December 07, 2020

Year-End Review and Risk Planning

The year-end is fast approaching. We did know it will be a crazy year because of the elections but we did not anticipate the year will go this way with the pandemic.

In today’s episode, we will discuss the three big risks that we need to manage for retirement. It is important to have a plan after what has happened this year. If you haven’t had your plan assessed or reviewed, now is certainly the time to do that.

In this episode, you’ll learn…

  • Chris’ positive focus for the week
  • Year-end recap
  • Secure act
  • SECURE Act can only stretch that IRA up to 10 years
  • The misconception about the tax-deferred account
  • Three Big Risks of pre-retirement
  • Required minimum distributions from your pre-tax accounts
  • The real reason why they pass the SECURE Act
  • Why the gov’t wants you to defer your tax
  • How tax can be the biggest risk
  • The window of opportunity for tax management
  • Importance of Qualified tax Analysis
  • How $22 Trillion debt affects the tax status in the future
  • Mitigation of long term care cost
  • Statistics of nursing home care
  • Market volatility as risk and pre-retirement
  • Investment audit 
  • Waiving Penalty under 60
  • Rich Man’s Roth
  • Checking where you fall in terms of the tax bracket
  • Moving to the tax-free bucket

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Episode Transcript:

This is the Chris Berry Show, expert information on wealth, estate and tax planning for the second half of life, information that you can understand. Here’s your host, Chris Berry.

Hi everyone. Welcome to the Chris Berry Show. This is of course, Chris Berry, and we’re going to start this show off with our positive focus, something we start every show off with, just sharing something positive that’s happened. It’s something that’s very important to me and my family and our firm. In fact, every team meeting we have, we start off with a positive focus. When I sit down with my family in the evening, we always go around and share a positive focus with my wife, my son Ryan, my daughter Madison. It’s a great way to just be thankful for the things and appreciate the good things that we have in our life, which is especially important right now. My positive focus is, obviously with this past week, just enjoying Thanksgiving with family, being able to sit down with my family, my mom, my dad, my wife, my son Ryan who’s 10, my daughter Madison who’s about to turn eight, and just sharing family time.

I think it’s important that given everything that’s going on, that we connect with our loved ones. My positive focus is, I was able to share some great time over Thanksgiving, wind down a little bit and just slow down and enjoy family time and enjoy the food that goes along with it too. One of my favorite hobbies or pastimes, and I think this happens once you become a dad and over the age of 40 is, you enjoy grilling. I have a Traeger smoker grill, that cooks over a wood flame. I smoked a wonderful turkey, and it just turned out great, probably the best turkey I’ve ever cooked, to be honest. That’s a good, positive focus right there.

And then a good friend of mine gave me a book, it was a cooking book that talks about cooking one thing, and then using the leftovers to create other dishes. It had a section on Thanksgiving. Everyone has Thanksgiving leftovers, and you can only do the turkey and gravy and stuffing, so many days in a row. It was great to have a plan for what we’re going to do with those leftovers. Again, it’s important to have a plan, if we know anything from retirement and legacy planning, it’s important to have a plan versus just going at it turkey, we had our traditional Thanksgiving dinner, which was delicious. Then the next day, the next morning we got in a good workout to work out the Thanksgiving meal. I’m a big fan of fitness.

In fact, I might not have shared before, but I actually used to own a CrossFit gym. CrossFit’s a form of working out and really being into fitness. My wife and I, we got our morning workout in, and then for breakfast, we use the stuffing inside of an omelet, which was delicious. Then for dinner that night, we did a hoisin turkey lettuce wraps, which were absolutely delicious. Then the next day, my wife took the Turkey carcass and turned it into stew. It was just great to take a wonderful Thanksgiving tradition and improve upon it with the leftovers. It was all about having a plan where a friend of mine gave me that book that laid out, these are the steps and the plan, and we had better results with it.

Similar with financial planning, legal planning, tax planning, it’s important to have a plan. Sometimes in life, life throws you a curve ball, and sometimes it’s time to adjust that plan. That’s really what we focus on at our firm, Castle Wealth Group, it is helping good families put together a plan and we call that a retirement and legacy blueprint. On the show this week, as we’re coming near the end of the year, I thought it would be good to cover, just to recap a crazy year, and talk about what issues we should consider before the end of the year. We’re running out of time with this, especially with the rest of the holidays and things slowing down a little bit, but we do have a two-page report that is entitled, what issues should I consider before the end of the year? And if you want us to send you a copy of that, all you have to do is just shoot us an email at contactatcastlewealthgroup.com or give our office a call at (844) 885-4200.

