MML# 082: When your lowest tax years arrive with a tuition bill attached.

I had a call last week with a lawyer about 5 years out from winding down his practice. Business attorney, 25 years in, the guy other people call when a deal needs structuring.

About 10 minutes in, he said there were a lot of moving pieces, and sometimes it felt like too many for him to properly analyze where they were and where they were going.

He had a spreadsheet for the rental properties. He had a rough model in his head for the retirement accounts. He had a CPA he trusts and a money manager he likes.

Every piece he had was a good piece.

The trouble lives in between them

Medicare premiums. Tax brackets. Roth conversions. Required minimum distributions. College tuition. Rental income. His wife's paycheck running a decade past his own exit.

Seven decisions, each one sitting in its own file, none of them talking to each other.

Chances are you know every street in your town. You could get anywhere from memory without thinking about it. Ask you to draw the map, though, and say which route is fastest across town at 5pm, and it gets a lot harder. Knowing the pieces and seeing the whole are 2 different skills.

He'd hit the ceiling of what he could work out on his own, and he knew it. That's more than I can say for a lot of people.

Where it starts costing real money

Let me walk you through the one that got his attention.

He stops practicing around 66. Required minimum distributions kick in at 73. That gives him roughly 7 years where his income drops and he can move money out of his retirement accounts at a lower tax rate than he'll ever see again.

For most attorneys, that stretch is the best tax planning window they'll ever get.

His son starts college in 2 years.

So 4 of those 7 years have tuition bills landing in them. And paying the tax on a Roth conversion means writing a check from cash in the same years he's writing checks to a university.

Let's say he can convert $150,000 a year at 24% today instead of paying 32% on it once RMDs start. That's 8 points saved, about $12,000 a year. Over 7 years, roughly $84,000.

If tuition squeezes that window down to 3 usable years, he keeps about $36,000 of it.

The other $48,000 goes to the IRS over a scheduling conflict. And that's before you count what the money would have done sitting in a Roth for the next 25 years, growing without a tax bill attached.

Both decisions were right

He was right about the conversions. He was right about getting his son through school. Neither one is a mistake.

Put them side by side, on one page, in order, and they change each other.

He can do the math on either one in his sleep. Laying a retirement date next to a tax projection next to a tuition schedule is a different job, and that's the job he'd run out of road on.

Your best next step

I've come to believe the value in this work shows up in the connections. Any advisor can tell you what a Roth conversion is. The more useful question is what it does to your Medicare premium 2 years down the line, and whether your cash flow can carry the tax bill in a year you're also paying tuition.

He told me there were too many pieces to properly analyze. He was right about that.

Holding 7 connected decisions in your head at once isn't a reasonable thing to ask of yourself, and it isn't a sign you've done anything wrong. It usually just means the pieces have outgrown the spreadsheet.

If any of this sounds like where you're at, grab a time on my calendar and let's put your pieces on one page.

Cheers,

David