Interview with Owen Edwards, with Edwards Investments Discussing the Retirement Tax Trap

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts,

sharing tips and strategies for elevating your business to the next level.

Here's your host, Mike Saunders.

Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders,

the authority-positioning coach. Today we have back with us Owen Edwards with

Edwards Investments and we'll be talking about the retirement tax trap.

Owen, welcome back to the program. How are you doing, Mike? Thanks for having me.

Appreciate it. Hey, you're doing really good and I know that every time you hear a word like

trap, you know, I want to know where a trap is so I can avoid it, right? And then taxes, it's like I

definitely want to avoid a tax trap. So, you know, this is kind of like a loaded topic here,

the retirement tax trap. Talk a little bit about what that means and what people need to understand.

What do you mean by the retirement tax trap? That's the question, right?

What do you mean by the retirement tax trap? I'm referring to something it's very simple

but very misunderstood. Most Americans have saved the majority of their retirement money and

pre-tax accounts like 401Ks, traditional IRAs, maybe a role over from a previous employer.

And those accounts are powerful tools and they help people save consistently.

But here's the part that gets overlooked. The money isn't taxed yet. So here's the tax trap

in one sentence. Tax deferred is not tax-free. So when retirement begins and income starts coming

out of those accounts, every dollar is taxable as ordinary income. And once required minimum

distributions begin, the government decides how much it comes out each year, whether you need

the money or not. So the IRS can become your largest retirement partner, whether you plan for it

or not. Yeah. That's interesting. You say that because as you were talking, it made me think of

a quote that I've heard years ago and maybe you've heard it often. An IRA is really an IOU to the

IRS. I've heard that many times too. Because a lot of times people think, oh yeah, yeah, it's tax

deferred, tax deferred. And they get deferred and free mixed up if they think tax-free. Nope.

You need to pay taxes. It's just is going to be way down the road and way down the road might not

be the optimal time. We don't know that. The time is coming. And I mean, I see it with retirees

who assume their taxes would automatically drop once they stopped working with this tax deferred

misnomer. And sometimes they do, but sometimes they don't. And now Social Security income with

draws, RMDs, and those withdrawals can push you into a higher tax bracket and retire where

most people are told they will be in a lower tax bracket in retirement. I say don't plan to fail.

And we don't know where taxes are going to be. So the trap isn't that taxes exist. The trap is

that most people they never plan for how to withdraw their money as its taxed. So they focus on

building the pile, but they don't focus on how to draw it down effectively. So most people plan

for growth, few plan for withdrawals. I've heard it said too, you work on accumulating your

money for retirement, but the trick is that the process is de-cumulating. How am I going to take

it out at the right time, at the right place with RMDs, Required Minimum distributions, which I

want to talk about that in a second, too? But let's talk us a minute about the comment you made,

because I think that you touched on something that I think a lot of people, if you were to say

true or false, with this statement, and you say a statement, they're like, oh, that's true.

And they like, really? Well, the statement is, oh, taxes are going to be lower when you retire,

and you're going to be in a lower tax bracket. Who says that the brackets, we don't know what the

brain, you know, the 20% or 30 or whatever, who says what the brackets will be? They can move.

We don't know what that's going to be. And we certainly don't want to know what the tax rate

will be. And probably if we were to talk to 100 people off the street and say, do you think

taxes are going up or down in the next 10 years? What do you think the answer will be? Because

we know that taxes are tied to like the deficit. Like the deficit means we don't have enough money

as a country, and we're borrowing kind of like, you know, when you run up your credit card debt,

at some point you better work on paying it off. Well, the only way you can pay it off is make

more money. Well, the only way we can pay down the deficit is raise taxes or cut spending. And

we know where the cut spending, you know, initiative goes typically. So what do you say to people that

think, oh yeah, yeah, in retirement, my tax bracket will go down. And probably the tax is going

to be lower. Well, historically, federal taxes are pretty low. I mean, people, you know, we're

always complaining about taxes are going higher and they're high. Historically, they're not.

And no one can predict a future tax policy. Here's what we can know. The national debt is high.

The government obligations are growing. And the tax law changes are constant. So basically,

to your point, our government's income is taxes. And we got big bills to pay.

You know what? Drop the mic on that. Right? I mean, exactly. So when you think about the

retirement tax trap, yeah, why is it becoming a bigger issue today than what it was even a decade

or two ago? Yeah, retirement today is very different than our parents and grandparents. I mean,

for them, pensions were common. A large portion of retirement income came from guaranteed income

sources like that, which were only partially taxable. Some weren't taxable at all. At the very

least, they were structured differently. Today's pensions are rare. They're gone the way the

dodo bird. So we've shifted the responsibility from companies to us as individuals. And that means

people are retiring with larger 401k balances than ever, which sounds like a good thing. And it is,

but larger balances means larger withdrawals. Larger withdrawals mean larger tax exposure.

