially on taxes, the devil’s in the details and you want to make sure you have a full understanding of what it looks like. And on top of that, the reality is that a tax deduction is not usually a reason to spend money if you don’t need something. So that’s kind of like the famous last words of, “Yeah, but there’s a tax deduction.” But also if there’s a cash flow issue, then it may not make sense. So just like anything else, you want to be smart about the decision.

 

Speaker 1:

Yeah. And I’ll take this last one, John for a little bit. Myth number six, it was really around the itemizing. “I can skip itemizing and still get deductions for charity giving.” And I think people confuse the itemization and QCDs. And so I think there’s a little bit different disinformation there and there is some above-the-line stuff. So just hit me with that one real quick.

 

John Teixeira:

So you can make the deductions with charitable gifting. And it’s just recapping last episode, it’s capped at 1,000 for single in 2,000 for couples. So you can get the standard deduction and go ahead and get these additional deductions for giving to charity without itemizing.

 

Speaker 1:

And I think for a lot of people, especially if you’re making good money, they think, “Hey, I don’t need the RMDs,” especially for a lot of your client base. “I got to pull this RMD. I don’t want to, but I have to. The government’s making me. How can I maybe be charitably inclined but also be effective from a tax standpoint?” And that’s where the confusion with the QCD comes in. Because you can satisfy that RMD by doing a QCD.

 

John Teixeira:

Yeah, these are… Yeah, thanks for clarifying.

 

Speaker 1:

Yeah.

 

John Teixeira:

Yeah. These are two separate things here. The QCD is its own strategy and definitely take advantage of that if you are not, it’s a great way to do it. And just let’s kind of recap that strategy, Although it’s not part of the bill here, but what you want to do is have your… Once you’re above the age of 70, you can take advantage of it and you want the check or distribution that’s coming out of the retirement plan to go pre-tax, let’s emphasize that pre-tax, go directly from the retirement account to the charitable institution. So it has to be check made payable to that institution. They don’t need to get it directly. I have some clients that will get it mailed to their house as long as it’s written out to that institution. And the example, they go to church and they feel good about actually handing the check in.

 

And full disclosure, when you’re doing your taxes, I don’t want to say all, but most financial institutions aren’t basically telling the IRS what you did. When you do your taxes, you actually need to say, this is what you did. So the 1099 will kind of reflect a little bit of that, but you have to actually tell your CPA, “I did this.” Because if you do not, you will not get that tax deduction.

 

Speaker 1:

Yeah, no, for sure. And that’s why I wanted to ask you that because it does get confusion around what the tax law changes were with the above line charitable deductions or gift giving and the QCDs, so there was definitely some confusion there. So thanks for clearing that up. And again, that’s the whole point, right? Anytime there’s legislation, it always brings confusion. So having a good strategy, a good plan, and a good team in place to help you deal with this stuff because dealing with it every day is a lot easier than us who just only see the headlines and whatnot. So if you need some help, reach out to John and Nick, get onto the calendar at PFGPrivateWealth.com, that’s PFGPrivateWealth.com and schedule some time for yourself today. And with that, guys, thanks so much for hanging out. I hope everybody has a great holiday season. Don’t forget to subscribe to the podcast on Apple or Spotify or whatever podcasting app you enjoy. Retirement Planning – Redefined with John and Nick from PFG Private Wealth. We’ll see you next time.

 

What The “Big Beautiful Bill” Means For Your Retirement Plan

On This Episode

Today, John and Nick dive into the Big Beautiful Bill and what its changes mean for retirees and pre-retirees as the year winds down. They break down updates to tax brackets, standard and senior deductions, SALT caps, and Roth conversion strategies, while sharing tips on avoiding common pitfalls. Plus, they touch on credits and deductions like charitable giving, auto loans, and solar panels to help listeners make the most of these changes.

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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.

 

Speaker 1:

This week on Retirement Planning Redefined, still a lot of questions out there about the Big Beautiful Bill and what happened earlier this year and some of those changes. So, we thought we would talk about that and touch on that as the year is winding down here on the podcast. So, stick around. Let’s get into it. Hey, everybody. Welcome into Retirement Planning Redefined with John and Nick from PFG Private Wealth. Find them online at pfgprivatewealth.com.

