Book Appointment

S2E4 - How to Ethically Pay Zero Taxes in Retirement

Season #2

Q: How can retirees make the most of their money WITHOUT paying too much in taxes? (1:48)

Q: So the tax codes are actually written in favor of his citizens? (3:54)

Q: Where do we, how do we start making our money more efficient to benefit? Not only us, but our nation? (7:38)

Q: Talk about the aspect of social security being taxed in retirement. (9:09)

Q: So your guide, does your guide talk about this? (11:29)

Q: Where do you start to avoid paying taxes in retirement? Where do we begin? (15:30)


Q: How can retirees make the most of their money WITHOUT paying too much in taxes? (1:48)

A: Before we dive in, we need to clear up a common misconception and that is: "you do not have an ethical obligation to pay as cent more in taxes than what is owed."

In fact, you have a responsibility to make sure that you are paying the least amount of taxes possible. When we look at how taxes work in our country, Taxes are designed to be part of our economic engine. It's really is an extension of our economic policy. Taxes is how we make America Great!

Our tax engine is designed to move money around our economy and incentives behaviors that we as a country want and penalize behavior that is not helpful to our economy.

So when you think about "do rich people don't pay their fair share in taxes?"

It's not that they're not paying their fair share in taxes. It's their contributing so much to our economy that they're being rewarded with not having to pay taxes...huge amounts of taxes.

Now, if we, as a society, decide that we are over-incentivizing that behavior, we will adjust the tax code accordingly. So when you think about "how do I pay the least amount in taxes," you're not cheating on taxes. What you are doing is you are repositioning your money so that it is being efficiently used, in the ways our nation that it helps America be Great!

Q: So the tax codes are actually written in favor of his citizens? (3:54)

A: it is written in favor of our nation. Our nation as a whole, not as an individual.

Because as, as a person, we are just a number,

We're a nation of 330 million people, plus a whole bunch of territories and allies. So we as a nation, we are statistics, and we as an individual have desires, and we have needs, and we have wants, and we want to continue to grow. And right now our economy makes up about 24% of the world's economy. That didn't happen by accident. That happened because we are very, intentional about how we use our money, and how we use our influence. And the tax code is just an extension of that.

Q: How do taxes change in retirement? (4:57)

A: in our working years, the tax code is set up to incentivize behaviors that we want. So it's set up to incentivize us to get married. We get a tax break. If we get buy a house,  we get a tax break for that giving to charity. We get a tax break for those behaviors. Having kids, the government will actually give us money for having kids. Saving for retirement, getting a college education. All of these things are incentivized in our tax code.

When we move into retirement, a lot of that those incentives go away.

When it comes to having kids, we're probably not having kids in retirement...or at least I hope not.  Things like saving for retirement. Those things kind of fall off in retirement. And so what we're left with is we now have all this money without any of the tax savings.

In fact, you could argue that we have negative incentives in retirement. Because all of a sudden, we have to start taking money out of our retirement accounts, and we have to start living off of that money.

And so all those incentives that we got to save our retirement, they start working against us, and before we were able to take those savings off of our tax return and not pay money in taxes.

Well, now we have to pay taxes, but we have to pay taxes at the highest rate possible.

We're paying it as income tax, not as investment tax.

And so this shift happens in retirement, and it now shifts in favor of the government.

And the governing factors in the taxes from your retirement income into their budget, they'll spend money and say, "It's only gonna cost us, you know, $10 trillion over 20 years, part of how they do that is they're factoring in all this tax revenue that they're gonna get off of us in these later years in retirement."...Because they control how much money we have to take out in retirement, and they control what the tax rate is that that money is gonna be taxed.

So our goal in retirement is to try to do everything that we can to make our money as tax efficient as possible, which means shifting our income, shifting our retirement savings from being taxed as income to being taxed as something else. And that means finding ways of using it in retirement that is more efficient to our nation and more advantageous to us as a country.

Q: Where do we, how do we start making our money more efficient to benefit? Not only us, but our nation? (7:38)

A: So the first thing that we gotta do, is we got to look at what our future tax liability is. And so we need to look at what our money is in our retirement accounts because that's not money we control, that's money that Congress controls.

And well, I, I shouldn't say that...We have this window, this opportunity zone, where we have the ability to control our income and retirement. And that is from Age 60 till when we have to start taking required minimum distributions. During that time period, we control how much money we take out of our accounts retirement accounts.

At that point, after we're required to take those required minimum distributions, then Congress becomes in control of the taxes and those accounts. So we need to use that window of opportunity strategically. We need to decide when and how to use that money so that we pay the least amount of taxes.

And that might mean the least amount of taxes now or in the future. And we gotta decide which one is more advantageous to us. Then we need to figure out how we keep from paying more taxes on it, now or later on? And that means investing it in ways that are beneficial to our country as a whole.

Q: Talk about the aspect of social security being taxed in retirement. (9:09)

And I know that you have a guide that speaks really directly to that, and our listeners can access that, but let's talk about social security tax in retirement. (

A: I absolutely hate the fact that they're taxing social security! And this is one of those things that is a default action that they've created to reduce the liability of the social security program because Congress kept tapping into it, the social security trust fund.

We keep paying premiums for this insurance policy. And instead of it getting invested for our future, Congress has been using it to fund wars, to fund, you know, pet projects. In fact, they require that the trust fund buys US fact, they require that the trust fund be invested, I think is like 70% or 80% is invested in federal bonds.

