Talk to me about taxes and how you view things like Ross, how you view things like social security, how you're using this concept of tax-free nature in investing. Let's make this a masterclass. I did a couple of videos for how do you pay zero taxes on $100,000 per year in retirement. And I did that one to show people it's possible, but then two to like a bigger picture. The goal is not to pay zero taxes in one year in retirement. The goal is to minimize your lifetime tax liability throughout the year. retirement. And sometimes those are at odds with each other. Of what I would hate to see is someone pays zero taxes, zero taxes, zero taxes, and then spikes up. What I'd rather see is most people, specifically in their retirement years, have what's called a tax planning window. You're earning a great income while you're working. Before you retire, you're probably your peak earning years. You're maybe in the higher tax brackets. And so if you can imagine, just imagine the tax bracket stacked on top of each other, 10%, 12%, 22%, 24%, so on and so forth, you're up there. And then all of a sudden you retire and your tax bracket drops. significantly because of a number of things we can talk about in a second. And then later on retirement, you pop right back up because you have two social security benefits. If you are married, you have required distributions from your 401ks and IRAs, which even if you don't want to take the money out, you're going to be required to take money out of your IRAs. And that can be a significant amount specifically for people who've done a really good job of saving to their 401ks and IRAs. And so you can kind of visualize this tax planning window where high taxes when you're working. Low taxes in those medium or those middle years, call it early 60s to 73 to 75, and then you pop right back up. And so what can we do in that valley? What can we do in those middle years? Because when you start to look at the tax plan landscape in retirement, a lot of people are like, I can't do much tax planning. They think tax planning is for business owners and people with a lot of real estate. That is the case in your working years. But when you're retired, if you have an IRA, a Roth IRA, a brokerage account, social security, Every single one of those things is taxed differently. Social security. A lot of states don't tax it at all. At a maximum, 85% of it is going to be included in your income that's taxed at the federal level. And Trump might change that. And that might change. And that was changed for the first 50 years of social security. It was not taxed. Then there's this thing called provisional income that was added. And now you're in a position where about half of people pay tax on their social security. A brokerage account. We talked about this earlier. Are you receiving dividends for that? Are they qualified or non-qualified? Are you... realizing capital gains in that account? Are they short-term or long-term? Are you investing in municipal bonds? Are you investing? So all of these things have tax consequences. And what you can start to do is you realize the tax consequences or lack of, lack thereof, I mean, they're tax-free, like things from a Roth IRA or other things. And you compare that to the way different things are taxed. So for example, I think, correct this if it's wrong in the editing, but I think $96,700 is the example I used earlier, where until your taxable income, exceeds that threshold, if you're married, finally jointly for 2025, you're not paying any federal taxes on long-term capital gains or qualified dividends. I'll give an example. Let's assume if you retire today and your mortgage is paid off and you live in a reasonable cost of living area, 8,000 per month, it's probably pretty good life for you and a spouse. No mortgage, no consumer debt, 8,000 per month. That's pretty solid. Round it to $100,000 per year. Well, if you're living on $100,000, you might expect, okay, I'm going to be paying, I don't know how much in taxes. 10 grand, 15 grand, 20. It depends. Well, let's assume that a big chunk of your money is in a brokerage account and you bought some stock or some investment that did really well. You've put in $250,000 to an investment and it's grown to a million. So for every dollar that you take out of that, 25 cents is just a return of what you put in. 75 cents is a long-term capital gain. So you retire and you say, okay, I'm going to take $30,000 from my IRA. Well, that's income that is taxable. But the standard deduction for 2025 is $30,000. So that kind of cancels that out. So you have $30,000, but so far you're at $0 in taxable income. Then with the remainder, you, let's say, sell $70,000 from your brokerage account. Okay, well, of that 70,000, not all of it's taxable. Because remember, 25% is what you put in. 75% is growth. I know we're getting into the numbers here a little bit more. 25 times 7, I'm trying to do the math at the top of my head. I should be able to do it. like 17,500 somewhere. I'm just going to call it 18,000. That number's wrong, but just about 18,000 of that 70 is your money. Caleb put that in, it's return tax-free. Let's call it 52, is long-term capital gains. So between the 70 from your brokerage account and the 30 from your IRA, you have $100,000, a little over 8,000 per month you can live on. Your tax bill is zero. The standard deduction offset what you took from your IRA, so that kind of canceled out. The remaining tax, the 52,000 of growth, Again, it's not exactly 52, but more or less. That's under the threshold. Until your taxable income exceeds $96,700, you're in a 0% federal tax bracket for long-term capital gains. And explain the $52,000 again. Of the $70,000 you took from your brokerage account. Yeah, why is the under $96,000 tax-free? Because it's not tax-free if it's ordinary income. So it's not ordinary income. Ordinary income tax brackets are the 10%, 12%, 22%. 