Looking Poor on Paper in Retirement
Freddie: What's the key to a great retirement? Is it looking poor on paper? Well, today we're unpacking how smart tax strategies like Roth conversions and income planning can help you to keep more and owe less. We'll reveal hidden tax traps and share how looking poor can actually mean retiring rich.
Hello again and welcome to Leibel on Fire. I'm Freddie Bell, and with me is the man. He's Leibel Sternbach. You know about the books living with Financial Anxiety and also the book Authenticity. Leibel Sternbach is the guru and he smiles every time I say that. He's a guru when it comes to your retirement. Leibel,
hello and welcome back to the show.
Leibel: Hey, how are you doing?
Freddie: I'm doing well. So glad to be with you again. So I love the opening. What does it mean to look poor in retirement and why is it often the smartest tax move Leibel
Leibel: So the reason why we wanna look poor in retirement, right? And we don't, and I don't mean wearing tattered clothes and I don't mean wearing their shoes down so that nothing's there.
What I do mean is that from a tax standpoint, from a IRS standpoint, from a government standpoint, we wanna look like we are broke. We wanna look like we, we have no money, and the government really needs to give us as much support as possible because if they don't, we are going to end up on the streets and we can't take care of ourselves.
And the reason why we want that is because when the government looks to go buy votes, who do they buy their votes from? They buy from the low income learning people. They don't look to the white collar people and go, you know what? We need to give white collar people more money. Right now, Republicans are pretty good about doing that in the form of tax breaks, which is okay, right?
It's good to get tax breaks. I like tax breaks. They incentivize our businesses, they drive our economy. However, when we look at all the social welfare programs, when we look at all the money that flows in our government and from our government to the people, it goes to the people who are below the poverty line, right?
The federal poverty line. That is where we wanna be in retirement. I wanna be a recipient of all those tax dollars, right? We paid in long enough. Into the tax system. Let us get our pound of flesh. And so in retirement what we wanna look like, we wanna look like the people who are recipients of those programs and not the people who pay to fund those programs.
'cause if we are the people who pay to fund those programs, that means that we are paying a lot of money in taxes. And in retirement we need every penny that we can so that we can pay for the things that we need and make sure that we don't run outta money in retirement. 'cause one day those government programs will go away.
And who knows whether social security. Be there, or whether they're gonna cut our checks at some point down the future. And we need to ensure our financial security first.
Freddie: So what's the key to looking poor on paper Leibel?
Leibel: So the key to looking poor on paper is to control our income in retirement, right?
We wanna make sure that the money that we're making in retirement, at least as it gets reported on our tax return, is as low as possible, right? And so that means making sure that we know where our income is coming from. We are controlling our taxable income in retirement, our taxable income social security, that gets counted towards our taxable income.
And then distributions from our retirement accounts count as taxable income. So we want to make sure that the amount that we're taking out, whether it's because we're taking out to live off of, or because the government forces us to take it out in the form of required minimum distributions, we wanna make sure that amount doesn't push us up into the 22% tax bracket or the 24% tax bracket.
Which unfortunately is what required minimum distributions are designed to do. The government didn't give us a free lunch by saying, you get to get a tax break for saving for retirement only to get us not paying taxes. Later on in life, when we start taking that money out, they force us back into that higher tax bracket and oftentimes they force people into the 37% or the 32% tax bracket. Because
those required minimum distributions, they are an escalating amount. They are designed to drain our accounts while we're still alive. And so we need to do everything in our power to appear poor and weak and helpless in retirement so that the government takes pity on our poor soul and helps us fund our retirement and helps us, and not tax us to death.
Freddie: Talk about some of the tools that are at our disposal to help us to achieve these goals with smart withdrawal strategies and keeping those taxes low for life as you just outlined.
Leibel: Let's talk about withdrawal strategies first. The biggest thing that we can control is how much money we're taking out of our retirement accounts in retirement.
Sure. Unfortunately, required minimum distributions IRS kind of controls how fast we have to drain that, which means we've got two ways that we can control that problem. Way number one is we can spend our retirement account dollars first, right? And bring that balance down. Or we can do Roth conversions, which again, a Roth conversion is
we're taking money outta that retirement account. We are paying taxes on it, and then we're putting in a Roth account where it gets to grow tax free. Both of these have the net result of reducing our retirement account balances down. And as we bring that down, our required minimum distributions go down, which means our future taxes go down, which means our future tax rates go down.
And that is really what we're driving towards. Now, there are other tools that you can use to reduce your taxable income in retirement, like having a business, like having real estate that pays depreciation. Like having investments that throw off active tax losses.
There are lots of things that can do this. But the two primary ones, the ones that are most common for people to use are Roth conversions, and then spending down your retirement dollars first is one of the biggest things that I teach people to do is to spend your retirement dollars first, not your brokerage accounts, because retirement dollars, you have to pay in income tax, you know it's gonna force you into higher tax bracket.
So bring that down. And then your brokerage account and your Roth account could potentially be tax free for life if you do the right moves. Whereas retirement account, there's no way around paying income tax on that. Not unless you got active losses.
Freddie: Unfortunately everybody we're talking with Leibel Sternbach today about why looking poor on paper and is retiring well because we're focusing on taxes.
