Beware the Free Steak Dinner and Financial Advice Retirement Seminar | Retirement Stewardship (2024)

I recently received another one: an invitation in the mail to a "free dinner and retirement discussion."

It seems like I've been averaging one every few weeks or so. (My wife also receives one every once in a while. So does somebody named "Current Resident" who apparently lives with me who I don't know.)

I'm not sure how I got on their mailing lists, but they target near-retirees or those already in retirement (think aged 60s and 70s), but I suppose some 50-somethings are also interested in these topics.

They say "there is no free lunch," but you can get a "free dinner" if you're willing to sit through a retirement talk. (This reminds me of the "free" timeshare weekend in return for sitting through an hour-long sales pitch.)

The invitation read: "How to Avoid the Large Tax Consequences of Your Retirement Assets." Here's more messaging taken directly from the invitation:

If you would like more information on how to reduce taxes while maximizing retirement income, this workshop is for you. Attend this workshop and learn:

– How to minimize your taxes in retirement

– Utilize financial vehicles that can reduce your tax burden and last a lifetime

– Different approaches to help protect yourself against taxes on your Social Security income

– Tools and methods available to retirees to help develop a retirement tax strategy

– Common misconceptions about taxes in retirement

You probably see a common thread here: taxes, taxes, and more taxes. Other seminars might focus on mitigating stock market volatility, inflation, and longevity risk (long-term care).

I get it. As I've written previously, I don't enjoy paying taxes on my retirement income, but it's a fact of life, at least for most of us.

Nonetheless, when I get these 'invitations,' I sometimes wonder if there's some income tax 'secret sauce' that I'm missing out on that would save me a ton on taxes. Perhaps you and I could learn a trick or two while enjoying a juicy steak dinner.

Why all the fuss?

Many folks retire with six-figure and higher taxable savings accounts and other taxable income sources. These include taxable brokerage or savings accounts, Traditional IRAs, 401(k)s, 403(b)s, 457s, pensions, annuities, and Social Security benefits.

The more you have in these accounts (or receive taxable income from), the more considerable your pending debt to the IRS, whether you or your heirs pay it (yes, funds in IRAs and 401(k)s remain taxable at death).

While it's true that the debt is deferred until you spend the money, the IRS comes calling with their Required Minimum Distributions starting at age 72 (it was 70½ and may change to age 75). The RMD percentage increases each year, increasing your tax bill and making things worse.

You may have a general idea of how much you will spend each year and calculate your RMDs, but you can't know what tax rates will be in the future.

There's some relief

No one likes to pay taxes, but we do it because 1) it's the law, and 2) scripture tells us to "render to Caesar what is Caesar's" (Matt. 22:21). There are also essential government services we would not have without them.

Income taxes can be complex since the code has to consider the wide diversity of the tax-paying population. But it also includes 'niceties' that provide some relief for almost everyone. For example:

• At least for now, the wealthy get favorable treatment for capital gains, dividends, and tax-free municipal bonds.
• The middle-class (most of us) get deductions for contributions to IRAs and 401(k)s and mortgage interest, real estate taxes, charitable donations, children, and dependents.
• Some families get the child tax credit and earned income credit.
• If you don't itemize deductions, you can take the standard deduction, which was significantly increased in the Tax Cuts and Jobs Act of 2017.

In addition to these 'goodies,' the current tax law, with its lower brackets, is more favorable to most than it's been in a long time. A married couple filing jointly who can keep their taxable income below $83,550 will be in a 12% marginal tax bracket (their actual tax rate will be less). And even if their taxable income rises to $100,000, only $16,450 will be taxed at the next higher marginal rate of 22%.

Less relief in retirement

Many of these tax 'goodies' may slip away in retirement. We may no longer have dependents or make tax-deductible contributions to our retirement accounts. Itemized deductions can be harder to come by (although retirees can still itemize if their deductions exceed the standard deduction, which is $29,400 for couples filing jointly over age 65 for the tax year 2022).

If a retiree has limited resources and lives on less income (mainly from Social Security and withdrawals from retirement savings), they will want to minimize taxes to maximize spendable income.

