Paul Is Back and Jumps Right Into the Big Beautiful Bill Act (Part 1)

Paul Winkler: Welcome to “The Investor Coaching Show.” I’m Paul Winkler, talking money, investing, and financial planning.

So I’ve been out, took a little time off. Thanks to Evan for covering for me. It was really good just to take a little time away. Then, of course, what happens is I go, and a tax bill gets passed.

How the Big Beautiful Bill Affects Retirement Planning

Now this is something that has been on a lot of people’s minds, so I thought I’d spend a little time on it. So one of the things that I thought I would talk about is just people talk about retirement planning, and how this might affect retirement planning.

This is something I’ve talked about significantly for quite a while now. And the reason it’s been a topic of conversation is because I see a lot of financial firms, and people bring in proposals from other financial firms and say, “Hey, what do you think of this?” And quite often I see things that I just shake my head and I go, “What on earth are they thinking?”

For instance, one of the things that I’ve heard a lot in radio programs or have seen in proposals is “Convert your IRA to a Roth IRA. Do this. Quick! You’ve got to do this because the tax laws are going to change after 2025.”

And number one, the way they had them do it was really kind of weird. It was just bad math. And let me just explain that in a second and walk through why the issue was an issue.

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Now, if you have higher tax rates in the future, converting an IRA to a Roth IRA makes a lot of sense. 

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So sometimes it makes sense for a younger person, for example, that’s in a super, super low tax bracket right now, to use Roth IRAs because of the likelihood, if they’re saving early in their career, that they might actually have higher taxes in the future.

And that’s really what’s key. What’s your marginal rate right now? If you earn another dollar, what’s that going to be taxed at, versus what are you going to have to pay in the future? That’s really what we got to look at.

Now, where the math gets really bad is let’s say you had somebody with a $10,000 account, just to keep the math super simple. And let’s say that throughout time, they multiply it by 10 times.

Now that may seem ridiculous, but if you think about it, the rule is 72 divided by your interest rate. And let’s say that that rate of return is 10%. Let’s just use the rate of return for the lowest-performing asset category, large U.S. stocks throughout history.

Because small companies have a historically higher rate of return over long periods and value, a higher rate of return in small value, and so on and so forth. Now let’s just use that.

Now that means money doubles every seven years, so $10,000 grows to $20,000, that’s seven years. Then in 14, you got $40,000. And then in 21 years, you got another doubling.

And so it is 10 to 20 to 40 to 80, and you can see that that’s not ridiculous at all. That’s over a 20 to 30-year period of time. It’s not ridiculous in any stretch.

Tax Law Changes

Now let’s say that we look at that and we just say that those are the numbers. Let’s say $10,000, $100,000. I’m just showing you where I’m coming up with why it’s not a ridiculous stretch. If I have a 22% tax bracket and I pay taxes at 22% on $10,000, that’s $2,200.

Now if I look in the future, and I’ve heard this talked about where they say, “Well, even if you’re in a 15% tax bracket in the future and you take out $100,000, let’s say the tax law has changed back to the old ones, and now you have 15% bracket again. Now you pay taxes on $100,000, 15%, that’s $15,000. Wouldn’t it be way better just pay $2,200 in taxes today, 22% of 10,000, versus paying $15,000 in the future?”

And you go, “Well, wait a minute. You’re missing something.” That $2,200 would have also increased in value. You wouldn’t have paid taxes, and it’s still invested.

So you look at it and go, “Well, wait a minute. That’s just bad math to think about it in that term.” Now, the reality of it is, we’re talking about 15%.

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If you look at what happened in the new tax law, you have the standard deduction that has been continued as well. 

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There’s a lot of money that people get to earn where there are no taxes whatsoever, which is kind of cool. Now, it used to be, I remember when I first got through the financial planning, my first financial designation of the eight designations that I got, in the first one, I remember the standard deduction back then was $5,700 for married filing jointly. That’s what it was, $5,700. That’s how much money you got to earn that you paid no taxes on.