 

Guys, I know it’s been around for a couple of months now, half a year or whatever, but still a lot of questions and things going on with the Big Beautiful Bill changes, especially as it affects retirees and pre-retirees. So, we thought we would dive back in and have a conversation on some of this and just maybe touch on some of the things you guys are still hearing a few months later and see if we can break this down a little bit for folks and help them out. John, how are you doing this week?

 

John:

Hey, I’m doing all right. Just getting ready for Thanksgiving here and just looking for some downtime right now.

 

Speaker 1:

Yeah, it’s right here upon us. Nick, you’re double whammy. You got Thanksgiving and then you got a wedding right after that. So, congratulations and happy holidays.

 

Nick:

Thanks. Yeah, it’s going to be a busy end of the year.

 

Speaker 1:

Yeah, for sure. Well, speaking of, let’s get into our topic here because there’s lot of stuff that’s happening and changes and whatnot. So, let’s just dive into some of the things and break some things down. The big piece obviously was that the tax brackets that we were under the TCJA since 2017 got extended. All year, we were wondering if that was going to happen as the year was winding down. This stuff was going to wrap up at the end of this year, but they extended it and they made it permanent. So, talk to me about that, whoever wants to take this. That’s interesting language and confusion for some people, but what’s your thoughts on the tax brackets being extended?

 

John:

Yeah, so the tax brackets from 2017 now remain in place where they were set to expire. So, they’re as permanent as I guess you could be when it comes to tax brackets-

 

Speaker 1:

To Washington.

 

John:

… to Congress. Yeah, exactly. So, obviously, Congress can make some changes at some point, but for right now, this is where we are. For retirees, important to take a look at historically where tax brackets have been and if you really pay attention where in some pretty low tax brackets if you look throughout time. So, now could be advantageous to some people to really develop some strategies to take advantage of this low tax bracket period for themselves because permanent doesn’t mean too permanent as we just discussed. Depending on what happens, the next administration, things could not become permanent.

 

Speaker 1:

So I mean, one of the things Roth conversions has been really on the radar for many people for the last number of years because to your point of the historical tax lows, so now you do have some time to Roth over time for at least a couple more years anyway, until what, ’28 or ’29 potentially.

 

John:

Yeah, so Roth conversions is definitely something we implement for clients, and while this is going to be in place for the next few years. Maybe we get a little bit more aggressive and I think we’re going to touch on it a little bit more in the podcast. We’ll talk about some of the pitfalls to avoid with that because there are some new deductions that you want to remain below.

 

Speaker 1:

Yeah, yeah, for sure. Well, Nick, let’s have you just jump in and tackle some of that. So, talk to me about some of the deductions, the standard stuff, some of these other pieces that they locked into place and some things we might want to know and think about.

 

Nick:

So for people that aren’t familiar with the jargon when it comes to the tax or they don’t prepare themselves, essentially people have two options. They can either use the standard deduction, which is what the majority of W-2 earners do especially or they can itemize. So, the reason that people would itemize historically is they would have enough expenses maybe through a business, maybe through interest from a mortgage or kids or different things that would allow them to itemize and there’d be a benefit to them from a tax perspective.

 

But when this was originally put into place and the standard deduction was increased, it really shifted it to people being able to just, for the most part, use the standard deduction, which previously about $29,500 for joint, $14,600 for single, and the updated number is going to be $31,500 for joint and then $15,750 for single. So, it’s bumped up a little bit. Years ago, it was lower, and so there would be a lot of people that would get caught between the standard and the itemized, but it is a benefit for quite a bit of people.

 

Speaker 1:

Yeah. I mean, there’s some decent numbers here we’re talking about. When you take the standard deductions, it’s going to be hard to get there, but you could really make a big dent. We’ll talk about some of the add-on deductions as well here in a second. Does the SALT cap change a lot of things for you guys in Florida? I’m not sure versus other states like New York or California, New Jersey, and I guess maybe to clarify, John, what is the SALT cap and can you break that down a little bit?

 

John:

So I’ll punt this to Nick. He just actually did this with a client. So, he can give a personal story, which is probably better than me.

 

Nick:

Yeah. So, the SALT cap is really state and local tax. It is or historically has been much more relevant in states that have higher property tax and/or state income tax. So, a lot of the northeast states, really just a lot of states in general. Here in Florida, we don’t necessarily run into this a ton, however, we do have quite a few clients that do the snowbird thing.

