#48 | Moving to Tax-Free in 8 Steps

In this episode of Protecting and Preserving Wealth,’ we dive into Bruce Hosler’s article, “Moving to Tax-Free: Eight Steps You Can Take for Success.” We are joined by Bruce Hosler and Alex Koury, who walk us through these crucial steps to achieve a tax-free retirement.

We begin with the importance of sourcing and engaging trusted advisors. A team consisting of a tax planner, financial planner, estate planning attorney, and wealth advisor is essential. These professionals help navigate the complexities of current and future tax laws, ensuring a comprehensive understanding of one’s financial situation.

Next, we discuss the necessity of preparing a tax plan and calculating the ideal IRA to Roth IRA conversion amount. This step involves strategic planning to balance paying taxes now to reduce future tax liabilities. Factors such as age and the size of one’s IRA play a significant role in determining the conversion amount.

For those required to take minimum distributions (RMDs), Bruce emphasizes taking these distributions early in the year to avoid complications with Roth conversions. This ensures a smooth transition and avoids IRS issues.

Making the actual Roth conversion is critical. Unlike IRA contributions, Roth conversions must be completed within the calendar year. Opening a Roth IRA, if one doesn’t exist, and initiating the conversion process well before year-end is crucial to avoid last-minute issues.

We then explore the Life Insurance Retirement Plan (LIRP)*, which provides tax-free benefits and long-term care coverage. Each spouse should have a LIRP to ensure financial flexibility and tax-free withdrawals, especially important for estate planning and tax efficiency.

When paying taxes on Roth conversions, individuals under 59.5 years of age should use funds outside their IRA to avoid penalties. Those over 59.5 can pay directly from their IRA, which can be advantageous in managing tax obligations.

Creating a dynamic financial plan with the help of professionals is the seventh step. Unlike static plans, dynamic plans adjust to life changes and financial developments, much like a GPS providing real-time directions (as opposed to the old Rand McNally atlas). This adaptability is key to maintaining a tax-free retirement strategy.

Finally, the eighth step underscores the importance of a qualified wealth manager to implement and maintain the tax-free strategy. Professional guidance ensures that the plan is executed correctly, avoiding costly mistakes and unintended tax consequences.

Overall, these eight steps provide a structured approach to achieving a tax-free retirement, emphasizing the importance of professional guidance and strategic planning.

To view the whitepaper in its entirety, please visit Moving to Tax-Free: Eight Steps You Can Take for Success!

For personalized advice, Bruce invites listeners to contact Hosler Wealth Management:

Call the Prescott office at (928) 778-7666 or our Scottsdale office at (480) 994-7342.

To listen to more Protecting & Preserving Wealth podcast episodes, click here.

Limitation of Liability Disclosures:  https://www.hoslerwm.com/disclosures/#socialmedia

*A life insurance retirement plan (LIRP) is a strategy that uses the cash value of a permanent life insurance policy to hold retirement assets. The policy must be properly structured and managed to avoid becoming modified endowment contracts; distributions from modified endowment contracts are subject to tax rules and penalties similar to non-qualified annuities. In addition, withdrawals, and loans plus interest on them, lower both the cash value and the death benefit.


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Guest Profile

Alex Koury - Advisor

Alex Koury CFP®, CERTIFIED FINANCIAL PLANNER™ professional and Wealth Manager in Scottsdale, has worked in the financial services industry for fifteen years as a financial advisor and Financial Planner. He holds Series 7, 9, 10 & 66 securities registrations– and is a Registered Representative with Commonwealth Financial Network®.

Podcast Host

Bruce Hosler Image

Bruce Hosler is the founder and principal of Hosler Wealth Management, LLC., which has offices in Prescott and Scottsdale, Arizona. As an Enrolled Agent, CERTIFIED FINANCIAL PLANNER™ professional, and Certified Private Wealth Advisor (CPWA®), Bruce brings a multifaceted approach to advanced financial and tax planning. He is recognized as a prominent financial professional with over 27 years of experience and a seven-time consecutive *Forbes Best-In-State Wealth Advisor in Arizona. Bruce recently authored the book MOVING TO TAX-FREE™ Strategies For Creating Tax-Free Retirement Income And Tax-Free Lifetime Legacy Income For Your Children. www.movingtotaxfree.com.