Now it’s $30,000 for married filing jointly. For singles, it’s 15. But under the new law, it’s going to $15,750 for singles and $31,500 for married. So that has jumped up, number one.

Number two, the other thing is that the tax laws aren’t changing from the 10 and 12% to the 15 and the 22, 24 jumping up to 25, because that’s what was going to be happening if nothing was changed. Now, of course, because the tax laws have changed, now we have those 10 and 12 and 22 and 24, so we’re not looking at jumps.

And a lot of financial people were jumping the gun and having people do conversions. And I’ve seen where they’ve actually said, “Convert the entire account.” And I go, “Oh my gosh, the tax implications of it.”

Converting a large account could be absolutely horrible. Now that’s one thing.

Estate Tax Changes

The other thing is that with estate taxes, a lot of people were concerned that you are going to have significant amounts of people passing away having to pay lots of money to the government. And let’s say you had a big piece of farmland. This is an example that gets used a lotor any kind of property or businesses and those types of things.

You have to be concerned that you have to literally sell the business at a discount or sell the farm at a discount or the property, because you’ve got to come up with the tax money fairly rapidly in order to pay the tax.

Now, one of the things that they did with estate taxes is that right now, you’ve got just shy of 14 million for a single person, just shy of 28 million for married, that you can pass without estate taxes. Now that was moved to 15 million and 30 million.

Now, a lot of people within the sound of my voice, you’re not worried about estate taxes because a lot of times people call us and go, “I just inherited money. Do I end up paying a lot of taxes?” Well, it depends. There can be some taxes.

But when we’re dealing with non-qualified accounts, taxable accounts, you get step-up in basis, that can be the case with inheriting an account like that — which now you get a tax-free pass on that. But you may have inherited IRAs and those types of things, where you have to distribute the money over a 10-year period, or there are some exceptions to that.

So it gets a little bit complicated. But the idea being that I might have to pay some income taxes.

But the estate tax is often what people are concerned about. “Am I going to have to pay estate taxes on this inheritance?”

And for a lot of people, the answer is no and continues to be no because of this change right here. Which is pretty significant, because I was concerned about it, because it could have dropped.

I remember good grief, I think it was, oh, was it 600,000, 650,000? It’s been so long. But I remember early on in my career, you couldn’t pass much of assets. You couldn’t pass much without having an estate tax. And that becomes problematic because if you have property, you want somebody to inherit something, you have a business, you literally have to come up with some pretty good gymnastics in order to pay the estate tax on that.

And what do you do? Do you sell the business? Do you break it apart? And do you really ruin something that you’ve built over maybe decades in order to pay taxes?

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So that to me is a really big deal, having those estate taxes and not having to worry about that as much. 

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So that’ll be something that I’m glad to have seen go through.

Roth IRA Conversions

Other things that I think are interesting. Now the Roth IRA conversions, that is going to be a moving target. One of the things that we’ve been looking at is how soon we get our software programs up and running and adjusted so that we can do this type of work.

Because Roth IRA conversions can absolutely make sense. For some people, they can make sense. It’s just not something that you want to just broadly, just everybody do and go, “I think it’s a good idea to do this so you save in taxes in the future.” Because that can be a real problem, especially if you end up with higher taxes right now versus what they would have been had you just let things ride.

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So sometimes what we’re doing is we’re doing partial conversions, small ones, and that can make a lot of sense. 

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And I’ve even heard where financial people say, “Hey, yeah, just do small ones.” And then in their proposal, they’re doing large ones, and it just makes no sense. Be very, very specific about this.

The other thing that can be an issue is the idea of social security taxes, because what can be my taxes on distributions from IRAs? Well, I’ve got my income taxes, but it can also create a tax on social security.

Now, that was one of the things that Trump talked about, is “Let’s not have taxes on social security.” Well, it didn’t quite work that way.

You didn’t end up having it in that particular manner, but there was an additional amount of money that seniors can earn without taxation. That did end up happening. And that can be helpful when it comes to conversions to Roth IRAs as well.

