Episode 42 – Year-End Tax Planning Tips with the Legendary, Bob Keebler, CPA, MST, AEP

Episode: 42
Originally Aired: December 1, 2010
Topic: Year-End Tax Planning Tips with the Legendary, Bob Keebler, CPA, MST, AEP

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Year-End Tax Planning Tips with the Legendary, Bob Keebler
James Lange, CPA/Attorney
Guest: Bob Keebler, CPA, MST, AEP
Episode 42

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  1. Introduction of Special Guest, Bob Keebler, CPA, MST, AEP
  2. Year-End Tax Planning Tools
  3. Tax Loss Harvesting
  4. Additional Year-End Tax Planning Tips
  5. Caller Q&A

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Nicole: Hello, and welcome to The Lange Money Hour, Where Smart Money Talks.  I’m your host, Nicole DeMartino, and I’m here this evening with two of the country’s top tax experts tonight, and we’re live.  Of course, I’m here with James Lange, CPA/Attorney and best-selling author of the first and second edition of Retire Secure! and also his third book, The Roth Revolution: Pay Taxes Once and Never Again, now available on Amazon.com.  Tonight, we’re going to be covering several issues that you need to be aware of when you’re preparing for your 2010 taxes, and to help Jim in the conversation tonight, we’re so pleased to have Bob Keebler on the show with us.  Bob, are you there?

Bob: I’m here.  Good evening.

1. Introduction of Special Guest – Bob Keebler, CPA, MST, AEP

Nicole: Oh, good.  Good evening, Bob, and thanks for joining us.  Before we get started, Bob certainly isn’t a stranger to the Lange Money Hour.  He’s been with us several times.  Before we get started, I wanted to tell you a little bit about Bob, and I’m sure Jim will probably add some details after I’m done, but our guest tonight, Bob Keebler, is a nationally recognized expert in estate and retirement planning and Roth IRA conversions.  He’s been named one of the top one-hundred most influential CPAs in the country for four out of the last six years, and he’s also won the award for the top forty advisors to know during a recession, and both of those awards have been given by CPA magazine.  Bob is the author of The Big IRA Book and The Rebirth of Roth: A CPA’s Ultimate Guide for Client Care, and his most recent book, One Hundred Roth IRA Examples and Flow Charts.  He has also been published dozens of times in the New York Times, Chicago Tribune, Barron’s, The Wall Street Journal, USA Today and Financial Planner magazine, so I’m sure Jim may want to add some things.  I want to remind our listeners that you have Jim and Bob at your disposal tonight, because we are live.  That number is 412-333-9385, so certainly feel free to call in and get your tax questions answered right on the spot.

Jim: And I’d like to add one other thing before we get into the substance, and this was told to me by a financial advisor who had read my book, and he said, “Boy, after reading your book, if I wasn’t a financial advisor, I would go to you.”  Well, I do think I have some expertise in Roth IRAs and Roth IRA conversions, and even, for that matter, general tax expertise, but if I did not, and I had to pick somebody, let’s say, all throughout the country, I don’t think that there is anybody that I would pick before Bob Keebler for any Roth IRA or difficult tax issue, and I mean that sincerely.  Bob, I’m honored that you are here to talk about both year-end planning and maybe a little bit about Roth IRA conversions.  Thank you for joining us.

Bob: You’re welcome, Jim.

Jim: Bob, one of the issues that, this to me is the toughest year-end planning that we’ve ever had because of the enormous uncertainty in both income tax rates and also estate rates, and there are a lot of unresolved issues in terms of even extensions of certain tax breaks that we are used to.  What are some of the things that you’re telling your clients, and what do you think some of our listeners should be concerned about?

2. Year-End Tax Planning Tools

Bob: I think the big thing right now is or people to take a real objective look at whether the Roth IRA fits into their overall plan.  Now, for people that are retired and they do not need their IRAs, most of those people unequivocally, unless they have major charitable goals, have maybe a 70% to 80% chance that they should convert at least some of their IRA over to the Roth.  Now, for people who are going to need the money, the issue is actually much more complicated, so someone comes to you and they say, “You know, Jim, I’m seventy and I’ve never touched this IRA.  What should I do with it?”  You probably should take a real hard look at whether they should convert to a Roth.  On the other hand, they come to you and they say, “I’m going to need this money to live on.  No doubt about it.”  Then, the Roth becomes a much more difficult calculation, but nothing that we can’t work through.