In the Protecting & Preserving Wealth podcast, Bruce and his guests discuss current financial topics and provide timely answers for our listeners.
If you have a topic of interest, please let us know by emailing info@hoslerwm.com. We welcome your suggestions.

*2018-2024 Forbes Best In State Wealth Advisors, created by SHOOK Research. Presented in April 2024 based on data gathered from June 2022 to June 2023. 23,876 were considered, 8,507 advisors were recognized. Not indicative of advisor’s future performance. Your experience may vary. For more information, please visit.

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Speakers: Jon Gay, Bruce Hosler, & Alex Koury

[Music playing]

Jon Gay (00:04):

Welcome back to Protecting and Preserving Wealth, I’m Jon Jay Gay. I am joined today by Alex Koury and Bruce Hosler. Welcome gentlemen.

Bruce Hosler (00:10):

Good morning, Jon.

Alex Koury (00:11):

Hey, Jon. Good morning.

Jon Gay (00:12):

I’ve seen your article, Bruce, Moving to Tax-Free: Eight Steps You Can Take for Success. We’re going to kind of dive into this today, right?

Bruce Hosler (00:19):

That’s right, Jon. Sometimes people read about this information, but they have a hard time getting started on the process. So, I came out with my book, Moving to Tax-Free, and I wanted to provide our listeners with more concrete steps that they could take to get started and get on the right path of moving to tax-free.

Jon Gay (00:37):

Alright, we’re going to link to your book in the show notes, and we’re going to walk through those eight steps pretty quickly today. So, Alex, let’s start with step number one.

Alex Koury (00:43):

Sure. So, step number one is you want to source, identify, interview, and engage your trusted advisors. So, who are your trusted advisors or who should they be? Who should be part of your team?

We’re talking about a tax planner. So, an enrolled agent primarily. Maybe your CPA does tax planning work, but you want someone that’s going to help you figure out what your taxes are going to look like before the end of the tax year. Of course, you want to have your financial planner involved, your estate planning attorney, and your wealth advisor.

So, think of it as your team, not just one individual that’s going to be helping you with this whole process. Because when we’re thinking about taxes, especially as they are lower today, we know that potentially in the future, because of the situation we’re dealing with in our country, taxes may be a lot higher than what they are today. We’re talking about income tax laws, capital gains taxes, estate taxes, just to name a few.

So, it’s really important for you to work with your trusted advisors on understanding what your income looks like, year in and year out, to make sure that this is going to be the right strategic solution for you, not just in one year, but over the years to come.

Jon Gay (01:51):

I know financial literacy is an issue in this country for a lot of folks, and if you had a bad knee, you’d go see a knee specialist. This is the same thing we’re talking about here: finding somebody who’s a specialist in the field that you need assistance with.

Bruce, what are some of the issues that people are facing as they contemplate this move to tax-free?

Bruce Hosler (02:07):

There’s a number of issues. Certainly, one of the first things we want is that tax professional to work on preparing a tax plan every year. So, we’re looking at the amount of taxes that you’re going to face as you start making the move to tax-free, whether it’s Roth conversions or converting to a life insurance retirement plan.

You’re creating and implementing this tax plan every year and you’re strategically moving your assets over. We want to make sure you’re not paying too much taxes. We want to make sure that perhaps you’re not subjecting yourself to IRMAA, which is the penalty on your Medicare if you’re of that age.

We want to look at all those challenges that are laid out there for you in getting your affairs lined out, whether it’s with your attorney, with the trusts and your beneficiary designations, and then making sure that everything is providing this income in the strategy and the way that works together to give you the highest amount of tax-free income over your lifetime, and that it helps you pay the least amount of taxes over your lifetime instead of just this year.

What we have happen is tax accountants, our clients come in and they say, “Hey, what can I do to pay less taxes this year?” And really, the question should be, what can you do to pay less taxes over your remaining life?

So, once you’re doing all that, you’re monitoring the plan, once you get it put in place. That’s a lot of work and that’s what you want to be focusing on in this first step.

