Retirement and Legacy Blueprint Webinar – Episode #6

Michigan attorney and advisor Chris Berry of Castle Wealth Group answers questions on estate planning, elder law, retirement planning live. Register at or contact our office at 844-885-4200 or visit us online at

We are seeing clients both in-person and virtually. We have retirement and legacy planning offices in Brighton, Ann Arbor, Bloomfield Hills, Livonia, Novi, and Lansing.

On this week’s webinar, attorney and advisor Chris Berry of answers questions regarding Roth Conversion, Tax Impact, and the science of calculating how much to move out of these tax-deferred accounts.

In this episode, you’ll learn…

  • Chris’ positive focus for the week
  • Roth Conversion
  • Moving money out of IRA/401k/403B, or out of pre-tax
  • How the presidential election will affect the tax situation
  • The federal deficit and debt
  • The effect of Care’s Act I and II
  • Secure Act and the 10-year stretch
  • What is the widow’s penalty?
  • Calculating how much to move out of these tax-deferred accounts
  • Stealth taxes 
  • The values of two scenarios under the potential tax Impact 
  • How to ensure that Life Insurance
  • Term insurance as a cheap death benefit
  • Types of Permanent insurance
  • Variable type of insurance can cost more
  • Whole Life or a permanent death life benefit
  • Index Universal Life that offers tax-free income, death benefit, and LTC

Episode Transcript:

We’ll get rolling. So again, my name is Chris Berry. If you don’t know, we like to do this once a week every Wednesday at 1:00, where I have people submit questions throughout the week, or actually ask questions on this specific call, and I’ll go ahead and answer those questions. Understand that everything it’s kind of general advice. If you want to see how this applies to you, make sure to sit down with a professional, ideally me. And you can at any time book time on my calendar by just going to, and we can talk about any specific issues, how we want to see this play out.

So with that, let’s get into the questions. And I just made a note and I’m going to share my screen. So the big questions I had was, a big thing regarding Roth conversions, or really just any conversation about moving money out of IRAs, 401k’s 403b’s, really anything that is pre-tax.

And the big thing here is why is this an important conversation piece? I think there’s a couple of reasons. First of all, we have the Tax Cuts and Jobs Act. So Tax Cuts and Jobs Act, and this runs from 2018 to 2025. And really what this is doing is across the board it’s lowering the marginal tax rates about three to 4%. So right now, if you’re at the 22% tax bracket as a married couple, let’s say you’re making a $100,000 that puts you at the 22% tax bracket. Understand that when the Tax Cuts and Jobs Act ends that 22% tax bracket is going to be 25%. So the question is, when is it going to end? Well, according to the law it’s going to end in 2025, but we’re moving into a presidential election year. And if Joe Biden wins, chances are he’s not going to follow Trump’s tax code.

So while we say we have this window of opportunity from now till 2025, if there is a flip in governments, then understand that we might not have that full window. And he’s talked about repealing the Tax Cuts and Jobs Act, which will then revert back to that higher marginal tax bracket across the board, three or 4%. So that’s the first thing. The second reason why this is an important concept and why I think that tax risk is one of the three biggest risks out there, along with long-term care and market risk is our federal deficit. So the amount of debt that we have as a country right now. So coming into 2020, so prior to 2020, we had $23 trillion in debt. And so a lot of people were asking the question of, “Well, what is the government going to do? Are they going to cut spending?”

And really we haven’t seen that when either side is in office. They just spend on different things, but we were $23 trillion in debt. So the question is, “Are we going to cut spending, or you’re going to have to raise taxes at some point?” Because understand, we’re the lowest historical marginal tax bracket ever in history right now. It’s been as high as 94%, 60%, 70%. So our highest marginal tax bracket of 37%, that’s just a drop in the bucket of what it’s been at some points in the past. And then with the pandemic, we also had the CARES Act that passed, and we had version one and we’re talking about having version two coming up, maybe after the election. And so we’re going to exit 2020 with probably $30 trillion worth of debt. So it looks like we’re going to add with everything going on this year about $7 trillion worth of debt on top of the 23 trillion that we entered with.

