Strategies to Pay Zero Taxes on Social Security
by SGL Financial
Our 2 Cents – Episode #163
Strategies to Pay Zero Taxes on Social Security
On this episode of Our 2 Cents, Steve and Gabriel discuss various financial topics, including new work benefits that employers may offer, how Social Security is taxed, and if it’s possible to pay zero taxes on your benefits. They also address a couple great listener questions at the end.
- New Workplace Benefits to Help Increase Savings in 2024:
- Making student loan payments could help boost your 401(k).
- Accessing 401(k) money for emergencies.
- A 401(k) match for building emergency savings.
- Lowering the bar for 401(k) participation.
- Strategies to Pay Zero Taxes on Social Security:
- Just how is Social Security taxed to begin with?
- How contributions to certain IRA or HSA accounts can help.
- Implementing additional tax planning strategies can also help lower your taxable income.
- Listener Questions:
- “Gabe, Steve, I recently retired a few weeks ago and I’m feeling very uncomfortable living on income from my investments. I’m considering going back to work. Is that a normal reaction?” – Joyce
- “The majority of my 401(k) is invested in company stock. I know that I am not diversified but I am very confident in my company’s future. I am wondering if that is okay?” – Danielle
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Podcast Transcript
Announcer: You are listening to Our 2 Cents with the team from SGL Financial, Building Wealth for Life. Steve Lewit is the president of SGL Financial and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Hello. Welcome back to the show. You’ve got us here with you live in this conference room studio.
Steve Lewit: In the fog.
Gabriel Lewit: Well, it is foggy out there. Foggy and froggy.
Steve Lewit: Yeah.
Gabriel Lewit: It’s raining frogs. It’s foggy. That’s why I said foggy and froggy.
Steve Lewit: It’s good to talk to everybody. For some reason, I was really looking forward to this podcast today.
Gabriel Lewit: Oh, good. Me too as well. I think we’ve got some good topics lined up for you here today.
Steve Lewit: We do.
Gabriel Lewit: We’ve got a range of different things actually that we’ve curated just for you and of course, we’ve got our producer, Katie, on the computer recording and here to look up anything on the spot that we need.
Steve Lewit: Tell me, Gabriel, does she have headphones on today?
Gabriel Lewit: No headphones today.
Steve Lewit: No headphones.
Gabriel Lewit: Of course, we’ve got Steve. Now, Steve has a blue shirt on.
Steve Lewit: I do.
Gabriel Lewit: It’s an excellent shirt.
Steve Lewit: It’s multicolor blue.
Gabriel Lewit: Blue and white stripes. I said I was going to pick on him.
Steve Lewit: This is not stripes.
Gabriel Lewit: What are those, then?
Steve Lewit: They’re little boxes.
Gabriel Lewit: Boxes? They’re stripes. Vertical and horizontal stripes.
Steve Lewit: Well, that makes squares.
Gabriel Lewit: Okay. What’s that? Plaid? Oh, producer Katie is more fashionable than me and is giving me the proper terminology. You should’ve known this because you were a fashion guy-
Steve Lewit: I didn’t even think-
Gabriel Lewit: … way back when you were-
Steve Lewit: I was so shocked that you said stripes.
Gabriel Lewit: … Do our audience members know this?
Steve Lewit: No.
Gabriel Lewit: That you used to sell clothing? What’d you do?
Steve Lewit: I didn’t sell clothing.
Gabriel Lewit: Distribute clothing?
Steve Lewit: I was a merchandise manager for Lord and Taylor when they were exclusive stores. I know all about the fashion industry. It’s actually an industry I really love.
Gabriel Lewit: Well, I do not know as much as you do, hence why I’m calling plaid stripes. That’s okay. Well, I said I was going to pick on you a little bit on the show today. Folks, we’re about to kick off the show and Steve goes, “Can you bring a cat to work?”
Steve Lewit: Yeah.
Gabriel Lewit: Well, first, I want to say it’s your company. You could bring a cat to work if you really, really wanted to.
Steve Lewit: Well, here’s the deal.
Gabriel Lewit: Because you make the rules.
Steve Lewit: I want to buy this cat and the cat is a …
Gabriel Lewit: Well, it gets better, folks.
Steve Lewit: It’s a leopard cat.
Gabriel Lewit: You said it was a hairless cat.
Steve Lewit: It’s not hairless, it’s hypoallergenic, which means that it doesn’t have the same-
Gabriel Lewit: Has no hair.
