How Taxes Work Differently in Retirement (What to Consider Before Filing)

Tax season is here, and if you're retired or approaching retirement, your tax situation looks very different than it did during your working years. 

In this episode, Stewart Smith (LUTCF®, RICP®) and Mitch Davies (CFP®) break down the critical tax considerations for the distribution phase of retirement.

Whether you're planning your first year of retirement or you've been retired for years, understanding how taxes work in this phase can help you make more informed decisions about your retirement income strategy.

In This Episode:

• The three tax buckets and why they matter in retirement
• How Required Minimum Distributions (RMDs) affect your tax bracket
• IRMAA: Understanding income-based Medicare Part B premiums
• The standard deduction changes for seniors (and the phaseout thresholds)
• The "tax torpedo" - why one withdrawal can trigger unexpected tax consequences
• The "widow penalty multiplier" and single filer considerations
• Qualified Charitable Distributions (QCDs) for those age 70½+
• Donor-advised funds as a tax-efficient legacy strategy
• Why lifetime tax mapping matters more than year-to-year planning

Key Takeaway: Tax planning in retirement requires looking at the entire retirement timeline, not just the current year. Understanding thresholds, phaseouts, and the interplay between different income sources can help you avoid costly mistakes.

This episode is educational in nature and not intended as tax, legal, or investment advice. Please consult with qualified tax and financial professionals regarding your specific situation.

Connect with ClearPath Retirement: Website: ClearPathRetirement.com Location: Greenville, South Carolina Listen: Saturdays at 10 AM on Upstate Red AM 1330

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ClearPath Retirement Planning helps retirees and pre-retirees in the Upstate SC and Columbia areas create tax-efficient retirement income strategies. 

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Important Disclosure:

Investment advisory services offered through Alphastar Capital Management, LLC, a SEC-registered investment adviser. SEC registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Fixed insurance products are offered through Clearpath Retirement Planning, LLC and Alphastar Capital Management is not involved in the offer, recommendation, sale or management of commission-based fixed Insurance products. Alphastar Capital Management and Clearpath Retirement Plannin...

Transcript

How Taxes Work Differently in Retirement (What to Consider Before Filing)

[00:00:00] Welcome to ClearPath Retirement Radio. From retirement income and tax planning to protecting the savings you've worked a lifetime to build. This is real world financial talk designed for real people, people who want clear answers, not sales pitches, so you can make informed decisions and plan for retirement with confidence.

Now here are your hosts, 

Stewart Smith: Stewart Smith and Mitch Davies. Good morning. Welcome to Clear Path Retirement Radio. I am Stewart Smith, and as always, I'm here with my co-host Mitch Davies. Good morning. Hey Mitch. What's going on buddy? Not much, man. Doing great. Excited to excited to get started today. We got a full one.

Stewart Smith: Yeah, we sure do. And we're gonna be talking today about, you know, one of my favorite subjects, which is how tax planning changes in retirement. Right. And some of the things that you need to be conscious of is as you move in, you know, the shift from that accumulation [00:01:00] phase, as we like to call it, to more of an asset preservation and tax control phase, right?

Stewart Smith: Yeah. Yeah. Yeah, so we have helped quite a few people over two and a half decades make this transition. So we're gonna talk about some of the things you need to be on the lookout for and some of the concepts and strategies that we use to help make sure that this is as efficient as possible for you and, you know.

Stewart Smith: It's, we will start by just kind of talking about the, the three different, what we call tax buckets, which would be money that is in a tax deferred status. Money that is tax free. And money that is a taxable status. Okay. And let's get real clear on that. So tax deferred would be those pre-tax accounts, the IRAs, the 401Ks, those type of accounts where you are [00:02:00] making pre-tax contributions into those accounts and then you're deferring taxes all the way until the point where you actually start taking money out.

Stewart Smith: And then you pay tax, regular income tax on that based on whatever tax bracket you're in at the time. That's right. And for a lot of people we find that, you know, you're working your whole career, working career, and we find that that's a significant asset for a lot of people in this country is that, you know, a 401k, we're converting it over to IRA, and then we need to figure out what to do with that.

Stewart Smith: What's the optimum way to handle that? So that's certainly the first bucket. And then the second one would be what we call that tax free bucket. The magical tax-Free bucket. Oh Yeah. We love that bucket. That's, that's what we call Roth money typically, right? Money that we just, you know, once we get it into that type of account, we never have to pay taxes on it again.

Stewart Smith: And that is a beautiful thing. And this bucket, you know, contrary to the first one is the hardest one to get right. It's the hardest one to get assets into. You know, you've got that. Roth IRA or Roth 401k that you can access, you know, before retirement. [00:03:00] But there's limits to it. You know, in the Roth, IRA, you can only, only $7,000 you can contribute into that and you know, 8,000 if you're above 50.

Stewart Smith: But they really restrict that bucket. So we love when we see that bucket. But that's, that's the best one. That is, that is. And there's also. Income limits on when you can actually make contributions to that bucket. So it is more difficult, but it is one of the few very beautiful tax benefit type accounts that we have available to us.

Stewart Smith: So if you're not taking advantage of that, then we probably need to talk. That's right. That's right. And then finally we've got, you know, that the, the money that's that we've already paid taxes on the principle. We've already paid taxes on the money that we invested into the account and, but we still have to pay taxes on the growth as we grow those accounts.

Stewart Smith: That's right. And those are taxable in each year, right, Mitch? That's right. And there's a lot of you, I'm glad you brought that up. I'm excited to talk about this today. There's a lot of. 

