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[Video] Real Life Case Study Saving Over $1.7m in Retirement Taxes Thumbnail

[Video] Real Life Case Study Saving Over $1.7m in Retirement Taxes

Tim unveils a real-life case study of a couple worth $2.4 million. They were sitting on a "tax bomb" set to explode to over $1.7 million in taxes! Tim's strategy of Roth conversions and withdrawal planning could save them $2.2 million!

Case Study: How are we going to help a couple with a net worth over $2.4 million save over $1.7 million in lifetime tax liability? 

In today's video, I'm going to do a case study for a couple that recently came to us with a net worth of just over $2.4 million, and how we are going to be able to save them over $1.7 million in lifetime tax liabilities. We've obviously changed the names and the numbers a bit and the ages a bit for anonymity reasons, but for the most part this is pretty much the scenario, and this is how we're going to be able to help them.

We recently met with a couple in their 60s (she’s 62 and he’s 64), and they sought our advice to see how their retirement could be optimized with tax-planning. 

Charlie and Lucy Brown are 64 and 62, respectively, and they have a net worth of over $2.4 million. They have decent size 401(k). Charlie has over $1.5 million in his 401(k) and he's got some Roth money. Lucy has some rollover IRA money and also a decent sized Roth IRA. They also have some joint brokerage account money. And they have a primary home worth approximately $400,000 that is paid for. 

As I've mentioned before, sometimes people are sitting on a retirement tax bomb. In the video, I show the tax allocation summary for Charlie and Lucy. They have about just under $1.7 million in tax deferred assets, about $200,000 in taxable assets, and then they have about 8.2% of their nest egg in tax-free or a Roth account. 

So, here’s what we have done, and are going to do for their retirement income plan: 

1. Roth IRA Conversions

First, I want to show you the timing of filling up lower tax brackets, over multiple years, with Roth conversions.

Roth accounts are our best accounts moving forward because we don't pay any tax on those, if they're qualified, when the money comes out. If we're going to have something go from 10 to 100, that's where we want it, right? 

If they do nothing, they're going to retire and then RMDs or required minimum distributions are going to kick in. They're going to have to start taking money out of their account, and then it's going to keep growing, and their RMDs are going to get higher and higher as they age.

According to our planning software, the proposed plan of Roth conversions and withdrawing from the proper accounts will save this couple over $1.7 million in taxes.  


Next, we can’t forget about the Income Related Monthly Adjustment Amount (IRMAA), which is the technical term for paying higher Medicare parts B andD premiums. Those  premiums are affected by your modified adjusted gross income (MAGI), and they would be very high later on in their retirement if this couple did nothing. 

When we do Roth conversions, and we withdraw from the proper accounts at the proper time, their parts B and D premium are going to be higher with the Roth conversions because that's going to increase their income. 

But we're doing that now so that we reduce it later. They drop back down and then they're lower for the the rest of their life. Now, if you total that up to see the difference, they would spend $587,000 under their current plan running the scenario to age 90. If they do the proposed plan, their parts B and D premium over their lifetime to that same 90 is going to be about $363,000.

That's going to be about $224,000 in savings, so you definitely want to be cognizant of the parts B and D premium because that's a big chunk of change that you would rather keep in your pocket as opposed to going to Uncle Sam.

Current $587,000 - Proposed $363,000 = $224,000

3. Asset Location

Next, we adjusted their investment portfolio, both investment allocation and asset location. The software doesn’t show the estimated savings by properly using asset location, which Vanguard estimates saves clients and additional 0.6% per year, when done properly.

Asset location is placing more conservative investments in pre-tax accounts, and more growth-oriented assets in Roth accounts, because if you’re going to have an investment go from 10 to 100, you would want it to come out tax free in a Roth as opposed to paying ordinary income tax rates on it in a pre-tax account like a 401(k) or traditional IRA.

We can do tax loss harvesting in the taxable account, and any long-term gains will be taxed at the preferred capital gains and qualified dividend rates (which are lower than our ordinary income tax brackets).

If we take their $2,000,000 investment nest egg, and multiply that by 0.6%, that will be about $12,000 in additional annual savings, and multiply that by 25 years (approximately age 90), that would be and an additional $300,000 in lifetime tax savings. 

Total Savings

So, what do we have in total savings?

  • We take the $1.7 million from properly timing Roth conversions and getting Uncle Sam out of their retirement accounts in the lower brackets.
  • Then add the Medicare parts B & D premium savings: $224,000,
  • Then add the asset location savings: $300,000,

And we have an estimated total tax savings of about $2,224,000. 

So, by tailoring retirement tax strategies, combined with a proper income withdrawal plan, and proper allocation and location of investments. That’s a very large savings. 

If you're interested in seeing if you might be able to mitigate a retirement tax bomb, like Charlie and Lucy Brown, look at our 3-step process and then schedule an intro call. 

A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation. 

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