Steve Lewit: … No, it has hair, but it doesn’t give off the same whatever it is that they give off to-
Gabriel Lewit: Dander?
Steve Lewit: … Dander, right.
Gabriel Lewit: Dander or something.
Steve Lewit: Different … anyway, here’s the deal on this cat. It’s a leopard cat. They’re highly intelligent and they’re highly active.
Gabriel Lewit: Can it type emails for you?
Steve Lewit: They’re alpha cats. “Can it type emails?” It could answer the phone, it can greet clients.
Gabriel Lewit: Well…
Steve Lewit: I want to be with it. They say if you don’t encourage it and play with it, it becomes reckless.
Gabriel Lewit: Producer Katie, on the computer, we need to google leopard cat. What is … It’s going to pull up lepers. Leopards.
Steve Lewit: This is a financial-
Gabriel Lewit: Did you say leper or leopard?
Steve Lewit: … Leopard.
Gabriel Lewit: Not a leper cat.
Steve Lewit: Spotted, leopard. I think it’s called a leopard cat.
Gabriel Lewit: Leopard cat. Let’s see what we [inaudible 00:03:39]
Steve Lewit: Folks, I hope you don’t mind that we start out highly educational.
Gabriel Lewit: Wow. It does look like a leopard and it looks like a cat.
Steve Lewit: We start a highly educational financial show with this stuff.
Gabriel Lewit: I have never heard of this.
Steve Lewit: This is a magnificent cat. I saw one and I really fell in love with it, then I’m reading about it and it says, “Highly intelligent. They’ve got to be entertained, otherwise, their energy will turn … ” they’ll scratch up your house or something.
Gabriel Lewit: They’ll claw and bite your clients.
Steve Lewit: If you don’t agree with us, folks, you will meet my cat.
Gabriel Lewit: Anyway, I thought I’d share that with our listeners.
Steve Lewit: Isn’t it beautiful?
Gabriel Lewit: It’s very pretty, actually.
Steve Lewit: It’s beautiful.
Gabriel Lewit: Folks, if you haven’t, google leopard house cat and you’ll see what we’re talking about here. I was just pleasantly surprised here. I was expecting one of those weird, hairless ones, which I was going to say, “If you really want to scare clients away, have a hairless cat running around.”
Steve Lewit: Well, your brother has a hairless dog.
Gabriel Lewit: I know. Hairless dogs, hairless cats …
Steve Lewit: It’s the weirdest thing I’ve ever petted.
Gabriel Lewit: If you have one out there, folks, I love them still. I think they’re sweet, they just … they look hairless.
Steve Lewit: And they’re weird.
Gabriel Lewit: Like alien animals.
Steve Lewit: They’re weird to pet.
Gabriel Lewit: Very interesting.
Steve Lewit: There’s no hair.
Gabriel Lewit: All right.
Steve Lewit: Can we move on to-
Gabriel Lewit: Of course.
Steve Lewit: … the show?
Gabriel Lewit: Of course. Well, if we can’t have any fun and we’re just boring finance people, I don’t think I’d be excited to do our show.
Steve Lewit: Well, I love joking around.
Gabriel Lewit: I’m going to start with a very important update for you. For anybody that’s still mails snail mail, postage-
Steve Lewit: Oh, I know where you’re going with this one.
Gabriel Lewit: … is increasing. Now, here’s what’s funny. I was reading this and apparently, I haven’t followed this in a while because in my head, I was like … I saw the headline and it said, “Postage rates increase.” I’m like, “What is postage now-”
Steve Lewit: I have no-
Gabriel Lewit: … “41 cents or something?”
Steve Lewit: That’s what I said.
Gabriel Lewit: Then, I looked at it and it said it’s going up from 66 to 68. I said, “When did postage become 66 cents in the first place to even rise to 68 cents per letter?”
Steve Lewit: Well, I asked you … I said, “Do we still mail stuff?” Which we do.
Gabriel Lewit: We do.
Steve Lewit: I had no idea it was 68 cents.