24%, so on and so forth. There is a separate tax bracket for long-term capital gains and qualified dividends. Those tax brackets at the federal level are 0%, 15%, and 20%. Married, filing, and jointly, until your taxable income exceeds 96,700, 0% is your tax bracket. So your brokerage account kind of becomes like a Roth equivalent in this regard. Well, you take that. I'm actually going to encourage you, if this is you I'm talking to, take that because it's tax-free and sell more. because you can sell up to this limit before you pay any taxes. I don't know what state you live in, so we have to consider that as well. Realize gains up until that limit because it's a complete tax rate. Any amount you don't need, reinvest it into what it was just sitting in because now you've stepped up your basis. Is it one of those things where if you go over, let's say you do 120, is the whole thing taxable or just the difference? It's just marginal. That's an important thing to know. Most people are very familiar with tax loss harvesting. Sell some stuff, write it off. I call this, not I, lots of people call it tax gain harvesting. Can you? realize gains up to a threshold. How common is it to have a ton of money in a brokerage versus like an IRA or 401k deal? It is not as common, but what's more common is if someone's got a $2 million portfolio, 1.4, 1.5 of it is in IRAs, let's say the rest is in brokerage accounts. So this isn't something that every single year you're doing this. I understand. This goes back to your analogy of you might be able to do this one or two years, but what you could be doing. is not tapping into your deferred bucket. And then eventually you're going to get to a place where you can't get away with only taking 30 grand. Exactly. So that's one thing. Now, the bigger thing, that's an example of how you keep taxes zero for one year. I don't actually find that a lot valuable because what you've done is you've let this deferred bucket keep growing. If you have a $2 million IRA going into retirement at 60, and you don't tap that until 75, which is when a required distribution start, that $2 million portfolio, if you just let it sit, might be $6 million. Your required distribution from a $5 million portfolio is going to be about $200,000 the first year. No, it's higher than that. Yeah, $200,000 and growing. And now you've got nothing. So the actual thing is, can you keep your taxable income low in that tax planning window and then start doing Roth conversions? Start shifting money from your IRA to your Roth IRA to fill up the 10% bracket or 12% bracket or whatever bracket you can do today that's going to be lower than where you'll be. in the future. Talk to me about your framework around Roth conversions. I know you've had videos, you have videos on this. Talk to me about your view of Ross and how you apply that to planning. Ross is awesome, obviously. I'll give you a quick example where it's not, and I'm going to show you what I do. I had a client that was 62 years old, working in California, making great income, maxing out his Roth 401 . He was going to retire and move to Texas the next year. I said, stop doing the Roth 401 because literally put that money in your IRA year when you're in the highest federal tax bracket in California. Pull it out next year when you're in Texas at a much lower tax bracket, no state income. So in that case, it does not make sense. But for most people, what you want to do is I want to see if you're retiring today, Caleb, I want to run a projection. What if we don't do any Roth conversions? I want to get a sense for like, what's the landscape, the tax landscape that we're entering into over the next 20, 30 plus years? What is your taxable income going to look like? You kind of model what that looks like. If you're never going to be in a really high tax bracket, I don't care about doing Roth conversions. Why pay taxes today if there's not going to be a tax problem in the future? For most people, especially people that have prepared and saved really well for retirement, there's a big tax liability that comes right around when required distributions kick in. I want to avoid that. And so when I can project out and say, you can't predict the future, but it's not unreasonable to think you might be in a 30 plus percent tax bracket later on. Why wouldn't we convert up to the 10 or 12 percent bracket today? And it's just tax arbitrage. Pay taxes today, but at half the rate that you'd pay in the future. Do you feel like... Trump could lower taxes permanently. And if so, the Roths could actually be a problem, like game the system. Like right now, Trump's talking about 150,000, I think, ordinary income being tax-free. Not sure if it's going to have any legs to pass, but is there a world where people would regret doing Roth conversions because we just don't know what the future holds? And also, the exact opposite could happen. Like taxes could increase and now you're stuck with all this money. at the mercy of whatever taxes are going to be. Yeah, it could happen. Here's how I like to think about Roth conversions, is I like to think of them as tax insurance. Like I have two-term life insurance. That's really good. I hope I never, I hope they're a waste of money. Yeah, I hope. Me too, dude. I hope they... I'm going to be okay if these Roth conversions, within reason, are a waste of money, because it means the rest of my plan is going to function better because of overall lower tax rates. I think that's good. That's a good analogy. What are your thoughts about deferring taxes? Are you a fan of, right now, say we're talking and I'm making... good income, what would you tell me from a standpoint of, should I put money in a Roth? Should I put money, should