Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

8 Tax Strategies To Consider Before Year-End

• Ari Taublieb, CFP®, MBA • Episode 211

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Tax Strategies Before Year-End -> Consider These 8!

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

I started the early retirement podcast because there was not enough people talking about tax planning. When it comes to an early retirement, you have an opportunity. Your income is often very low because there's no social security. Your required distributions have not started yet. Maybe there's rental income, maybe there's part-time income, maybe you're still working, but more often than not, you're wondering hey, what should I do when I may be 60 or 61 and I've got a few years before Social Security gets turned on? Can I optimize in that time?

Speaker 1:

So today's episode is going to be about tax planning before the end of the year. Right now, as I'm recording this, we've got about two months left before, right away. We are now in 2025. How weird does that sound? And I'm going to give you the tax strategies that I go over for my clients that want to, of course, save on taxes, which is every single one of them. So, generally, I'll introduce my tax planning checklist in the summer, because tax planning should not wait until the end of the year. But there are certain things by the end of the year you want to review and certain things you actually want to wait for and not implement, and I'm going to talk about those today, if you don't already know, my name is Ari Taublieb, I'm a certified financial planner, I'm the host of the Early Retirement Podcast and I'm the vice president on route. If you are listening to this podcast episode on the podcast apps, great. If you're watching this right now on YouTube, I love it because you can see what I'm going to be going through and you get to actually see my face. So I'm going to go over a few different things today.

Speaker 1:

Now, first things first, which is, when it comes to tax planning, do not and let me be clear, do not let the tax tail wag the life dog. Well, what does that mean? That's when people come to me and go like, hey, I'm going to try to decline this bonus because then I'm not going to have to pay taxes. I go, it's going to be a net positive to you. Yes, you're going to pay taxes, but you're going to make more money, so don't go decline a bonus. Now, most of you are like, hey, did someone really say that? Yes, okay, in my role, I hear lots of interesting stories, so I'm going to be going through my tax checklist.

Speaker 1:

Now, if you're wondering about all of the different checklists and charts that I'm always talking about, if you're on YouTube you can see it on my screen, but if you're on the podcast apps listening, you're going to hear me explain it for you. So I have a lots of different checklists. These are called flow charts. They're within my early retirement academy, so you can see here, if you're asking yourself or when you give to a friend, what issues should I consider when starting out financially. What are the important dates? Should I use a donor advised fund? When should I collect my pension? Am I in a position to retire early? What should I do with my concentrated stock position? How do I think through paying off my mortgage? Where should my next dollar go? So on. You can see all of these charts which really help your brain go okay. So if this is me and I'm a small business owner, or if this is me and I'm wondering when to collect social security, how do I think through that? So just want you all to be aware, because I get lots of emails saying, hey, should I set up a traditional 401k for my business? And hey, should I keep adding to my 401k or should I go Roth? Of course, there's not every single one, but a lot of these. I mean there's north of 80 of these inside of this academy that our team has put together, so make sure to check those out. I'll use them when I'm meeting with clients, so certainly worth considering. You can see them on my screen right now, but at the same time you're listening on the podcast app. Ultimately, I just don't want you worried about stuff they don't need to worry about, and too often I find people are worrying unnecessarily.

Speaker 1:

So let's get into the tax tips. The majority of the things I'm going to talk about today are applying if you're probably a year out from retirement, in retirement or let me think Sorry, milan, I might need one more edit. The majority of the things I'm going to talk about right now are if you're a few years out from retirement or you're in retirement now. Actually, milan, no, I'm just gonna hop in. So let's go through the eight different tips. Number one is going to be a little bit of a rocket, so let's get into it Now. I'm going to start by going over what I view as the high-impact strategy. So if you're like, look, I'm already five minutes into this episode and I haven't gotten the guidance I'm looking for and you're already frustrated, it's coming right now. Now, I know that's not most of you, but I want to hear what's helpful and what's not. So please drop in the comments. I want to hear from you guys. So number one and I'm going to read through my list that I put together here is maximizing savings.

Speaker 1:

Now, a lot of you know that, but when it comes to maxing a 401k, there's a lot of issues that I see. Some people max out their 401k so early on in the year that they actually forego matching contributions, meaning, if you were to just defer your entire paycheck for January and February, you're like hey, I did awesome, I just maxed out my 401k. Maybe you did, but maybe you actually no longer get the catch-up contribution from your employer. So there's lots of things that sound like you're kind of doing something. Maybe your neighbor isn't doing, or you're kind of beating the system.

Speaker 1:

Here, for example, I see people going I'm going to do this mega backdoor. I could get more money into my retirement accounts. Isn't that cool? I go. It's certainly cool. I'm a fan of it. I've personally done it.