And either connect with us or leave a message and give us your email and the address and name, and we can get this report out to you. It’s a checklist of what issues should I consider before the end of the year. I’ll go over that checklist on the show today. But before I get into that checklist, what I wanted to do was, just talk about a year end review to figure out where we started this year, and where we’re ending up. Because I think as we move into January, it’s the start of a new year, and with everything going on, a lot of people have been looking forward to 2021, based on all the craziness that’s happened in 2020. As I was preparing for the show today, I was just writing down all the things that have happened over this past year. It’s been a one for the record. I was talking to a client of mine who is a high school history teacher. I was just talking about what are the history books going to talk about or write about for 2020? And there’s still time left too, which is crazy. With that, I want to do a year in review to start off the show.

We started the year, well, actually we ended up last year with what we thought was going to be the biggest news of 2020. What that was, in December 20th, of 2019, we thought this might happen at some point, but the government passed the SECURE Act, and passed it right before the holidays. We knew this was coming at some point, we just didn’t know what the final law would look like. They snuck it in at the end of the year, under the new cycle, because of what it did. The SECURE Act became effective January 1st of 2020, which seems like a lifetime ago, given all the craziness that’s happened. What the SECURE Act did was a few things. The passage of the SECURE Act is scary in a sense, once you really understand the amount of debt we have as a country and the way the tax deferral works and how all of that pre tax money you have growing inside of your 401(k)s and IRAs, it’s really benefiting the government to have you defer paying taxes.

If you don’t believe me on that, here’s a little exercise and this is easier to do in person. We do these webinars once a week, every Wednesday at one o’clock. We call them wisdom webinars, and you can actually register for them by going to wisdomwebinar.com. We record all of them and they show up on our YouTube channel. Here’s the thing with tax deferrals and 401(k)s and IRAs, that a lot of people don’t conceptualize or they have a misconception. Here’s a little exercise to show why the government wants you to defer paying taxes and why the SECURE Act scares me, because what the SECURE Act says, is that, when your beneficiaries inherit a 401(k) or IRA, prior to the SECURE Act, they could stretch out the taxes that were owed over their lifetime. They could continue to defer to a certain extent when they inherit an IRA or 401(k).

But the big thing that SECURE Act says, is that, now they can only stretch that IRA up to 10 years, which doesn’t sound like that big of a deal, but it tells you that the government’s coming after these IRAs, these pre-tax accounts for your beneficiaries. Why this is scary is, coming into 2020, the government was $22 trillion in debt. Both sides, they’re running up the debt, they’re just spending money on different things. Then they passed the SECURE Act, because the problem is, is that they understood that this is a debt bubble, that the interest rate alone on this can I have a devastating impact moving forward. The government was scared, and so they passed the SECURE Act. Here’s the exercise, bear with me, if you have pen and paper, maybe write this down as I’m talking about it. Let’s say we have $100,000 pre-tax sitting inside of an IRA, and let’s just assume a 20% tax to keep things even, and let’s say we have 80,000 sitting inside something post-tax like maybe a Roth IRA, right?

Roth IRAs, they grow tax free. My first question is, $100,000 pre-tax, is that the same thing is $80,000 post-tax given a 20% tax rate? Most people would say yes, right? Because it’s all about spending power. Here’s the misconception. A lot of people think that it’s better to grow money inside of that tax deferred account, it’s better for you because you’re growing on a bigger number, right? Conceptually 100,000 is bigger than 80,000, right? But in reality, it’s better for the government for you to grow that money in a tax deferred account, like a traditional 401(k) or IRA. Because we have that $100,000 pre-tax, $80,000 post-tax and a 20% tax. Write that out, $100,000 IRA, 20% tax and $20,000 would be the taxes paid to do a Roth conversion to get it over to $80,000 post-tax. Right with me on that? Okay.

Now let’s assume that both accounts grow a 10%. They’re invested in the same exact thing, X, Y, Z mutual fund. Now that $100,000 grows to $110,000, because 10% of a hundred is 10,000 or is 10, right? And that 10% of 80,000 is 8,000, so now that’s grown to 88,000. Now the question is, is $110,000 pre-Tax the same as $88,000 post-tax? Well, we need to pay that 20% tax on that $110,000. 20% of 110 is 22,000. Now we subtract that 22,000 from the 110, and what does that equal? 88,000. From your perspective, it doesn’t matter whether you save the money pre-tax or post-tax, assuming taxes remain the same. But if you notice, if we pay the tax upfront, that $100,000, we pay a 20% tax, what does that equal? 20,000. If we pay the tax upfront, we paid $20,000 worth of taxes. But if we continue to defer it and allow it to grow, now we pay 20% tax on 110,000, which is $22,000.

My point with this, is first, let’s get rid of that misconception, that it’s better for you to defer paying taxes, because you’re growing a larger pre-tax number. That’s not true. And the numbers show that. Here’s the part that’s scary, it’s better for the government to have you defer paying the taxes. They don’t get the taxes right away, but they get more tax, because instead of paying $20,000 tax upfront or receiving $20,000 of tax upfront, they’re receiving $22,000 of tax in the long run. This is what’s scary about the SECURE Act. And this is something that really worries me and why I think taxes are one of the biggest risks right now for retirees and pre-retirees, or even people accumulating and saving right now. Is because the government knows, and that’s why it’s been beaten into everyone’s head defer, defer, defer paying taxes, because we’ve, it’s, it benefits the government for you to defer.