Mitch Davies: [00:04:00] Misconceptions mistakes that are really easy to make with this type of account. You know, when you've got stocks that are growing and you're not selling them necessarily, but you're still having dividends paid out and interest, and a lot of people get confused on, wait, I don't, I didn't sell anything, but I'm still getting this 1099 DIV.

Mitch Davies: It's tax time right now. I'm sure you guys are dealing with this, so I'm glad we're talking about this today. Yeah, and I mean the difference there, and I was trying to explain this to a client yesterday was, you know, the difference between what we would call realized gains and unrealized gains. Okay. And if you're just, you have

Mitch Davies: stocks inside of one of these taxable brokerage accounts, and you're just holding that stock and you're not selling and realizing a gain, then you're not paying taxes on it, right? That gets real complicated. And with those after tax investment accounts, we like to call, individual accounts, brokerage accounts.

Mitch Davies: You have to use a specific strategy on those accounts, which we would call tax loss harvesting [00:05:00] strategies. Right, exactly, exactly. And help us understand a little bit of how that works, Mitch. So, you know, the most important thing with these, with these types of accounts is. Exactly like Stewart said, there's realized versus unrealized gains and the strategy called tax loss

Mitch Davies: harvesting is super underutilized today. Essentially what we're doing is every year you can net the difference between gains and losses. So if you have, what often happens is you have a lot of positions that you really like that have done well in an account, and you'll have two or three that you don't like that have done extremely poorly.

Mitch Davies: What we can do is start to sell off some of these positions that have done extremely well. Say we feel like we're not capped, but say we feel like we've caught the majority of the move we wanna catch, we can go ahead and start to shift out of those into some other positions and simultaneously sell the losers that we we're done with.

Mitch Davies: And if we do it in the same tax year, we can end up netting a zero taxable event, which can be super advantageous for managing tax liability in these accounts. Yeah. And that is a really good [00:06:00] strategy to, to use and we have a team that, that absolutely does that for all of our clients and, and making sure that.

Mitch Davies: If it is possible inside these types of accounts that you are netting zero taxes and zero capital gains at the end of the year. And that can be extremely helpful in retirement as you look at all these different variables that are moving around and all the different thresholds and different things that, that can happen to you tax wise.

Mitch Davies: And you know, I, I would say that. You know, the, the main driver of taxes in retirement are, you know, first of all are gonna be, require minimum distributions. Yep. And for those of you who don't know, require minimum distributions are, you know, in these pre-tax accounts, these IRAs and 401Ks, 403Bs, the things that you actually invest pre-tax money in and defer taxes on at a certain [00:07:00] age.

Mitch Davies: For most people it's gonna be 72 or 73. But at a certain age the government basically says, Hey, you've enjoyed tax deferral in this account long enough. Now you're going to have to start taking a small percentage of this account every year and going ahead and paying taxes on it because they're tired of waiting on their cut.

Mitch Davies: Right. They are. They're, yeah. So, so they're gonna require you to take these distributions and pay taxes on them. And what a lot of people, you know, what we've seen over time is, a lot of people when they do tax planning, they're doing tax planning in very short windows. That's right. And what, what, what we like to look at it in very long time horizons.

Mitch Davies: We like to look at the tax picture for, you know, 15, 20, 25 years to where we're, we're calculating like. Okay. So, you [00:08:00] know, some of these, these things that, that people deal with and we're gonna get it deeper into it, like IRMAA which is, you know, your part B premium for Medicare is income based. And so if you make too much money they're gonna charge you a higher premium on your Part B premium for Medicare and your Part D for that matter.

Mitch Davies: But all of these thresholds that, that we look at. You know, phasing out of the, the extra tax deduction that we're gonna talk about with the one big beautiful bill act because those phase out at a certain income threshold. When you looking at the big picture, there's so many moving parts here. What you have to do is look out, like we say, 20, 25 years at least, to really get your arms around the entire tax picture.

Mitch Davies: And understand, you know, tax efficiency and smoothing out the, that tax picture over your entire retirement. Whereas we think most people where they're shortsighted is they're planning for the next [00:09:00] 2, 3, 4 years and what they're not understanding is that, you know, maybe they don't want to do Roth conversions because it's gonna cause them to get, to have to pay a higher part B premium in the short term.

Mitch Davies: But what they're not maybe thinking about Mitch, is if they don't do the Roth conversions, then eventually their required minimum distributions they're gonna have to take, are gonna push their income too over the threshold to have to pay those. Additional part B premiums anyway, and for a longer period of time.

Mitch Davies: So if you're not looking at this long trajectory, the big picture, and that's what we do at the firm that's right, is really help people get their arms around this bigger picture here in the tax picture. Then you could be missing the boat and and be missing out on some major tax efficiency throughout your entire retirement.

Mitch Davies: Absolutely Stewart, and that's the, that's the biggest shift. That's the most important shift going from your working career to [00:10:00] retirement is working. Career tax picture is relatively simple, Stewart. I mean you most, and again, for most people you have a W2, you go in, you maybe have somewhere prepare your taxes, maybe don't.

Mitch Davies: You take your standard deduction and you're good. You don't have to think on a macro scale. There's not as much things going on. You don't have required minimum distributions. You're not even able to access these IRAs yet, so there's much less to. Deal with, there's much less to plan for at that time. But when you shift to retirement, all these different avenues seem to open up and people think, oh, taxes are gonna be easy in retirement.