So tell me about Leibel, if you don't mind, the hidden costs like RMDs. You mentioned that just a second ago. Medicare premiums social security taxes. How can these trip up retirees who don't effectively plan ahead?
Leibel: Yeah. So, there's no such thing as a free lunch in this country, right?
The last time you get a free lunch is when you're in public school, right? And even then you don't really get it. So you know, no free lunches. So the real question is, what are the hidden gotchas that people get? The first hidden gotcha is know about required minimum distributions.
If you listen to our show, if required minimum distributions is a problem you gotta solve. So that is hidden tax bomb number one. Hidden tax bomb number two, which I probably shouldn't call it a tax bomb, but hidden gotcha number two is people take social security early, but then they're working, which reduces how much benefits they get.
Social Security also is taxable as income on your tax return, so it's something that you need to account for. Now, Trump is talking about eliminating taxes on social security. I hope he gets it. But in the meantime, we've got a plan for what we know, which is that it's taxable income. So when you have taxable income from there, you have your distributions that the government is controlling.
You have pension, that's taxable. If you've got annuities, those are taxable. If you're working that is taxable, then all of a sudden you have a lot of taxable income. Which leads to the next problem, which is IRMA. So IRMA is, you gotta pay for Medicare premium. So you know, 185 bucks if you're a normal person if you start making too much money, then they start charging you more for part A and part D.
That is called IRMA, that increase in premium. Can get up to $10,000 a year if you weren't planning for it. It can come as a nasty surprise. Again, it is something that you need to account for as you're doing this, planning, your healthcare expenses you need to plan for. All of these things kind of, the other thing is capital gains, right?
If you have a large brokerage account, if you don't control your taxable income, then all of a sudden it puts you in a higher t ax bracket, which means the capital gains on your brokerage account goes from zero to 15% or 20% or 23%. Wow. And so you really need to focus on bringing your taxable income down.
That also means interest, right? Where are you getting your interest from? You got your money in a high yield savings account. You're so proud of yourself. You got your emergency fund, but guess what? That emergency fund is throwing off taxable income that is showing up on your 1040, which now you're paying taxable taxes on, which makes you pay more taxes on social security, which makes you pay more on IRMA, which means that you eliminated yourself from paying zero on capital gains.
It's a vicious cycle that all starts with controlling your taxable income and looking poor, look poor in retirement. I want the IRS to look at you and go, poor you.
Freddie: That might happen anyway, but you've been sharing some great examples. Are there any real life examples of maybe someone that we can talk about?
Of someone who looked poor on paper, but retired wealthy in practice.
Leibel: So this is our specialty is helping people, do this. And one of the ways right is when we're working there are two people.
And actually I'll give you a very famous person. So Peter Theo. Who is one of the co-founders of PayPal. He very wisely held his PayPal stocks in his retirement account and he converted it to Roth 'cause he's very smart. And then when PayPal sold, he ended up with $5 billion in his retirement account.
Right. $5 billion. Now having that as in a Roth account versus a regular, traditional retirement account. Tax free. So that is, again, an example of, now he, all he has is social security income, right? If he's in retirement now, obviously Peter Thiel is a billionaire and has lots of other income sources.
Sure. But, that's what you want to have, right? You want to have your assets, you want to control your income. A nother thing, and this is everyone in real estate, right? Go talk to your friend who's a real estate investor who has money in real estate, and they will tell you debt is the best thing in the world, right?
And you go turn on Dave Ramsey and he is like, you wanna be debt free. You don't wanna have any debt. Well, the reason why real estate people like debt is because they get two things out of investing in real estate is number one. They get depreciation, so they get to any income that they have.
They get to wash it away with these losses, this depreciation on their property. And number two, they never sell their properties. They are always going into another investment, right? You never hear them saying, oh, I sold this and I made $2 million and now I have $2 million in the bank. No, it's
I sold this and I bought another building. And I bought another building. Right? Why are they always buying another building? It's because they buy the building, they improve the property, they rent it out, right? You go on TikTok, there's lots of people talking about ways of doing this and not so legitimate.
But the fact is that this is what the benefit is you improve the property and you take a property from a million dollars, you get it full occupancy or whatever, and now it's worth $3 million. You borrow against that $3 million. Debt is not taxed, that is tax free money. And then they go turn around and sell that $3 million and they go and buy a $6 million property, right?
And becomes an endless cycle. And then the government gets to collect the taxes literally over their dead body.
Freddie: That's really interesting. I know yields4u.com has a lot of information on this. Am I correct?
Leibel: Yields4u. We've got quite a bit of information on this, and again, if this is something that applies to you, go and get that free retirement tax law analysis.
More than happy to talk to you, help you figure out if this is something you should explore or if there's other opportunities inside of what you want to do that you can tap into.
Freddie: By far this has got to be my favorite show with you because looking poor on paper can mean you're really rich in reality.
Thank you so much. Looking poor in retirement might be the smartest way to stay rich. Yeah, a little planning goes a long way when it comes to taxes. Thank you so much Leibel and thank you for listening and we'll catch you next time with Leibel On Fire.