So on top of that, people are living longer. I mean, retirement is in 10 or 15 years anymore. It's

often 25 years or more. So that's decades of withdrawals. And you don't want the government

deciding your income schedule. So the tax environment is that we're in historically low tax bracket,

low tax levels. And we don't know where taxes are going to go. So that's why we want to take

control now, plan now, and just be ready for whatever they are. You know, and let's talk about

something too. Like you mentioned there about, you know, at one point pulling money out because

at some point when you've accumulated at some point, you need to go, okay, hey, I need to get

X number dollars a month to live on through retirement. So whatever that number is, that means you

need to start taking some money out of these accounts just to live. But another factor is the

required minimum distribution. I think that sometimes people get really confused on that because they

could think, oh, well, I've got, you know, five accounts. And I took some out of this account. So I,

I took some money out. That might not be correct. Or, hey, I sold my RV. And I'm flush with cash.

I don't need to take any, I'm good to go. But that's not a good choice either. So talk a little

bit about the RMD strategy that you need to make sure people are aware of. Oh, required minimum

distributions happen at certain ages for some people at 73, for some people at 74, for some people at 75.

And it may go up in the future. It may not. And that's where we don't know where the tax strategy

is going to be. But at certain point, Uncle Sam's taps his foot long enough and tax deferred

does not mean tax-free. So they want their pound of flesh, which means they require minimum

distributions from your qualified accounts, which are all your IRAs and qualified accounts added up.

And you have to take a certain percentage. And that percentage goes up every year. You prepare for

that by the three bucket planning, because you have tax later, tax now, and tax-free. The better you

plan for those three buckets, the better those required minimum distributions are going to look.

And as soon as you start planning the better, it's never too late for a long term plan. But at some

point, the government says pony up and you have to and they dictate it then. So while you're younger

and you before your 73, 74, 75, you control the narrative. And once you get into the RMD stage,

you no longer do. Yeah. You know, I'm, you're the expert. So,

correctly, if I'm wrong here, but I wonder why required minimum distributions were ever created.

And it made me think, well, back in the 30s, 40s, 50s, people were not living as long as they

do today. And we're taking better care of yourself. We're living to, you know, 75, 85, 90 in that kind

of thing. And I feel like the government one day woke up and said, shoot, all these people have

this money and tax deferred account. We haven't gotten any taxes on the money. They're living forever

or way longer. We need to start, you know, getting some money in our back pocket. Let's make them

take money at a certain interval so we can start getting some of these taxes to come back in.

Is that kind of a fair assessment? I think that's a very fair assessment. That's also why they start

taxing Social Security. Back when Social Security came out in the 30s, you know, the, the new deal.

Social Security, you collected it at 65. The average life expectancy was 67.

So think about that for a minute. The average, you can start collecting at 65. Today at 63,

it's 62, by the way. So it's actually less. So you can collect at 65. And life expectancy was 67.

So it really wasn't to get that. And they didn't tax Social Security. And, you know,

there were no required minimum distributions. And you're absolutely right. So at some point,

people were average life expectancy went up by two decades or so by now. Yeah. And people

are living longer. People are retiring younger. So they, the government wanted their income. So

required minimum distributions go, come from qualified accounts. So that would be an IRA. When

I say qualified, I mean qualified by the government as a retirement account. So it would be an IRA

of 401k, a 403b, a 457, you know, alphabet soup from the IRS. The only qualified account that does

not have a required minimum distribution is a Roth IRA. And that's because there are no tax

consequences. They're taxed. They grow tax-free. And they're taken tax-free. And they go to your

family tax-free. Not tax-to-ferred tax-free. And that's the only qualified account that doesn't

have required minimum distributions. And why? Because there's no tax consequences. Yeah.

Yeah. Wow. That's pretty huge. So in addition to kind of the fuzziness on

required minimum distributions, which by the way, if someone listens to this and goes,

oh, I guess I'll just go Google it and have chat GPT or Google tell them, good luck with that.

So it's going to be different for everybody. There's requirements. There's strategy.

Get with someone that knows what they're doing and can guide you in that process and put

reminders and sticky notes and Google alert or whatever to make sure you are doing it well ahead

so that you're not getting penalties because if you don't do it right, you're going to get

penalized. But in addition to understanding fully RMDs, what other mistakes are you seeing people

make today that kind of contribute to that retirement tax trap concept? Yeah. But there's a

feel that the first mistake is waiting too long to think about taxes. People spend 30 or 40 years

focusing on like you said, accumulation, saving, investing, contributing, but they don't think about

distribution strategy. Yeah. And that's tax strategy until they're on the doorstep of retirement

or past it. So by then, some of the best planning windows may have already passed.

And the second mistake is having no tax diversification and there's what we get into those buckets.

When you think about diversification, we usually think about stocks versus bonds, domestic versus

international growth versus value. But there's other kinds of diversification that matter just

as much and sometimes more tax diversification. How much of your money is taxed later? How much of

your money is taxed now? And how much of your money could potentially be tax-free? So if all of your

retirement savings are in one bucket, you have very little flexibility in managing the income strategy.