Mitch Davies: We're just living off of money. It's far more complicated and there's much more mistakes that could be made if you're not planning in that macro sense. So we like to think of the tax picture and like a, a roadmap, and we'll get into that here in the next segment where we're looking at the entire.

Mitch Davies: Retirement lifespan in different cycles and planning for them in different ways. So we're, we're excited to talk about that. Yeah. Because, you know, while most people are working and especially if they're, they're working in like a W2 environment [00:11:00] where they're working for an employer, you know, the tax.

Mitch Davies: The taxes are pretty much taken outta their checks. It's handled for them. It's not a big concern. They don't have to think about it very much, but once you pull that trigger and you retire, and especially if most of your money is in these pre-tax accounts, buddy, you have to, it's a different ball game.

Mitch Davies: Yep. Now you're having to spend pre-tax money to live, and that tax picture becomes incredibly important. To your success or failure in retirement and meeting your income goals. So we're gonna wrap up this first segment here. When we come back, we're gonna dive much deeper into some of the tax strategies and concepts we use to help our clients.

Mitch Davies: Hey, are you approaching the distribution phase of life where it's time to turn the assets? You've worked so hard to accumulate into a reliable retirement income, and are you unsure how to do that in the most tax efficient way possible? At ClearPath Retirement Planning, we help retirees [00:12:00] and pre-retirees design income strategies that aim to reduce taxes, manage risk, and create confidence in retirement.

Mitch Davies: Visit ClearPath retirement.com to schedule a complimentary consultation. Thanks for tuning in to ClearPath Retirement Radio with Stewart Smith and Mitch Davies. Let's get back to the show. Hey, welcome back to ClearPath Retirement Radio. I am Stewart Smith here with Mitch Davies, and today we are talking in depth about how the, your.

Mitch Davies: Tax picture and tax planning strategies must change dramatically in retirement and how important it is to be incredibly tax efficient in managing through taxes in retirement. Even more important than I feel, than those double digit returns that we're looking for when we're in that growth mindset.

Mitch Davies: Right, Mitch? Absolutely, sir. Absolutely. So one of the things I want to, you know, mention again, we, we talked about in the last segment [00:13:00] was looking at more of this big picture. The biggest mistake that we see for folks when they're planning for taxes in retirement is looking at short windows, short segments of, of the tax picture and not.

Mitch Davies: Forecasting out long enough and understanding more of what we would refer to as a lifetime tax map, right? So we build this lifetime tax map for our clients, and what it's gonna do is we can, you know, look at. At certain strategies, if you have a ton of money and pre-tax accounts like IRAs and 401Ks, you know, maybe a Roth conversion strategy, converting some of that pre-tax money every year over into a Roth account where that money can grow tax free and you never pay taxes on it again, that.

Mitch Davies: Typically makes sense for most folks that we work with. And [00:14:00] so when we're modeling out those strategies, the, you know, what you have to do is make sure you're not just modeling that for five years. We have to model that out for 25, 30 years of retirement and to really get our arms around what are the benefits here and how advantageous is this for our clients?

Mitch Davies: And when we do that, you have to take into consideration things like IRMAA. Let me explain IRMAA in detail. IRMAA is where your Part B premium for Medicare is income based. This take catches a lot of people off guard when they get to Medicare, your part B and part D premiums when you go to start Medicare.

Mitch Davies: Are income based. Now, if you've worked for at least 10 years in this country and paid into the system for 10 years, more than likely your part A is not gonna be a premium for that. [00:15:00] But there is a premium for Part B and it's income based and that. Income determines what that Part B premium will be, and there's different income thresholds that will push you into paying a higher income on your Part B Medicare premium.

Mitch Davies: So what you have to understand that is if you are going to execute a Roth conversion strategy. That is cons, any money that you convert, and there is no limit, by the way, on how much money you can convert from an IRA to a Roth IRA. Any money that you convert is considered income in that year. Okay? So the way that the, the, the Medicare folks determine what your Part B premium's gonna be is they look back two years at your tax returns

Mitch Davies: every year. So every year they look back two years. So if you're aging into Medicare at [00:16:00] age 65, they're gonna look at your tax returns from age 63. Now at age 63, if you exercised a huge Roth conversion and it was all counted as income in that year, that can push your part B premium up dramatically.

Mitch Davies: So you have to be conscious of those thresholds when you're doing this. Now, does that always mean it's not advantageous to do it, Mitch? Not at all. Not at all. And this is, you know, again, really emphasizing the point of micro versus macro tax planning. Getting out of that one year at a time, how do I save the most money this year?

Mitch Davies: Mindset. We've sat down with some people who, you know, did a big Roth conversion and weren't. You know, we were like, okay, what's the plan for the backend of retirement with that? And they're like, well, I don't know. We just heard you should do a Roth conversion. We converted $200,000 and didn't even, weren't, weren't even aware of any of the implications.

Mitch Davies: And that's fine. But it's very important to again, have that, what we like to call that tax map, where we look at the whole picture. 'cause a lot of this stuff [00:17:00] is just misunderstood. We. A lot of people don't even understand that they're paying for Medicare in the first place. I mean, we sit with people all the time and they're like, no, I mean it, it's, I already paid it.

Mitch Davies: Right? Like it comes out of that Social Security. so if you started Social Security before you started Medicare Part B, which is becoming more and more common, because if you're still working and you say you have Part A, but you're not paying for that part B yet, 'cause you still have an employer healthcare plan, you're not.

Mitch Davies: You know, you're not even, you might have started social Security before you got off your employer plan. So when you go to do that, they're just deducting that part B premium from your social security check and you don't even know. So we've literally sat with people and they're, they don't know what tier of that IRMAA they're in.

