One Strategy to Reduce Taxes on Your Old 401k or IRA

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The new year is coming and I am revealing one strategy that could potentially save you $100K!

What is it and how can you get it started NOW so you can save on taxes and fees?

Listen and learn more!

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Speaker 1 (00:00):

Hello, my fellow Ripples. This is Chris Miles, your cashflow expert and anti financianal advisor.

Speaker 2 (00:07):

Chris Miles was able to retire twice by the time he was 39 years old, but he’s not content to just enjoy his own financial freedom and peace of mind. Chris wants you to have your own ripple effect so you can live free today. He’s not the financial advisor you expected. He’s the non-financial advisor you deserve. He’s jumping behind the mic right now, ready to make waves. Here’s Chris Miles.

Speaker 1 (00:38):

Welcome this show that’s for you. Those of you that worked so hard for your money and you’re now ready for your money to start working harder for you. Why? Because you’re sick and tired of being sick and tired. You’re sick and tired of having to be in this rat race each and every day. You want time freedom. You want to be with those that you love, doing what you love, but I know it’s not just about getting rich because as you create more financial prosperity in your life, you have a greater capacity to bless the lives of those around you. And that is a ripple effect that I want you to create. I’m so grateful that you’re allowing me to create a ripple effect for you. Thank you so much for tuning in. Thank you for binging on these episodes. You’ve been sharing ’em as well, and I know I say that every week, but seriously, you guys are awesome.

And I’ll tell you what, I’ll give an extra special shout out to those of you that have reached out to us after you’ve done the passive income calculator, and especially when we realize, hey, you’ve got at least 15,000 or more a year that you could create. It’s been so inspiring having conversations with you guys now that I’ve kind of stepped in to really see what’s on your guys’ mind, which is inspiring this show today. So thank you so much for reaching out after doing that passive income calculator. Alright, so today guys, I want to talk about one strategy that kind of came up and actually with one of our clients, one of my old clients from before, they’re in their seventies, they want to retire. The husband’s still working. They were just very concerned. They had money and annuity and this annuity, it was an IRA annuity and whatnot.

But of course now they have to start taking out money because he’s 72 years old. So starting this next year, he’s required to start pulling money out. Believe it or not, you may not have known this, but if you have a 4 0 1 K or an IRA, even if you don’t need the money, you are required by law to pull that money out. If you don’t, you will be taxed 50% of the money that you should have taken out that year as just a penalty, and then they’ll still want you to take it out. So be aware that’s one of those little dumb rules that are part of IRAs and 4 0 1 Ks. Why we don’t like ’em as much, and by the way is a quick side note here. I’m going to give you a little extra bonus. If you’re looking for extra cash to use to invest, you’re looking for extra cash to get it to work for you today, the worst place to put it is in your 4 0 1 kss or IRAs, unless you’re already 60 years old and you can tap into that and use it right now.

If you’re under the age of 60, that could be one of the worst places to put your money because I’ve had so many of you say, yeah, I’m really tight on cashflow, don’t really have anything to invest, but then you’re maxing out 20,000 a year into your 4 0 1 k. That’s a great place that you might have a money league right there because that money gets trapped into prison. You can’t do anything with it other than watch it go up or down with the whims of the stock market, and I don’t want you to be in that place. So anyways, just my little rant about why I think 4 0 1 ks at IRAs suck anyways, and why right now is the worst time, especially if you’ve got credit card debts or other high interest loans right now, putting money in those places are probably the worst rate of return versus paying off some of these debts.

All right, now back to this tax strategy because I had this example of this couple here in their seventies and they were saying, well, what do we do with this money? How do we get it to work for us? And they were debating about paying off their mortgage, which would save ’em about 800 bucks a month. But the problem is there was like 160, 170,000 left to pay on the mortgage. So that’s a lot of money to dish out, which would wipe out all of the retirement to do so. Now they had their money trapped in annuity, had surrender fees and charges on it. Their date, the little anniversary date is actually towards the end of December. And I said, listen, if you guys wait and this could apply to you too, if you wait till towards the end of December after that anniversary date, those surrender fees could drop.