So basically diversification isn't just about investments. It's about tax treatment.

And probably the third mistake is not coordinating social security.

With the time of security combined with retirement account distribution can dramatically change

how much of your income is taxable because now a portion of your social security is taxable and has

been for 40 years now. So finally, and this is the biggest one, many people don't have a written

retirement income plan. They have investment accounts, they have statements, they have balances.

But they don't have a documented strategy that outlines where income will come from and here's

enough in what order and how taxes will be managed over time. Investments alone are not a retirement plan.

Yes. And hope is not a strategy. I think you taught me that one.

I've heard that for decades, decades. I'm sure that I attribute it to a zig-ziggler saying that,

but he probably got it from someone and nine other people probably. So it just really is a great

concept. It's like, look, measure twice, cut once. Don't hope plan and then check the plan.

And trust, but verify all of those little things. It's like, know what's going on.

Know the state of your philosophy. Have it documented. It's a living

breathing thing. It changes as your life changes and your life not might not change for six months.

It may change three times in a month. So you have a living breathing plan that changes as you do.

But it's written down and you could do projections out 10 years, 15, 20, 25 years and have it documented.

So think of someone that's been saving diligently in their forewarn care IRA.

Is it too late if they're five or 10 years from retirement to make some strategic moves

that can reduce maybe some long-term tax exposure? When is it like, oh man, I mean,

in a perfect world, you should start thinking this way in your 20s, of course. But when is it

like, look, man, it's kind of too late. You're retiring in whatever timeframe.

It's never too late for a long-term plan. And as we discussed, retirement now is,

I think the average is 22 or 23 years and some people it's 30 years.

So long-term investing is 10 years or more or so. So if you're in your early mid 60s and you

haven't planned for this yet and you're going to live to be in your mid 80s and you probably will

if you're that age now, you got 20 years. And if the long-term plan are 10 years or more,

it's never too late for a good long-term plan. But just like anything else, the sooner you start

the better. Yeah. And those people who are 10 or 15 years away from retirement or more,

the first step is just being aware of it. Simply understand what types of accounts you have.

And it's pretty simple. You look at your statements in categories. Tax now, tax later,

or tax free. And if everything falls into tax later, it's not automatically bad.

But it does mean you want to explore adding flexibility. The second is consider running

multi-year tax projections before retirement, not after. The longer you have to plan the better

for anything that we do. But it's never too late, even if you're pushing retirement and you're

not retiring next year, but you could see it from here. You're still planning for the long-term.

If you're required minimum distributions, don't start until 75 and you're 63 and you're thinking

about retiring in the next couple of years. You have a decade. That's long term. So it's not a lot

of people think it's too late. It's never too late. And they have longer than they think.

That's great. You know, let's kind of wrap up with this thought, because this could actually be a

whole weekend seminar six hours a day for two and a half days. But I think when I think of retirement,

you know, tax traps or retirement risk and things like that, is the risk of volatility in having

a certain percentage or too much of your money in the market versus, hey, let's put it in some

tax-favorite accounts or some tax-favorite accounts that can't ever go down. Talk a little bit

about the final point of making sure that your money is not at risk while you're accomplishing these

things. Well, there are options for that. There are investments that have no actual market risk.

And you know, they go up. When the market goes up, they don't go down when the market goes down.

But this, it's really not about chasing the hottest investment or even products. It's about

structuring income intelligently. And to your point, you have that short-term guarantee, as long

as you could lock down your income for a certain amount of time between Social Security, a pension,

if you're fortunate enough to have one, and guaranteed income from other sources, then the

rest can grow. And it doesn't matter what the market does. And that's the true freedom people get

when they retire in the paycheck stops. It isn't about the hottest investment or where gold is

or a war starting overseas, or it's about structuring income intelligently. Because retirement

isn't just about building the wealth. It's about keeping more of what you've built. So when income

strategy and tax strategy, they work together, that's where clarity and real confidence comes from.

Mike, retirement isn't a dress rehearsal. You get one shot at it. You better get it right.

And you better get it right by talking to the right people like yourself who can sit down and

understand someone's goals where they are now, where they want to be, guide them. Let's not rely

on hearsay, water cooler, chat GPT or Google. So if someone is interested in connecting with you to

learning a little bit more and get some of that clarity, what's the best way they could reach you, Owen?

Well, they can look up my website. You Google me or Edwards Investments and Rolf on Management

is my registered investment advisory firm. There's contact information on their email at

wouldbe Owen at edwardsinvestments.com or you could go through my website and schedule an appointment

or you could simply call my office and speak to me or someone who works here and that would be

570-3030-515 and I'd be happy to help. Excellent. Well, Owen, thank you so much for coming back on

and it's been a real pleasure chatting with you today. You're welcome, Mike. My pleasure. I hope

this gives folks some clarity in any time. Thank you. Yes. You've been listening to influential

entrepreneurs with Mike Saunders to learn more about the resources mentioned on today's show

or listen to past episodes visit www.influentialentrepreneursradio.com