Mitch Davies: So it's, again, that's fine. You, you only know what you know, but it's very important to sit down with a team that's really mapping through all the phases of your retirement journey, and in especially in this regard. Yeah, absolutely. And a lot of people get upset when they pay IRMAA, but what we can are able to, to show them is [00:18:00] even though you might be paying IRMAA for a few years because of some big Roth conversions you did right after, you know, right before retirement or right after you retired.

Mitch Davies: Then, you know, what does that look like on the back end of retirement? Exactly. Because if your require minimum distributions, were gonna push you into an IRMAA situation later on as those RMDs they grow every year, how much money you have to take. So if they were gonna push you into a situation where you were gonna pay IRMAA anyway, but you were gonna pay it for longer without having done the conversions.

Mitch Davies: That you did then maybe even paying those IRMAA charges for a couple years still makes more sense than not doing those Roth conversions. So. You know, it, it's, it's, again, it is looking at that big picture. Now the other thing that we wanna talk about here is the you know, the tax changes that came through on [00:19:00] the one big beautiful bill act.

Mitch Davies: And a lot of people get confused about this. So Mitch, they did away with taxes on social security, right? I mean, I, I thought that's what the ads were saying. Like, it's gone. Right? They're done. Right. It kills me every time I see that ad. I can't believe that ad. So anyway, here's what really happened.

Mitch Davies: Let's, let's get clear on this. Okay. So what really happened when they passed that bill was they added for everyone over the age of 65 in this country. They added an additional $6,000 standard deduction on top of the already higher standard deduction that seniors get in this country per person.

Mitch Davies: That's right. So, you know, for a married couple. Just to kind of rough numbers here, for a married couple in this country, the standard deduction was sitting at, I think it was about 31,000. Yeah. Right there. So, and [00:20:00] then with the extra little bonus, I think it's about 3,600 that a couple would get for being over 65 for the senior bonus that they talk about.

Mitch Davies: So, you know, now you're at whatever, 34600 . Yeah. And, and, and then on top of that, if you get another. 12,000 and when you go to do your taxes this year, if you haven't already done 'em, then you're gonna be pleasantly surprised at that. You'll get another 12,000 on top of that. So, I mean, we're talking about an excess of about a 45,000 or so standard deduction.

Mitch Davies: Yeah. That's gonna help reduce the taxes that you end up paying on your social security. And for some folks, it may push them to paying none. For some, it may push them from paying taxes on 85% of their social security down to 50%. And, and so on and so forth. So, you know, it was definitely a wonderful thing.

Mitch Davies: Yep. And, and definitely helped, but also. You know, tho and, [00:21:00] and just so you understand those standard deduction increases phase out for a single person at 75,000 a year and for a married couple at 150,000 a year. So you also have to be conscious of that. So if you're going to do these Roth conversions, and again, Roth conversion strategies are

Mitch Davies: awesome. And we've helped a lot of people save money on taxes that way. Be conscious. You don't wanna phase yourself out of those extra standard deductions when you do it. That's right. And so you've gotta be conscious of certain thresholds. You need to be conscious. Just to recap here of the.

Mitch Davies: What we call the IRMAA threshold, which for a married couple, I believe is about 2 12, 212,000 a year. Yes sir. Before you get into that next that next higher premium the next higher premium threshold for your part B Medicare premium. And then also you, you, you know, you more, if you're a married couple over 65, you probably wanna stay below that 150 to get that, that extra [00:22:00] $12,000 standard deduction.

Mitch Davies: And so just be conscious of all these moving parts, right? There's a lot going on here that you need to be conscious of if you're going to employ some of these strategies. There's so much going on, and that's why it's again, more important than ever this phase of life to sit down with a team that can run through these things because it's kind of this game of.

Mitch Davies: Juggling all these different thresholds, right? You're trying to maximize on the backend, but stay below on the front end and you gotta stay under the threshold for the extra bonus deduction. But you wanna make sure you're getting money converted because guys, the government is smart at getting money.

Mitch Davies: They thought through this stuff when they keep, you know, now the RMD age for. Anybody in the next, you know, 10, 15 years out is gonna be 75. They keep bumping it back. This is on purpose. They figured out a way to get the most money outta people. Yeah. So they know if they keep bumping this back, those tax deferred accounts are gonna keep growing and then people are just gonna end up paying that higher Part B premium anyway.

Mitch Davies: Right. [00:23:00] So this is, you gotta juggle all these different. Things, all these different thresholds and it's really hard to just, we see people come in with a simple calculator. They're just like, okay, if I convert this much today, how much is the tax free gonna grow versus the tax deferred? And there's just too many moving parts for that to work anymore.

Mitch Davies: So much more to it than that. And all of you engineers out there, listen, we love you guys in your spreadsheets, but listen. We live, eat, breathe, and sleep. This stuff, we understand all the thresholds, all the moving parts, and that's where we can really help you guys to really complete and build a real true picture of what this whole lifetime tax map looks like.

Mitch Davies: And you know, if you're interested in that and you think that can be of value to you. Please go to our website, clearpathretirement.com. Click the button to get started now and let us take a look at the big picture for you and let us see if we can help you. [00:24:00] Retirement planning isn't just about growing money.

Mitch Davies: It's about using it wisely, generating income, managing taxes, planning for healthcare costs, protecting your legacy at Clear Path Retirement. Planning. We specialize in helping retirees and pre-retirees transition from accumulation to distribution with confidence and clarity. If you're approaching retirement and want to plan, not just opinions, discover the clear path difference.