 

Speaker 1:

Yeah, sure.

 

Nick:

So they have to incorporate taxes in other states and that thing. So, the reality is that it had previously been a benefit for people that were paying a large state income and/or property taxes. They could use it to offset the tax that they paid against their federal income. I guess when the legislation was changed, I think it was like 2017, 2018, they had reduced that SALT cap to $10,000. So, that really had an impact from the perspective of especially high income earners in states that had those different taxes that were applicable. It did cause a decently effective increase in taxes for them.

 

So, with the good old lobbying that’s done, they went ahead and increased that from the $10,000 that’s been in place for the last five, six years to $40,000 cap for incomes below $500,000. So, although we don’t see it here, we have recently had some clients moving into homes that do have pretty significant property taxes. Although they’re not paying state income tax, the level of the property taxes where they’ve gotten with the run-up in real estate around this area, it has become a little bit more relevant than it was previously.

 

Speaker 1:

And so that could make a difference. So, again, you want to make sure that of all these changes that are potentially there, you’re talking with your financial professional and your CPAs and working together on making sure that you’re being as effective as possible. So, John, you punted that one back over to Nick. I’ll give you this one, the senior deduction. There was a lot of talk, obviously, a lot of campaigning on just getting rid of taxes on social security. They did their bartering and their deals and they came up with this senior citizen deduction. I mean, it’s not bad for a number of years. It’s like you’re not paying social security taxes, but it’s a little confusing for folks. So, can you break down some of the data on that?

 

John:

Yeah, so it was initially discussed as, “Hey, we’re going to eliminate social security tax.” This has come up a little bit with some clients asking, “Hey, did they get rid of it?” And the answer is, your social security still is taxed, but if you’re above the age of 65, you do get what they call a senior citizen deduction. That’s $6,000 per person, $12,000 married filing jointly, and there are some income limits to it. The single is $75,000 and the joint is $150,000. So, I would say over the last few months, we have been doing quite a bit of planning to make sure people stay below these thresholds to maximize the deduction and when we’re doing our projections for this year and upcoming years, for some people, it’s a big difference.

 

It’s a nice little benefit for these retirees who unfortunately over the last few years are really impacted with inflation. I mean, the cost of everything is up. I know CPI recently, I think last year was like 2 to 3% or something, which doesn’t feel like that, but if you’re on a fixed income, this is a pretty big deal. So, it’s nice to see some of these retirees get some relief, but especially with this one more than others, I think if you can stay below those income thresholds, now’s the time to do it because as of now, they’re expiring in 2028. So, you really only have about two or three years to really take advantage of this.

 

Speaker 1:

Be effective. Yeah. I mean to your point, Nick earlier was talking about the $31,500 for the standard, and then you slap another $12,000 for married, right? Then you slap another $12,000 on here. I mean, that’s pretty hefty, right? So you could get really efficient with this. It’s just a matter of making sure that you’re, again, jumping in and taking advantage of it while you can. Any thoughts on that, Nick?

 

Nick:

Yeah, no, just like anything else, what you can see a little bit with some of these changes are that there’s certain gaps that it’s stepped in to help with. The reality is a lot of times it’s going to be people that are middle, upper middle class, but from a tax perspective, so if they can keep their income under the 150 for a joint household, that tends to be a middle, upper middle class family.

 

Speaker 1:

Well, it’s funny you say that because there was so much argument about, “Oh, they’re going to do stuff for just the wealthy,” but a lot of the changes that were put in on the Big Beautiful Bill really actually do help lower and middle class like these. So, I mean, I think there’s some good benefits to the bill for everybody. There’s some things that obviously are a little weird too.

 

Nick:

Oh, for sure.

 

Speaker 1:

You got to be effective with it.

 

Nick:

Yeah, yeah, for sure. The devil’s always in the details. Absolutely. That’s the case with any legislation that is this large and this comprehensive. But those are the standard deduction and the senior citizen deduction are definitely two that are going to have a pretty substantial impact on a large group of people.