Now, you might be saying, well, Chris, I’m going to be in a lower tax bracket in retirement. Well guess what? A lot of times, you’re not, because what happens is, a lot of the deductions and things you have while you’re working end up going away in retirement. For example, children, right? Children are independent, typically one of the biggest deductions. Are you going to have more children and retirement? No. Contributions, your 401(k)s, IRAs, those go away. Charitable distributions or charitable donations, typically in retirement, you’re donating your time, not your money, and that’s not tax deductible. A lot of times people have paid off their mortgage in retirement. First of all, a lot of those deductions go away, plus you have a lot more income sometimes than you plan, where now you have social security, where 85% of your social security could get taxed.

You have your pensions, you have your required minimum distributions from your pre-tax accounts. If you haven’t set things up properly, what I see is when I sit down with a lot of people and they’ve accumulated and saved, they save a lot of this money in these pre-tax accounts, and now as they’re moving into retirement, maybe they’re making 180, $200,000 while they’re working, but they still need $100,000 of income in retirement. I would say majority of my clients fall in that 22% tax bracket, even retirement, because it’s the old paradigm. Look at what your parents did in terms of saving in retirement. A lot of times they save, save, saved, and then they retire, they would have a pension, they were frugal. They cut back. They didn’t do a lot of traveling versus, I’m not trying to disparage, for a lot of baby boomers, they want to travel.

They want their income to be typically at least or maybe 80% of what it was while they were working. They want to do more things. It’s more of the go-go years versus the slow-go years or the no-go years. A lot of the retirees that we work with, they still have a good amount of income. They want to cover their expenses, their travel, et cetera. It’s a misconception that we’re going to necessarily be in a lower tax bracket in retirement. Then on top of that, like I said, coming into 2020, we’re $22 trillion in debt. Do you think taxes are going to go up or down? Most people say, yes. We even have laws on the books with the Tax Cuts and Jobs Act that was passed in 2018 and runs to 2025, to say the taxes are going up in 2025, or if not sooner, if the president were to repeal president Trump’s tax bill.

We know taxes are going to go up, plus we have $22 trillion in debt. Plus we added another $2.2 trillion with the CARES Act and taxes might go up even higher. It’s a little bit of a misconception in terms of thinking that you’re going to be in a lower tax bracket in retirement. Given that, the passage of the SECURE Act again, really scares me because it’s in the government’s best interest for you to defer paying taxes. I’ll continue this conversation, talking about this year end review and the SECURE Act.

Hi, we’re Madison and Ryan Berry.

Our dad is Chris Berry from the Castle Wealth Group.

The Castle Wealth Group used to be The Elder Care Firm, but dad wanted the company to be broader in its scope of services.

To not only protect and preserve assets, but to help people grow their assets, to prepare for retirement.

As a certified elder law attorney and fiduciary financial advisor, our dad and his team at Castle Wealth Group can help you with lots of important things.

To tell you more, here’s our dad, Chris Berry.

Thanks Madi and Ryan. Here at the Castle Wealth Group. We can help you put together an estate plan to avoid probate, work with you on a tax plan to keep more money for your family and less for uncle Sam and protect you against the devastating cost of long term care. Our team is here for your family. I invite you to learn more about the Castle Wealth Group at our next free workshop, where you will learn the three steps to create a legal, financial and tax plan for the second of life. Call us today to register at (844) 885-4200.

The Castle Wealth Group, formerly The Elder Care Firm.

Learn more at the castlewealthgroup.com today.

All right, so we’re talking year end review. And then we start off talking about the SECURE Act, which was technically the first thing possible, since it became effective January 1st. The SECURE Act on its face, what it does is, it pushes back your required minimum distributions from 70 and a half to 72. Those pre-tax IRAs, the 401(k)s, prior to the SECURE Act, you had to take out your RMDs, required minimum distributions. You had to take out 3.65% of whatever your December 31st account value of any pre-tax accounts. Take it out and pay the tax, whether you liked it or not. What the SECURE Act did, is pushed back the RMD age from 70 and a half to 72, really this doesn’t benefit individuals much at all, to be honest. Really why I think they included that provision is, they’re setting the stage to push back full retirement age for social security, which is right now, 66 or 67.