Mitch Davies: Visit clearpathretirement.com

Mitch Davies: welcome to ClearPath Retirement Radio. From retirement income and tax planning to protecting the savings you've worked a lifetime to build. This is real world financial talk designed for real people, people who want clear answers, not sales pitches, so you can make informed decisions and plan for retirement with confidence.

Mitch Davies: Now, here are your hosts, Stewart Smith. And Mitch Davies and welcome back to ClearPath Retirement Radio. I'm Stewart Smith and I am here with Mitch Davies. And we are all set for [00:25:00] Mitch's Market Minute. Take it away, Mitch. Excited as always, Stewart. Excited as always. So we're gonna get started with the same structure that we've been following.

Mitch Davies: I'm gonna break down, you know, what's going on right now, where we're at today, where we're at for the year what's, what we're watching, you know, what's coming up, and then where, where's our focus for the year, right? What, what trends are we trying to follow? What. In what ways are we trying to bring value?

Mitch Davies: That sort of thing. So to start off, you know, the S&P, it's been a couple rough weeks. You know, last week was choppy. This week started off slow, you know, as we're recording here today, it's up, up a good bit. But s and p sitting right around, you know, mid 6,800 the Dow is just under 50,000. We saw it eclipse through, so we've seen all time highs this year, but it's that same trend as last year where even though we're.

Mitch Davies: Moving up and into the right it, the red days feel heavy because of all the news coverage, because of all the, is the AI bubble is, you know, whatever's going on. There's a lot of negative coverage. And [00:26:00] again, the news, the media's designed to do this to, you know, get views, induced fear, whatever it is. But these red days feel heavy.

Mitch Davies: So it's important to, in times like this, you know, zoom out and look at where these companies are at. There's some deals in these bigger tech companies that are, that are down a ton, but. Overall, we're still holding up. Okay. You know, we're still right around. We started the year, we still had a great year, you know, in 2025.

Mitch Davies: We had two amazing years prior to that, so we're still doing okay. The big focus we're looking at right now is in, you know, the economic state is the jobs, unemployment reports. We had the jobs report. Early this week, and it was great. You know, we saw 130,000 jobs. Analysts were expecting around 60, 65,000.

Mitch Davies: So that was double what the expectation was. And this is gonna be the focus for the year because all the news articles, every headline is talking about AI and is it replacing jobs. And we're all kind of, you know, panicking as we're watching these unemployment numbers come out because we saw. An unemployment report, [00:27:00] I believe it was last month in the mid four percents, which is the highest we seen in years.

Mitch Davies: Now, this most recent one was a couple percentage points down. It came in at like 4.2 analysts were expecting higher, so we're still seeing jobs being added and weekly jobless claims are still in the low 200 thousands, which historically is very stable. It's very indicative of a strong economy and. So that's, we're gonna be watching that carefully.

Mitch Davies: We're gonna watch that going forward. The other thing we're watching is when we see these strong drop reports, what happens is the Fed can kind of take a pause on rate cuts. You know, the market's expecting two to three rate cuts this year, depending on where you look. And it's almost counting on it. You could say, you know, we need these mortgage rates to come down.

Mitch Davies: We need, and, you know. Current office is pushing for that. So we wanna watch, there's kind of a balance there between strong labor market and the rate cuts. So we're, we're trying to watch that. But you know, the main thing we're watching in the market, the main last week we [00:28:00] talked about the sector rotation.

Mitch Davies: You know, coming out of some of these big tech companies and into consumer staples and that kind of thing. You know, the main focus now seems with these tech companies seems to just be that all the only positive catalyst they have are just spending money. You know, we have this, you may have heard this term, CapEx, which just means capital expenditure.

Mitch Davies: And these companies, the way they're exciting investors is just by announcing that they're spending money. And that worked all last year. You know, we saw all these big companies make partnerships with other big companies and announced that, you know, I'm sure you guys have heard these data centers, you, they're announcing these big things, which is great.

Mitch Davies: But at a certain point investors are getting tired of that. So that's where we're seeing the big names down 10, 20% on the year, like the Microsoft and Nvidia and Tesla and Amazon. And they're shifting into, again, this consumer staples, consumer defensive sector. And you could [00:29:00] say that, you know, they're worried about over.

Mitch Davies: You know, over capitalization on these companies, whatever it is. But this sector is doing well. So again, one thing I want to challenge you guys to do today is if you take a look at your portfolio for the last year, last two years, and if you feel like it's just. All these tech ETFs, which has kind of been the thing for the last few years, is just by the NASDAQs and these overall ETFs.

Mitch Davies: And you've done well. Take a look at that. And if you are, especially in retirement and you're extremely exposed to that, I challenge you to just look at that and see if maybe shifting some of that could make sense. So that's and to some of these consumer staple plays that we like so much right now.

Mitch Davies: That's right. That's right. So that's, that's where I wanted to. You know, focus on today. We'll look forward to talking next week and take it away, Stewart. Absolutely. Well, great job, Mitch. As usual. Very, very insightful. You know, I think just to expand on that a little bit, I think we're getting into this, this unprecedented, you know.[00:30:00]

Mitch Davies: Time now to where it looks like we could actually have increased productivity in a lot of these companies while unemployment is going up at the same time. Yeah, and I find that fascinating, right? We've never seen it, like we've never seen that in the history of. Industry in this country. And so I'm just real curious at how all that's gonna play out.