Gabriel Lewit: No idea. I guess I’m used to those old forever stamps that we bought forever ago. Maybe those were the 41-centers. Well, I guess the post office has to stay in business. I was just also reading, post office-related: they are looking to modernize their fleet and they’re going to potentially buy EVs from this company called Canoo. If you google it, producer Katie, C-A-N-O-O, you’ll see Canoo electric vehicles. They look very funny. Let’s see. Go to images there. Let’s see, let’s see. Could you imagine? Folks, you’ve got to google this thing. Canoo car, C-A-N-O-O. You’re going to see there’s a Walmart one, there’s going to be a post office one. They’re just the goofiest little things-
Steve Lewit: They are goofy.
Gabriel Lewit: … I’ve ever seen, soon to be bringing mail to you via electricity.
Steve Lewit: Then, the stamps go up to 72 cents each.
Gabriel Lewit: Who knows? Anyways, I digress. That’s a hike of almost … I don’t know what percentage that is, but package shipping costs are also going to go up by 6% and priority mail’s going to go up by 5.9%. It’s the fifth increase in two years and it’s part of the Postal Service’s 10-year Delivering for America Plan to raise rates and recover from plunging profits because they are projected to have a, get this, $160 billion loss over the next 10 years.
Steve Lewit: Getting the mail is very expensive and what’s remarkable is they do a great job. It’s a little slow than I prefer it, but the mail always gets there. I’ve always been impressed by that.
Gabriel Lewit: Well, here’s what’s funny. I have always said, not that anyone would ever ask me, I would be 100% fine with every other day mail. I don’t necessarily see the need for it to be delivered every single day and it seems like that would save money. I’m sure there’s some reason they haven’t done it. I know it would lay off jobs but, if you’re facing … that’s a $16 billion, billion with a B, loss every year to equal 160 billion loss over the next 10 years.
Steve Lewit: Well, in terms of the $31.4 trillion deficit of the United States, that’s not a lot of money.
Gabriel Lewit: Well, it sounds like a lot, still.
Steve Lewit: It sounds like a lot, but it really isn’t.
Gabriel Lewit: It does say here, in case you’re curious, “Some of the cost-cutting measures have already translated into slower deliveries while the increased prices will affect residents in non-contiguous states … ” Contiguous? Did I say that correctly?
Steve Lewit: Yep.
Gabriel Lewit: I don’t use that word too often ” … like Alaska and Hawaii, who will see an increase of more than 9%.”
Steve Lewit: Well, it’s their fault for being out in the middle of an island.
Gabriel Lewit: Alaska is not happy with this.
Steve Lewit: Well, it’s Alaska.
Gabriel Lewit: Their senator is saying they feel discriminated by their own federal government for geography.
Steve Lewit: No, you’re discriminated because you live in Alaska.
Gabriel Lewit: Oh gosh.
Steve Lewit: Hawaiians aren’t … mainland. I appreciate that, but you’re in the middle of the ocean, so it makes it more difficult for you to get delivered.
Gabriel Lewit: Well, I think … now, producer Katie, do they still sell forever stamps? Yeah. I think you might have … I already missed the boat here, actually. You could’ve bought some more forever stamps and saved the 2-cent increase but now, you could buy them at 68 so, when they go up to 70 cents or 72 cents, you’re locking in those gains.
Steve Lewit: Do you know what I did as a kid? You don’t know this either.
Gabriel Lewit: You kicked the can? I know you did that. Stick ball. You’ve told us this story before.
Steve Lewit: Ringolevio, Johnny on the Pony … I used to collect stamps.
Gabriel Lewit: No kidding.
Steve Lewit: For about two, three years, I had all these books. Stamps are really beautiful. They’re really amazing and I don’t know why I stopped because I really enjoyed collecting them.
Gabriel Lewit: Did save them is the question.
Steve Lewit: No. I don’t know where they are.
Gabriel Lewit: Oh God. You had a collection that you didn’t save?
Steve Lewit: No.
Gabriel Lewit: It’d be worth probably a lot of money these days.
Steve Lewit: You’re not getting it in your inheritance, I’m sorry.
Gabriel Lewit: Maybe a couple forever stamps. Save me some money.
Steve Lewit: All right.
Gabriel Lewit: All right, well, that was your news to use for today. We’ll now talk a little bit about some personal finance retirement planning topics here. We’ve got some listener questions for today that I think we’ll have some time to get to. What I wanted to do is also just in the spirit of the new year, there’s some new work benefits that you may want to check if your employer has rolled out. They are new, so many of them may not have rolled these out yet, but they’re designed to help people save money and they were initially introduced through what were called the Secure Act and Secure Act 2.0. There is different provisions for workers to be able to save and contribute more, and some abilities for their employers to help them with that. Your employers aren’t required to implement all of these, but it sounds like based on what we’re reading here, they are-
Steve Lewit: Most of them.