Jim: Well, it’s interesting, Bob, because I’ve done a lot of shows and we’ve had a lot of content with Roth IRA conversions, and by the way listeners, this was not a setup to talk about Roths again, but Bob Keebler immediately went to Roth as perhaps the most important year-end planning tool, and I’m in the process of writing an e-mail, and I’m trying to decide whether I’m going to say “I told you so” next year to the people who didn’t convert.  So, I think that Bob picking this up as the most important year-end planning tool is probably very appropriate.

Bob: Right.  I would encourage all of your listeners to spend fifteen minutes tonight before they go to bed and look at different websites for the different press organizations on what’s going on in Washington, and no politics, but the House and the Senate are struggling with what to do with these tax bills and parties are diametrically opposed, and there’s a very good chance that tax rates could go up for everyone.  If that actually were to happen, then many of our clients are going to regret not having converted to the Roth IRA.  So, I think that’s kind of what we’re up against and what we have to work so hard on.

Jim: Bob, what do you think of the strategy since you are allowed to recharacterize or, I actually prefer the more common word, “undo”, Roth IRA conversions.  What do you think of the idea of making a Roth IRA conversion, or even making a Roth IRA conversion of several different IRAs, and then waiting until maybe next September or October to decide what you are really going to do in terms of whether you’re going to keep the Roth IRA conversion, and then, if so, if you’re going to recognize income in 2010, or whether you’re going to recognize half the income in 2011 and half in 2012, and it seems to me what the tax rates are, which we will hopefully know much sooner than then, but we should certainly know by then, will be a major determination about whether how much and when you should recognize Roth IRA conversions.

Bob: I think tax rates are going to be the driver, so virtually no CPA in the country can advise their clients what to do right now.  But once we know what to do, so what I’ve been telling CPAs is, there’s a lot of teaching, Jim, from October 15th through December 1st, and what I told the CPAs in the classes and webinars is to create pivot points with your clients, like if this happens in the tax bill, this is what we’re going to do, and if that happens, this is what we’ll do, and the point of that, and it still holds true today, is there’s simply not enough time for clients to get with their advisors between now and, you know, everybody can’t get in after December 20th, so we have to meet and analyze and figure out what we’re going to do under different circumstances.  So those are all kind of what we’re up against.

Jim: Alright, and by the way, I don’t know if listeners know this, but you are not only a wonderful advisor and user, but you are one of the top, if not the top, advisor to advisors in the area of IRAs and Roth IRA conversions.  So, for example, many advisors turn to you and I believe you have a series of workshops that you do, and then are you not also teaming up with someone to do IRA and retirement and estate planning workshops?

Bob: Exactly.  We’re working hard on that, and that’s an important part of our practice.  I mean, I think it helps a lot of people if we can teach other advisors in what we’re thinking about.  But towards the end of the year here, I think there are a number of things that the dynamics are so big, and I would encourage every one of your listeners to sit down with the person that does their tax return just to make sure they’re not missing anything that they should be doing.  You know, should they be doing more charitable gifts before the end of the year?  Should they be, if tax rates go up, all of us should work hard, so if you have a cash basis company and somebody owes you $15,000, call them and beg them.  Say “pay me this year, because if you pay me this year, I’ll pay tax on it at 35% and not 39.6%.”  And then, on deductions, maybe some of the deductions of a cash basis taxpayer should be deferred.  Everyone should be doing IRAs.  I mean, there’s just a ton of things that all of us should be reviewing in a very disciplined way.  Just go down the checklist and make sure you’re dotting i’s and crossing t’s.