So regardless of which political affiliation that you subscribed to, chances are taxes are going to have to go up. So then the issue here is that if you’re sitting there with pretax, oh, and then also, I’m sorry, this seems like old news because it happened a lifetime ago, but the SECURE Act and this passed December 20th, 2019, and basically, this killed the stretch IRA where now we can only stretch out IRAs up to 10 years. So all the taxes on those pre-tax accounts, if you leave them to loved ones or beneficiaries, they have to pay all the tax within 10 years. So what that’s doing is that tells us the government’s coming after beneficiaries to pay the tax. And then on top of that, if you’re married, we have what we call the Widow’s Penalty. Ed Slott has called this the Widow’s Penalty. And what that it is, is when you’re married, you have a married filing jointly tax bracket.

And then when one spouse passes, you have a single filing. And now that tax bracket shrinks. So, and a lot of times we need the same amount of income in retirement. So now that surviving spouse is paying more tax on those pre-tax accounts. So the big issue here is if you have IRAs, 401k’s, 403b’s, and the idea are to understand the tax buckets. So we have tax taxable accounts. These are like you’re checking, savings, mutual funds, brokerage accounts. We have tax-deferred accounts. These are like your IRAs, 401k’s, 403b’s. Any money you pull out of these accounts is going to be taxed at your marginal income tax rate. And then we have our tax-free accounts. These are things like Roth IRA. So that’s why people talk about Roth conversions. This is like Indexed Universal Life, money that grows tax-free inside of a cash value life insurance policy. Things like 529s, they have to be used for education. Health savings accounts have to be used for healthcare.

Those are all things that grow tax-free. So the idea is to move money out of these tax-deferred accounts. So move it out of the 401k’s, move it out of the IRAs, and invest it somewhere else where you’ve paid the tax at maybe 22% versus paying it at 25. So that’s kind of the idea. And it’s something that, especially as we’re getting near the end of the year, we’re really focusing on, is trying to diffuse the ticking tax time bomb that exists in these pre-tax accounts. So a question someone submitted was, how do you calculate how much to do, or how much to move out of these tax-deferred accounts, whether you’re doing a Roth IRA or doing IUL conversions, how do you calculate the appropriate amount to move? And so what I’m going to share with you is the art and science of this, okay?

And I’m going to share my screen. So bear with me a second here. And I’ve shared this before, but this is something that I’ve referenced on a regular basis every day. I have it laminated in my portfolio just because I can’t remember all the numbers. And so this is key data for 2020. And of course, we’ll update this for 2021 as the numbers come out. Some of those have already come out and come out today in fact. But so this shows us our tax bracket. So let’s say you’re a married couple and you have $100,000 worth of income coming in, whether you’re working or in retirement. I see a lot of my clients married. They fall somewhere in that 22% tax bracket. So the idea is to understand that this 22% tax bracket is going to go up to 25% when the Tax Cuts and Jobs Act ends.

And that could be in 2025, or that could be even sooner. Plus on top of that with the pandemic, with the debt, they might make decisions where we’re going to raise taxes over and above whatever the Tax Cuts and Jobs Act repealing that would do because we’re $30 trillion in debt. And that’s where you see some of these stealth taxes coming into play. And that’s what the Secure Act was. It was a stealth tax. It didn’t on its face raised taxes, but it did raise tax revenue. And one of the things that we’ve seen in Biden’s proposal is he’s talking about getting rid of what’s called step-up in basis, which I don’t want to get into unless you have questions on it, but it’s another version of the stealth tax. So I think for sure we’re going to see more stealth taxes from both sides, but also I could see them just across the board raising marginal tax brackets because of this, and they can use a pandemic as an excuse to do this because we’re $30 trillion in debt. We can’t just print more money.

So again, this 22% tax bracket is going to jump to 25% whenever that Tax Cuts and Jobs Act ends. So the idea is let’s pay the tax at 22%, fill up this tax bracket where we could do maybe a conversion of say $70,000 or pull $70,000 out of that pre-tax IRA and just put it somewhere else. So now that we’ve paid the tax and that’ll keep you at the 22% tax bracket. Now keep in mind, it’s not a 22% tax on all of your money. Your first 20,000 is taxed at 20%. The next portion, the next 60,000 is tax at 12. And then this next portion is taxed at 22. But we could also take it one step further, and this is where some of the art of this type of planning comes into play.