Yes, because I can already hear you saying this. In fact, somebody’s probably going to comment and say, oh, you just said it. Someone’s going to come out here saying, yeah, but you can pull out out of those annuities usually 10% a year, you can pull that money out, which is true. But the problem is this. What if it doesn’t earn enough interest? So say it’s $150,000 and you want to pull out 10%, that’s 15,000. Well, what if the market doesn’t really go up because you’re in this indexed annuity or whatever. In their case, even though the market went down and they had guarantees there, there’s fees coming out that they actually now have less. They actually lost money in something that’s guaranteed. So now they have less money to even deal with in the first place. So when you pull out 15,000 and then you have the fees coming out because the market doesn’t perform well, and now what happens that next year you want to pull out 10%, that’s not 15,000 anymore.

You might be able to pull out maybe 13,000. Does that make sense? So while inflation’s going up, your income is going down. That’s one of the tragic things when it comes to annuities. I’m not saying that annuities are bad in all situations. There are some that we actually like, but for the most part you could do so much more. Now here’s the restriction that they have. Now they could move that over into a self-directed IRA, invest it and then just pay taxes on it. Or what if they cash that money out, they would pay taxes on it now, but then they can invest it however they want and get it out of the IRA so then it can start generating real income that they can just start having paid to them directly versus paying into their IRA than they have to withdraw from the IRA.

A little simpler if you do it that way. But the problem is they’re going to pay tax. One advice I’m going to give you is never let the tax tail wag the dog. Never just do a strategy because you’re trying to save taxes and never stay in something that could be bad for you just because you’re trying to avoid paying taxes for now. Remember that 4 0 1 K is an IRAs, you still have to pay taxes. There’s not a way out of it. Now someone might say, well, I could do a backdoor Roth. Yes you could, but you still have to pay taxes. You’ll avoid the 10% penalty, but you still have to pay taxes on that money and then you can get it tax free. So either way, you’re going to pay taxes on this money. That’s the thing. There’s no tax benefit of 4 0 1 Ks and IRAs.

There is zero benefit for taxes there. So anyways, I told ’em, I said, well, here’s the deal. If you pull all this money out, now this could bump you up in another tax bracket, but what if we split it up and because they had an anniversary date coming up, I said, we can reduce your surrender fee by waiting till after your anniversary date, like the day after, which is towards the end of December. Take out some of it and then you could take out the rest the next week in January, which means you’re getting taxed in two different tax years, splitting up your income over two years, which can reduce the tax. Let me show you what I mean here. Alright, here’s an example of the tax bracket for 2023 that of course the tax come due in 2024. Now you’ll see here I focus on the married filing jointly because many of you are married and you’re filing jointly, right?

Well, what many people don’t realize is that when you get into a tax bracket, your whole income is not taxed at that rate. You’re taxed incrementally as it goes up. So for example, the first 22,000 that you earn, if you’re married filing jointly, meaning you’re married couple filing together with your taxes, you pay 10% on that 22,000, which means that first 22,000, you pay 2200 bucks to federal. This is not including state the federal income tax 2200 bucks. It’s just 10% of that amount. Now, if you make almost let’s say 90,000, well it doesn’t mean all 90,000 is taxed at that 12% rate. What it means is everything over 22,000 up until about 89,450, that is taxed at 12%. So you still have the 2200 bucks, you’re taxed on the first part, but then the next $67,000, give or take your tax 12%, that means really your tax roughly about $8,000.

So your first 90,000 bucks, you’re going to pay about 10 grand in taxes that year. Now with this situation, they had about 135,000 left in their annuity that hadn’t lost with fees and things like that. And I said, well, you could try to take it out. And they earn roughly when you factor in all the money that they’re getting from social security and everything else. Again, they’re in their seventies, he’s probably about 140,000 a year, give or take, maybe 130 because they donate to their church too. So let’s just say 10,000 goes to the church, 130,000. And so I showed them this. He said, wait a minute, if it’s 130,000, what you’re showing me here is that up to 190,000, it’s 22%. Now if we go over 190,000, that only goes up 2% more, but there is a big jump there. But he is like, I’m already in the 22% tax bracket because of the money I’m earning at work and with the money that I’m receiving from social security.

