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

4 Tax Strategies To Consider This Year

• Ari Taublieb, CFP®, MBA • Episode 247

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Tax strategy is the most overlooked aspect of financial planning, yet it could save you thousands over your lifetime by minimizing your total tax burden rather than just focusing on this year's bill.

• Roth conversions let you pay taxes at potentially lower rates now to avoid higher taxes later in life
• Asset location matters – keep growth investments in Roth accounts and more conservative assets in brokerage accounts
• Health insurance premium planning can drastically reduce your healthcare costs through ACA subsidies
• Capital gains harvesting allows married couples to realize up to $96,700 in gains tax-free each year
• The standard deduction adds another $30,000 of tax-free money, meaning you could potentially generate $126,700 with zero tax liability

If this was helpful, please reach out at ari@rootfinancialpartners.com. If you'd like a custom strategy, you can apply to work with Root Financial Partners. For those 5-10 years from retirement, check out the Early Retirement Academy for software, courses and tools to help you prepare.


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

“Early Retirement – Financial Freedom” is a podcast produced by Root Financial Partners, an SEC-registered investment adviser. The content provided is for informational and educational purposes only. It should not be interpreted as investment, legal, or tax advice. I may reference planning situations based on real client experiences, but they’ve been simplified for clarity. Always consult your own financial advisor before making decisions.

Listening to this podcast does not create or imply an advisory relationship with Root Financial. Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results. Testimonials and endorsements do not reflect all client experiences and are not compensated. Learn more at our website or by reviewing our Form ADV at https://adviserinfo.sec.gov.

Speaker 1:

Tax strategy is the most overlooked aspect of financial planning, in my opinion. Now, this is something that I'm really excited to talk about, because one of my early experiences in the financial services was all about tax strategy, specifically municipal bonds. For those of you who do not know my full story, I started at a company where I people talk about this when people retire early and they have the ability to massage their income, because generally, people that retire early have a variety of accounts. It's not just a 401k although that's the case sometimes but traditionally there's a brokerage account, there's a 401k, there's cash, maybe there's inheritance or real estate, and you want to understand how do we move all these pieces to optimize our tax perspective Now, transparently and this might sound bad, but it's just the truth. Your CPA might be the nicest person in the world, but their job is to try to do as good as they possibly can to save you in taxes this year, so you pay them again next year, and there's nothing wrong with that. I pay a CPA to do that today for myself, but their job is generally once again looking for that year so that you pay them again next year. They are not always and I say that with a disclaimer, because some CPAs are awesome who do this, but they're not always looking at. How do we minimize your lifetime tax liability liability, and that is what I'm consistently thinking about for my clients. I don't want to save someone $100 in a given year if I could save them $500 over three years. Simple example, but I'm going to be walking you through today the main tax strategies that I would consider at least looking at. If you're interested in retiring early or if you're going, I'm already retired what should I be doing to minimize my tax bill over my lifetime? So, if you don't already know, my name is Ari Talbleeb.

Speaker 1:

I'm a certified financial planner and host of this podcast, the Early Retirement Show. I love getting to do this and I rely on your feedback. So, if you can't tell, I get really excited recording these episodes. Some of you have asked if I'm on drugs. No, I'm not on drugs. I don't even take coffee. That's how weird I am. But what I want you to understand is I truly rely on your feedback and an email that came in recently had asked me to try to keep some of these topics a little more concise, because sometimes I'll do my stories and it becomes a 20, 30 minute episode and I'll be honest with you, sometimes I get lost having fun in it. I try to, of course, stay on topic as much as I can, but I love this stuff, so today I'm going to try to keep it a shorter episode If you go. Hey, this was really more helpful for me. You didn't scatter my brain, I felt it was more on topic. Great, I want to know that. If you went, I kind of missed the stories I actually like. When they're 20, 30 minutes, I find I get a Also. I want to know that. So I'm going to go through each of these. It's going to be a ton of fun. Let's hop in.

Speaker 1:

So number one when it comes to tax strategy is Roth conversions. The reason I bring this up first is it doesn't apply to all of you, so why would I bring it up first? Well, I don't want you to worry about it if it doesn't apply to you. Roth conversions are awesome, and I use the example of cauliflower when I talk about Roth conversions. What you're doing is you're going. I'm happy to pay a little bit in taxes today, I'm happy to eat a little cauliflower. So in the future, I don't have to eat a ton of cauliflower when I'm going to want steak and I'm going to want pasta, I'm going to want all the good stuff. So my personal fan fan favorite I don't know why I said fan favorite, but my personal favorite is I'm a pink sauce guy. So if you guys have a different preference there, you can just tune out right now. No, I'm just kidding.

Speaker 1:

But from a Roth conversion perspective, in all reality this is going to apply to you. If you have one big big thing coming. These are called RMDs required minimum distributions. If you're going to be forced to take out more money than you need, something like a Roth conversion might be really applicable. Because what you're doing is you're saying I'm happy to move money from this 401k that I've been putting money into for the last 30 years to make these dollars Roth and tax-free.

