In this video, we will touch on the following:
0:00 - Introduction
01:18 - Defined Benefit plan
03:42 - 401k
07:57 - Spousal IRA
09:49 - Required minimum distributions to charity
13:09 - Retiree tax savings ideas
15:00 - How to Contact Us
Jeremy: Hello, this is Jeremy Finger with Riverbend Wealth Management. I have with me today Bobby Jayroe with Jayroe, Lordo & Catalano in Murrells Inlet, South Carolina. What we're going to be talking about today are a few different ways people can save money on taxes prior to year end. So Bobby's been in this business and helping people save taxes here in the area for over 24 years and welcome, Bobby.
Bobby: Thank you. Thank you, Jeremy. It's good to be here.
Jeremy: Perfect, perfect. So Bobby, we've discussed briefly a little bit about you know some, what some people can do. One of the things we talked about, we talked about defined Benefit Plans, 401k, Spousal IRAs, being able to give money directly to charity through your IRAs and then possibly bunching some charitable contributions together so that it would be beneficial for the individual. Now, full disclosure here guys, we'll talk about some general information okay some just ideas to be able to get specifics on how that can affect you certainly give, you know. Bobby Jayroe or his comp or his firm a call to see how that could benefit you so Bobby, what's the first thing on your mind that would be you know somebody something somebody needs to think about to help save them money on taxes
Bobby: Well, if you're a high net worth individual who owns their own business and I guess this would probably be more geared towards maybe the medical profession or some sort of a small business where you've got a diverse number of employees and the employees are fairly young relative to the owners. This defined benefit plan, I think is the biggest bang for the buck because it will allow you to put a substantial amount of money away into a tax deferred vehicle take a current year tax deduction based on the statistics of the life expectancy of all the covered employees there is a cost associated with doing this so you have to do a thorough analysis to decide whether the cost benefits you know, if they weigh out correctly but I've found that that there could be a substantial tax savings by setting these plans in place you have to be able to stand up for at least 3 years to make this thing work to get past the IRS and the rules but if your company meets these categories it's probably the biggest or the largest way to put away a significant amount of money for the owners.
Jeremy: Alright. that sounds good like when you say significant, how much more could someone I mean, just estimates that someone could put in something like this that they may not be able to put into maybe a traditional way like a 401k
Bobby: Well, an analysis would be, I've seen some of my medical physicians be able to put away anywhere from $75,000 to $150,000 tax-free in a given year and you compare that to a 401k that's got a $26,000 limit I mean, you can see the advantages.
Jeremy: Wow, yeah, so especially if you're making a lot of money you know early on and able to do that you can, you know, double it possibly triple the amount of money you can put in pre-tax
Bobby: Yeah. You would need to do a thorough analysis on that but there's lots of opportunities and I'm sure Jeremy you can help with those taxes.
Jeremy: That's right, that's right. Yeah, Bobby you and I have worked on a few cases and being able to help people go through that and obviously guys it's your individual case may be maybe different but that's that's one thing there. I mean you did touch on 401ks you know that's another thing that small business owners could use to be able to put away money pre-tax or save us some money on taxes
Bobby: Yeah, you know, and if you're a small business and you've been up and running for a few years and you're being forced to take compensation usually in the s-corporation world where you have to have officer compensation but you really just don't need the money or you want to start something small and let it grow you know a 401k plan is really cost-effective and it allows you to put some money away the company can match and so you get a deduction for that as well. All the employees can participate in that and the cost on a per employee level is generally very small you know and it has its advantages too because most small businesses when they're starting out they're worried about cash flow and if you put a loan provision in your 401k documents you can borrow up to $50,000 or 50% of your account value down the road if you find that all of a sudden you have a cash crisis and you need money so over the years that I've been working with people you know the biggest fear about putting money away is they can't get it back without a negative tax consequence so they're hesitant to fully fund 401ks because they want to reserve some cash for operating expenses but we said with a loan provision that kind of allows you to be a little more aggressive in the 401k contributions knowing that if you get into hard times, you can borrow some of it back and the cool thing about borrowing money back out of your 401k is that the interest you pay back is to yourself so in versus going to a credit card or a bank loan why not borrow from yourself you know, there is a downside I mean the money is not in the market at that moment in time earning you market returns but if you're if you're having to fund your business on credit card debt or on a high interest bank loan it's a definitely a viable option
Jeremy: Yeah. That sounds good and also helps us with employee retention knowing that you're you know you're looking out for them and their best interest and hey we can put away some money for you on your behalf and-
Bobby: I've seen these things used a lot in small businesses as well where you may have a lot of female employees who at some point in time know they're going to go out on medical leave for a child and being able to do a hardship loan for their 401k when they're outside of you know, when they've used up all their vacation or PTO time during that three or four months that they're choosing to stay at home, this is another way of generating some cash into the household to help them meet their monthly expenses from their 401k savings account.