So he’s saying, if I make 130,000, does that mean I could take out 60,000, still keep it at 22%? Is that correct, Chris? I said, yes, disclaimer, I’m not an accountant, but theoretically, yes, exactly. If that’s your adjusted income, that would be what it is. So he said, well wait a minute. So if we got about 135,000 there, we could take out 60,000 this year, take out the other 75,000 or 80,000 the next year in 2024, which is just the next week. So they take out towards the end of December, next week, wait, after New Year’s pull out again, they don’t have to pay that tax bill until 2025 on that money for that other 75 or 80,000 that they pull out. And all of a sudden the light bulb hit. He’s like, oh, okay. And he’s planning on trying to retire this next year, and that’s how we’re trying to help him do it.

He’s just almost right there. He just needs a little extra money. But now if we could take that 135,000, now there could be some taxes there on that money. So I told him easily you could have probably 25,000 of taxes, give or take. Well still leaves about 110,000. They can invest that. If it gets paid them 1% a month or 12% a year, that’s 1100 bucks a month. That’s money he’s now getting without having to touch the principle. Unlike where they were trying to do it before, they’re trying to pull out that $15,000, that 10% each year, but then if the market doesn’t make any money, then they start losing money, they lose in fees and they lose from the withdrawal. So they actually have this double whammy, it’s called disinvesting, where you’re pulling out money and when you’re not making money, your money runs out faster, which is exactly the fear that almost everybody that’s trying to go into retirement has.

We don’t want that to be the case. And so the great thing is literally within a week he can pull out his money in two different payments and reduces tax by keeping it still under that 22%. Again, I recommend based on your situation, talk to a tax professional. And I said the same thing to them too, but look, I mean that’s one way you could actually reduce it. Now, even if he did go over, okay, it’s an extra 2%. Now, ideally, I don’t want to pay that extra 2% on whatever goes over that 190,000, but he knows that worst case, that’s not a big deal. As long as he does go over that 364,000 where it jumps up to 32%, then it’s a different story. But again, even if you jump a thousand, say it’s a thousand dollars over, you hit 365,000 that year. Okay, fine.

Then you pay 32, 320 bucks on that extra a thousand, you got over that limit, right? That’s the thing is that it’s not as bad as you think. And so one opportunity you could have right now is that we’re nearing the end of 2023. Now, if you’re listening to this in 2024, well, alright, so what, it may not be great, but right now if you’re trying to create tax strategies, November is the time to do it because CPAs will take off Christmas and pretty much the week until New Year’s, most of ’em won’t do any calls for the last half of December. So if you don’t want to be pushed back into January or the new year, you should start talking to your CPA now, getting advice to see if there’s ways to reduce those taxes. Those are great, great strategies to get this to work for you.

Now, I know this is not a big revolutionary thing. Maybe it is for you. I know it’s not a super complex strategy, but just remember that you don’t have to take out all your money at once, and I’m not recommending, of course, you cash all your 4 0 1 kss and IRAs. And the truth is, if you’re still working at a business or a job, you can’t cash out your four oh k anyways. They won’t let you. But I’m seeing this more and more lately with some of you that have been reaching out and doing the calculator and we get great results. And even when we start to dig in deeper beyond the results that we can already get you, we start finding out that you’ve got 4 0 1 K that you’re still funding, you’re still putting money in here, taking that power out of your control so that you can’t generate passive income right?