Is that what is the next tax bracket above 22? Well, if it’s less than 25, maybe we should consider getting in there. Well, it is 24. So what that gives us is more room to do things like Roth conversions, more room to move money out of those taxable accounts. So instead of just pulling 70,000, if our income is $100,000 right now, maybe we want to pull 226,000. So it allows us to convert more money. Now it does get us into a higher tax bracket, and there are some things that we need to take into account. And the person who submitted the question correctly identified some of these issues. Well, understand that if you are jumping up tax brackets, we need to take into account how it’s going to affect your Medicare premiums. So right now, if you’re at a $100,000 or I’m sorry, if you’re at a $100,00 for a married couple, you’re paying the base premium.

But if we jump you up a tax bracket or two, understand you might be paying more for your Medicare premiums. But that said, think of this as ripping off a Band-Aid, once you do this, it’s only going to be in the year that you do the conversions. So your Medicare premiums will drop back down to their normal level for the rest of your retirement. And so without doing the math, I can tell you that your tax savings, especially potential tax savings if taxes really shoot up, is going to cover any additional Medicare premiums you might pay for the year that you do that conversion. And also some people are super concerned about their tax, social security is taxed. Well, chances are, if you’re already at a $100,000 of income, you’re over the provisional income amount where your social security is already getting taxed at 85%.

So yeah, your social security will continue to get taxed. It wouldn’t be necessarily an additional tax on your social security because you’re already over that 44,000. But yeah, it’s important to understand that doing that conversion that is income and that could affect your Medicare premiums in the year that you’re doing the conversion. So understand that it’s not happening in a vacuum. It might have an effect on some other things, but that’s where we sit down and run the numbers and make sure that it makes sense at the end of the day. And so that key datasheet, that gives me a good kind of big picture. But when we sit down and work with clients on this, I’ll kind of walk you through some of the things that we look at and what I’m going to do is first share another screen here. Let me make sure I pull up the right screen.

All right. So one of the things we typically do is we look at your tax returns. And what I did is I took some actual tax returns reports and blanked out all of the private information. So this is one of our tax reports. So let’s say we have a married couple, they’re married, filing jointly, and this is something that we can run for you. We figure out what is their total income, adjust their gross income, how much taxable income do they have? But here’s the interesting thing. The first interesting thing is it shows us exactly where are we in terms of a tax bracket. So this family just under $100,000 of taxable income, that puts them in the 22% tax bracket. And this is just, this is them in retirement, what their social security, their pension, the income they need to pull off of their IRAs. It puts them in the 22% tax bracket.

So again, as we talked about, if we think taxes are going up in the future, which most people do, which they’re scheduled to do, let’s look at pulling money out of those IRAs to fill up that 22% tax bracket or maybe 24% tax bracket. And what we do is we look to see based on the income what are some of the things that we can do. Could we convert to a Roth if we’re still working? Yeah, we’re under that threshold, et cetera. So we’re not looking at it just in a vacuum. And again, as I talked about, we look at the Medicare premiums, we make some observations. And again, one of the observations here is maybe a Roth conversion or looking at some of the alternatives. So, okay. And then what we do is we run a couple of example scenarios.

So what if we were to jump then to the 22% bracket or essentially the 24% tax bracket? How much money could we convert? So we could keep them at the 22% tax bracket by moving 74,000 out of that pretax account, or we could keep them at the 24% tax bracket, which again is still less than 25, and we can move more money quicker. We could move 225,000 and invest it somewhere else, whether it’s inside of a Roth, whether it’s in cash value life insurance, whether it’s invested in an asset protection trust. And then also we figure out okay, again figure out which on the next $1,000, what are we going to put you at? So in this first situation, we got them right to the top of the 22% tax bracket. In the next one, we left a little bit of space. Typically we like to leave a little bit of space just in case something crazy comes in. But again, the 24% tax doesn’t apply to everything and it just applies to the next dollar earned.