Jim: Yeah, and what makes it so hard, and I’ve played with some numbers myself, and it seems to me that if tax rates are going to go up, so let’s say right now, as scheduled, unless legislation changes the current rate for 2011 is if, let’s say, you’re a 35% taxpayer and you’re going to be a 39.6% taxpayer, I would absolutely agree with Bob’s analysis that it would make more sense to accelerate income and defer deductions, which is the exact opposite of what we usually tell people unless, and I calculated unless you can do 13% better on your time value of money, that that would be the way to do it.  On the other hand, if they change the rates, and the other thing is, they can split the baby and say, well, we’re going to change the rates for maybe middle income taxpayers, or we’re going to keep the same Bush-era tax cuts for the middle income taxpayers, but people at, let’s say $250,000 and above if you’re married, which is what President Obama wants, or I’ve even heard the suggestion to keep the tax rates the same for everybody below $1,000,000.  I find this a very difficult environment to plan, and I like your idea of having some guidelines set up ahead of time.

Bob: So all we can do is to try to look for guidelines.  We know the general principles, and we’re just going to have to flex with what the law does.  Now, it’s very possible that Congress could actually come back between Christmas and New Year’s.  I mean, that would be almost unprecedented if they can’t get this done.

Jim: Do you think that there’s a chance that they will get it done after year-end, or is that going to be difficult because it’s hard to have a tax increase or decrease in the middle of the year?

Bob: Well, they could possibly do it on a retroactive basis, but my guess is they’re going to want to solve it this year because just the sheer numbers are, we all know this, but right now, the Democratic Party controls the House and the Senate.  That changes in January to where the Republicans now control the House.  So, if I’m the Democrats, you know, I want to be very strong right now while I still have control, and if I’m the Republicans, you know, I’m willing to be patient because I’m going to rule pretty soon.  Now, even in January, though, we have to remember that the Democratic Party will still control the Senate and the President, of course, is a Democratic President, so it’s just very dynamic right now, Jim, and I think that no one knows what’s going to happen.  All we can do is focus on, trying to figure out what’s going to happen is really a waste of energy.  Creating pivot points of what you should do if this happens or if that happens is really where the action is.

Jim: Well, that was what you said, but can I take it you don’t like the idea of taking your best shot and then looking at it and considering a recharacterization?

Bob: Oh, no.  If that’s what I said….

Jim: Well, you didn’t say it, but you didn’t answer that, so I wanted to clarify because I’ve actually, and by the way, I myself am a big fan of your material and you were one of the very early guys to talk about the benefits of making Roth IRA conversions and sometimes even multiple Roth IRA conversions, then taking a look later to see whether you should recharacterize them, and I’m wondering if that wouldn’t even be more appropriate in this uncertain time.  So, rather than, let’s say, really sweating it out and waiting until the last couple days of the year, that you when in doubt, convert and then take a real hard look in, let’s say, September of 2011 and decide what you’re going to keep and what you’re going to undo, and then also address the issue of whether you’re going to recognize the income in 2010 or half in 2011 and half in 2012.

Bob: Well, that’s one of the beauties is with the Roth, and just to explain to your listeners, the recharacterization means if you convert to a Roth, you can undo it.

Jim: Yeah, thank you.

Bob: And Jim’s probably spoken to you about this before, but let’s say that you have $200,000 in your IRA and you convert $50,000 over to the Roth, okay?  The law would allow you to, if you didn’t like that, to recharacterize, to go back and pretend like it never happened.  Now, if you decide to do that, you could either pay all the income tax on your 2010 tax return, or, remember we did a $50,000 conversion, if you decide to keep it, you could put $25,000 on 2011 and $25,000 on 2012.  No one knows what you should do right now.  But the beauty of this is, let’s say you’re totally wrong.  You convert and then you look back and go what in the world did I do that for, you can undo it.  You have a mulligan here.  So, I think the biggest thing for all of us to pay attention to is that’s one of the places where we can accelerate income with virtually no risk.  So that’s something that you can do immediately.  Now, a very big issue on that, Jim, is many brokerage firms will not be able to honor conversions done, say, after December 20th.  So, listeners should talk to their brokers and say, you know, when is my drop dead day on this, because if I can’t convert, you know, if I can’t do this on December 30th, is the date December 20th, when is the day you will no longer process this for me?  I mean, that’s really important and I would hate to see anybody get caught in that.