 

Speaker 1:

John, I’m going to go back to you for a minute because we were talking about the Roth earlier. We tossed that in there at the beginning piece there. Again, clearly, this is a good time to think about the fact that it is still alive for a little bit. So, again, Rothing over time is back on that table as we talked about, and so that may be a really effective part of your strategy. You do not want to ignore it because it still could be a limited window.

 

John:

Correct, yeah. So, definitely that’s one thing we’re looking at currently is what’s the right amount of Roth conversions to be doing at this time. So, it is a great time to-

 

Speaker 1:

Any traps in there? Any pitfalls we should be aware of?

 

John:

Yeah, so I was going to say there’s definitely a good time to be aggressive with it, but with this new senior citizen deduction, if you’re doing some conversions, you want to make sure you stay below those thresholds to take advantage of that additional $6,000 per person. So, now is a great time to be aggressive with this, but at the same time, you want to be cautious because there are some things you could be missing out on if you get too aggressive. So, like we’ve always said, look at the plan, talk to your CPA, talk to your financial advisor. One of the most important things going into retirement is avoid unnecessary taxes. So, it’s just an eroding factor on your money. So, if you can avoid it, that just helps you overall.

 

Speaker 1:

Well, people tend to stay confused if we don’t do this about the whole brackets and the steps anyway, right? Because I think a lot of people think, “Oh, I’m in the 22% bracket. That stayed. Yay, cool. I’m still there. I don’t have to go up,” but every dollar is taxed at that and that’s not how it works. That’s what I think confuses people. So, when you’re talking about maximizing your Roth or something like that, you want to maximize those steps in that bucket, if you will. So, that you just don’t pop into the next bracket if you can. Is that accurate?

 

John:

Correct, yes. You definitely want stay within the bracket, not really jump up, and sometimes it’s okay to jump up as long as you understand how much-

 

Speaker 1:

Yeah, not every dollar is going to be at 24 if you popped up to 24.

 

John:

Correct, yeah. I mean, we have some clients that are doing some Roth conversions from an inheritance standpoint, so they look at it and say, “Well, I’ll pay 22 so my kid doesn’t have to pay 30, whatever, whatever it is.”

 

Speaker 1:

Right, yeah.

 

John:

Depending on your situation, you really want to pay attention to what bracket you’ll be, what your effective rate is, and just don’t do it willy-nilly. You want a strategy.

 

Speaker 1:

Yeah, if you have $1 million you want to convert from a traditional 401 over to a Roth, you want to make sure that you’re not going bracket busting on that, right? Don’t do it all at one time. Again, Roth over time, right? That’s the conversation piece there. So, what else is of note in the bills, guys? Nick, what’s some other things that jumped out at you?

 

Nick:

Yeah, I think it’s definitely less applicable for many people, but they did bring back bonus depreciation for… It’s typically used by small businesses or landlords, oftentimes applies to qualified business expense or rental property purchase. For example, it can have to do with vehicles, large equipment where a company can accelerate the depreciation into the year, instead of spreading it out over multiple times, which can help offset if they’re having a really good year from an income perspective or just bring down the taxes in general.

 

From the standpoint of a couple of other things, I’ll have John speak to the EV credit because he took advantage of pretty much all the EV stuff that you could. But one of the deductions, additional deductions that they had put in place is for auto loan interest deduction. So, it’s an above the line. It applies to cars purchased in 2025 or later, and the car has to have final assembly in the US.

 

Speaker 1:

That’s a funny one right there. It’s like how much of that this qualifies, right? So what’s final assembly mean? Is there a percentage break?

 

Nick:

There’s definitely cheat sheets out there. Ask your local AI machine.

 

Speaker 1:

Or dealership I suppose.

 

Nick:

Yeah, yeah, the dealers will definitely know, but once again, there’s an income threshold on that. So, income above $100,000 won’t qualify. From a charitable giving standpoint, there is an above the line deduction for people that do not itemize. So, $1,000 per person or $2,000 for married filed and jointly.

 

Speaker 1:

It’s not a lot, but I mean it’s still something, especially in the season of giving, right? It’s above the line. So, give some money.

 

Nick:

Yeah, exactly.

 

John:

Better than nothing.

 

Speaker 1:

Yeah, exactly.

 

Nick:

For sure.

 

Speaker 1:

Yeah, for sure. Well, what about that EV thing, John?