I defer it right now? How is your framework? I put all my money in my Roth 401k. Let's say I have $20,000 to invest. Well, let's use it. $23,500, the max that if you're under 50, you can put into a 401k. If I put in $23,500 to a 401k, the pre-tax equivalent of that is $23,500. So you're actually able to put in more money? I view it that way. I can put in $23,500 to a Roth. The pre-tax equivalent kind of depends on your tax bracket, but might be more like $40,000, $45,000 that I get to put in to this thing. Not to mention that it's just, I like having optionality for the future. Yeah. Who knows what the tax rates are going to be? I like that word. Yeah. Do you use that a lot? Yeah. Okay. Flexibility, optionality, whatever it is, the best thing you can do is prepare yourself to not have, if all of your money's in Roth, you probably did it wrong. If all of your money's in pre-tax, you probably did it wrong. There's cases where that's not true, but can you give yourself options? Because in retirement, you get to, I don't think I finished this thought earlier, for people that have no tax planning ability in their working years, because it's nine to five, you got your 401k, maybe an HSA, there's not much you can do. In retirement, there's a ton you can do. You get to create your tax bracket year to year, and it comes from where you're going to pull money from and how much and having the options to do that is huge. Hence why having a planner that knows what they're doing. is worth it. Because if you're not doing tax stuff in retirement, you're missing a huge part of the things you can actually control. I agree. I agree. Oh man, there's so many questions I want to ask. My question to you is, above the Roth 401k, are you now opting in to doing brokerage, like just putting your money in brokerage accounts? Are you trying to defer your money? Do you have any of your personal money going to deferral plans that's Postponing tax? Yeah, like the Roth 401k. Yeah, but outside of Roth, are you investing any of your money in wrappers and getting you a deduction? If you're a business owner, here's how I think of it. If you're going to put $23,500 into a 401k, all that's doing is it's reducing you're not paying taxes on $23,500 of income. Now, you own a business. If you put that $23,500 back into the business, that's an expense. It also means you're not paying I view the business as the greatest potential return on investment. in whether I put... $100 into a traditional 401k or $100 into the business, the tax impact to me personally is the exact same. I'm deferring those taxes. One just happens to have, in my opinion, a greater potential rate of return than the other. One's also riskier, like one individual business. So it's a balance. And one's deferring and one is technically a true deduction that hopefully it's deferring because it's growing in value, but it could even be taxed differently depending on how you exit. Okay. So you personally, this is not investment advice, but as a business owner, you're maxing the Roth 401k and then you're investing in your business. And then if there's outside of what you put in your Roth 401k, you're putting in a brokerage account. A brokerage account, that's actually my conservative investment. It's just short-term treasury bonds. And I do that for flexibility to say, I want to invest pretty aggressively in the business. to do so means I might need to be in a position where I'm not taking anything from the business. And so my short-term brokerage account is almost like my extended emergency fund. I'm all equities in my 401k and my Roth IRAs. There's not a single bond in that. The bonds I have are that short-term, it's not an emergency fund, it goes beyond that to say, so that I can afford to invest aggressively in Root and not put Root at jeopardy of having to lay people off for me. I have a brokerage account on the personal side that says, okay, if I needed to take my income from this for some time because I'm not taking it. It just gives me flexibility. And right now you're getting right now Robinhood is getting liquid accounts four and a half percent. Are you getting that or greater in in your short term? OK, yeah. I mean, when when when banks have high yield savings accounts, they're just investing in short term treasuries. And so you're doing that. I'm just doing that directly. Yeah, it's same thing. OK, awesome. Yeah, I'm I'm similar mindset, by the way. I have heavy emergency funds, mainly because the ROI of running business well and having a peace of mind, it means a lot to me. And so a lot of times you could look at probably someone could look at both of our emergency money and say like, hey, you could get a better return. What's the return of thinking long term, potentially making moves when people are afraid. So anything else, James, on the tax side, I mean, we talked about your views of Roths. We talked about... I love the optionality concept of giving yourselves options in the future. Anything else? I know you talk a lot about in videos, like anything else when it comes to taxes that is... There's a lot for everything from donor advised funds, qualified charitable distributions, just the tax efficiency of how the investments are managed, asset location, which is okay. You have the investments that you want to own to meet your plan goals. Like where do you own each of those? Because some are taxed differently. So do you want to shift some to... tax-free accounts and some of those investments. So there's probably too much to get into here as much as like really if you're preparing to retire, just know that taxes might be the big, you have no control over what happens in Washington, but you have very a lot of control over how you personally are realizing. I love it.
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