Jim: And I think a lot of people got caught in it last year.  I know that for a fact.  So that is a very good warning.

Bob: Now, so what people should be doing, I mean, if there are five or six things for us to look at, one is everyone should probably be looking at Roth contributions, whether they’re deductible or non-deductible.  It takes a long time to make this work, but over time, it will pay off for you.  Secondly, Roth conversions.  Thirdly, we want to look at should you be harvesting losses in your stock portfolio?  Can we use those losses to reduce your tax burden today?  So, that’s a very important issue.  Now, many of your listeners in western Pennsylvania are probably involved in oil and gas, so make sure your CPAs know what’s going on there and how it’s going to affect your return.  We have many clients that actually used oil and gas investments, Jim, as a way to reduce the tax hit on their Roth conversion.  So that’s an important thing to look at.

Jim: Yeah, and back in the old days, like last year, when you had to have income of less than $100,000, I occasionally used, even though I usually don’t necessarily encourage people to go into oil and gas, particularly if they’re not experts in it, but I would occasionally do that, and I almost looked at it as a ticket to qualify for a Roth IRA conversion.  So, let’s say, I had a guy who was at $105,000, and we really wanted to do a Roth conversion, but we couldn’t because our income was too high.  If he bought a $10,000 interest in oil or gas and he got depletion of, say, $8,000 or $9,000, that would push him under the limit and, in effect, give him the ability to make a Roth IRA conversion.

Bob: If we switch gears on the estate planning side, we do not know.  It is possible but unlikely that the exemption could go back to $1,000,000 a person, which means a couple with a couple of million dollars of assets, which is still a big number, would have an estate tax problem, and if you’re in that situation and you have capital that you could give away, you’re allowed to gift $13,000 per child, so a husband and wife with two children, let’s say the husband and wife are in their early eighties and their children are in their fifties, maybe they gift each child $13,000, so $26,000 per child, but you can get that out of your state so that you won’t have to worry about estate tax in the future.  If you have a larger estate and you go and see someone like Jim, they’re going to talk about other more sophisticated things, but there are plenty of techniques.  I just put together a list of the sixteen best planning ideas today for a seminar we’re working on, Jim, and there are so many opportunities and there’s still a lot that we can do.  So, I think between now and the end of the year, there’s some hard work to do.

Jim: Yeah, and by the way, you can’t see me here, obviously, because it’s radio, but my eyes are lit up because I’m thinking, “Wow.  Bob Keebler has sixteen of his favorite ideas,” and I assume that that’s not going to be available to consumers, although I will also tell you this, Bob.  Your newsletter is so good, and you give so much information that, frankly, many people would charge for, and I know that your business now is different because you used to be a partner at least a medium-sized CPA firm, and now you are on your own.  Are you planning to maintain your e-mail newsletter?

Bob: We’re going to maintain that, so that’s available to lawyers, CPAs, financial advisors, trust officers who, if they just send me a note, they can Google me and get my address and then if they just send me a note, I’ll put them on the e-mail list.

Jim: Okay, well, that is helpful because I know we have a lot of financial advisors all through the country who are also listening to this.  So, again, we have this uncertainty, but what do you think of the idea when in doubt, convert, and do it before, as you said, you know, within the deadline, and then I’ll tell you what I’m telling people.  I’m telling people if you make a conversion, to consider doing an extension on your tax return, paying some money in with that extension, and then actually filing the return after you have finally decided how much you’re going to convert and whether you’re going to convert in 2009 or 2010.  Do you like that idea, or do you have something else that you think might work better?

Bob: No, I agree with that.  I’m good with that, and what most people, if you have a larger IRA, say $200,000 or $300,000 and you have two different mutual funds in there, in the ideal world, you would convert each mutual fund separately.  Your financial advisor can teach you how to do this.  But that way, if one goes up and one goes down, the one that goes up in value, keep in the Roth and the one that goes down, you recharacterize.  You create a situation where you virtually can’t lose.