Consider this example: For the tax year 2021 (returns filed in 2022), a retired couple over age 65 filing jointly with an adjusted gross income (AGI) of $80,000, composed of $35,000 in Social Security benefits and $45,000 in withdrawals from a Traditional IRA, will have a taxable income of $38,925 after adjustments (including taxable Social Security benefits) and after taking the standard deduction of $27,800.

(If the numbers don't seem straightforward, it's because of the formula for calculating the percentage of taxable Social Security benefits.)

Based on their AGI, they're in the 12% marginal tax bracket (which kicks in at an AGI of $46,451) but based on TAXABLE income of $38,925; their income tax will be $4,273, which is an effective tax rate of only 5.3%. (A 10% effective tax rate doesn't appear until AGI of $120,534, and a 12% effective rate doesn't apply until AGI reaches $144,640.)

Retirees with less income from savings (who rely mainly on Social Security) will pay little or no taxes, whereas those with higher incomes from pensions, annuities, and investments will pay more.

But $4K in taxes is still a lot of money, especially when it has to come from savings. That's why this topic tends to be of great interest to retirees and why catchy phrases like "how to minimize your taxes in retirement" and "reduce your tax burden for a lifetime" are used by the free dinner and advice marketeers.

Less relief for heirs

I discussed this at length in an article titled "Giving by Leaving a Financial Legacy," but to summarize, The SECURE Act of 2019 repealed a popular estate-planning strategy known as the "stretch IRA."

Under the new law, most non-spousal beneficiaries (think children and grandchildren) are required to distribute fully (i.e., take as taxable income) inherited IRA account balances by the end of the 10th year following the death of the primary account owner or their spouse.

Recent IRS rulings indicate that heirs must take distributions in equal amounts each year (i.e., a "required minimum distribution"—RMD). The account must be fully distributed by the end of the 10th year.

This is instead of "stretching out" the distribution based on their life expectancy, which resulted in a significant tax benefit.

What can we do?

The question, then, is whether there are strategies retirees can use to reduce or eliminate their tax obligation (and perhaps that of their heirs) altogether. And if so, what are they, and how can they find out about them?

This is the essence of the "free dinner and retirement seminar" sales pitch.

Who are they?

You may be wondering who puts on these free seminars. It may not be as easy to determine as you might think.

There are marketing firms specializing in setting up these events for financial 'advisors.' I use the term loosely as you may not easily discern what kind of financial 'advisor' your host is. They could be a so-called retirement specialist, insurance salesperson, or a wealth manager. They may or may not be a Registered Investment Advisor (RIA) or one who operates under the Fiduciary Standard.

Or they could be a trained salesperson who delivers the information and sales pitch and then connects you to a financial professional later on—someone who may not even be present at the seminar.

Some of these (a small percentage, I would assume) make misleading claims and even commit outright fraud. But most are legitimate, even if the sales tactics are somewhat aggressive.

What are they selling?

They aren't just offering free education and advice in most cases, though things may start that way. (And some of it may be truly helpful.) Eventually, someone will be selling something (or to get you in front of someone who is), and it's likely to be an insurance product (or salesperson).

I want to inject something important here: I am not anti-insurance products. I believe they have a place in some people's retirement portfolios. For example, single-premium fixed income annuities can help establish an income floor. Deferred income annuities for 'longevity insurance.' Permanent (cash value) life insurance may serve as an alternate source of income in specific circ*mstances.

I'm even open to the idea of certain types of indexed and variable annuities for some people. However, I tend to find many of them inappropriate for most due to their complexity, high fees, and exaggerated claims about performance made by overzealous salespeople. Still, there are some good (decent) ones out there.

The problem is that this is an "if you have a hammer, everything's a nail" kind of thing. There are good insurance products and not-so-good ones, and since everyone's situation is different, they will be more or less suitable for some than others.

These seminars will talk about all the challenges of retirement income planning (and there are many) to get your attention. But all roads lead to the same place: you are being pitched some kind of life insurance policy or annuity product claiming that it will help address some or all of these retirement challenges.