Gabriel Lewit: … required to implement at least one and many might implement more as a way of attracting qualified people, retaining better employee retention-
Steve Lewit: Well said, yes.
Gabriel Lewit: … doing other things that benefit … and some just want to do things to benefit their team as opposed to benefiting the business. What are these provisions? If you want to write these down or if you want a copy of this, we can send these to you, as well. You can always email us anytime at info@SGLFinancial.com. The first is that you can make a student loan payment, all right, and your employer would actually match … let’s see … match the payments you’re making towards student loans in the form of a matching retirement contribution.
Steve Lewit: That’s correct.
Gabriel Lewit: Instead of you feeling like you have to choose perhaps between making a loan repayment or saving for your future, you might be able to get the benefit of both here.
Steve Lewit: Absolutely. The idea is that you’re going to … well, the idea is I think this has a lot to do with employee retention, too, because the idea is to help get the loans paid off but not lose an employee maybe for that goes for a higher salary that’s going to leave. It’s actually a real benefit to … it’s a win-win for the employee and the company, which is unusual in our world.
Gabriel Lewit: There’s a fellow here they interviewed, Brian Graff, CEO of the American Retirement Association. Not sure exactly what they do, but he did a survey and their survey said that a third of employers were seriously considering offering that match for paying off student loans. He thinks that there’s going to be a lot more employers that are going to get on board by next year, 2025, and it’s going to help attract and retain younger workers who are the ones that predominantly have the most amount of student loan debt.
Steve Lewit: Exactly.
Gabriel Lewit: Now, there’s also some other parts in here. Congress passed a separate law that lets employers give workers up to $5,250 tax-free to offset the payment of principal interest on their student loans, but that’s not going to be around for forever and once again, your employer may not offer that benefit. Do check on that one, very important, but there’s more here. The next part of Secure 2.0 included two provisions for helping build emergency savings. Hopefully, most of you out there have a emergency account.
Steve Lewit: Well, this is a real problem in America. 60% of the families in America have no emergency savings or less than $500.
Gabriel Lewit: I think the survey or the study that was done said most, maybe it was the 60%, couldn’t afford a $1,000 or $2,000 emergency-
Steve Lewit: That’s exactly right.
Gabriel Lewit: … if it were to have popped up.
Steve Lewit: That’s right. This is a big deal.
Gabriel Lewit: Essentially, one of the ways now is what’s called a more simplified hardship withdrawal. What it does is it’ll allow you to take out $1,000 a year penalty-free from your 401(k) for any type of emergency, no explanation required. You would still have to pay taxes but, if you’re not aware, most 401(k)s do restrict you from taking withdrawals prior to age 59 and a half, unless there’s certain exceptions to that. One of these new exceptions would be for any reason whatsoever, you can grab $1,000 out of your 401(k).
Steve Lewit: You just check a box and say, “This is an emergency.” I helped a client get emergency funds out of a 401(k). It was like I was buying a house. You had to explain why, how, when and, “Do we get the money back?” It was terrible.
Gabriel Lewit: This one does not have to be repaid.
Steve Lewit: That’s correct.
Gabriel Lewit: Although you could repay it and then, if you do repay it, then you’ll be able to take it again in following years.
Steve Lewit: That’s right. That’s a good measure.
Gabriel Lewit: What does this mean? This means you can put more money into your 401(k) and not, again, feel like it’s causing you not to have other savings accessible in case you needed it. There’s another potential provision that will allow you to create an emergency savings, what’s called the sidecar, and the employer would actually be able to match the amount you put into emergency savings into your 401(k).
Steve Lewit: I haven’t read much on this, Gabriel. Has that become like a separate account?
Gabriel Lewit: Correct. It’s a separate account, separate from the prior provision. It’s a separate account that would be a sidecar to your main 401(k). You can fund it with up to, I believe it says here, $2,500, but while you’re funding this, the employer could match those contributions to the savings sidecar and those match amounts would go into your 401(k). You can build your emergency fund and simultaneously-
Steve Lewit: Build your 401(k).
Gabriel Lewit: … Build your 401(k), too.
Steve Lewit: The match will not go into your savings fund, it’ll go into your 401(k).
Gabriel Lewit: Correct.