I can see them pushing that back to 70, if not later, because when social security originally started full retirement age was at 65, and the average lifespan was at 63. Let that sit in for a second. But that’s not the real reason they passed the SECURE Act. The real reason they passed the SECURE Act, is to make a claim on these pre-tax accounts that you’re leaving to the next generation. Prior to the SECURE Act passage, if you’re to leave IRA money or 401(k) money, that was pre-tax, let’s say you left a $500,000 IRA to the next generation. Well, when your beneficiaries inherited that IRA, not a spouse, but say children, they didn’t have to pay all the tax on that $500,000 all at once. They could stretch it out over their lifetime, where they’d have required minimum distributions, they’d have to pay over their lifetime.

And the reason why the government was in favor of people deferring the taxes, is because the longer you defer, the more those accounts grow, you don’t get more money in your pocket. You grow a tax bill for the government. The passage of the SECURE Act was really a warning shot, a huge red flag, because in the longterm, it’s not in the government’s best interest to receive the tax sooner, as we talked about in the previous segment. Because, again, if you look at it, you have $100,000 pre-tax, 80,000 post-tax and a 20% tax. If you pay the tax at once it’s $20,000 worth of tax, you pay. You let it grow, say 10%, now, your tax bill has grown to 22,000, but your after cash spending power has remained the same. Again, it’s in the government’s best interest to defer the taxes, because they get more tax revenue over the long run.

The SECURE Act is saying, okay, the government realizes this, but what they’re doing is saying, hey, we need the tax money sooner because we have this $22 trillion deficit, this debt that is spiraling out of control. They’re basically calling these loans early. They’re saying, hey, we know that in the long run, it’s not in our benefit to have you pay the tax now, we’d rather you defer it, but we’re so screwed, we need that money now. That’s scary. And that really was a warning shot. We’re doing a lot of workshops in-person, talking about the SECURE Act at the beginning of the year, talking about having to update your estate planning documents, because of this talking about strategies to given the Tax Cuts and Jobs Act that was passed in 2018, and it was scheduled to run to 2025, given the $22 trillion deficit, given this warning shot from the governments that they know they need to generate tax revenues sooner, rather than later. We talked about different strategies to move money out of those IRAs.

And those strategies are still valid. And if not, with everything else that’s went on this year, I think even more important. Taxes is one of the biggest risks and one of the biggest opportunities right now, because I don’t know how much longer we have this window of opportunity. When the Tax Cuts and Jobs Act passed, it’s scheduled to run from 2018 to 2025. But with the change in presidency, Biden ran on the proposal of repealing the Tax Cuts and Jobs Act, which will immediately cause taxes to go up, and immediately caused the value of your pre-tax IRAs and pretax 401(k)s to go down. There’s strategies right now that you should be utilizing. And if you want help with that, give our office a call at (844) 885-4200. And what we can do is run a qualified tax analysis for you, to work out some strategies to minimize taxes, looking at taxes through the macro lens of over your retirement and what you leave to the next generation, versus just a micro lens and minimizing taxes any specific year.

Because I think it’s basically given the taxes have to go up at this point. The SECURE Act was a warning shot. It’s basically a stealth tax. It’s not a tax on its face, but it’s a stealth tax, where they’re raising taxes in the short term, when you pass away and leave those pre-tax IRAs to the next generation. We started off with the SECURE Act and also we came into this year, as we do this year in review, $22 trillion in debt. Taxes are a big concern. Also in the beginning of the year, one of the things we do is, we help families navigate the devastating cost of long term care. We have certain types of asset protection trust and Medicaid, crisis planning strategies, and asset based long term care strategies to mitigate long term care costs.

Whenever I give a workshop or educational talk, or when I’m sitting down and talking to clients, a lot of times I talk about the cost and the statistics around nursing home care. Current statistics say, one out of every two individuals will need nursing home care. The average stay in a nursing home is about two and a half years. I say the average cost of nursing home care is about eight to $12,000 a month. But I remember early in February getting a call from a client saying, that their mom’s in a nursing home paying $14,500 per month, $14,500 per month. I remember just thinking that, I’ve been saying eight to $12,000 a month for so long, it’s just mind boggling the cost of long term care. Planning for longterm care is something that should be started ahead of time.

Now, that said, if you do have a loved one in a nursing home right now, there’s certain things we can do to mitigate the costs, whether it’s veteran’s benefits or Medicaid. The earlier you start thinking about it, the more options you’re going to have on the table and the better the results. I just remember hearing that mom was going to go broke in a nursing home, because she was going to pay $14,500 a month until she ran out of money. Again, that’s where we have some strategies where we can try to protect those resources. I just remember that at the beginning of the year, thinking, wow, I need to update that framework of long term care costs that I have in my head, that eight to $12,000 a month bill, that’s not accurate now it’s nine to $14,500 a month for nursing home care.