Could it be a good product? Yes, maybe. Is it the best thing for you? Maybe or maybe not. That's why "caveat emptor" is the order of the day. As I have said, some products have their place, but they're not for everyone, nor will they necessarily eliminate your tax liability in retirement.

Some options

It's possible that the seminar is being put on by a financial planner or advisor, perhaps one with expertise in retirement income planning, who offers traditional financial advice and investment management services and is just looking for more clients.

But more often than not, the ostensibly 'educational seminar' is set up to identify potential customers for insurance products that might address the significant concerns that retirees have—risks to their savings and taxes.

Earlier in this article, I listed the talking points for a seminar invitation I received. If you look at them again, notice that every one refers to taxes, directly or indirectly.

Are taxes your most significant concern? And if so, are there really any good answers to reducing or eliminating taxes altogether on your retirement income? Here are eight tactics to consider that are very likely to be discussed in a "free retirement seminar":

1 – Reduce spending

You may be in a lower tax bracket when you retire, so you're already paying less tax than before you retired.

The less you withdraw from tax-deferred retirement savings accounts, the fewer taxes you will pay since you will fall into a lower tax bracket (thank you, captain obvious).

And, to whatever extent you can control your spending, you'll also be able to control the amount of tax you pay.

2 – Monitor your marginal tax brackets

I previously differentiated between marginal and effective tax rates in this article. Because the former influences the latter, minimizing your effective rate means you want to know your marginal tax bracket and try not to get too close to the next highest one.

As I mentioned above, there is a big jump once you go from the 12% bracket to the 22% bracket once your taxable income exceeds $83,550. (You may also have higher Medicare Part B and D premiums as your income increases.)

Also, up to 85% of Social Security benefits become taxable based on your additional retirement income. Most will pay some tax on their benefits since the income threshold is relatively low.

Other taxes, such as the Net Investment Income Tax, the Alternative Minimum Tax, and the Capital Gains Tax, can also come into play at higher income levels.

3 – Have an" order of withdrawals" strategy

Working out an" order of withdrawals" strategy based on the types of accounts you own can also help minimize your taxes over a long retirement.

Financial and tax professionals generally recommend you spend down your accounts as follows:

1. Any income you receive from part-time work, Social Security, annuities, etc.
2. Your RMDs (if age 72 or older)
3. From taxable accounts (brokerage, savings)
4. From tax-deferred accounts (IRA, 401k, etc.)
5. From tax-exempt accounts (Roth)

There may be some exceptions. For example, in some years, it may make sense to spend from tax-deferred accounts to the point where you would be taxed at a higher rate and then switch to your Roth account to keep you below the next highest tax bracket. (This strategy may only be feasible if you have a sizeable Roth account.)

4 – Move assets from tax-deferred to tax-exempt accounts

One of the most often recommended strategies, especially in the years leading up to retirement, is to do a Roth conversion. That's when you move funds from a Traditional IRA to a Roth IRA (tax-deferred until withdrawal IRA to tax-exempt at withdrawal IRA).

But there's no free lunch—when you do the conversion, you'll have to pay taxes on any originally tax-deductible contributions and any tax-deferred earnings you convert.

This strategy is most effective if you use non-IRA dollars to pay the taxes, and it may be helpful if you're still working and earning an income or have saved the money to pay the taxes outside a retirement account.

5 – Move assets from taxable accounts to tax-deferred vehicles

This is probably the area given the most focus in these free seminars, perhaps because it's where insurance products come into play.

In this context, "taxable accounts" mainly refers to savings outside of retirement accounts such as IRAs and 401(k)s. However, 'advisors' may sometimes recommend using money already in tax-deferred accounts, such as an IRA, to purchase another type of tax-deferred product.

6 – Purchase an annuity

After you've maxed out your 401(k) and IRA, this strategy is to purchase a tax-deferred annuity. It can effectively reduce taxes for high net worth retirees who want to shelter more income after maxing out their retirement accounts.

Annuities enjoy tax-deferred growth and could ultimately reduce taxes. You will have to pay taxes on earnings but not necessarily on the original principal when you spend it in retirement. How much tax you will owe depends on the source of the funds used to purchase it.