Steve Lewit: But then, you have this savings fund that you can just dip into-
Gabriel Lewit: Mm-hmm.
Steve Lewit: … and it’s available for you. I like that.
Gabriel Lewit: Obviously, once you hit that cap of 2,500 bucks, it allows you to have that emergency fund of 2,500 and then after that, your savings can go into your 401(k). You can start by basically building up an emergency fund and then-
Steve Lewit: That’s accessible to you.
Gabriel Lewit: … Correct, then build up your 401(k).
Steve Lewit: Then follow up after that.
Gabriel Lewit: Because all of this is generally done through payroll deductions, there’s a reason why those are so effective because people, when they don’t see money being taken out of their paycheck, a lot easier for them to save.
Steve Lewit: Well, that’s why everybody suggests, “Look, start your 401(k),” because that that’s a savings that takes place behind the scenes. You never see the money, you just learn to live on what you actually get in your bank account. That does help. It’s the reason why most retirement savings, where are they? They’re in 401(k)s, 457s and 403(b)s, all retirement funds.
Gabriel Lewit: Now, the last one here is predominantly for part-time workers. There’s reduced criteria for part-time workers to make it easier for them to be able to contribute to a 401(k). That’s good news. Those are the main changes for this year. Again, it’s important to keep in mind if these are helpful for you, right? You want to see if your employer matches college debt payments, you want to see if they help you build an emergency fund or a savings fund. Check with your HR benefits department, see if they’ve rolled out any of these new provisions into your 401(k).
Steve Lewit: Lots of times, a company will roll out a provision like this, they’ll send out all kinds of information and most people think it’s just general information that’s really not important. Keep your eye open when you get a notice about your 401(k) for one of these benefits. They’re all good, they’re all terrific.
Gabriel Lewit: Here’s the other thing: if you’re like many of our clients, you’re approaching retirement, maybe this isn’t as big of a benefit for you but tell your kids. Your kids out there … if you’ve got younger kids just leaving college, if you’ve got kids early on in their career, they’re starting to save, they’re starting to build up their emergency funds, let them know to ask about these provisions, kids or grandkids, I should say, because they can be very helpful for them as they’re starting off in their careers, wouldn’t you say?
Steve Lewit: I would say. Kids, as you know, folks, are not generally aware of this kind of stuff.
Gabriel Lewit: They’re more focused on the next concert.
Steve Lewit: You think?
Gabriel Lewit: Let’s see, the next trip they’re going to go on, which bar to go to this weekend, that kind of stuff.
Steve Lewit: Well, I-
Gabriel Lewit: Kids’ stuff.
Steve Lewit: … just never did that, did you?
Gabriel Lewit: Kids these days. Me? No.
Steve Lewit: No.
Gabriel Lewit: I was a young 20s kid that lived downtown Chicago. Definitely never went to the bars.
Steve Lewit: Never.
Gabriel Lewit: Never.
Steve Lewit: I would never think of it.
Gabriel Lewit: All right. I mentioned we’ve got a little bit of a wide range of topics here for you today. The next one I wanted to talk about is, with tax season coming up, and this might not be something that you’re aware too much about here, but how is Social Security taxed? We’ve gotten some questions from clients, so I thought this would be a good thing for us to talk about here, because not everybody is really familiar with some of the nuances of how Social Security is taxed. What do you think, Mister Lew? Should we give them the scoop?
Steve Lewit: Let’s scoop away. Definitely, definitely, definitely.
Gabriel Lewit: All right. Believe it or not, there is a way, if you’re not aware of this, to pay very little to no taxes on your Social Security but, before we get into that, we’re going to talk about just how it’s taxed to begin with. What you want to do is you want to figure out what’s known as your provisional income or combined income, which is different than what you might think it is. This is part of why this is confusing: there’s a separate formula for determining how much of your Social Security benefit is ultimately taxed. Think of this as a separate calculation that will eventually flow into your total adjusted gross income to determine your total taxes for the year. Here’s how this works. To calculate your combined income, or your provisional income-
Steve Lewit: Provisional income, yeah.
Gabriel Lewit: … you’re going to take your adjusted gross income from all sources, your non-taxable interest and 50% of your Social Security benefits.
Steve Lewit: Now, say that last one again.
Gabriel Lewit: Yes. Again, to calculate your combined income or your provisional income-
Steve Lewit: Provisional income.