Speaker 1:

So, for example, let's assume I want to retire today and I'm 50 years old. Well, if I have 2 million bucks in my 401k, if that keeps growing when I'm 75 and I have to take money out, I might be forced to take out something like $400,000. If it keeps growing, well, I'm probably going to spend less when I'm 75 versus when I'm 50. I'm probably going to have social security. Other things may have grown, so I might not need 400,000. It's not a bad thing.

Speaker 1:

But what happens is, if I do nothing I'm talking about all of that money, that 400,000, that gets taxed at your highest marginal bracket. So I might be a big baller in retirement. I might be still living in California. I don't want to pay 40, 50% taxes on that money. I worked really hard to get that. So what people do is they go on 50 right now, maybe because of my current bracket, while I'm retiring early and I'm in a low bracket. Maybe I happily go pay 22% in taxes Once again, just federal, and maybe another 8% in state. I'm happy to pay 30% taxes today, to not pay 40 or 50% in the future, and as this money grows, I pay no more taxes on it ever again.

Speaker 1:

And if something happens to me, my spouse inherits it. They don't have to worry about taxes. My kids inherit it they don't have to worry. So it's, yes, something that's for you, but it's generally a tax arbitrage play, or it's for your family or children. So some of you don't need to worry about this. You might have a million bucks in your 401k and 2 million bucks in a brokerage account. Well, your 401k you're going to be living off of that at some point.

Speaker 1:

You might not need to convert money and I don't need you to unnecessarily do something because it feels like some fancy tax technique that you heard on some podcast. So don't just do it for the sake of doing it. I have a lot of videos and examples of when to do it. But this is the first thing you should consider, because when, right now, markets are being volatile, if markets are down, it can be an advantageous time to consider a conversion. So that's number one. Number two and I'm already about seven minutes in, so I'm trying to keep this concise, but you can see I'm not very good at that Asset location. This is a really easy one and you can all probably do this in three minutes if you take this advice. So asset location is basically saying where should I own my best assets? What the heck does that mean? Okay, so ready.

Speaker 1:

Let's assume you have a Roth IRA, which most of you do. Do we want bonds or cash in your Roth IRA? No, no, no. That's your best account. You're not going to want to touch that for a long time. So you should make sure that Roth account assuming, once again, it is in your risk tolerance should be growing like crazy. So personally, I have 100% equities in my Roth and I probably always will. That's the best account I've got for long-term growth.

Speaker 1:

But let's think about your brokerage account, or what I call your superhero. This is an important account. If I retire at 50, that's the first account I'm going to go to to live off of this money. So I don't want that invested like crazy because if it's invested for maximum growth, it's going to have more volatility, which means there's a risk that Markets are down and I have to sell at a loss, which you do not want to do. So generally, you want your brokerage account to have the absolute lowest amount compared to your other accounts in equities. However, if you determine you're more than five years out from retirement and you don't need income right now, your brokerage account could still have 100% equities.

Speaker 1:

The tricky thing becomes well, what if you have one stock with a really big gain? Do you sell it just to have a safer asset, like you heard on this podcast? No, that's cookie cutter advice, so I can't give one example that applies to everyone. But generally you want your brokerage or your superhero accounts to be safer in less volatile assets compared to your IRA. And then you want your IRA even safer compared to your Roth, because do you remember the last point I just talked about RMDs required minimum distributions. Well, those only apply to your pre-tax accounts like an IRA or a 401k. So those accounts, we don't want them growing for maximum capacity because we're going to be forced to take money out of that in the future whether we want to or not. So that's.

Speaker 1:

Number two is asset location. You can quickly use the software that I use for my clients that you can all get in the description of this episode, or you can just look at your statement and see do I have any things that are not growing for me like they should in my Roth IRA? And if I'm about to retire, is my brokerage account invested for too much growth? Should I put some money in a little bit of a safer asset? That's something I would consider.

Speaker 1:

Number three, a big one health insurance premiums. I have some clients that are spending legitimately a few hundred bucks a month on healthcare and others that spend a thousand plus, and the difference is how you create income in retirement Now, if you are taking money from a 401k to live and you're 60 years old, so Medicare is not there yet you need health care. This causes anxiety. I'm not going to retire, no way. I don't have health care yet. You are cheating yourself. It's something you need to plan for. It can be a significant cost, but you can be really strategic to try to reduce how much you're paying through what's called ACA subsidy planning. This is basically how do you massage your income to stay under a certain threshold so that you receive subsidies from the government. So I have clients that have legitimately millions of dollars that are paying a very small amount in healthcare because they're pulling from their brokerage account, which allows them to pay capital gains taxes on it, which is way less than ordinary income. So they are happy to pull from a brokerage account instead of a 401k or an IRA, because it keeps their taxable income much lower, which is essentially telling the IRS hey, here's my income for the year and they go. Well, that's pretty low, here's a subsidy. Now you don't want to over optimize here, where now you're in Medicaid territory, showing no income, which I've seen as well. So you want to be careful here. Now, if your Act, it temporarily. Temporarily it removed the 400 percent federal poverty level cap, and that's through 2025, meaning higher income households may still qualify if their insurance costs exceed eight and a half percent of household income. So I have examples where I go through deeper case studies on this. So if you want to check those out, I have a lot of YouTube videos where I go through deeper case studies on this. So if you want to check those out, I have a lot of YouTube videos where I go through those. So just search Ari Talbleaf Healthcare I'll come up.