So they're just saying that of the money that we're paying on social security taxes, it is actually going to fund other government programs. Mm-hmm , which is kind of ridiculous. So the result is, is that the social security administration doesn't have enough money to pay out all of its obligations.

And it says it right there on your social security statement, right? It says there's a year. It keeps moving. But that they will only be able to pay, you know, 80% of their anticipated liabilities, and this number keeps changing. 

And, one of the ways that they keep stretching out the limited social security revenue is by reducing the amount of benefits they have to pay out.

Q: So your guide, does your guide talk about this? (11:29)

Yes, my guide talks about this. And one of the things that you wanna do in retirement, Is so when you're looking at your income, and you're looking at, what's my cash flow gonna be in retirement one of the questions you wanna know is what percentage of your social security is gonna be taxed? Because it's very possible that 50% or 85% of your social security income is automatically gonna be considered taxable income.

Now here's the thing because of how this tax works in practice and because we have that individual deduction that we can take off our return, it's possible that even though 85% is taxable, you won't actually pay taxes on it. However, if you take too much money out of your retirement accounts, right? And you go beyond that exclusion, all of a sudden. You're gonna be paying taxes on a whole lot more money than you thought you would have to.

And you may not need that money to actually to live on!

You may be good just with social security plus, you know, maybe $500 a month or a thousand dollars a month. Mm-hmm . But if Congress requires that you take out from your retirement accounts, you know, $2,000 or $3,000, that extra money can easily push you into a higher tax bracket, and can easily cost you years, or lifestyle changes in retirement, because it's gonna erode your growth...because all of a sudden you're paying, you know, 15, 20% effective taxes on money that really should be growing and continuing to invest.

In retirement, our goal needs to be to pay as little in taxes as possible because that is easily one of the biggest costs in retirement we can control. After all, market losses you can theoretically recover, taxes once owed is forever gone. We're probably not going to get that money back.

The second thing is we have to control what our income is in retirement. We have to be an active participant in deciding how much money we're taking in retirement and not letting Congress dictate that. Because the second they dictate what our income is a retirement that allows them to dictate what our taxes are in retirement. And we've lost control of our future.

Q: Where do you start to avoid paying taxes in retirement? Where do we begin? (15:30)

A: So the first thing that we need to know is what is our future tax liability is..And so the first thing that I like to do whenever I'm doing a retirement plan is, I just list out every single monies that a person has. Right. Every single account, every single asset, I put it on a spreadsheet, and I mark on there Is this a future tax liability?

Is this something that Congress controls?

So that's your 401k account. That's your traditional IRA accounts. It could be your non-qualified annuities. You wanna look at these things, and you wanna see if I use this money in retirement, will it result in a tax liability? And can I control that tax liability? If the answer is "no," it goes on that list.

Once you have that list right now, we are, we're gonna have a number. It can be a hundred thousand, it can be a million, whatever it is, right? You have your number. We can now go and look on the IRS's website. And what we're looking for is the uniform life expectancy table. This is the table that the IRS uses to determine what your required minimum distributions are, and there's a few other tables out there, there are options. But for most people it's gonna be this table. You're gonna look at that. And that's gonna tell you what percentage of your assets are gonna be required for us to take out as income in retirement.

If you look at the number in the first few years, it's generally about 4%, and if you look at your retirement needs, you look at what you're getting from social security. And if you add social security and 4% of your taxable income and retirement, you add that together. If that is more than the amount that you need in retirement, or if it's a significant amount and it will push you, let's say, beyond the 10% tax bracket, that is something that you want to address, right?

And ideally, you want to be in that 0% tax bracket, but it's not always realistic for everyone.

if you're beyond that first tax bracket, that 0% tax bracket, now you really start, you gotta start asking yourself questions of how can I reduce my taxable income in retirement?

How can I reduce the balance that I have in those retirement accounts? So that. If Congress came along and changed what the tax rates are, if they came along and they changed how much I have to take out of my retirement accounts, it wouldn't throw off my entire retirement plan.

And that's where we start getting strategic about how do we convert our taxable retirement accounts into what people like to call tax-free retirement.

And I don't like to call it tax-free retirement.

What I like to call it is the tax me when I choose because that's really what it is. 

Now let's talk about how you use this, right? How do you move your money from the tax me later to the tax? Me, when I choose, you wanna choose it at times and places that are advantageous to you. And, before we were talking about this window of opportunity that you have in retirement, this window. Age 60, you know, really is 59 and a half till you have to take that first RMD. That window is when you have to choose when to take your money out of your traditional retirement accounts and can pay taxes on them and then put them in a Roth account or wherever you wanna put them.

You may even just use it. Because during those years, you get to control your income. You get to control your tax rates, you get to control your tax bracket. And so what you wanna look at is in these years. Your income during those early years in retirement is zero. You have to decide how you're going to pay your living expense. Well guess what? This is a tax opportunity because you have that first tax bracket, that's 0% tax bracket!

And so if you took money from the tax me later buckets, and you either used it for it to live on, or you put it into a Roth account, so now it's tax free. When you pull the money out in retirement, you've saved yourself a huge amount of future tax liability. You now gain control on that money in retirement, and you didn't have to pay taxes. And guess what you have, you have a decade plus to make those decisions. Wow.