Jim: Well, I know that you have been a big fan of that, and I really like that idea.  So, I think it’s…

Nicole: It is.  It is, Jim.  We need to take a short break.  When we come back, Jim and Bob are going to carry on the conversation.  We are live.  That number’s 412-333-9385 if you want to pose a question to Jim or Bob.  You’re listening to The Lange Money Hour, Where Smart Money Talks.


Nicole: Hello.  Welcome back to The Lange Money Hour.  We are here with James Lange, CPA/Attorney and best-selling author and we’re also here this evening with Bob Keebler, another nationally recognized retirement planning and tax expert.

Jim: Bob, I wanted to pick up on something that you said before, which was this might be a very good time to make gifts before year-end, and you mentioned that you could give $13,000 per year per beneficiary.  If you’re married, that’s $26,000 per year per beneficiary, but we didn’t talk about necessarily what types of gifts, and we also didn’t necessarily talk about gifts to grandchildren that might include Section 529 plans, and I want to know if in your recommendations to clients, you use other than just straightforward stocks and bonds as gifting material, if you will?

Bob: Right, just for everybody again, it’s $13,000 from each person, so if grandma and grandpa have five grandchildren and they were so inclined, they can gift each grandchild up to $26,000 between the two of them, and most of the time when the gifts are to grandchildren, they’re going to be in trust because grandparents are wise and they realize you need to bring some adult supervision to the party, otherwise the grandchildren are going to disappoint their parents and their grandparents with what they do with that money.  So most of the time, we’re going to use a trust.  Most of the time, when parents gift to children who are adult children in their forties and fifties, sometimes those gifts are outright, Jim, and sometimes they’re in trusts, but we gift all kinds of property.  We gift partnerships in real estate, cash, stocks & bonds and sometimes businesses.  So it can be really anything you own.  There are no restrictions.  It’s just a matter of figuring out what things are worth.

Jim: And what do you think of Section 529 plans, which I always consider a variation of a gift, or a subset of a gift?

Bob: The best thing about a 529 plan is that it accomplishes both income tax and estate planning goals, because the growth of a 529 plan is going to be tax-free.  Now, the benefit varies greatly from state to state, okay?  So, some states have wonderful plans and some states have plans that aren’t so great.  You’re going to have to talk to people in your state to figure out whether they like the 529 plans that are available.  Now, there are nationwide plans too that are also out there.  Now, one of the other benefits of 529 is let’s say you have five grandchildren and you start setting up 529 plans, and the oldest grandchild, who is very smart and gets into a wonderful school and has a scholarship, so he doesn’t really need the 529 plan.  You are allowed to then use the 529 plan for other grandchildren or for nieces and nephews.  So there are ways to move that 529 plan around that would not be available if you just put $13,000 in a trust for that child.  So, I think the 529 plans have tremendous flexibility.  They can accomplish a lot of goals.  Now, we always have to be careful not to over fund, okay?  And we also have to remember that for very affluent families, 529 plans may or may not be the right way to go because under the law, in addition to being able to gift $13,000, if my grandson is attending Penn State and tuition is $25,000 a year, I could write the check out right to Penn State, and that doesn’t count towards my $13,000.  So, that’s something else that we have to worry about, or not worry about, but that’s another great opportunity we have to focus on.

Jim: Yeah, by the way, you mentioned that it varies by state.  I will just mention in the state of Pennsylvania, there has been a relatively, I think within the last two or three years, a change of the underlying investment company, it used to be Delaware funds, and I don’t want to say anything bad about any set of funds, but I’ll just say that I am much happier with the choice of Vanguard.  So now, if you are a Pennsylvania resident, and you are interested in setting up a tax-free education fund for the benefit of your children or grandchildren, you could do it with Vanguard funds that might have a slightly lower cost and might be a little bit better recognized and something that you might be comfortable with.  The other thing that I think is wonderful about the plan is that when Bob said it is not in your estate, that’s correct, so if you make a 529 contribution to a grandchild and then you die, that money that you gave to the grandchild is not in your estate.  On the other hand, let’s assume your worst case fears do come true and you actually need that money.  You’re allowed to take it back, and it’s the only area of the law and correct me if you can think of any others, Bob, where you can, in effect, make a gift, have it not included in your estate, but make a gift with a string that you can take it back, but even with the string, it’s still not included in your estate.