It can become helpful in doing planning in the future as to whether the marginal rates or the taxes that you pay on distributions will be higher. Because not only do you have income taxes that you have to pay on distributions, but you can have what was called the torpedo tax.

Why Software Programs Are Critical

A torpedo tax is where you have provisional income, you have income that you earn in retirement, plus half your social security. When you add those two things together, if they exceeded certain thresholds, like 32,000 and 44,000, and 25,000 and 34,000 for singles, if it exceeded those two numbers, you could have either 50% or 85% of social security added to taxable income.

Well, with these new deductions and these bonus deductions that seniors are able to take, that actually can mitigate that to some extent. Now, from a practical standpoint, your head may be swimming as you listen to me. And good, it probably should be swimming, because this is complicated.

But here’s the thing to keep in mind. This is why software programs are critical. This is something that we have been really, well, we’ve been embracing this for years and years, but really high-end programs.

Some programs out there I’ve seen, they’re used more for marketing and trying to sell products. Because as I used to joke a lot earlier in my career, financial planning is just a tool to sell stuff to people. And that has been the case. That’s why we don’t sell anything, so it doesn’t play in.

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But we use these programs because it becomes so complicated to determine.

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Does it make sense to do conversions? And if so, how much?

And if you’re not using this type of stuff and you’re planning, I would really urge you to make sure that you’re using some sophisticated software programs and your planners are using some really sophisticated programs.

Because you can dial this in and say, “Okay, how much per year should I convert? What should I do this year? What’s next year? Do I convert when I’m taking social security?”

Maybe, maybe not. A lot of times in the past, we’re looking at it and going, “Maybe not because of the torpedo tax. It may not make sense to do that.”

Now with the additional deductions, it may make sense for some people to actually continue converting even after they start taking social security. So these are all things that we’re thinking about.

Additional Deductions for Charities

Some of the other things that I’ve been looking at is the additional deductions for charities. I think that’s fascinating. And the way I’ve explained it, $1,000 additional charitable deduction for non-itemizers and another $2,000 for married filing jointly is permanent after 2025, is basically what they’re looking at there.

This really interesting because I look at standard deductions versus itemizing. Now, this is something I’ve used to describe QCDs, a Qualified Charitable Distribution. If you’re age 70 and a half and older and you are using a standard deduction, just for fogging a mirror in 2025, $15,000 was the single level, and it was $30,000. Now that it’s increased, it’s $15,750 under the new legislation, and $31,500.

Let’s just use the married, just for my example, so I’m not running and throwing so many numbers out there. If I look at my income, my first $31,500, that income coming in is tax-free because of a standard deduction.

Now, if I’m itemizing, which I’m taking property taxes and mortgage interest and I’m adding charitable contributions and all of these things in there, if I’m adding all of that stuff in there, now if that number exceeds the $31,500, then I might itemize. I would itemize.

I would look at that and go, “Hey, it makes more sense. I get a bigger deduction.” So I would do that.

Well, a lot of people when they get into retirement, they’re over age 70 and a half. A lot of people are not itemizing anymore. Maybe their mortgage is paid off, maybe their property taxes aren’t that high, they’re not contributing as much to charity.

But a lot of times, the things that you have, maybe medical expenses are going to be in there, but you look at those things and you go, “That’s an awful lot of expense right there, $31,500. And I just don’t have that much in deductible expenses.”

So what do they do instead? They just do the standard deduction. And it made sense.

Well, if you think about one of those items in there was your charitable contribution, and you lose it. You don’t have the ability to deduct it if you’re using your standard deduction.

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Enter the QCD: You can make distributions from your IRAs and have it be tax-free. 

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As I’ve always explained it this way, it’s like getting your charitable deduction back. Well, what they did under the new legislation is they gave an additional $1,000 for single, additional $2,000 for married filing jointly. After 2025, they allow an additional deduction.

And it’s like that. You can make a charitable contribution, which is cool.