Mitch Davies: And we're certainly gonna be keeping our eye on it, but just imagine that where we're actually losing jobs, but, but companies are becoming more productive and through the use of, of artificial intelligence and, and all of the other wonderful things out there. So, we'll we'll keep you posted on that. But let's get back to talking taxes in retirement.

Mitch Davies: And, you know, I wanna kind of talk about one of the one of the things that we see it can be an issue when it comes to taxes in retirement, and that is something that we refer to as [00:31:00] the widow penalty multiplier. And what do I mean by that? Well. When you are a married couple in retirement and you, you know, you are enjoying the, the stand, the large standard deduction and all of those sort of things, and then something happens to, to one of you.

Mitch Davies: What happens is your filing status now changes to single your thresholds for having your in your Social security income tax dropped from 44,000 to 34 on your provisional income. You probably have the same IRA balance because the, the, the person that that survives just gets out, has all the IRA money at this point.

Mitch Davies: And you are, you, you have basically the same social security because the survivor keeps the larger of the two, right? And the smaller one goes away. But now you are in much narrower, [00:32:00] narrower, smaller tax brackets. And so your tax. Picture changes dramatically. It does. It does. And we have seen that that is something that, that we like to kind of stress test people's portfolios and their plans against is what would that look like tax wise if that were to happen for folks?

Mitch Davies: And when we do that, we can really look at, you know, a lot of people think your expenses are gonna drop dramatically. Yeah. If one of you's gone, what we've seen is that's not necessarily true. A lot of times you don't wanna move, you don't wanna sell the home that you've been in. You, you don't want to, you know, change your lifestyle dramatically.

Mitch Davies: Yeah. Maybe you save a little bit of money on food. Right, right. And I mean, but most of your expenses, you know, are gonna stay relatively the same and you're probably going to be dealing with rising healthcare costs. As you go forward and especially as, as a [00:33:00] single person as opposed to a married person.

Mitch Davies: So a lot of that is, you know, is can, can be very impactful on you tax wise if that were that scenario were to play out. So. You know, we also look at, you know, another tax issue that we see is something that we refer to as the tax torpedo. And that's just fun. It's a fun, fun, that's a fun way to call it.

Mitch Davies: Yeah. The tax torpedo. I'm gonna give you an example of how this could work. So you have a married couple. Let's just say they've, they're receiving about 40,000 a year in Social security. Between the two of 'em and they're having to take about $30,000 of IRA withdrawals to live on. So they're, they're living off of about 70,000 a year pre, you know, before taxes.

Mitch Davies: And they're inside that 85% inclusion ban. Meaning 85% of the social security [00:34:00] is taxable. Or not taxable, excuse me. If they withdraw an additional 10,000 from their IRA, and we see this all the time. All the time because you might be living off of 70,000 very comfortably, but what happens when you want to take that trip?

Mitch Davies: Gotta get it from somewhere. What happens when it's time to replace the roof? Right. You know what happens when the fridge goes out, now you're having to pull pre-tax money out of that IRA and that $10,000 that you pull is considered ordinary income. What that does is drive you into a situation where now your, your social security is 85% taxable, so 8,500 of that withdrawal is, is taxable Now.

Mitch Davies: And, and at whatever tax bracket you're in. So not only is the extra 10,000 that you took taxable, but now you, you've got [00:35:00] 8,500 that's taxable for social security purposes. That's right. And what that does is. For that one withdrawal of $10,000, about 40. If you're in a 22% tax bracket, which is where you would be at that point, about 40% of that becomes you have to pay in taxes.

Mitch Davies: So you know, $4,070 of taxes just on that one withdrawal. So you're not in the 22% tax bracket on that, you're in the 40% tax bracket. So, you know, by being very smart and strategic about how you do this, if you were to take, you know, you had Roth money and you had done the conversions, and you were able to take that 10,000 from a, a tax free account like a Roth account.

Mitch Davies: Then, you know, none of this takes place and you don't cause yourself, you know, this tax torpedo situation that we're discussing. And so just food for thought here on how [00:36:00] you plan to do your taxes and how you plan to, you know, to look at that whole. Pick big picture. You know, a lot of times what folks you know don't understand is, you know, withdrawal order.

Mitch Davies: That's right. Right, that's right. What accounts to take from when. And you know, we have general rules of thumb on that and, and just talking about the Roth account made me think about this. You know, generally you, if you are of the belief that taxes are only going up in the future and we are. At at our firm.

Mitch Davies: Yeah. And I know every client we speak to says that they feel that way. Then it, you know, do paying taxes on pre-tax money now as opposed to later probably makes a lot of sense. You know, that, that, that. Basically that Roth conversion strategy makes a lot of sense. Yep. Especially if it, if we model it out with the tax, the current tax rates and you on, and it makes [00:37:00] sense then, and you only see taxes going up in the future, then it really makes.

Mitch Davies: Sense. Right does. It does. But again, if you're going to do these type of strategies, then you need to be conscious of all the moving parts. Like we said in earlier segments. You gotta be conscious of the IRMAA, the higher part B premium. You've gotta be conscious of the extra standard deduction phase out on the one big beautiful Bill Act.

Mitch Davies: That, that, that, that seniors get age, over age 65, be conscious of all these things. And, and there's more too. We're gonna get into some more. That's a lot. But be very conscious of these things and managing survivor exposure, right? Like we just talked about you know, the widow penalty multiplier and how that works.

Mitch Davies: So, you know if these concepts, if you want more information and you want to sit and talk with our team, visit clearpathretirement.com and hit that get started button. Are you a business owner with an [00:38:00] email list you are not sure is actually growing your business? Most business owners are just guessing, sending emails, hoping for a click.