Speaker 1:

But there are also times where I could have done it and I chose not to, and the reason for that is I wanted more liquid funds, because I wanted to travel, because I'm already on track for plenty of retirement money. It's today that I'm worried about. So I don't want you optimizing on paper, like a lot of people do, who just max out their 401k, because that's what I've done the last 20 years. Now you've got a ton of money, but you want to retire early and we don't have a way to tap into enough of those funds. So generally, if someone come to me with a really healthy pre-tax balance, I'll say I want you to stop maxing out your 401k.

Speaker 1:

Now I'm not telling you that because I don't know your situation, but I am saying if you have a healthy pre-tax account and you have followed what's called the rule of 72, and many of you don't know it, which is okay, but it's basically compound interest let's assume you take the number 10, okay, and you're getting a 10% return. What the rule of 72 says is, on average, if you get a 10% return, you will double your money in seven years 7.2 to be specific. But let's be more conservative. Let's assume you're 50 years old, you have a million dollars and you get a 7% rate of return. Let's just say 7.2 for argument's sake. Well, what that's saying is your money's going to double every 10 years. So you're 50, you've got a million dollars. When you're 60, you have 2 million. When you're 70, you have 4 million. When you're 80, you have 8 million. Are you going to need 8 million dollars? Probably not. So is it bad to have? No, but you get my point. So now you have $8 million. Well, that's you maxing out your 401k, trying to put as much money in as possible, right? No, the example I just gave you is assuming your million dollars gets no more money added by you personally and just gets this average growth rate, which, of course, does not happen like that.

Speaker 1:

But it's important to understand. There might be a point where you don't need to add more money to your 401k. What you need to do is have a brokerage account. That's what's called a superhero account. That's going to help you weather the downturns so you can pull income. It's going to help you retire earlier because you don't have to wait until 59 and a half or 55 if you elect to use that rule, and it allows you to pay capital gains taxes, which is better than ordinary income. Ordinary income is as if you just made more money. Getting a W-2 type job versus capital gains is what you pay if you were to sell your home, for example.

Speaker 1:

It's a lower tax bracket, so what you want to do is ensure that you have the right bucket of money in certain accounts. So you want a bucket to be in brokerage, which is after tax. You want some to be in a 401k, you want some to be in a Roth. You want to optimize that approach. So, in terms of what tips for the rest of the year is right now, if you are once again over 50 years old, you can contribute an additional $7,500. So max you could put in is $30,500. So if you're looking right now going yep, I've got two months left and I'm flexible. I've got my travel fund, I got my car fund, I've got my rainy day fund, I'm good to go. Well, you might want to go max out that 401k, but more often than not I tell people go get the free money, the rest goes to a brokerage account if you've saved and invested very well in your 401k and it doesn't need more funding.

Speaker 1:

Number two is consider after-tax contributions up to the limit, which is $69,000 plus $7,500 over $50 over 50. Not all of you need to do that and with an early retirement, I find many of you have already saved and invested very well, so I actually don't want you to just add more dollars for the sake of the fact that you could. I see too much optimization on that front. Some of you are confused. You're like Ari. You already said your nickname is optimized because you hate the word fine, which is true. I hate the word fine. That's when people are like how was your weekend? It's like it was fine. It's like no, no, no, I don't do fine. I do optimize. So they make fun of me here at the company.

Speaker 1:

But the point here when it comes to your retirement, I don't want you over-saving and over-investing and yeah, that feels weird, coming from a financial advisor, I get that, but I want to make sure that you're not mad at me when you're 75 with $30 million and I want to make sure we're not running out of money too early and there's a balance there. So next thing is Roth IRAs, traditional IRAs. Make sure you're not contributing to a Roth IRA if you're above the income limit, if you make too much money. I have other videos where I'm going over that, but I'm going to show it to you right now as well, so I'm pulling it up live on my screen. This is another checklist, another flow chart that if you want access to. Of course everything's in the Academy, so you can see here. I'll scroll down on my important number sheet and we're going to go down to eligibility.

Speaker 1:

If you are single and make over $161,000, you cannot do the Roth IRA. You can do a backdoor Roth, but be aware of what's called the pro rata rule. If you don't know what that means, look it up. Pro rata rule. It's very difficult to do a backdoor Roth contribution if you already have money in a traditional IRA. Now, if you are making over $240,000 and you married, filing jointly, you can see right there and then your ability to deduct a traditional IRA is based on these numbers right here. I'm highlighting them, but I will say them as well for the podcasters out there If you make over $87,000, what this means is, if you make over $87,000 and you are covered by a 401k, you cannot also get a deduction for your traditional IRA, which pretty much means you should not be contributing to it because you don't get a deduction for it and when you take the money out, you're not really being tax efficient. You should have a brokerage account instead. But that is just regarding the important numbers there.