Jeremy: Alright. Yeah, that sounds great, Bobby that sounds great and as an independent IRA you know, we're able to use plans for multiple different providers that are out there and again you know which one might be best for you depends on the number of employees, how much money you're putting in on a on a monthly or an annual basis your payroll, the ages of your employees, there's all kinds of factors that come into play and so you know not only talking to a great, you know, good financial advisor but also working with your CPA to coordinate what, which one might be best for you or which plan type might be best for you because there's simple IRAs, there's 401ks and a few other things.
Bobby: Touching on your point earlier about an employee benefit I mean as the marketplace is becoming more competitive for good people and health insurance is a sticky point being able to afford health insurance premiums I mean a lot of my clients are looking for ways to beef up their employee offerings to make them competitive when they don't have health insurance and what I've found is that although a 401k plan is not a replacement for health insurance, it certainly helps in the in the employee's decision whether to come on board with your company or not having a 401k.
Jeremy: Yep, that sounds that sounds great, matter of fact Bobby, I am having another conversation with someone who is an expert in the you know group health and field and I'll share with you that information and you know once we get that dialed in I'll have that posted to my website as well yeah and a little bit about... okay so there's your Spousal IRAs you know, so if there's a non-working spouse you know what are some of the things that a non-working spouse can do to help save the household some money on taxes as well.
Bobby: Right, well you can make a Spousal IRA and although that's not a huge amount of money every little bit helps and then what a lot of my high net worth people have inquired about is the so-called Backdoor Roth which you can't contribute to a Roth account if you're a high net worth earner and so you know the idea behind putting money into Toth is that he grows tax-free and so there's an incentive to try to put money into those accounts but the statutes kind of bar certain individuals from doing it and a Spousal IRA is one way to do this you make a IRA contribution for your non-working spouse and then that spouse immediately turns around and does a Roth conversion on that IRA and that's what's called a backdoor IRA and basically the wife's account then becomes a Roth and it'll grow tax-free going forward indefinitely so the reality with this is that although you do not get a current year deduction for that contribution at least the money's invested in the market growing tax-free for retirement and it's the spouse's name which also, it gives you some liability protection as well and it's a credit it's a protected asset so there's a lot of reasons for doing it to do a backdoor Toth is something you're going to want to do early in your career because obviously with the IRA limits it's going to take a substantial number of years to build any kind of significant value there but if you were to start today and run for 20 years, 10 years, 15 years that could be a nice portfolio asset at the end.
Jeremy: Yeah. That, I mean that makes a lot of sense I mean every every little bit helps and so yeah definitely so what about like you know someone who's charitably inclined and they're looking to give give money to you know charity on an annual basis what are some of the things that you've seen that people have done.
Bobby: Well, I think one of the biggest attack angles on that is taking a look at individuals subject to the RMDs of their retirement plan these mandatory distributions you can direct your retirement accounts to directly fund the charities with these contributions that you're currently making as an itemized deduction and have them apply to your RMDs so in essence basically, you're making a tax-free charitable contribution directly from your retirement account to the charity and you're not having to report that distribution as income on your tax return. It reduces the amount of your required RMDs directly so I think that's a great planning opportunity for those who give a lot of charity and it's another way of yet reducing the taxable income by having those contributions come directly from your brokerage account.