Gabriel Lewit: … for purposes of determining how much of your Social Security is taxable-
Steve Lewit: It’s the only time you need to calculate that.
Gabriel Lewit: … You’re going to take your AGI-
Steve Lewit: Adjusted gross income.
Gabriel Lewit: … adjusted gross income, your non-taxable interest and 50% of your Social Security benefits for that year.
Steve Lewit: If I’m receiving $48,000 in Social Security, I have to add 24,000 into my provisional income, half my Social Security.
Gabriel Lewit: Correct. If you have no other AGI other than your Social Security … For example, let’s say you just lived on Social Security. You’re likely not to pay any taxes because you’re going to take half of your Social Security benefits. Half of 48,000 would be 24,000.
Steve Lewit: And that is below …
Gabriel Lewit: Now, there’s a separate bracket. You’ve got to love separate brackets. There’s separate ordinary income tax brackets, there’s separate capital gains brackets, there’s separate Medicare surcharge brackets and there’s a separate bracket for this provisional income, combined income Social Security calculation.
Steve Lewit: It’s the simplified tax system we have developed here in America.
Gabriel Lewit: Very simple. Here’s how this works. If you’re filing as an individual and your provisional income is between 25,000 to 34,000, then you’re going to pay 50% tax on your Social Security … not 50% tax rate, you’ll pay taxes on 50% of your Social Security income.
Steve Lewit: That’s right.
Gabriel Lewit: If it’s less than 25,000, you would pay zero taxes on your Social Security.
Steve Lewit: When you’re figuring this out, if you’re close to that 25,000 break point, the question is, “Okay, how do I get under that so 50% of my Social Security is not taxed?”
Gabriel Lewit: If you’re married filing jointly, you and your spouse, if your provisional income is between 32,000 to 44,000, then, again, 50% of your Social Security benefit would then be taxed.
Steve Lewit: Now, is that tax at the same rate as all other-
Gabriel Lewit: That 50% will then flow into the rest of your tax return-
Steve Lewit: … and be taxed as?
Gabriel Lewit: … and be taxed at whatever bracket you’re then in.
Steve Lewit: It becomes just like-
Gabriel Lewit: Generally, a very low bracket, either way. Now, what happens if you’re below those bracket thresholds for the 50%? Again, you’d pay zero taxes on your Social Security. If you’re under 25,000 for provisional income, not your total income, provisional income formula, as an individual, you pay no taxes on your Social Security and if you’re under 32,000 married filing jointly, again, no taxes.
Steve Lewit: Folks that are living on their Social Security generally do not have the burden of taxation, which is a blessing to them because that’s all that they have.
Gabriel Lewit: Now, for a lot of people, if you’re over those provisional income brackets … let’s say you get into the next level up. You’re filing as an individual and your provisional income is more than 34,000 or, if you’re married filing jointly and it’s more than 44,000, which is a good number of people, especially people we work with, you will then pay taxes on 85% of your Social Security.
Steve Lewit: That’s right. Now, it’s not an 85% tax on your Social Security.
Gabriel Lewit: That was my mistake early on.
Steve Lewit: Well, no, I have people that have said that to me. “I’ve got to pay 85% taxes on my Social Security?” No, 85% of your Social Security is taxed at whatever income tax rate you figure out with all your other income.
Gabriel Lewit: What does this all mean? I said we would explain how this works first. It means if you’re smart with your tax planning, and maybe you can’t do this for last year, but you still could, right? If you were at a low threshold of this bracket, you could make a tax-deductible IRA contribution for last year still-
Steve Lewit: Still, yes.
Gabriel Lewit: … or potentially an HSA contribution, and possibly lower your income below these brackets to the point where now, your Social Security isn’t taxed.
Steve Lewit: Look, if your income is 80 grand a year, 90 grand or 100 grand a year, there’s not much-
Gabriel Lewit: You’re not going to be able to do that.
Steve Lewit: … but there are lots and lots of people that … they’re not big spenders, they live very frugally and they’re close to these breakpoints. If you don’t take a look at, “How can I get this down?” or not aware of a breakpoint, you’re paying taxes for no reason at all.
Gabriel Lewit: The other big way is, if you’re a younger person that’s not taking Social Security yet, and we’re not going to spend too much time on this because we’ve got some listener questions we want to get to today, you can, if you’re smart, plan ahead, knowing that you can take advantage of this. If you can get enough of your other income coming from tax-free sources, then that makes potentially both your and your future spouse or spouse’s Social Security benefits tax-free, right?