 

John:

Yeah, so the vehicle EV credit went away at the end of September, so that one can no longer be used. So, that was if you bought new, there was a tax credit you could obtain and then if you bought used, there was something you could actually get as well depending on the value of the car. If you were actually leasing, basically, the dealership got the credit, which would hopefully reduce your payment depending on how good you are at negotiating.

 

Speaker 1:

Got you.

 

John:

But the big one that we’ve been talking to clients about, and I did myself, which Nick was referencing, was solar panels. So, after 12/31/2025, you will not get that 30% reduction for solar panel installation on your house.

 

Speaker 1:

Yeah, it might not be enough time now, huh? I wonder if you could get that done.

 

John:

It depends how quick your contractor is. I’ll tell you, by the time I agreed to mine, I thought it’d be about a month out and I think within two to three weeks, they got me on the calendar and put it in. So, I had mine in much faster than anticipated, which I was happy about, but it’s a 30% tax credit. If you put some solar panels on the roof, it just has to be installed by 12/31. It doesn’t have to pass inspection or anything as far as I know. It needs to be installed by that date. But I’ll tell you, for those that are comparing this, I just got my first bill from the energy company and there still is a fee to be on their grid.

 

In Florida here, apparently with these hurricanes, there’s additional fees that we’re getting charged to build the grid back up and to pay for the emergency services. A funny conversation with the person, I said, “Well, when it’s built back up, does this go away or whenever we’re done paying for the cost of the emergency services?” Yeah, that’s a good question.

 

Speaker 1:

That’s a question.

 

John:

Well, let’s take a look at that.

 

Speaker 1:

On ours here in North Carolina, we have storm repair tax or whatever. It’s been on there for a number of years now, and it’s like, but when the storms are repaired, what then? Ongoing storm.

 

John:

I’m like, “Okay, so this is just an ongoing bill-“

 

Speaker 1:

Pretty much.

 

John:

… regardless of my usage that I’m doing here.

 

Speaker 1:

Another way for them to just hit us with something and go, “Oh, but it’s necessary.” Yeah. Okay. All right. Well, final one here I thought was interesting was the no tax on tips one, right? Might not affect necessarily your client base, but maybe their kids or grandkids, especially a lot of service industry in Florida. So, no tax on tips up to 25 grand, I think, and that’s temporary as well, but that could be interesting. Any final thoughts as we go to wrap this up guys? Anything, Nick, on something we should do now or be effective as the year’s winding down?

 

Nick:

I mean, I wouldn’t say that there’s a lot to do before the end of the year when it relates to this. I think this is a good example though, and one of the conversations that we have with people is that just because a certain strategy is best now doesn’t mean it’s going to be best in 5 years or 10 years or 15 years. So, when you see a bill like this and with the different changes, something’s becoming permanent, something’s changing, new rules that are built into sunset, it just shows you how important it’s to plan, to build in flexibility, have options both now or later on in retirement, have different buckets of money and really just have a strategy moving forward so that you can benefit no matter what’s happening.

 

Speaker 1:

All right. John, final thoughts from you?

 

John:

Not too much. I think we hit mostly everything. I think just being aware of where we are. Historically, tax brackets to me is something to take a look at because I think part of this new bill added, I think, 2.4 trillion of new debt over the next 10 years and I think 4 trillion increase in debt ceiling. So, there’s a lot of-

 

Speaker 1:

Future tax liability.

 

John:

There’s a lot of trillions getting created here. So, just be wary of what’s down the road. So, it’s good to just take a look at your overall strategy.

 

Speaker 1:

Yeah, good point. Timelines, definitely got still a couple of years left, but just be effective and get on it as soon as possible because we all know time just zings it right by. So, if you’ve got some questions, need some help, reach out to the team at pfgprivatewealth.com That’s pfgprivatewealth.com and have a conversation with John and Nick and the whole team today and just get started. Don’t forget to subscribe to Retirement Planning Redefined on Apple or Spotify or whatever podcasting app you enjoy.

 

You can find all that information again at the website as well or check the show links. There’s some just stuff in the descriptions there. So, pfgprivatewealth.com. Guys, thanks for hanging out. Appreciate it. Hope everybody has a great holiday season and happy Thanksgiving everyone. We’ll see you next time here on the podcast.