Speaker 1:

The last point I want to bring up is a big one. It's called capital gains harvesting, which is another name for tax gain harvesting, which is another name for how do I pay 0% in taxes in retirement? This, in my opinion, is the coolest thing about tax strategy, which allows you to truly pay zero percent in taxes. So if you have income and I'm going to pull this up right now on my screen so I can read the exact numbers with you but the reason I think this is so valuable is you truly can retire early and you can pay 0% in taxes on some really healthy gains. What does that mean? Well, assuming you've held a stock for over a year, what you can do is, let's assume you're married, finally jointly. You have what's called a long-term capital gains tax rate. For anyone who's married finally jointly, this is below $96,700. You can pay 0% taxes on those gains.

Speaker 1:

What the heck does that mean? So let's say we bought Apple stock for a dollar Actually, let's use a better example $1,000. And now it's worth $100,000. That's $99,000 in gains. I'm a CFP. You guys saw that math right there. Pretty cool, right. So now you are wondering what do I do? Well, in your head you're probably chalking it up to go I'm going to have to pay some taxes on some of these gains, because that's just how this works.

Speaker 1:

The reality is the first $96,700 in gains gets taxed at 0%, which means if you have no other income which I'm just using hyperbole for this example, because you're going to have dividends or interest or part-time work, but pretend your income is zero, I don't let you keep working and you have a brokerage account where you bought Apple stock for $1,000 and now it 0% taxes on, which means the remainder the other $2,300, that you are paying at 15%, because now you're in the 15% bracket. So any income from 96,701 all the way to 600,050, you pay 15% taxes on. So why is this important? Well, if you retire early and you're 50 or 55 and you've got a brokerage account, you could keep working and bring in $150,000 a year through your traditional job, or you could try to sell stock and pay no taxes on the first $96,000. Plus, you have your standard deduction, which, as of now, is about exactly $30,000, which means, legitimately, you could try to generate $126,700 tax-free, pay no taxes. And I would ask my clients the following Would you rather go work a stressful job where you make $250,000 after taxes and 401k and insurance, you're netting $170,000, or would you rather have $126,000 where there's no work at all?

Speaker 1:

You can do whatever you want. You can play golf, you can go travel and you can now take these proceeds and do whatever you want. You could go live off of them. You could go reinvest them and just reset your cost basis. So basically, you could, if you wanted to go sell Apple stock, pay no taxes, go buy Apple stock and all you did was reset your basis so as it grows, you're not going to have to pay as much in taxes. So this is an often overlooked strategy because people know tax loss harvesting. They don't often know tax gain harvesting.

Speaker 1:

So I hope that you learned something with this episode. I try to keep it under 15 minutes. I'm right about there. There's going to be some important disclosures and things that are added, of course, in post production to these episodes, but that's it. I hope you guys enjoyed this one.

Speaker 1:

If this was helpful. I like hearing from you, so please shoot me a note, ari, at rootfinancialpartnerscom If you're going. I want a strategy. I need a custom strategy. I don't wanna do this tax stuff, but it's interesting. I think it's gonna apply to my situation. You can reach out to apply to work with us.

Speaker 1:

And then, finally, we have the Early Retirement Academy, which is, if you're just looking for software and different courses and tools and strategies. I put that together for people that are a few years out from retirement, let's call it 10 years. I want to retire early one day. I don't have $2 million, so I can't work with Root quite yet, but I still am interested in this. That's where you can go to enroll in that, learn more about what you need to do to be in a good spot to work with Root in the future and begin retiring early, spending time on what the heck you really want to do, which, for some of you is continuing to work Awesome. Others of you are hey, I'd love to walk away. So hopefully this episode resonated. I'll see you guys next time.

Speaker 1:

Thank you all, as always, for listening to the Early Retirement Podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years and that is because I love getting to do this. Now, please be smart about this. Before you actually execute any strategy that you see me talk about or hear me talk about, should I say Please talk to your financial advisor, your tax preparer, your estate attorney. Please be smart about this.

Speaker 1:

This, none of this, should be construed as financial advice. This is for fun, educational, informational purposes only. Once again, just quick disclaimer here. Guys, please be smart about this. Appreciate you listening, as always, and you can, of course, submit a question on my website, earlyretirementpodcastcom, if you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person and if I find it will be helpful for a lot of people, I will absolutely make an episode on it, at the very least give you some insight. That's it. Thanks, guys.