Now that for me is sad. That is prison. I know you’re doing it because that’s what you’re supposed to do. That’s what all good boys and good girls are supposed to do, right? Is fund their 4 0 1 kss and get your match. But the problem is what does that actually cost you? Is it really worthwhile or is it actually costing you more than it should be? So the key thing is this, is that the important thing is you have a strategy. You know exactly what to do. This is why it’s not just like us when we’re working with our clients this way, we get CPAs involved so that we can start to look at those little nuances. The other situation, it was pretty easy. They had very simple income. There wasn’t extra side business hustle income or anything like that. It was pretty straightforward. But if somebody’s got a business, for example, if you’ve got potential write-offs and or not, and I’ll tell you, it’s just another bonus too.

I’m finding a lot of people right now, especially if you’re business owners, practice owners, I’ve talked to dentists and veterinarians and chiropractors and other sorts where I would venture to say it’s not unimaginable that you could be overpaying by five 10,000 or more a year in taxes already because you’re not taking advantage of all those things. And that’s just in addition to things you could do with passive income, right? So there’s often strategies you can do, and if you do it early enough in the year, you can actually get that tax strategy working for you. Now, this might be the year to do it. This might be the year to prepare versus waiting until after January 1st and you make all these new year goals and you say, all right, I’m going to do this only to find out you missed the boat. You were too late versus those, and I’ve had clients do this.

I had one actually, he was a friend that was in a ballroom dance team with me. He hired us and right there, the very first part of December, we’re talking about taxes and he’s like, I’m pretty sure I’m overpaying. Talked to the CPA before the end of the year. Found out he was saved him over $10,000 a year. Tax strategies alone, didn’t have to reduce his lifestyle, didn’t have to do anything. He just had to do his taxes better. And unfortunately, the CPA he was using the accountant wasn’t was conservative, if you know what I’m saying. Conservative accountants. What that really means is that they’re playing it safe because they have no clue where the line is. They don’t really know the tax rules that well. And so they’ll just say, instead of trying to figure out what the line is and study it, I’m just going to stand as far back as possible and say I’m a quote conservative accountant.

What it really should say is, you’re an ignorant accountant and you just don’t know what to do for your clients. You want to avoid that. You want to make sure you’re getting this tax strategy working for you right now before the end of the year so that you can come into the new Year one, you could save some more money now this year, but then also in 2024, the next year, save even more. And like I said, that strategy also allows you to be able to free up cash to then invest it to generate more passive income. And ideally, some of that passive income could give you better tax breaks. I’m not saying it’s tax-free, but I’m saying that maybe it’s taxed differently, better, which most investments are than just earning income at your job or your business. That is the difference. You get all these things working together, you free up money from tax savings and you invest the money that you have to get it to work together, and that’s the difference.

And so needless to say that client in their seventies, they’re excited because now they realize, wait, I can get that money working for me, generate at least a thousand plus dollars a month, have enough money that we could actually retire now versus his original thing was, maybe I don’t have to work till I’m 80 and I’m telling you deal with my dad and seeing how his life is right now where he’s now almost 80. I can guarantee you if he had extra couple years of his life back, he would want to do it differently too. He would want have that income coming in, giving himself to that point where he is work optional. How about you? Maybe it’s not even wait until your seventies or eighties, which is the typical financial plan, even though they sell you on the sixties, the reality is you really get the seventies or eighties.

But what if you could do it earlier? I just talked to a guy that seriously, just for him to replace his expenses, we could do it this year. I told him, I was like, really, within the next year we can get to the point where you’re financially independent, but he wanted not a few thousand a month, which is all he needs for expenses. He wants 10,000 a month. I said, well, great. We could probably do that within about five years in your situation, especially if we do it right. That is the key guys, not about working harder or smarter, it’s about working, right? That is how you get there faster. That’s why you want these strategies to work together harmoniously to get you to where you want to go as quickly and safely and efficiently as you can. If you have any questions, of course, you can always reach out to If you’ve got cash wondering what to do with it, maybe you’ve got equity in properties or whatnot, try our passive income calculator on the website, money and see what number you get to see what’s possible in your situation. Guys, go make a wonderful process week and we’ll see you later