Bob: I think that’s right.  It’s probably one of the few areas where we have that kind of flexibility.

Jim: Yeah, that’s one of my favorite areas.  Are there some other areas that you are advising your clients to be careful of at the end of the year, such as capital gains or refinancing or establishing a 401(k) plan?  Actually, I’m sure there are plenty of them, but are there any that you want to highlight?

Bob: I think, basically, the 401(k) plan is a really big thing for a lot of clients who are setting up charitable gift funds where, and this is interesting, where, let’s say that I wasn’t sure who I wanted to gift money to, but I want the deduction this year, I can move, let’s say it’s $5,000, I can move $5,000 into a charitable gift fund where I eventually have to gift the money to charity, but in the meantime, I don’t have to decide.  So, I could make my gifts in the future, but I get the deduction now, so that is a really big thing for us to do.

Jim: Yeah, and at the risk of making any specific recommendations, I know individual investment firms will handle that, and also the Pittsburgh Foundation is a convenient vehicle for that strategy.  For our self-employed listeners, and we do have self-employed listeners, are you a big fan of the one-person 401(k) plan?

Bob: I’m okay with that.  The problem with the one-person pension plans is you have to be very careful with the amount of asset protection you pick up.  See, if you’re in a multi-employer plan, Jim, you know the law well, and you end up in a bad financial situation, they cannot take that plan away from you.

Jim: That’s why O.J. Simpson, by the way, doesn’t have financial issues, because he has a lot of money and an ERISA creditor-protected plan.  So, he’s sitting there in jail with plenty of money.

Bob: Well, that’s exactly right.  So, that’s why people, if you’re going to set up these plans, you always want to talk to your lawyer and make sure you understand exactly what creditor protection you’re getting or not getting.

Jim: On the other hand, that’s no worse than a plain old IRA or Roth IRA, is it?

Bob: In some states, it actually could be.  So, that’s what we have to be careful about, and that’s, since you’re so nationwide, I think it’s really good to find an expert in that state that you can talk to.

Jim: Okay, and I will mention that at least in Pennsylvania that it might be controversial whether the one-person 401(k) plan offers better protection than a IRA or a Roth IRA, but to my knowledge, it’s certainly not worse in terms of creditor protection.  What do you think about the ability to have higher contributions to the one-person 401(k) plan than, let’s say, a SIMPLE or a SEP, and do you ever use a Roth component inside the 401(k) plan?

Bob: I personally make my 401(k) contributions into the Roth portion, not into the regular, traditional portion, and the reason for that is when I retire, I want to make sure I have three pools of capital.  So, if you just envision this in your mind, a pool of capital that is going to be completely tax-free, and that’s the Roth.  Then, a pool of capital that’s my regular pension plan, a profit sharing plan that I will be able to draw on and fill up my lower tax brackets.  And finally, I would like to have a pool of capital that’s my outside brokerage account, whatever I’ve been able to save from wages that’s out there for me.

Jim: Alright, and by the way,  I don’t know if listeners really recognize how significant this is, because a lot of times, people come in and say, “Hey, I want to convert everything, or I don’t want to have anything to convert,” but what Bob is pointing out is converting everything might not be a good idea, because you could even have a million dollars of investible assets and, with Social Security and even particularly if those investments are invested in a tax-efficient manner, you could still be in a very low tax bracket.  So what Bob is saying is don’t convert everything, but keep some money outside.  The other thing, Bob, that we have noticed is if you convert too much, what happens is that might lower your minimum required distribution from your IRA so much that that alone will keep you in a lower tax bracket.

Bob: Well, that’s exactly right, and those are the things you have to keep in mind, and I think the other thing, Jim, that is really applicable to people with a little bit more wealth, but remember, in 2013, if things stay on track, the health care bill puts a whole other dynamic in this because there’s going to be a surtax on taking money out of pension plans.

Jim: Yeah, that’s right, and a lot of people who, right now, are taxed at, let’s say, 35%, unless something changes, many of those people will be taxed at 43.6%.

Bob: That’s exactly right.