And so the question is, how are you going to go about paying for that? We have different strategies to help pay for that. That was the beginning of the year, and then March happened. I think we all know what happened in March. I remember the moments when schools were just closed. I remember when the lockdown happened. I remember when our governor went on TV and it seemed like every other day there was a press conference and the rules were changing. It was a crazy time. One of the things that I said during that time is, we can’t control the events. We can only control our responses. Just like everyone else, we were trying to problem solve from things as simple and silly as, how do I get my hair cut now? To important things of, how do my 10 and seven year old stay educated? How do we service our clients? How do we make sure that legal documents can get signed, financial accounts can be protected?

We were obviously an essential business, but it changed up a lot of things. Our team of 14, how are we going to help our clients? Are we going to work from home? Are we going to all be in our front office? Are we all going to be in our back office? And meet clients only when they come to the front office? I think everyone went through a lot of problem solving, and I know with leadership, we don’t always agree with leaders, but I think something that was important is to show grace and that we’re all trying to make tough decisions, whether you agree with the decisions or not. I viewed the pandemic as a health issue that became a financial issue, that became a mental health issue. I think we’re, we still haven’t seen all the ramifications of the financial crisis that’s going to shake out because of this, with the unemployments and commercial real estates trying to understand the needs, they’re moving forward. We’re not done with it.

I think it’s something that’s going to stick with us for a while. And then, because of that pandemic, we had the market crash, right? This is something that we’re talking about coming into 2020, we’re talking about a potential crash in the markets, because we’ve been in a 12 year bull run and we’re moving into a presidential election year. Whenever there’s presidential election year, there’s always some volatility. And then the fact that typically we see market drop once every 10 years or so, and we’ve been on a 12 year bull run. Coming into 2020, there was a lot of, not necessarily red flags, but I’d say signs that this 12 year bull run of any investor, do it yourself, or can open up a Vanguard account, throw a dart at a stock, and chances are, it’s went up over the past 12 years.

But it’s not necessarily a portfolio that’s going to weather all the seasons. March happened and we saw the markets drop about 30 points. Then we had the CARES Act and 119 days later after the market dropped, they recovered to their pre-pandemic numbers, which for a lot of experts, myself included, was a little bit head scratching, a little bit of smoke and mirrors. Granted the government manipulated some interest rates, the government passed the CARES Act with, quote unquote, stimulus package that added another $2.2 trillion to our deficit, made it so that for a lot of my clients who ran businesses, it was hard for them to find workers, because with the unemployment benefits being higher than the pay they’re receiving prior to it, it was hard for them.

It was a little bit of a head scratcher, but the market’s recovered. When I talk to a lot of individuals and families, I was talking to our clients, for a lot of our clients, because we put together portfolios that were geared to weather the storm, they were not super concerns. Obviously there’s concerns with everything else going on, but in terms of their future, they felt protected. But with the markets making that rebound, there’s a complete disconnect, because if you look around even now, gyms, can they open or can they not open? Restaurants, travel, sports, everything is slowing down, but yet the markets haven’t. I think the other shoe or other boot hasn’t necessarily dropped on that, and I think market volatility moving forward is still one of the big risks.

I think we took a gut punch in March. I was having a conversation with a family the other day, he invested a lot in equities, moving into retirement, a lot in stock, had a very risky portfolio. And he said, “You know what, Chris, I’ve made it so far.” I pointed to the 12 year bull run. I pointed to the fact that we had a big drop in March. Yes, it rebounded, but you have to look back historically. We’ve had times where the rebound wasn’t 119 days, where it took 10 years to rebound. If you’re drawing on assets to help cover your retirement income needs, then there’s that concern of sequence of returns. If you’re drawing and selling during a down market, that could put a drastic negative effect on your portfolio.

That’s I think really the second of the three big risks right now. The three big risks, I think for a lot of pre-retirees and retirees are tax risk, long term care risk, and market volatility. We saw the markets drop and then through smoke and mirrors, 119, I think it was 119 days later the markets rebounded to their pre pandemic numbers. But again, I think there’s another shoe that might drop. It’s important to consider that if we do suffer another drop, like we did in March and it lasts for a longer time period, are you going to be okay? That’s where what we can do is run a volatility test, where we can test the volatility of your investments. We can run different scenarios, and we can put together a portfolio that will weather all the seasons, even if we do have a market drop.

And if that is something that you’re concerned about, give our office a call at (844) 885-4200. You can set up a short phone call to talk about our process, and we can do that investment audit for you, where we can test the market volatility of your portfolio. We had that pandemic in March. We had the CARES Act, which was an answer to that. Again, you might’ve received a stimulus package. One of the things the CARES Act did, is it removed the requirement for any required minimum distributions for this year. That’s where we were talking to our clients, instead of doing an RMD, maybe we do like a Roth conversion or something like that. And then also what it did is, it allows for, if you are younger than 59 and a half, normally you’d be penalized if you took money out of your pre-tax accounts and pay the tax. It waved that pellet penalty up to $100,000, and also spread out the taxes.