Steve Lewit: Let me say this. Can I say this another way?
Gabriel Lewit: Which is a huge deal.
Steve Lewit: Folks, you know there are three tax buckets: there’s the tax as you go bucket, which means dividends, income and interest, you pay taxes; there’s tax deferred, where we save our money; and then there’s our favorite bucket, which is the tax-free bucket. As you’re accumulating assets and going through life, we teach this to a lot of our younger clients: if you can accumulate your assets in the tax-free bucket, when you retire and get all your income from a tax-free bucket, then your Social Security taxes go down or are eliminated.
Gabriel Lewit: There’s a lot of synergy there, which … we have a few clients on what we call a zero-tax target plan, where we are specifically trying to build … I have one client right now that comes to mind. She’s putting everything into Roth, just everything. Doesn’t have a single dollar of pre-tax. When she turns 62, and let’s say she starts her Social Security-
Steve Lewit: No taxes.
Gabriel Lewit: … she needs 75 grand and maybe they’ve got 60 grand coming in from Social Security, I’m just ballparking, the other 15, 20 grand comes from Roth IRAs, will pay … whether it’s 15 grand, 20 grand, 30 grand coming from Roth IRAs, she’ll pay zero taxes on everything, including the Social Security, because of that synergistic relationship.
Steve Lewit: Folks, when it comes to tax planning, when we meet here and we try to figure out, “What is our philosophy? What are our goals? What are our strategies?” Get you down to a zero tax.
Gabriel Lewit: Well, this is the last thing I want to say because I don’t want to run out of time, but-
Steve Lewit: Maybe I want to say the last thing.
Gabriel Lewit: … Well, we have to move on, so I wanted to add one last thing.
Steve Lewit: Why are you getting the last thing?
Gabriel Lewit: Because I’m the host, I don’t know, the main host.
Steve Lewit: I thought I said the last thing.
Gabriel Lewit: Which is yes, when you first consider the benefits of Roth versus pre-tax, you tend to look at just the tax brackets. A lot of people don’t then consider, “Well, if I build up sufficient enough Roth IRA funds, I won’t owe any Social Security taxes when I retire.” That’s a huge boost to the Roth side of the equation.
Steve Lewit: And not take RMDs at higher tax rates. One thing rolls into another.
Gabriel Lewit: You got to say-
Steve Lewit: I got the last thing.
Gabriel Lewit: … the last thing.
Steve Lewit: I had to.
Gabriel Lewit: I knew you were going to do that.
Steve Lewit: I had to get it. I couldn’t let you.
Gabriel Lewit: Joyce. Joyce, we’ve got your question here for-
Steve Lewit: Power play!
Gabriel Lewit: … us to talk about with our listeners here today. Joyce has said, “Gabe, Steve, I recently retired a few weeks ago and I’m feeling very uncomfortable living on income from my investments. I’m considering going back to work. Is that a normal reaction?”
Steve Lewit: Yes, it is a normal reaction. Here’s the deal, guys. What we believe is that, if you want to sleep well at night when you retire and you don’t want to worry about money, you’ve got to make sure that you know where your income is coming from and have as much of it as guaranteed as possible. In that way, you know where you stand and you don’t worry about it. Now, a lot of folks will go back to work because they don’t have a plan. They’re not sure. They think their income is going to last, but they’re not really sure and they say, “Oh, well, I’ll go out, get a job and make 25 grand, then I’ll be fine.” From our perspective, that’s great if you want to do that. A lot of our clients work part-time because they want to, not because they’re doing it out of fear. Joyce, you need a good plan.
Gabriel Lewit: Well, it’s funny, I just also had a conversation yesterday or the day before with a client that’s about two years away from retiring, about a year and a half, actually. Her exact words to me, even though we have a plan that shows she would be fine, is, “Maybe I’ll work longer, just in case. You never … ” I said, “Well, no, no, no. If you want to retire, your plan’s good.” That was really something she needed to hear-
Steve Lewit: It’s hard.
Gabriel Lewit: … because even with the plan, you can feel like, “Well, what if the plan doesn’t go according to plan?” That was where her mindset was, but I think it’s even harder if you don’t have a plan and you’re just hoping that things work, you’re going to maybe default back to working.