Speaker 1:

Now, going back to what I wanted to go through here, my other list, and this is still I know I'm only on point number one right now traditional Roth IRA. If you're a small business owner, it doesn't apply to all of you, but SEP IRAs and solo 401ks. $69,000 is the maximum you can put in there and then just know IRA contributions. Those can be made up till you file your tax return. So that one, there's not a huge rush, but 401ks there are. Number two is Roth conversions. Roth conversions are done by year end, so you don't have until April 15th when you file your taxes. It's a year end decision. Now don't just go do a Roth conversion because you have a huge pre-tax balance and you're 401k. But if you're wondering, hey, should I optimize? And you've got Roth conversions that you think you should do, this year and next year are probably good years to do it before tax brackets change in 2026. So something to consider.

Speaker 1:

Number two, three, excuse me tax loss harvesting. This is when you sell holdings at a loss on purpose, where you're essentially going to take losses. You can do that up to $3,000 a year. That will reduce your tax liability. Yes, that is a year end decision harvesting. I've heard of that. I'm going to do it when they should be doing what's called tax gain harvesting. That's often more applicable if you are in retirement, your income is low and you have a brokerage account with big gains. So if you're like those are all me, I'm retired, I bought Apple stock, it's in my brokerage account, it's done really well. I want to pay 0% in taxes. That's how this works. Those are the two that you want to consider.

Speaker 1:

Number four charitable giving. Many of you guys know my donor advised fund examples that I give. But think about it like this let's assume you give $5,000 a year to a charity and you take the standard deduction every single year. You're being a very nice person and there's nothing wrong with being nice. But if you wanted to give 5,000000 a year for, let's just say, 10 years to the Red Cross, great, they got $50,000. You're a nice guy, nice gal. Standard deduction you don't get any tax benefit, you're just helping them out. Now, the way you're giving them money is probably through cash that you're living on, so after-tax dollars. But you can be more efficient. What you can do is say I'm going to take cash or a stock that I have. That's done. Well, that's gone up in value and I'm going to give it to the Taublieb, which is my last name giving foundation. Why would I do that? I get a big tax deduction this year. Ooh, that's kind of cool. What if I got like a $50,000 tax deduction and I did a Roth conversion?

Speaker 1:

Let's assume a lot of you out there are making a lot of money. You're the Henry's Okay, I don't know if you guys are familiar with the Henry's terms, but if you're a high earner, what I want you to consider is Ooh, we're in a high tax bracket. What do we do to minimize our tax bill? Well, we've already done the 401k, we've already done the HSA. What else can we do?

Speaker 1:

Well, if you're someone that is charitably inclined, and sometimes even if you're not charitably inclined and you like to give through time or another means, it can still make sense financially to do some charitable planning. To the point where I'll ask a couple hey, do you want to do charitable giving? And they're like to be honest, yes, but we're just going to donate our time. We're not going to give money. I said that's okay If I told you it would make you more money to do this versus not doing this. Would that be of interest? They're like well, obviously. So I will explain to them.

Speaker 1:

Hey, here's the impact, here's when it does make sense, here's when it doesn't make sense. That's what a donor advised fund allows is you're essentially bunching all of your charitable contributions in a single year and then you get to give out of that foundation, so the foundation still gets 5,000 bucks a year. Red Cross is like we don't care either way. All we did was say I'm going to take $50,000 or 10 years worth of giving at 5K a year, give it to my foundation, I get a big tax deduction. I give 5,000 bucks a year out of that, so I get a big tax deduction. Why is that helpful? Well, if we're going to do a Roth conversion or if you're in a high tax bracket, this is going to save you a ton in taxes. That's number four. Number five and I feel like I'm already out of order here, so you guys can correct me if so but um, education funding. So if you're saving for education, consider adding to a 529.

Speaker 1:

Also, know the annual gift exclusion amount is $18,000 per donor, per donee. What the heck does that mean? All right, so my fiance is Alice and my name is Ari. Let's assume I want to give to anyone outside my door right now. I was trying to think of a better story, but I don't have one for you, so I want to give it to someone outside my door. Well, I could go give them $18,000 and I don't have to file anything. I don't have to file a gift return or a tax return, I don't have to go change my last name. I don't have to do any paperwork. It's awesome. Let's assume Alice wants to give $18,000 to that person also. Well, she can do that too.

Speaker 1:

So this guy is like what am I the luckiest guy ever? I just got $36,000. It's so cool. But let's assume I wanted to give him $20,000, right, I can only give him $18,000 because once again, that's the annual gift exclusion. The other $2,000, am I taxed on that right now? No, I just have to tell the government. Hey, government, I just gave $2,000 above my annual exclusion, so when I eventually die, take that $2,000 off my bar tab.