If you do have someone that’s under the age of 59 and a half, and they want to pull money out of those traditional IRAs and 401(k)s, there’s a potential to do so up to $100,000 if they’ve been affected by the pandemic and they can stretch those taxes over a period of 10 years. That was the CARES Act. The big thing from my standpoint with the CARES Act is, it added another $2.2 trillion to the federal deficit, which again, coming into this year, we were $22 trillion in debt. We started this year with a warning shot of the SECURE Act. And now with a stroke of a pen, we’re adding another $2.2 trillion to the deficit. We’ll continue this conversation, talking about our year end review in just a moment.

Hi, Madison Ryan Berry here from the Castle Wealth Group, formerly The Elder Care Firm.

Our dad is Chris Berry.

He’s an attorney and fiduciary financial advisor, which means he helps families plan, protect and preserve their assets.

The entire team at the Castle Wealth Group can help you with lots of important things, to tell you more, here’s our dad Chris Berry.

Thanks Madi and Ryan. Here at the Castle Wealth Group, we can help you put together an estate plan to avoid probate, work with you on a tax plan to keep more money for your family and less for uncle Sam and protect you against the devastating cost of longterm care. Our team is here for your family. I invite you to learn more about the Castle Wealth Group at our next free workshop, where you will learn the three steps to create a legal, financial and tax plan for the second half of life. Call us today to register at (844) 885-4200 (844) 885-4200, or visit us at castlewealthgroup.com

The Castle Wealth Group formerly The Elder Care Firm.

Learn more at the castlewealthgroup.com today.

We’re talking year end review, and what a year it’s been. We started off with the SECURE Act, which was really interesting from a legal, financial, technical standpoint, where I enjoy seeing how all these pieces fit together, in terms of putting together a holistic plan for clients. Something that really got me into this profession, is this idea that things are always changing. If you’ve heard of the book, Who Moved the Cheese, this idea that in life your cheese is always going to be moved. You’re always going to have to figure out ways to do new things, you always have to problem solve. From a technical, legal, financial, and tax analysis standpoint, I enjoyed the SECURE Act because it forced us to think about the planning that we’re doing for our clients in a different light.

Then from a personal or political standpoint, it scared me, because again with the SECURE Act, this is a move that’s not in the government’s best interest long term, because it’s in the government’s best interest for you to defer paying taxes as long as possible. Because by you deferring paying taxes, you’re growing a bigger tax bill. You’re not putting more money in your pocket, you’re putting more money in the government’s pocket. If you disagree with me, with that, I’m more than happy to sit down on a Zoom meeting and walk you through the numbers behind it. I covered it, basically you have $100,000 pre-tax, 80,000 post tax, assuming a 20% tax, you pay the tax right away, it’s $20,000. You’ll allow it to grow. Let’s say 10%, now you’re paying a $22,000 tax. I have a lot of engineering clients that don’t necessarily believe me until I walk them through that exercise.

Again, it’s in the government’s best interest to defer payment of tax. And that’s why through mainstream media and everything, it’s been beaten into our heads to defer, defer, defer. But if you look at the actual tax code and in my 15 years of doing this and working with retirees and pre-retirees, and pre-retirees who become retirees, I can tell you that a lot of times people are paying the same, if not more tax in retirement than while they’re working based on the deductions on everything. When that SECURE Act passed, first, I had to look at it from the just legal, financial tax analysis standpoint. But then the more I thought about it and understanding that the government, it’s in their best interest to defer paying taxes along as possible, it really scared me.

And ever since the Tax Cuts and Jobs Act of 2018 and even before that, as I’ve watched this federal debt just grow and grow and grow, and not seeing any stop to it. Looking at the way they talk about rating social security and how social security and less changes are going to be made before 2034, they’ll only be able to pay out 76 cents on a dollar, to be honest, the SECURE Act scares the bejesus out of me moving forward. I’m worried about the future and that the next generation from a government and tax standpoint, because again, it’s in their best interest to defer paying taxes. What the SECURE Act says, is that, well, when you die, you can’t defer paying taxes or your loved ones can’t defer as long, they can only defer up to 10 years, which again, it’s just a warning shot to say that the government knows they need to raise tax revenue soon.

And then we had 2020. This was before 2020. This was passed in December 20th, 2019. Prior to the pandemic, prior to 2020, we’re $22 trillion in debt, now we’re going to leave 2020, most likely about $30 trillion in debt, which is scary to think about. One of the things we have is, what issues should I consider before the end of the year? The biggest thing, and we have a checklist that goes through one, two, three, four, five, six, seven, eight, nine, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, goes through about 19 different issues. It’s a nice little checklist, a lot of my clients have enjoyed it, but if you do want a copy of it, just email me at contact@castlewealthgroup.com. In that subject put, end of your checklist or give our office a call at (844) 885-4200.