Jon Gay (03:34):

The analogy I’ve always heard is that an accountant looks back, but an advisor looks forwards, it’s that planning piece of it. Alex, what’s step number two?

Alex Koury (03:42):

So, Jon, step number two is preparing your tax plan for this tax year and calculating your ideal IRA to Roth IRA conversion amount. So, there’s a lot of different things you want to think about when considering what is the right amount of money you want to be shifting every year. You want to pay some taxes, obviously, because that’s the goal here, but you don’t want to pay too much in taxes.

So, think about some other things as well. How old are you today and how long do you have to convert your tax-deferred IRA and 401(k) accounts to tax-free Roth IRA accounts before you begin your required minimum distributions?

So, if you’ve got 5, 10 years and you’ve got a million-dollar IRA (just to give you some quick math examples), you know ideally how much you should consider converting every year, that’s going to help reduce those future distributions coming out that are required at that time.

Now, when you have a smaller account, it’s easier to manage and it’s a little bit less painful to make your Roth conversions every year. But think of it, if you have a million dollars or $10 million IRA account that you’re trying to figure out, how am I going to convert this whole thing? What are the taxes look like?

It’s going to be a little bit more painful of course, because you’re taking something out of your account that you’ve had for a long time. Paying the IRS their fair share because they own part of your IRA, and then moving the balance over into that Roth IRA, but that’s going to give you your tax-free growth.

Jon Gay (05:04):

So, million-dollar question (no pun intended, or pun intended), how much should people be converting to a Roth in any given year, Bruce?

Bruce Hosler (05:10):

Jon, funny you should ask that. I specifically wrote an article titled: How Much I Should Convert to a Roth IRA this Year?

If you would want the answer to that question, for all of our listeners, they can go to the article, it’s on our website at https://www.hoslerwm.com/, and you can look under the resources tab at the top for the article, How Much Should I Convert to a Roth IRA this Year? And it goes through, and it helps work through so people can kind of figure out how much they should be converting to their Roth IRA.

Jon Gay (05:42):

And I’m going to link to that article specifically in our show notes as well. What’s step three, Bruce?

Bruce Hosler (05:45):

So, step three is, if you must take a required minimum distribution, you need to take your RMD or your Required Minimum Distribution out of your traditional accounts first, and you should do it earlier in the year.

So, a lot of people that are old enough to have required minimum distributions, they may or may not need that money to live on. And what are they trying to do? Well, they want to let it grow in that IRA as long as they can. So, they’ll generally tend to pull it out in October or November, and that’s exactly the opposite of what we need you to do if you’re trying to take and move your IRA to tax-free with a Roth conversion.

So, the first dollars out of your IRA for the year are RMD dollars. And if you convert your IRA to a Roth, before you’ve withdrawn your required minimum distribution, you’ve now just made a total wreck of what’s going to happen for your RMDs that year. It’s going to be a mess to get it straightened out with the IRS and with your custodians.

So, the first and important step is if you have RMDs, you want to make sure that you pull out that required minimum distribution first. I recommend January, February, get it out for the year, and now you’re free to go ahead and calculate and execute your Roth conversion for that year.

Jon Gay (07:04):

Well, we’re into the summer now, Bruce, is it too late for 2024?

Bruce Hosler (07:07):

No, no. They can take out the RMD right now, but then do the Roth conversion afterwards.

Jon Gay (07:13):

Got it. Over to you, Alex, for step number four.

Alex Koury (07:15):

So, step four is the most important step and that’s actually making your Roth conversion for the year.

Now, let me explain this because it’s a little bit different than the rules for making contributions to your IRA, when you have up until April 15th of the following year to make your contribution. So, you want to make sure you make your Roth conversion in the calendar year to make sure that that counts for that specific tax year.

Now, some of the things you want to think about as well, if you don’t have a Roth IRA, you’re going to need to open up a Roth IRA as well to make sure that you can make the Roth conversion just as well.

The other thing you want to consider is everyone has until December 31st to make that Roth conversion. Don’t wait until the very final day of the year. Think about the holidays, everyone’s trying to go on vacation, there’s less staffing available.