Jim: That’s a pretty good bump, and that means that it might make more sense to accelerate some of the income and potentially even with a Roth IRA conversion now, before you get these higher tax rates, and here’s the other thing that I would say on future tax rates.  Yes, it’s maybe unclear what is going to happen in 2011 and 2012, you know, right now, and even 2013 with the healthcare surtax, but I have the feeling that in general, tax rates over the next five, ten, twenty or thirty years are going to go up, and Roth IRA conversions will be even more valuable if that is the case.

Bob: That’s probably reasonable.  If you just look at the demographics, that probably is what has to happen.

3. Tax Loss Harvesting

Jim: Alright.  I’ll tell you about one of the things that I’d like to talk about a little bit because, and by the way, I will refer readers to the last time you were on, because you gave a wonderful discussion about tax loss harvesting, and this, in effect, is the offsetting of gains and losses, and you gave some really powerful information and maybe if you could just wrap up on that one topic and talk a little bit about offsetting gains and losses, and then also the fact that right now, we’re enjoying a favorable capital gains rate, but that might not always be the case.

Bob: Right.  The issue with tax loss harvesting is that most of us should aggressively at the end of each year clean up our portfolios and try to use those losses to offset current year capital gains.  Now, if rates go up, this may not be a smart move this year.  You may be better if you know you’re going to have gains in the future to let those losses lay fallow and harvest them next year where they’re going to offset income that would otherwise be taxed at a higher rate.  What’s possible is we might have the tax rate jump from 15% to 20%, and if that happens, that just changes everything.  So, I mean, that’s out there and we have to take a look at that, and that’s where your CPA can give you some advice on what to do, but go through your portfolio, look at your losses and try to harvest them.  Now, sometimes you’re going to be, you know, most reasonable people are going to say, “Well, I’m afraid to harvest because what if…”  Like today, I think the market was up, at least when I looked, a couple hundred points.  Well, what you don’t want to do is have the market run away from you, and there are techniques such as doubling upon your stock in your portfolio and there are certain very complex things you can do with options that allow you to basically stay and keep most of your financial exposure with still being able to harvest your loss.

Jim: Anyway, Bob, you have been a great source of information, as always.  I want to thank you from the bottom of my heart for taking this time from your very busy schedule.  Could you please tell listeners where they could get some of your materials, particularly your Roth books, and then I will also just put in a plug for the financial advisors, and Bob, you might want to give them a contact place for your workshops coming up, both ones that you do and ones that you do with Phil Kavesh.

Bob: Sure.  A couple of quick things: if you Google me, my e-mail address will pop right up and you’ll be able to send me a note.  Again, it’s Robert Keebler, or Robert Keebler, CPA might be the best way to Google me, and then, if you’re interested in the seminars for financial advisors that we do, mostly on IRA-type planning, you can call our marketing person.  Her name is Lisa, and her number is 920-593-1704 or 1705.  Give her a call and she’ll be able to tell you when the next classes are.

Jim: Are they still at Lambeau Field?

Bob: We do them right at Lambeau Field.  You can see the field right from where we teach our seminar, so it’s wonderful, just a great experience for people.

Jim: Alright.  And what about your Roth IRA books, specifically The Rebirth of Roth? because that was one of my favorites.

Bob: That book is available though the AICPA.  Again, if you call Lisa, she can tell you how to get that.

Jim: Okay.  Anyway, Bob, I know you have to run.  You’ve been terrific.  Thank you so much.

Bob: Well, thank you, Jim.  It was wonderful to be with your group again.

Nicole.  Thanks Bob.  We’re going to take a quick break.  You’re listening to The Lange Money Hour.


Nicole: Well, welcome back to The Lange Money Hour.  We just said goodbye to our guest tonight, Bob Keebler, national retirement planning and tax expert, and just as a recap, if you are an advisor and you want to get more information on Bob’s workshops and whatnot, you can call his marketing director.  Her name was Lisa and the number is 920-593-1705, or you can Google him at Bob Keebler, CPA.

4. Additional Year-End Tax Planning Tips

Carl:  Well, I’m enjoying the show, and I wonder if Bill can please comment on the effect of mutual fund and advisor fees on a state withdrawal rate?  And I’ll take my answer off the air.