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Mitch Davies: Let's make your email marketing work smarter. Thanks for tuning in to ClearPath Retirement Radio with Stewart Smith and Mitch Davies. Let's get back to the show. Hey guys. Welcome back to the show. This is ClearPath Retirement Radio. I'm your host, Stewart Smith here with Mitch Davies, and today we're talking about the changing landscape of taxes and how they change in retirement, especially with a major focus on some of the obstacles and some of the, tax traps that we see people fall into quite often. [00:39:00] And you know, one of the strategies that, that I wanted to talk about today was how, you know, qualified charitable donations, QCDs, we call 'em and it, they can be a, a real help if you are charitably inclined. And you know, we are in the south and most people here are very charitably inclined and, you know, they tie to their churches and that sort of thing.

Mitch Davies: Once you reach age 70 and a half, and even if you're not required to take minimum, required minimum distributions yet, but at least you're age 70 and a half. Yep. You need to, this needs to be on your radar, okay? If you are giving money to, you know, the church, let's just use the church for an example because it's very common.

Mitch Davies: If you are tithing money to the church, then what you want to do is change how you do that tithe and what I mean is normally the way you do it now [00:40:00] is you just give them after tax money and then you get a charitable contribution deduction for that. What you want to do as opposed to doing that is if you structure this as a qualified charitable donation and you give them money directly from your IRA and have it go directly to the charity.

Mitch Davies: Any, any non-profit, any 503c charity. Then that QCD comes right off the top. Right. It comes just like a standard deduction. Yep. Just adds in and, and that can be extremely helpful. It, it's more tax efficient to do it that way than to just get a deduction after the. It's right. It's so, a lot of people aren't aware of qualified charitable donations and how they can impact, you know, those, those can definitely, you [00:41:00] know, change how you know your entire tax picture.

Mitch Davies: It reduces your adjusted gross income for the year and can push you below certain thresholds. That's the big thing for taxability on Social Security for IRMAA, which we've talked. About as far as getting, having to, excuse me, having to pay the higher Part B premium for Medicare. And even the phase out of the extra standard deduction you get with the one Big Beautiful Bill Act, all of that can be, you can, you can help to, to get under those thresholds by doing that qualified charitable.

Mitch Davies: Distribution as opposed to doing it the old fashioned way that you've been used to doing it. So if that is not something that you're familiar with and you want some help with that, I mean, we can even do set that up where those are made on a monthly basis. That's right now we can't do 'em, I don't think we can do 'em every week like you do when you, when you, when you put money in the collection, the collection [00:42:00] pole.

Mitch Davies: But I don't think the church has a problem with it. Yeah. As long as they're getting the tithe and you know, a lot of people just do it once a year. Yeah. And again, it depends on your church and how, you know, how their cash flow situation is. Right. But as long as they're getting the tithe, I think they'll be extremely happy about it.

Mitch Davies: But if you have not considered Qds as part of your tax control plan, then. Give us a call, 8 6 4 7 7 5 5 0 3 3 and let us know, you know, you need some help with that and we'll help you get that figured out and get that set up correctly for going forward. So you do that the most tax efficient way you possibly can.

Mitch Davies: That's right Stewart. And it's, it's more important now than ever, you know, with the standard deduction being so high, the majority of people aren't taking advantage of charitable giving deductions, you know? So if you're able to, again, to reiterate what Stewart said, literally donate [00:43:00] that, you know, do that de deduction, donation out of the pre-tax account and take that off the top of your adjusted gross income.

Mitch Davies: Reducing adjusted gross income is always gonna benefit you more because you're still able to take the standard deduction and do that simultaneously, which you with the current tax code, you're not able to. Do, do the charitable deduction and take the standard deduction at the same time. There you got one or the other.

Mitch Davies: They repealed that a couple years ago. So it's more important now than ever to make sure you can do those QCDs. And you know, to touch on something that we had spoke about prior, it's. These kind of things running through these different scenarios. You know, we, we mentioned stress tests earlier. This is one of the most important things that we're able to do.

Mitch Davies: And my favorite thing about, you know, working here is that we're able to, you know, these are the kind of questions that keep people up at night, is looking through all these different things and what happens if, you know, we're talking about the widow's penalty. What happens if one of us predeceases. Some, something happens early.

Mitch Davies: What, what does the tax [00:44:00] situation look like? What are the most efficient ways we can do this? These are the kind of things, so if you've never had, if you just have your portfolio and have investment assumptions and you're just, okay, we just need to make sure to try to get 8% a year on our portfolio, but you haven't stress tested.

Mitch Davies: You know, another thing we can do is stress test. What if we have three to five really bad years right now? Right? What if these next three to five years are really bad? What does that look like? How does that, you know, losing a significant portion of our assets, especially early in retirement, how does that affect the later end?

Mitch Davies: How, you know, so we can map all this out in a 30, 40 year time horizon and show you not just what it looks like for your retirement, but how does that look for the legacy as well? You know, there's again, increasingly complicated. Tax codes coming in about how to transfer assets to the next generation, and it's important.

Mitch Davies: It's more important now than ever to start preparing earlier. You know, you used to be able to just get there past IRA money to the next generation and keep moving, but [00:45:00] there's more and more things that are popping up that make that harder to do. So it's more important than ever now to stress test all these different things Again, if you.