Give yourself at least six weeks or more to submit the paperwork or submit the request to make that Roth conversion to make sure it counts because we’ve only got two years before the Tax Cuts and Jobs Act sunsets.

Jon Gay (08:09):

Very good point. Alright, step five, Bruce, we talked about a little earlier, the LIRPs (Life Insurance Retirement Plan). What do we need to know about this?

Bruce Hosler (08:15):

So, the Life Insurance Retirement Plan is important to secure a long-term care benefit for each spouse, and also to make it available for flexible withdrawals and additional premium investments into that policy. So, later on, when the first spouse passes, the surviving spouse still has a life insurance retirement plan that they can take money out of and put money back into, income tax-free.

So, you need one for each spouse; you need those death benefits to provide tax-free, long-term care benefits while they’re still alive. So, that’s very important that people apply for those policies and get them when they can still health qualify.

And that’s an important step that we have these policies to be able to leave a place where people can take money, income tax-free, and if they inherit money or sell a business, or sell a property and now, they have 50%, 60% tax rates and they’re looking for a place where they can hide that money from being taxed from the IRS — well the LIRP, the Life Insurance Retirement Plan, provides them with a place that they can hide their money, camouflage it from future taxation. So, that step is very important.

Jon Gay (09:30):

Alright, five down, three to go. Alex, step six.

Alex Koury (09:33):

When you’re considering making your Roth conversion and you’re making the Roth conversion, you’re going to need to do one of two things to pay your taxes.

If you are under the age of 59 and a half, you’re going to want to pay your taxes outside of your IRA monies. And why is that? Because even though you’re making a Roth conversion and moving money from a traditional to a Roth, that’s a qualified contribution to the Roth IRA under IRS rules. But if you’re withholding taxes from your IRA and paying them to the IRS, that’s considered a distribution that is not only taxable, but it is penalized at the 10% rate.

So, you need to make sure if you’re under 59 and a half, you’re going to make your payments outside of your qualified account.

Now, if you’re over 59 and a half, you don’t need to worry about the 10% penalty. You can move and pay your taxes directly from your IRA to the IRS from that account. So, if you don’t have money outside of your account in savings account or in wages, you can use those assets to actually pay the taxes as well, and avoid making any estimated payments, which is a big deal for people because even though you’re still paying the IRS, people hate writing those checks directly to the government.

Bruce Hosler (10:42):

And you know, when you’re trying to make the move to tax-free, you look at your IRA and you think of that tax obligation on the IRA like a mortgage, you have a mortgage on your IRA. So, you might as well let the IRA sometimes pay the taxes that are due on the IRA for that conversion. That makes sense for a lot of people.

Jon Gay (11:02):

This again, just speaks to the importance of working with trusted professionals. When Alex mentioned that 10% penalty a moment ago, mistakes in this arena can be very, very expensive.

Bruce, back over to you for step seven.

Bruce Hosler (11:14):

So, step seven, we want you to work with a tax and financial professional to create your moving to tax-free retirement plan, and more specifically, a dynamic financial plan.

Now, what do I mean by dynamic? So, the financial planning software has become very, very sophisticated now, and if you’re creating a financial plan, you want it to be used just like you would imagine if you were trying to travel around the country.

If you had the old Rand McNally map from when you were a kid, your family went on vacation and they got the big map out and you unfolded it and you can never fold it all back and you’re looking at the roads, that’s a roadmap plan. (Laughter)

But you need a dynamic plan kind of like Google today, or Waze on your phone, so when you’re driving and it says, hey, you got to take a diversion here because there’s a mudslide or the road’s under construction, and it gives you another direction to go, you need financial planning software that will tell you, “Hey, maybe you need to spend more or spend less or make some change in your financial planning of what you’re doing.

You need to create that dynamic financial plan. And you can only do that now with the financial planning software that’s sophisticated enough to help you make changes along the way that are going to help you accomplish the goal that you’re trying to do of moving to a tax-free retirement and to making sure that your retirement income lasts as long as you do.

Jon Gay (12:38):

Bruce, in all the episodes of this podcast, the Rand McNally map versus Google Maps might be my favorite analogy you’ve made yet.