Bill:   As far as mutual funds go, in my research, I assume that the investor was using index funds which have extremely low fees, so that the mutual fund fees didn’t enter in to my calculation withdrawal rates they weren’t affected by.  As far as advisor fees, that should be built into the client’s budget for retirement as an expense and should not be forgotten because I don’t think the advisor wants to go unpaid, necessarily.  They’re giving sound advice.  So, definitely, you want to make sure the client has included those fees in their budget and as part of that four-and-a-half percent withdrawal.

Jim:   Alright, and for whatever it’s worth, some of the money managers that I work with, and I guess I’m going to have to be careful about what I say, but I would say that it would be their hope that their performance would cover the fees.  In other words, their hope would be that their performance would be four-and-a-half percent at or better, or the market or better, after their fee.

Bill:   That’s right, and you have to remember that the four-and-a-half percent is how much you’re withdrawing.  People also have other sources of income during retirement: Social Security, pension plans, and so forth, you know, which can be used to pay expenses.  So, you have to look at the broader picture, as well.

5. Caller Q&A

Nicole: Alright.  Good evening.  You’re on the phone with Jim.  You have a question about a Roth IRA, I think, right?

Robert: Yeah, I had a question regarding my parents, actually.  My father’s going to retire here within the next few months, and he has a thrift savings plan with the government.

Jim: Okay.

Robert: And my mother is a nurse and she has a couple 403(b)s and a couple of IRAs, so the question is in the income bracket, their income is probably $80,000 each, so probably $160,000 before taxes, so being that, you’re saying that they should probably do the Roth conversion?

Jim: Oh wait, I didn’t quite say that, but go ahead and finish your question.

Robert: Well, we’re just wondering if that would be a good idea for them to possibly convert some of their IRA money to a Roth within the next month or so.

Jim: Well, let’s take a look at that.  Right now, your father’s earning $80,000, alright?

Robert: Correct.

Jim: Next year, maybe he’ll work for a couple of months, but let’s, for our example, keep it really clean and say he didn’t make anything, alright?

Robert: Okay.

Jim: So his income would be reduced by $80,000.  There’s a very good chance that he will be in a lower tax bracket in 2011 than he is now.

Robert: Even though mom’s still making between $80,000 and $100,000 a year?

Jim: Yeah, because presumably mom worked this year, so if your parent’s tax brackets are, let’s say, between $80,000 and $100,000 for mom and another $80,000 for dad, that’s going to put income before itemized deductions and exemptions and stuff at $160,000.  So, they’re likely to be in a lower tax bracket after dad retires.  Now, interestingly enough, in prior years, I would’ve said, “Hey, wait until after year-end when you’re going to be in a lower tax bracket and make the Roth IRA conversion when you’re going to be in a lower tax bracket.”  On the other hand, for your parents, one of the things they’re allowed to do is make the Roth IRA conversion in 2010 and recognize half the income in 2011 and half in 2012.  How long do you think your mom’s going to keep working?

Robert: I would say five more years, maybe.

Jim: Well, see, that’s a tough one, but it might make more sense to even wait until mom retires, and then do the Roth IRA conversion in the lower brackets, or maybe do smaller ones while you’re working.  We like to run the numbers to really make the optimal use of Roth IRA recommendations, but I will tell you that I think your parents have to be, in this situation, very aware of their current tax bracket, their future tax bracket, and I’m not a big fan of making a Roth IRA conversion at a high tax bracket when you’re going to be later in a lower tax bracket.

Robert: Currently, they still have some deductions on their Schedule A.

Jim: Right, their itemized deductions.

Robert: So, their mortgage will be paid off within the next year to two years, so that will hurt them on the tax side, right, because they’ll offset those deductions?

Jim: I would love to answer further, but I believe we are just about at the end of our time.

Nicole: We are getting the high sign.  You can always give us a call, Robert.  You can call Jim in our office.  Our number is 412-521-2732.  We want to thank Bob Keebler again, and everyone for listening, and you’ve been listening to The Lange Money Hour, Where Smart Money Talks.

jim_photo_smJames Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.