Steve Lewit: It’s like living in a fog. You’re not sure where you headed. I had a similar conversation, Gabriel, with clients, and what I said to them is, “Look, you can go back to work, but I want you to understand something: all you’re working for is your kids because you’re not going to spend the money that you’re making, you don’t need to make, so all you’re doing is building a legacy for your kids. If you want to do that, go back to work. Otherwise, you don’t have to go back to work.”
Gabriel Lewit: Exactly. Joyce, I think it’s a very normal reaction-
Steve Lewit: Definitely.
Gabriel Lewit: … but one that you want to be careful with so you don’t rope yourself back in unnecessarily just because of some uncertainty. All right, we have time for one last one here. Danielle. Danielle, thanks for emailing, reaching out to us here. You mentioned that you’ve got … a majority of your 401(k) is actually, in your case, invested in your company’s stock.
Steve Lewit: Yes.
Gabriel Lewit: You’re wondering … you said here that you know you’re not diversified, but is it okay because you feel really confident in the company that you work for?
Steve Lewit: Danielle … oh my gosh. We can go back in history and give you a lot of loyal company stock owners that were loyal-
Gabriel Lewit: Well, can I tell you-
Steve Lewit: … until the stock-
Gabriel Lewit: … this will turn out one of three ways. Danielle, this will either work out great for you, it’ll work out no better or worse than a diversified portfolio might’ve done, or it could work out far worse for you if the company crashes, even, because you might feel really confident in your contributions to the company, but you still can’t really control whether that company’s going to succeed or not succeed all on your own.
Steve Lewit: … over a long term.
Gabriel Lewit: Over a long-term period.
Steve Lewit: Companies … what goes up, goes down. Everyone says to me, “Well, Apple’s been so good.” Something could happen to Apple. It’s happened to other big companies. I like the way you put it. It’s either feast or famine and the question is, “Why take that risk?”
Gabriel Lewit: Well, let’s look at those three options. If it’s going to do just as well as a diversified plan but has way more risk, then we’d rather have the diversified plan. If it’s going to potentially lose a lot, well, then we hope it better gain a lot. Really, it’s a very risk-taker’s approach for retirement income planning and for saving for retirement.
Steve Lewit: But here’s the deal, Gabriel.
Gabriel Lewit: You’ve got to decide, Danielle, if you’re a big risk-taker.
Steve Lewit: Oh, she can’t. She’s in love with her stock and she’s in love with her company. When you fall in love financially, you can’t make logical decisions. I’m sorry to tell you, Danielle, what I think you’re going to do. Logically, it’s a bad business decision but emotionally, you’re loyal to your company and I think that’s admirable, emotionally fulfilling, but dollars and cents fulfilling, feast or famine, just like Gabriel said.
Gabriel Lewit: Without seeing the rest of your plan, Danielle, we can’t give you the exact answer there because, if everything else is diversified and maybe this is your concentrated growth position, then maybe you’re fine, but that’s something you would want to talk to us about in more detail and we could really help you figure that one out.
Steve Lewit: Absolutely.
Gabriel Lewit: Well, folks, thank you for tuning in. We love having you here. We love hearing feedback from you, so please continue to share any feedback you have with us. You can call us, 847-499-3330. You can email us, info@SGLFinancial.com, or go to our website, SGLFinancial.com, of course. We can’t wait to have you back for our next show.
Steve Lewit: When did you start using the word “ya” instead of you?
Gabriel Lewit: Ya?
Steve Lewit: Ya.
Gabriel Lewit: Having you.
Steve Lewit: “Can’t wait to have ya back.”
Gabriel Lewit: I think I was just trying to be casual on that one.
Steve Lewit: It’s your Bronx-
Gabriel Lewit: “We can’t wait to have you back on our next show.”
Steve Lewit: … I was just curious.
Gabriel Lewit: Now, have yourselves a nice day.
Steve Lewit: Yeah. Have yourself a nice day, folks.
Gabriel Lewit: All right, we’ve got to go. All right, take care. Talk to you later.
Steve Lewit: Be well, everyone.
Gabriel Lewit: Bye.
Steve Lewit: Bye.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at (847) 499-3330 or visit us on the web at SGLFinancial.com, and be sure to subscribe to join us on next week’s episode.
Prerecorded Voice: Investment Advisory Services are offered through SGL Financial, LLC, an SEC Registered Investment Advisor. Insurance and other financial products are offered separately through individually licensed and appointed agents.