And again, we look at, okay, what are some of the effects on some of the other aspects like Medicare, et cetera. And then what is the total tax on the conversion? And you don’t always have to have the money sitting in another account to pay the tax. We could just withhold the money from the account as we do a conversion, or if we are moving the money out of those tax-deferred accounts. So that’s part of the analysis that we do is we need a tax return to be able to kind of start the process to figure out how much should we be moving. And then what I want to do is share another screen, so just give me a moment, to show you just kind of the potential tax impact some of these decisions can have. So give me just a moment here.

I’m going to share another screen. All right. So let’s look at if we had a $500,000 pretax account. one option is we could keep it in the qualified account. So just keep deferring paying taxes as long as possible, and just take out our required mid own distributions. And let’s assume that we live to age 90. So if we keep just paying tax on the RMDs, and then we reinvest those RMDs, so into a taxable account. And then your beneficiaries inherit this, and now they have to pay the tax on whatever’s leftover in that pretax account. Then on a $500,000 pretax account, just kind of following the standard plan. And this is why, if you look at this, this is why the government initially wanted you to defer paying taxes. Why they pushed everyone for that traditional 401ks, traditional IRAs. Look at the total tax you’re going to pay over your lifetime.

And again, this is looking at taxes through a macro lens, not through a microlens. We’re looking at taxes over your lifetime, and especially with the Secure Act what you’re leaving for the next generation. So over your life time and what you leave to your kids or beneficiaries, you’re going to pay $521,000 worth of taxes potentially on a $500,000 account. And this is why again the government wanted you to defer paying taxes because you’re growing a tax bill for them, versus let’s just rip off the Band-Aid, all in one year you might pay $125,000 in taxes, but then if it’s in a Roth or something that grows tax-free, on the growth, once you convert it, you’re not paying any tax. And then upon death, your beneficiaries are not paying any tax.

So again, let me ask you the question. Would you want to pay $521,000 worth of tax or 125,000? And again, it hurts to rip off the Band-Aid and pay all this tax in one year, but understand that this is, the government set it up to defer paying taxes so that you would have a bigger tax bill. But what happened is they got so far in debt when they pass the Secure Act, that was a red flag to say, “Hey,” the government’s saying, “Hey, we need to raise taxes,” because they don’t want you to stretch it out anymore because they realize they can’t even cover their operating expenses at this point. We’re about $30 trillion in debt.

And taking it one step further. Again, let’s look at the potential income that we can create if we were to make a conversion, whether it’s to Roth or something that grows tax-free is also looking at the amount of income we can create on that same $500,000 pretax account. If we leave it where it’s at, if we’re taking out income, understand our income is going to be depleted much sooner because of all the tax that we have to pay. So again, it’s one part of it is minimizing taxes, but also the other part is maximizing income for you. And that’s why if you think taxes are going up in the future, it probably makes sense to look at doing some type of tax planning strategy where we’re moving money out of those tax-deferred accounts, paying the tax, and moving it somewhere else where we can invest it and do whatever we want with it.

Now, sometimes I get people saying, “Well, Chris, if we were to do something like that, we’re going to have less to invest and there’s going to be less growth.” Well, let’s take a look at that, and I’ve done this before, but let’s say we have an IRA and it’s pretax, and it’s a $100,000 and let’s assume a 20% tax bracket, okay? So if we were to do a Roth conversion, just keep our math even, let’s say that we have $800,000 now inside of the Roth account. And if we have a 20% tax bracket, the question would be, are these two numbers after-tax the same number? And the answer I hope you get to is yes. So now let’s assume that both of these investments go up 10%. So they’re invested in the same exact thing, XYZ mutual fund. So they both go up 20% or 10%.

So this $100,000 now becomes 110,000, right? And then the Roth, the Roth becomes what? It becomes 88,000. I’m not good at math in my head, but I think that’s correct, right? So the question is, okay, they both went up the same 10% investment in the same exact thing, XYZ mutual fund. The question is, is this the same after-tax spending money. So we got to subtract out our tax on this one because we haven’t paid tax. And the tax on this is 22,000, okay. 20% of 110 is 22,000. So what does that equal?