Now we’re not talking about the QCD here, we’re talking about something totally different, which I think is interesting that you’re able to do that. Because it gives people that ability and because it was a big complaint, quite frankly.

“Hey, I am using a standard deduction and I’m not really getting …” And I think the charities ought to cheer about that. They’ll probably be happy about that particular aspect of the bill. So I think that that’s super, super interesting right there.

Changes in the Big Beautiful Bill

Big topic of conversation, of course, is Trump’s Big, Beautiful Bill. So a lot of the changes, quite frankly, for me, were welcome. The standard deduction, not only staying but rising a little bit. Bonus deductions for older adults, for people over the age of 65, I thought was great.

State and local tax, we’ve talked a little bit, I gave my opinion about that in previous shows. I’m not going to get into that, but it’s a subsidy for the states. That’s the way I looked at it.

Child tax credits, a little bit of an increase in that and estate taxes, that was a big deal. Estate taxes is a big deal because it could really mess up people’s businesses, farms, and people that do have significant estates.

What they were going to do with those things, it could really destroy businesses. It really could. And really destroy farms all across America.

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Because a lot of those properties can be worth a lot of money, but you have to sell them off to pay the taxes. 

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And then you have the overtime pay things we talked about. We had joked about how we were actually going to start receiving tips for the work we do around here. I don’t think that would work. But that was something that was a big part of it.

Loan, auto loan interest deducting up to $10,000 of annual interest on new loans. I’m not a big fan of borrowing money to buy vehicles, so yeah, whatever. I mean, some people, you have to.

I remember my first car that I bought. My grandfather begged me not to buy a brand new car. He was right.

It wasn’t a good idea, but I did it. You don’t listen when you’re that age. You just don’t.

Trump Accounts

But the thing that caught my attention, I talked a little bit about here, was the Trump accounts. The thousand dollars that the government was going to put in an account for newborns, U.S. citizens born from 2025 through 2028, and then allowing parents to chip in and other people to chip in another $5,000 a year to the account. And these accounts, you can access them at age 18, was the idea behind it.

Now, the thing that really caught my attention, number one, it’s a giveaway, right? A lot of people have opinions on whether that’s a good idea.

But the idea on these accounts is just stick some money in an account. And how it gets invested, just it was SMH, right? Shaking my head on how they do that, because I talk about on this show, and I’ve talked about for years, the idea that, “Hey, don’t try to time markets. Don’t try to stock pick.”

People throwing darts at stock tables do better than people that are trying to figure out which companies. And when we look at how money is typically invested, it is the exception and not the rule that people actually don’t try to pick stocks or time the market.

And you think, Well, my advisor always talks about how you can’t time the market. And I go, “Don’t listen to what the advisor’s saying. Read what their disclosures say they are doing.” That is way more telling.

I’m telling you, I haven’t read a disclosure by a financial company in years that doesn’t say in there that they engage in fundamental analysis, tactical asset allocation, technical analysis, and those types of things. Just haven’t seen anything in years. And that’s one of the things that I have always said makes us so different, is how we approach that.

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We just don’t gamble. I don’t believe in it. I have found that the research shows it just doesn’t add value. 

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Matter of fact, when pensions engage in those processes — and they had major, major studies of pensions — they actually hurt returns and they increased risk when they engaged in that. But anyway, that’s one of the things that they did right in this.

They said, “We’re basically going to track and index.” Now, index is a fairly high-cost way of doing it because you’re overweighting bigger companies, and you do have a little bit of stock picking in that the index provider chooses which stocks go in there and the reconstitution effect and those types of things that I’ve talked about here. But at least they’re not engaging in trying to predict the future on a regular basis in these types of accounts in index funds.

But I thought it was odd, it just said in the legislation that the new accounts had to track a U.S. stock index. And you go, “Okay, which one?” I’ve heard S&P 500 thrown around, but you can go 20 years without any return in the S&P 500. That could be problematic.