I’ll tell you what, the biggest thing is addressing the big three risks. Again, I think the big three risk for any retiree right now, are going to be, in no particular order, market volatility, taxes and long term care costs. From a long term cure standpoint, at the end of the year, the only thing really that’s time sensitive, would be considering if you are working and you can contribute to a health savings account, not necessarily just for long-term care, but it’s something where you can create a tax free bucket of money that can go to healthcare costs in the future. From a long-term care standpoint, that’s really the only end of year item that I would bring up, is just consider whether you can contribute to a health savings account, it’s something that can grow tax free.

From a market volatility standpoint, based on what you saw in March, with the election, an interesting statistic, is that, 84% of the time after a presidential election, the markets do go up. Again, there’s not a huge sample size with regards to that, when you consider elections happen only once every four years, and there’s lots of other things going on as well. In terms of market volatility, I think with the year that we’ve had, the unemployment, I think we’re going to have a real estate issue moving forward. It’s crazy residential real estate is still flying off the shelf, even given that a lot of people are unemployed and that type of thing. I think we might be on the cusp of another drop that will last longer than may be 119 days.

If you haven’t had your portfolio reviewed in terms of the amount of volatility or risk, now would be the opportunity to do that. I sat with a family recently where I asked them and we walked through a scenario of just how much risk were they really willing to take on? We use a risk score analysis tool, it’s like a speed limit. Going 80 miles per hour, it’s pretty fast down the highway, a good chance you’ll get there quickly, but a chance you might wipe out, versus if you’re a going 25 miles per hour in a school zone, you’re going to go nice and slow. It’s going to take you a while to get there, but you’ll be safe, right? We assign a risk score to a family based on how they answer some questions. A family may come out as a risk score of 50, which would be moderate, 25 which would be a conservative, or 75 which would be aggressive.

Now, just for example, well, this family, I just recently sat with, they came out as a risk score of 33, which is pretty conservative, but their portfolio was an 80. There’s a big disconnect. And they said, well, the portfolio has worked for me in the past. I’m like, well, it has, because we’ve been on a bull run for 12 years. What if we have another 2002, to 2008? Now, especially as you near retirement, you’re going to have to draw on these assets. It could have a detrimental effect if the market drops right around retirement age, because the five years prior and five years after retirement, we call the retirement red zone, where it’s not all about accumulation anymore, now it’s about preservation and coming up with a distribution plan.

If you want a second opinion on your investments, to figure out the amount of volatility, the amount that you’re comfortable losing is in line with what your portfolio is saying, give our office a call, no obligation, (844) 885-4200, or email us at contact@castlewealthgroup.com. We can do an investment audit to figure out how much risk are you comfortable with versus how much risk is in your portfolio. That’s the second. We talked about long term care, end of year consider a health savings accounts. Again, now is the best time to plan for long term care, as you get older, as you develop health issues, some of the options fall off the table. Not necessarily end of year planning, but if you’re above the age of 40, maybe in your 50s or later, start considering a plan for long term care. You never know when you might have a stroke or something like that.

And then the second market volatility, based on what happened in March, some people just put their head in the sand and it worked out in March, but the next drop might not be just over 100 days. Consider a risk analysis and we can help you with that. And third, big risk, is tax risk. This is where there’s lots of end of the year opportunities. In fact, our office has been swamped, helping our existing clients with end of year planning. To be honest, we’re running out of time to do any more planning. If you were to give our office a call, there might be some things depending on how quickly you call us, but understand that, near the end of the month with Christmas and other holidays, a lot of these financial institutions slow down, so getting things done becomes problematic by the end of the year. But the big thing that we’ve been doing and we’ve been doing this really all year, given the fact of the Tax Cuts and Jobs Act and everything else going on, is looking at tax buckets.

We have three tax buckets. We have our taxable accounts, which is like your checking savings, brokerage accounts. You pay gains on that. We call that the sometimes taxed bucket. We look at the tax deferred bucket, and with that, that’s your 401(k)s, IRAs, et cetera, pre-tax accounts. And then we have our tax free bucket, which is like a Roth IRAs Roth 401(k)s, index universal life that grows tax free, health savings accounts. 529, they have to be used for education. What we’ve been doing all year and especially near the end of the year, is looking at where you fall in terms of your tax brackets and concern, moving money from the tax deferred bucket to the tax free bucket in an intelligent manner, and doing that on an annual basis, typically makes a lot of sense.

In terms of the year end review, the last thing that happened of course, was the election. With that, we have to now look at what Biden’s tax plan is, which involves repealing the Tax Cuts and Jobs Act. He’s talked about a huge stealth tax and getting rid of what’s called step-up in basis. This is confusing, so bear with me. The way step-up in basis works, is that, let’s say in that taxable bucket, you have $100,000, you purchase stock for $100,000. And then let’s say you pass away and it’s valued at 200,000. Then your kids sell it for 210. What are the gains they owe? Well, currently they would only owe $10,000 worth of gains potentially, because you get step-up in basis, meaning the new basis is the date of death value.