Well, that equals after tax 88,000. So again, and here’s the interesting thing. If you pay the tax right away, just as I described, how much tax did you pay? You paid 20,000, right? If you’re to do it right away, right? So if we have a 20% tax, 20% of a 100,000, you have to pay 20,000 tax, that’s 80,000. Versus if you let it grow, and this is my point is you’re growing a bigger tax bill. If you’re to let it grow, you have a bigger tax bill as well, but still the same after cash value. So that’s why again, one of the biggest things right now is to think about moving money out of those tax-deferred accounts. And we can help you with that.

We can do that with art and science behind it. Got a question. Can you make the reference documents available? Yeah, I can. And I think probably the easiest way to do that. If you do want any of the documents that I shared, just shoot me an email at And we can send you the samples that I put together, as well as that key data. So if you do want any of the documents, just shoot me a note, at and I’ll get you to whatever you need. I’m a big believer in education. Want to make sure that you’re educated on these. So I answered that. And again, if you do have any other questions and answers, feel free to put those in. Otherwise, I have one more question to take care of today.

All right. And the other question, and I appreciate these, was with regards to life insurance. So someone has an existing policy that they’ve been paying on, and the question is, do we cash it out? Do we find something else? Let it lapse? And really the answer to this, unfortunately, it’s going to be a, it depends. We need to figure out how does it fit into that overall plan? Because sometimes the cost of insurance can increase past the point of making it worthwhile. And understand, we have different types of insurance. We have term insurance. So the way term insurance works is that it covers say a period of time, say 20 years.

And if you were to pass away during those 20 years, the good news is that there’s a big death benefit paid out to your beneficiaries. But the bad news is that you die, right? So this is a good form of the cheap death benefit, especially when you’re younger. So I have a lot of term insurance. It’s not the only type of insurance I have, but my kids are 10 and seven. God forbid I get hit by a bus or something, I want to make sure that they’re taken care of. But that’s not the only type of insurance, and a lot of times it’s not necessarily the best type of insurance. So this is where I’m going to disagree with some of the Dave Ramsey’s out there and say, “It’s not all about term insurance.”

Another question mentioned variable life insurance. How does that work? So there are other types of insurance. So that’s term insurance. Think of this as kind of temporary over just a period of time, say 20 years. Then we get into forms of permanent insurance. So these are all permanent insurance and there are different types of permanent insurance. Variable insurance. This is something, to be honest, I’m not a big fan of this tool. It’s not often done I come out and say a tool is good or bad, and I’m not saying it’s bad. I’m just saying that there have been improvements since variable insurance came about. So it’s a little bit outdated, but what happens here is there’s a cash value. Now the unfortunate thing is that it’s variable and there’s, and I’m not saying it was wrong to ever get this. It just might have been one of the few things that were available at the time.

But the problem with this is that there are high fees typically with this type, because you have an insurance cost plus an investment cost, and those two can eat away at some of the cash value and can eat away at the death benefit. So I’m always trying to minimize fees, minimize costs as much as possible. And with variable insurance you have this cash value that’s then invested, basically, almost like in the markets. And so you’re paying for the insurance and then also you’re paying for someone to put together the investments that are wrapped inside of that cash-value account. And then also there’s a death benefit to this as well.

And so I’ve never done any variable life insurance for the reasons I stated. I’m not a big fan of the high fees associated with it. Plus it’s variable. The value can go up and down. And so, especially as we near retirement, we want more certainties. Most people want more certainties. So variable life insurance, it’s a form of permanent life insurance that has a cash value that can fluctuate based on how the markets are doing. You can pull the money out while you’re alive and you can pull it out typically in a tax-free manner. And then if you pass away there’s a death benefit. And these policies can be set up in very different ways, not all variable life insurance is set up the same way. Then we have what’s called whole life. And this is kind of a classic permanent death benefit.

Typically with these people are not looking to take money out where they’re alive, but there is a cash value. And if you’re just wanting to make sure that you’re going to have a death benefit, a large death benefit at the end of the day, a whole life policy might be the route to go if you’re really focusing on that death benefit. And this is where sometimes we’re doing some legacy planning where let’s say you have, in a lot of times we have to look to see what the numbers are. But sometimes, especially now kind of a newer product is index universal life.