Mitch Davies: Never had anything like that done, and you've got these questions that pop into your head. Give us a call 8 6 4 7 7 5 5 0 3 3. We'd be happy to run you through these different scenarios, but I just, I think it's extremely important to do that in today's world. Yeah, and I, I would also add that, you know, when you are, you know, running through these scenarios and you're trying to, to understand it, you know, you, there's just no way that you're going to be able to grasp, you know, unless you want to make financial, you know, retirement, planning a full-time job in retirement, there's just no way that you're gonna understand all of the.

Mitch Davies: You know, different variables and moving parts that, that we do as having done this for the last 25 years and helped thousands and thousands of people retire. [00:46:00] And we, I wanna also mention that we are a local Greenville tho firm here. And we are based right outta Greenville, South Carolina. And so if you wanna work with a local firm that you can come sit.

Mitch Davies: And, and look us in the eye and, and, and understand, you know, everything where we can explain it to you intimately. Then like Mitch said, just give us a call or visit clearpathretirement.com and let's let, let us take a look at the big picture for you. Okay. So one of the last things I wanna talk about in our final few minutes here is if, you know, we talked about people being charitably, charitably inclined.

Mitch Davies: Yeah. And you know, we have quite a few clients that we work with who don't have children. Right. And they want to leave significant amounts of money to charity. Yeah. And what we have learned and what we, the strategies that [00:47:00] we have employed is we have learned that using something called a donor-advised fund to do that is the most tax efficient way to do that.

Mitch Davies: So the way a donor-advised fund works is you, if you know you have money that you want to leave to a charity. And you don't want to, you know, even if you have children, but you, you wanna leave a significant amount of your money to a charity, then using a donor advised fund makes sense. And the reason is, is because the money that you put.

Mitch Davies: You fund that donor-advised fund with, you can get significant tax benefits from making those contributions to the donor-advised fund and giving to the charity through that vehicle. That's right. That's right. And I can tell you that, you know, it's, it's, it's a beautiful thing because every dollar you put into that [00:48:00] donor advised fund can be used for you and your lifetime to receive tax benefits from, and you can spread those, you know, deductions that you're gonna get.

Mitch Davies: And that gets a little complicated, but we can get into depth on that. But you can spread the deduction, the tax deductions, the benefits that you get for doing it with a donor advised fund over five years. And what that can often do for folks is using that deduction to offset like a Roth conversion strategy.

Mitch Davies: That's right. So if you are going to, you know, fund a donor advised fund and give that money and you can control exactly what charity gets it exactly when they get it, how they get it but when you fund that donor advised fund, the money that you put in there, a lot of it. It goes to be a tax deduction for you on your taxes that you can spread out over five years, which is very nice.

Mitch Davies: Again, [00:49:00] you can use those deductions to, you know, get yourself below certain thresholds or to offset Roth conversions and pay the taxes on the, you know, Roth conversions. So it can be a very, very effect. Strategy, if you never considered a donor advised fund and how that can help you, then you know, let us, let us know and we will sit down and show you, you know, in detail exactly how that would impact you and the benefits that you could receive from employing that type of strategy.

Mitch Davies: But donor advised funds are pretty cool. They're great. They're great. And it's, you know, it's a way to, if you know, again, if you know you're going to give money to x whatever charity down the road, but you know, your income's gonna be high right now. 'cause remember, deductions for giving are only can count against income.

Mitch Davies: So if we need to do some Roth conversions and have an high income for three or four years, why don't we front load that deduction, load up the. Donor advised fund, go ahead and take advantage of that [00:50:00] for a few years while we reduce our income for the Roth conversion and then inevitably just give that money to the charity anyway and it's sitting in an account that can grow.

Mitch Davies: Yeah, so it's, I mean, basically, do you want to give it to the charity or do you want to give it to, to pay taxes? Right. Yeah. It really comes down to this, that simple. So. This has been a great show today. We've really enjoyed talking about taxes here. Again, if you want us to take a look at the big tax picture for you that, that tax lifetime tax map we talked about, give us a call 8 6 4 7 7 5 5 0 3 3 or visit clearpathretirement.com.

Mitch Davies: Hit that get started button. And go ahead and schedule a time to sit down and meet with us again. That is clearpathretirement.com. I am Stewart Smith. And he's Mitch Davies. Thank you guys. Are you anxious to see what retirement might look like for you? Do you feel like you have the pieces of the puzzle but you're not sure how they fit together or where to start?

Mitch Davies: At ClearPath [00:51:00] Retirement, we help you bring clarity to retirement by organizing your income taxes, healthcare decisions, and legacy planning into one cohesive plan. Retirement doesn't have to feel uncertain, it just needs a clear path. Schedule your complimentary consultation clearpathretirement.com.

Mitch Davies: You've been listening to Clear Path Retirement Radio with Stewart Smith and Mitch Davies helping you make informed decisions so you can plan for retirement with confidence. To learn more, visit clearpathretirement.com. That's clearpathretirement.com. Investment advisory services offered through Alpha Star Capital Management, LLC at SEC Registered Investment Advisor.

Mitch Davies: SEC registration does not constitute an endorsement of the firm by the SEC, nor does it indicate that the advisor has attained a particular level of skill or ability. Fixed insurance products are offered through Clear Path Retirement Planning. LLC and Alpha Star Capital Management is not involved in the offer, recommendation, sale, or management of commission-based fixed insurance products.

Mitch Davies: Alpha Star Capital Management and Clear Path Retirement Planning, LLC are separate and independent entities. This is [00:52:00] for informational purposes only and is not intended as legal, tax or investment advice or a recommendation of any particular security investment product or investment strategy.