Speaker 1:

And some of you are like why would they do this? Let's assume I was worth $20 million. You know what would happen. A lot of people would want me dead. But let's just assume I was worth $20 million, which I am not, but let's assume. Well, if this guy outside is like hey, ari, you just gave me $18,000. I heard you have $20 million, can you give me $10 million right now? I was like, of course you seem nice, here's $10 million. You know, what's going to happen is one day I'm going to pass away. Maybe I'm worth $50 million. And what if that guy outside is my beneficiary? He's like I just hit the lotto. Ari gave me $10 million. I just passed. Ari passed away $50 million, I just got $60 million. This guy is the greatest man ever.

Speaker 1:

But the government is going to be like hey, ari, you cheated. And then I'm going to be like I didn't cheat, what do you mean? And they're like you can't give someone $10 million and then also pass away and assume that they're not going to pay any taxes. Like that's cheating. The government will be like Ari, you can only do $18,000 a year. Anything beyond that, well, that comes back at the end it gets added back on. So basically, the government's like look, you have a bar tab. You can, for example, give $18,000 a year. You want to give another $100K beyond that? Great. But if the annual gifting exclusion is $5 million, which it's not. But let's just, for example's sake, what they're going to say is they're going to go. Well, ari, you gave $100,000 beyond the $18,000 limit per year. So not $5 million, $4,900,000. That's how much essentially is going to be taxed, because that $100,000, we have to account for that. So you can't just kind of slide by, try not to pay taxes on that and give money to your family as a cheat. So the point here is this annual gift exclusion. This is something per donor, per donee. So me and Alice fiancé let's assume we have a child, we can both both of us we can give 18,000 bucks. We can spoil this baby, give it $36,000 a year. That is the most we can do. Okay, some States after tax, oh, some States, yes, they offer tax deductions for the current year If you contribute not every state, but some of them do. So check yours or get the flow charts and you can see it all.

Speaker 1:

Hsa health savings account. That's number six. This is a magical account that many of you guys do not utilize, and I know that because when I talk to you, whether it's on a live show or I'm doing an optimization call or it's a client they're like yeah, health stuff doesn't really come up for me, so I don't really think I need to do this. I go it's the best investment account there is. You get to save taxes. Today, you get a deduction, it grows, you don't pay any taxes and when you take it out, you don't pay any taxes.

Speaker 1:

So my client actually my child of a client said it really well they go is this like a combo account? I'm like tell me more. They're like well, it's like a traditional IRA because you get a deduction for it, but it's like a Roth IRA because you take it out and you don't pay taxes. I go exactly so, except you can only use it for health care expenses. So the thing is this health savings account, if you're making a lot of money, it's a very good account If you're over age, so $4,150 if you're single is the limit, $8,300 for family. You can do $1,000 more if you're over age 55. And remember, these will, dollar for dollar, reduce your income. So definitely want to do this. Fsa I like to skip over this, but some clients use it. It's got a flexible spending account. Hsa is better. So I tell clients mainly ignore this.

Speaker 1:

And then last one that I want to go over here, which is number eight, is can we be really intentional with the way we take deduction? So if you're in a really high income year right now and you're a business owner, or you just have a ton of income and you're trying to save on taxes, this might be the year. If you're like, hey, should I get solar? Or I'm going to, I want to pair up. Like, for example, I'm going to get a surgery, I'm not going to because I don't need to, but if you needed to, you might be like, hey, maybe I get it before the end of the year and I end up itemizing. And if I itemize, it's going to save me more. Maybe put more money towards your mortgage and pay off a little bit more interest. Now, there's limits to all of these things, but you want to make sure we're being strategic with tax planning and pairing contributions in a timely fashion.

Speaker 1:

So biggest thing here, obviously, is make sure with retirement planning, you are optimizing. But here's the mistake I see people make, and this is what I'll leave you with the mistake I see people do or not do. The mistake I see people make is they get so into this like, yes, I'm going to save on taxes with this strategy. I'm doing the 401k, I'm doing the HSA, I'm doing charitable giving, I'm adding to a 529. I'm like, hey, is there any money left over for you? Because, yeah, you just optimize all the taxes but like, now, all of a sudden, didn't get you closer to an early retirement. So when people are like, why am I making so much money but I don't feel wealthy, I'm like, well, you're either over saving for retirement, you're over spending, or you're not deploying your money. Well, in reality, you should be paying yourself so that you can retire early if you want to. And if you're like me, who has no desire to ever retire, but you're like, hey, I just want to financially feel, if anything ever changes, I don't have to keep working. Well, that's the power of good planning is, you don't have to as long as you're set up well. So these are the strategies.

Speaker 1:

If you want access to all the checklists and flow charts, like I mentioned three times already, go to the Academy. You can see it all there. If you want the software, if you want to work with our team one-on-one, you can go ahead and do that. You can see in the description where to apply. And other than that, I'll see you guys next time. Thank and other than that, I'll see you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.