Qualified Expenses for 529s

Now, one of the things that we’ve had for years that I’ve been an advocate of is we’re talking about kids. How about using 529 plans, because of the fact that you can actually use the money tax-free for education?

And that is one of the things that has changed over the years, because it used to be that it was only for college education. That’s all you could do. If you wanted to use the money tax-free for something, it had to be college education.

Now, under the new rules, the definition of qualified expenses for 529s has expanded. And you can use non-tuition expenses for elementary, secondary, religious, and private school expenses are now allowed, as are expenses for acquiring and maintaining professional credentials, which I think is kind of cool.

Beginning in 2026, 529 accounts can be used to pay up to $20,000 of elementary and secondary tuition. And that’s up from the $10,000 currently. So you look at 529s, and there’s some flexibility there.

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If you look at these Trump Accounts, you have to pay taxes at regular rates. Now, that is not as advantageous, in many ways, as regular non-qualified accounts. 

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When I have a non-qualified account, I just have an investment account, one of the things that I am adamant about is that we don’t stock pick and market time. So you don’t have a lot of movement, you don’t have a lot of trading while the account grows in value.

So if the account grows in value, and I’m not trading and buying and selling stocks, I’m not subjecting this account to taxes right away. So if I have a stock that’s worth $1,000 and it grows to $2,000, let’s say, or a mutual fund or an ETF or something like that, that grows in value, and I haven’t sold it, I don’t owe taxes on that $1,000 gain from $1,000 to $2,000.

I don’t have to pay taxes on that gain until I sell it. Now, when I sell it, if I’ve held it for more than a year, it’s subject to long-term capital gains taxes, which for many people, if you’re in a 10 or 12% tax bracket, is zero.

For a lot of people, that tax rate on capital gains is nothing. And then 15% for people above that, and then it goes to 20% if you’re in the super, super high tax bracket, which most people aren’t, but that is kind of nice.

It’s only when I actually sell this stuff. So I have tax deferral. And when you’re managing an account and you’re not engaging in these crazy processes of trying to figure out which company’s better than another and trying to get in, get out, move it in before the market goes up, move it out before the market goes back down, then we don’t have to deal with those taxes at all.

Flexibility of Non-Qualified Accounts

Then when we do spend it later, those tax rates are a lot lower than the, not zero, but 10 to 12% or not 15% but 22, 24 and so on and so forth, up to 37%. So you look at those rates on regular income taxes, the new accounts, I just go, “That doesn’t seem so wonderful to me. I’m not excited about putting extra money toward this account.”

I guess if you have a kid and you get the free $1,000, that’s probably worth it, right? You have free money, and then they can’t touch the money until they reach age 18, and then they have qualified expenses, things that have qualified uses.

Now it’s taxed like income, plus there’s an additional 10% penalty, from what I’m understanding, if you withdraw the money before age 59 and a half, but they have certain qualified uses, is what I’ve read.

So the qualified uses are paying for college, supporting yourselves if you become disabled, recovering from domestic abuse was another one, natural disaster was another one, recovering from that. And then you have that beneficiaries could actually withdraw up to $10,000 to buy their first home, up to $5,000 for a new baby that they have themselves. So there are certain things.

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It is better than a poke in the eye with a sharp stick, but I’m not excited about throwing a bunch of extra money toward these types of accounts. 

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I think non-qualified accounts, many times, it’s just you got more flexibility. The tax treatment, 529s, education.

Now, here’s the thing about 529s is that if you live in Tennessee, I’ve never recommended the Tennessee 529. I’ve always recommended other states. And the reason being is because of the investment options, and that’s the big benefit of 529s, is you have a lot more investment options.

You’re not just stuck with one single stock index. You could have large companies, you have small companies, large value and small value, and international large.

When people say, “Hey, what did the market do?” I just cringe. Because I have to ask, “Which market?”

You have some market segments that year to date are up 30%, not the S&P 500, not small caps by any stretch of the imagination. So I want to make sure that I have greater diversification.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.