Whole life also, you can add a long-term care benefit as well. And then we have Indexed Universal Life. And this is something that’s really interesting. First of all, it can create tax-free income in retirements. It can offer a death benefit and a lot … Sometimes that death benefit can outperform what you could get from whole life. And then also, depending on the policy, we could also offer a long-term care benefit. I have some Indexed Universal Life. If you know a Jim Harbaugh from UFM coach. There’s an ESPN article that talks about he was paid in Indexed Universal Life. A lot of times Indexed Universal Life is an alternative or used in addition to a Roth IRA as a form of tax-free income in retirement.

So I have a lot of people that are pulling money out of the pretax accounts, paying the tax, and then putting it into the Indexed Universal Life. And typically you don’t want to withdraw more money for at least 10 years from when you start this, just because you want to allow that money to grow inside of that tax-free environment. So we have term insurance and different forms of permanent insurance, and then we have what’s called Final Expense Trusts. The word trust, it’s kind of a misnomer because it’s not like a legal document or anything. Really what this is, is basically a bridge between estates and beneficiaries.

And typically what happens with this is it’s going to pay out within 24 to 48 hours to the beneficiaries and can be used for final expense, traveling. I had a client that’s personal representative is in Alaska. And so she’s going to have to fly to Michigan, take time off work, and all of this can be used for those types of things versus these other forms of insurance. Typically, it takes maybe a couple of weeks before they payout because they need a death certificate. This does not need a death certificate, and again can be paid out within 24 to 48 hours. So the initial question was is, I have a life insurance policy, existing policy, what should I do with it?

And so we could just stick with the initial plan, but always I focus on what are the goals, what’s the best strategy help you achieve the goals, and then let’s pick the right tool. And so coming into this, you already have a tool. So we need to figure out, does a tool still accomplish your goals? And if it does, then we asked the question, is it the best tool to still accomplish whatever your goal is with that investment tool? And if it’s not, then we might look at, okay, maybe you’re only interested in a death benefit. Let’s see if based on now your age and health, we can get a death benefit that does better than whatever it is you currently have. Or if you’re looking for tax-free income, does it make sense to cash that out, maybe go to an IUL, or does it make sense to just invest it?

Or if you’re looking for long-term care, maybe we get a policy that offers not only the death benefit but also long-term care. So again, is always having to act in the best interest of my clients, being a fiduciary, and as an attorney, you ask an insurance salesman that same question, and they’re going to say, “No, we should replace it with something else.” But my first inclination would be, let’s first make sure it still makes… If it makes sense for you. It may still make sense. And if it does, great, if it doesn’t, then let’s look in other directions. So that was the last question. Yep. I already answered that.

All right, so with that, let me know if you have any other questions. Otherwise, I’ll share what my positive focus was. I like to start all my team meetings, all my dinners off with this, and I forgot to start this off. Our radio show We start off with a positive focus, just something positive that happened the previous week. And for me, my positive focus is that my kids are playing soccer. They’re 10 and seven, and my son had the best soccer game I’ve ever seen him play this last week where I was just super proud of him. He really household, his team ended up losing, I think they lost eight to seven, but he was really in the game. I used to coach soccer. I played soccer in high school. I even coached high school soccer. So it just warmed my heart to see so much effort from him and how happy he was with how he played. I was so proud of him. So, that’s was my positive focus. And with that, unless you have any other questions, feel free. Here comes another one, will this video will be available later to view?

Yes. So what we do is when I remember to record them, we record all of these and then they actually go up on our YouTube page. So if you were to Google Castle Wealth Group YouTube, our YouTube page comes up and we have the full webinars. And also I have one of my team members kind of cut up some of the questions for little smaller bite-sized answers to some of these questions. And then also we have our past radio shows and everything up there. So yes, this will be recorded and you can get access to it. And someone said as an attendee, they’re my kids, Ryan and Madi. Right, any other questions, if not type them in real quick. Otherwise, it’s been a pleasure. I look forward to everyone participating next week as well. Thank you so much. Make it a great week. Take care. Thank you.

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