Jeremy: Yep, that makes sense and I've coordinated with great CPAs like yourself to you know to have you know my clients you know funds who are charitably inclined go directly to those charities to do just what you're talking about. Yeah and there's a couple other things that that if someone's in a lower tax bracket during a certain period of years if they get a and they have these huge RMDs that are coming towards them this is going to reduce that future taxable income that they may have to pay you know two, three, four, five, ten years down the road, right?
Bobby: Yeah and you know and the idea here is if you're going to give money away it's because you're charitable to start with but if you can save some taxes you know that that's an incentive.
Jeremy: Yeah. Yes, that's a it's a double benefit
Bobby: Yeah and it's great for planning too I've spoken with lots of nonprofits who appreciate having these direct conversations with their donors because it helps them with their budgeting purposes as well because if I know that I'm going to give $10,000 a year to charity A through my RMDs and I'm going to do that for the next three years that's useful information to go ahead and let that charitable organization know hey you're going to be receiving this money from me on a periodic basis for the next three years and it helps them with their internal planning and helps them achieve their goals because they know that you're going to be there to back them up and you know it's peace of mind too to to go ahead and do that in fact anybody that I have that's in RMD situation I fully would like for them and I try to encourage them to do all of their charitable giving directly from their retirement account and anything that even includes you know the $400,000 a year to the Salvation Army you know you're talking about things like that I mean I would encourage them to make up a charitable budget that says this is how much my planned giving is for the entire year and then just submit that budget to the broker and have them just honor it. It really takes that pressure off of the taxpayer and let's them also kind of plan out their giving and be able to see the tangible results of it and you know help them accomplish their goals and in a tax incentive.
Jeremy: Tax especially, yes that's one reason why you know I try to do full financial planning is to look and see where the expenses are and look at that whole picture and if there is a budget like you say for charitable giving okay how can we work with their CPAs like yourself to be able to have the biggest benefit for the client
Bobby: Right and I'll, you know, this approach is not very well known and you know I'm very surprised at how few people out there understand this concept so I think that everybody that I've been able to work with on this they've been very pleasantly surprised at the effectiveness of it and what has changed how it's changed the amount of tax that they're paying to the government
Jeremy: Yeah, okay. Great, great, perfect. Along those lines it's like if someone is giving money to a charity they may want to consider maybe bunching a couple years or a few years worth of contributions in one year so they can get a bigger deduction or if you know it may be more meaningful to do it that way?
Bobby: Yes, with the recent enactment of the change in the tax laws regarding the standard deduction and the itemized deduction limitations, a lot of people who are in a very charitable position generally, they find themselves not having enough expenses to actually take advantage of the itemization on the tax return and so they'll make the charitable contributions but it doesn't exceed the standard deduction so basically they're not getting any additional tax benefit from it and this is where this bunching comes in because if you're in that situation it may pay to take two years worth of giving and give it all out before the end of the year such that you've got a total quantity of charitable does just that helps you exceed that $24,000 standard deduction for a married couple
Jeremy: Alright that makes sense, perfect. Well I know we've only touched on just the very high level of things that some people can consider again we're not giving specific advice we're giving general information but if they have specific information, questions about their individual situation, how can they contact you or your firm, Bobby?
Bobby: Well they can contact Jayroe, Lordo & Catalano PA we're a certified public accounting firm based in Murrells Inlet, South Carolina. Our phone number is 843-902-1040 you can also go to our website jlapa.net and do your due diligence on our firm.
Jeremy: Perfect! That sounds great and if you've got specific investment advice or questions you can feel free to contact Jeremy Finger at 843-970-1043 and or Jeremy@RiverbendWM.com. Thank you very much and I appreciate it. Thank you, Bobby!
Bobby: Thank you! Have a great day!