Instead of paying gains on 100,000, to 210, they pay from 200 to 210, that step-up in basis. Well, one of the things with the Biden proposal, is that he’s getting rid of step-up in basis. If you bought a farm, if you bought a stock or an investment for $100,000, then it grows to 200, you pass away and your kids sell it for 210, well, they get rid of the step-up, so now the gains are on from the 100 to the 210. Now they’re going to have $110,000 of gains that they’re going to have to account for. This isn’t an estate tax or an inheritance tax, it’s just getting rid of the step-up in basis. That’s where if you have money in that taxable account and you have a low basis and now you pass away and you leave it to the next generation, well, the kids might get clobbered, because under the Biden plan, assuming it moves forward, he’s going to get rid of step-up in basis.

Not only are they attacking the tax deferred accounts by getting rid of the Tax Cuts and Jobs Act, they’re coming after, for tax purposes, your IRAs, your 401(k)s, they’re coming after that with your beneficiaries, with the SECURE Act, they’re coming after the surviving spouse with what’s called the widow’s penalty, where now the surviving spouse has to pay more tax, because of the tax bracket is shrinking. Now if the Tax Cuts and Jobs Act gets repealed, the value of your pre-tax accounts is going to drop three to 4%, because marginal tax rates are going to grow three to 4%. And then on top of that, now they’re coming after the taxable bucket, because they’re getting rid of step-up in basis potentially. Again, one of the best things to think about, the biggest opportunity right now, and I don’t know how long this window’s going to remain open, is moving money from the tax deferred bucket, moving money from the taxable bucket, trying to get it over to the tax free.

This is important for people who are accumulating wealth, who are saving. If you’re still working, think about where you’re saving that money. Are you saving it in a tax deferred 401(k)? I’m not saying you don’t take the employer match, always take the employer match. That’s free money, but maybe you shouldn’t overfund that tax deferred account. Maybe you should look at the tax free account. Maybe you should look at Roth IRAs. I have plenty of people that have made too much to be able to contribute to a Roth IRA, and that’s where you could look at what’s called the rich man’s Roth, which is cash value life insurance. It’s something that I’m saving money in right now, because it grows tax free, I can use it for whatever reason I want, say my kid’s college education, my retirement, plus that death benefit can double potentially as a long term care bucket.

End of year, look at where you think you’re going to fall in terms of tax brackets. Let’s say, you’re going to make a hundred thousand dollars this year, and you’re a married couple. Well, that’s gets you in the middle of the 22% tax bracket. What you could do, is fill up that 22% tax bracket with things like Roth conversions or pulling money out of those pre-tax accounts and moving it to the tax free bucket. Because again, your 22% tax bracket is going up to 25, whenever the Tax Cuts and Jobs Act ends. And you might want to fill up the 24% tax bracket, because that allows you to move, not just roughly the 60,000, that gets you to the top of the 22% tax bracket, but now you could move additional roughly $100,000 to fill up the 24% tax bracket, which is still less than 25, which is what the 22% tax bracket is going to be when the Tax Cuts and Jobs Act ends.

Again, end of year planning, we have a good checklist, very happy to send it to you. Just shoot me an email at contact@castlewealthgroup.com. Give our office a call at (844) 885-4200. It’s a handy two page guide that goes over multiple different issues, whether state planning issues, insurance issues, cashflow issues, tax planning issues, which is where meat of the opportunities are, asset and debt issues. Just a variety of issues. I only touched on a few of them, and I touched upon the three big risks that we had, market risk, tax risk and long term care risk. It’s been a crazy year. I don’t think anyone predicted this, that the year would go this way. We knew it’d be a crazy year with the election, but no one predicted the pandemic and everything that came out of that. And that’s why it’s important to have a plan. If you haven’t had your plan reviewed, after everything that’s happened this year, now is certainly the time to do that. Give our office a call at (844) 885-4200. This has been Chris Berry with Castle Wealth Group. Make it a great week. Take care.

Learn more about Chris Berry and how he can help your family, by visiting online at thechrisberryshow.com. That’s thechrisberryshow.com. You can also call Chris Berry at (810) 355-2584, that’s (810) 355-2584. This program content reflects the opinions of Chris Berry and his guests, not Castle Wealth Group or Advisors Excel, and is subject to change at any time without notice. Content provided herein, is for informational purposes only, and should not be used or construed as investment or legal advice or recommendation regarding the purchase or sale of any security or to follow any legal or tax strategy. There’s no guarantee that the strategist’s statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment.

Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. All investing involves risk, including the potential for loss of principle. There’s no guarantee that any investment plan or strategy will be successful. We recommend that you consult with a professional dedicated to your needs. This program is furnished by Chris Berry and Castle Wealth Group.

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