Bruce Hosler (12:45):

Alright, great. I love it.

Jon Gay (12:47):

Alright, Alex, step eight, our final step in this process.

Alex Koury (12:50):

So, this is really the most crucial step in this whole process is, working with your wealth manager to create, implement, and maintain your moving to tax-free retirement strategy.

We just had a client come in, and her overarching comment was, “I’m working with you because this is very complicated. I don’t have the time, resources, or effort or knowledge base really, to execute this on my own. I have over $3 million in my IRAs, we need to work on converting over the next 12 years.” So, that’s why she’s working with us now.

But you really want your wealth manager to be prepared and qualified to help you with these strategies. Anyone can say that they do planning of some sort, but do they carry the designations? Do they carry the actual expertise and have they done it before for many other clients to execute these strategies? Which we do.

We want to be in close communication with our clients through this whole process: opening IRAs, determining which accounts we want to set up beneficiaries on, looking at your trust accounts, your taxable accounts, how do we convert those into tax-free assets as well?

So, it’s not just, again, a “set it and forget it” type of exercise we’re trying to do here. We’re trying to do this over multiple years and decades that will pass assets on from you to your heirs and beneficiaries, and potentially, to a third generation beyond that.

Bruce Hosler (14:06):

And the other point I would make here is, there’s the unintended consequences. And that’s where the financial advisor can make a big difference for you.

So, we sometimes run into do-it-yourselfers, and so they go out and they figure out, well, I want to make a big Roth conversion, and they make the big Roth conversion. And then what did they do? They increased their income so much that they made their Medicare subject to IRMAA penalties and now, they’re paying $300, $400, $500 a month each for a married couple in additional Medicare premiums.

Or maybe they weren’t intending to do it, but now, they made their Social Security benefits taxable, and so all of a sudden, they were paying no taxes on their Social Security, and now, because they did a Roth conversion, now 85% of their Social Security benefits are taxable.

Now, in reality, you’re probably going to incur some of those penalties in both of those cases to make it forward, but if you have a plan to strategically do that over 1, 2, 3, or 4 years, you go in knowing what those costs are going to be and you plan for them, and they’re not big surprises.

And so, those unintended consequences are what we try to avoid with clients when we’re helping them implement, maintain, and move forward in moving to tax-free. So, it can be very important that you have someone that is experienced and looking at all the aspects of what this involves.

Jon Gay (15:27):

And a lot more accurate than when Google says you’ll be stuck in traffic for 10 minutes and it’s really 30, right?

Bruce Hosler (15:32):


Jon Gay (15:35):

Gentlemen, these eight steps, they’re going to give our listeners the confidence they need to get started on their own move to tax-free. If someone wants to get in touch with the team at Hosler Wealth Management, how do they best do that?

Bruce Hosler (15:44):

So, they can reach us at the website at hoslerwm.com. They can call us in Prescott at (928) 778-7666, or in Scottsdale at (480) 994-7342. This article will also be available on the website, Jon. So, they can look under resources tabs and find the article if they want to reference it as well.

Jon Gay (16:07):

We’ll put it in our show notes as well and take it directly there.

Gentlemen, great information today. I’ve learned something every time I talk to the both of you. Thanks so much, we’ll talk again in a few weeks.

Bruce Hosler (16:16):

Thanks, Jon.

Alex Koury (16:17):

Thanks, Jon.

[Music playing]

Jon Gay (16:18):

Securities and advisory services offered through Commonwealth Financial Network, member of FINRA/SIPC, a registered investment advisor. Forward-looking commentary should not be misconstrued as investment or financial advice.

The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

Any tax advice contained in this communication, including any attachments, is not intended, or written to be used and cannot be used for the purpose of 1) avoiding federal or state tax penalties or 2) promoting marketing or recommending to another party, any transaction or matter addressed herein.

The accuracy, completeness, and timeliness of the information contained in this podcast cannot be guaranteed. Accordingly, Hosler Wealth Management LLC does not warranty, guarantee or make any representations or assume any liability with regard to financial results based on the use of the information in this podcast.

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