If you should use after-tax money to purchase a single premium immediate annuity (SPIA)—known as a non-qualified annuity—the principal is immediately annualized over your lifetime. The payments will be pro-rated between after-tax (which won't be taxed again) and pre-tax (taxed as ordinary income) based on the IRS rules in Publication 575.

Some 'advisors' (typically, insurance salespeople) might recommend taking a portion of your tax-deferred savings in an IRA or 401(k) to purchase some kind of annuity. They typically recommend either a fixed index or variable annuity instead of the simpler (and less costly) fixed income or deferred annuities.

If you do, you'll have what is known as a qualified annuity, and the regular income payments will be taxed as ordinary income, just as distributions from a Traditional IRA or 401(k) would have been.

7 – Consider a Qualifying Longevity Annuity Contract (QLAC)

The IRS requires you to take minimum distributions from a Traditional IRA beginning at age 72 (unless you turned 70 1/2 in 2019 or earlier). Furthermore, you will have to pay taxes on those distributions.

This won't be a big deal for most people, especially if they're already taking withdrawals. But for those who want to reduce their RMDs, a new tax rule allows them to invest 25% of their IRA or 401(k) account balance or $135,000 (whichever is less) to purchase a deferred income annuity.

The annuity payments, which can begin later, will be taxed as ordinary income when received. (The longer they're deferred, the higher the payments.) The principal amount used to purchase the QLAC is excluded from their IRA or 401(k) account balance, effectively reducing their RMD.

8 – Buy life insurance

Here we're talking about life insurance products that grow cash value, not standard fixed-term life, which does not.

The most common is permanent (cash value) life insurance. And like annuities, they grow tax-deferred, and payments from cash value life insurance are taxed similarly.

Although life insurance benefits (payable upon death) are not taxable, payouts from the built-up cash value (which grows tax-free) are at least partially taxable. The portion of the money used to make premium payments isn't taxable (this is known as your "basis"). But the amount attributable to growth (interest or investment gains) is taxable when you withdraw it.

Note: life insurance policies are a "modified endowment contract" (MEC) subject to different tax rules. In those cases, it's best to consult a financial professional to understand the tax implications.

One problem with this strategy is that most people don't retain their policies long enough to accrue any cash value. One study found that over 80% let them lapse. The high cost of premiums is the main reason.

There's another life insurance product known as "Life Insurance Retirement Plans" (LIRP) that is most appropriate for those who are already maxing out their 401(k) and IRA plans.

A LIRP is part life insurance and part annuity. It is typically targeted at people with sizable assets that aren't in tax-deferred (or tax-free on withdrawal, like a Roth) retirement accounts.

The primary purpose of a LIRP is to grow the assets for legacy (like traditional life insurance) or to use for healthcare or long-term care (like an annuity). The account's growth is indexed in some cases, meaning it's tied to the S&P 500. There are earnings caps, so it resembles a fixed index annuity.

I can't do justice to them in a short paragraph, so I'd recommend this resource if you want to learn more about them: Life Insurance Retirement Plans.

Getting advice

As I discussed in a previous article, tax matters in retirement usually are pretty straightforward. They are for me as someone who receives Social Security and is withdrawing from a Traditional IRA to fund retirement.

I don't currently own any of the insurance products mentioned here. However, as I have written before, that doesn't mean I would never purchase one. I plan to take a second look at immediate income annuities and perhaps a QLAC in the next year or two. (I'll be more motivated if long-term interest rates continue to rise.) It will have less to do with taxes and more about setting up an additional guaranteed income stream if I do.

I learned from researching this article that tax-saving strategies (such as saving in Roth accounts, purchasing cash value life insurance, etc.) are best done before entering retirement, not after when you sit on a sizeable taxable account balance.

But keep in mind that every situation differs, especially in terms of whether any of the things I discussed here (or that you might hear in a "free retirement seminar") will make good sense for you as you seek to minimize taxes while building a reliable income stream in retirement.

So, consulting with a financial professional and a tax advisor is probably a good idea, especially if your situation is more complex.