Do you actually understand how recent tax changes could impact your financial plan? In this episode, we break down several important tax topics, including Trump accounts, Virginia tax changes, Net Investment Income Tax (NIIT), and estimated tax payments. Tax laws are constantly changing, and what seems permanent today may change with the next administration, which is why tax planning should always be part of a long-term financial strategy.
Listen in to learn what Trump accounts are and who they benefit, what the Net Investment Income Tax is (and how to potentially avoid it), how long-term capital gain distributions work, and how to manage non-qualified investment accounts more efficiently. We also discuss why many federal retirees may not need to make estimated tax payments and why customized financial planning is essential when it comes to taxes.
Listen to the full episode here:
What you will learn:
- What the Trump account is and who benefits from that. (8:30)
- How to go about opening a Trump account. (12:45)
- The most recent Virginia tax changes. (20:00)
- What Net Investment Income Tax is. (26:00)
- How you can avoid NIIT. (31:25)
- What a long-term capital gain distribution is. (39:00)
- Examples of managing non-qualified accounts. (45:35)
Ideas Worth Sharing:
- “When it comes to taxes, permanent is only permanent until the next change of administration.” – Mason & Associates
- “Probably for 90% of our federal retirees, there is almost no reason to make federal estimated tax payments.” – Mason & Associates
- “The one constant is that taxes change, and it’s important to work with someone to help you figure it out.” – Mason & Associates
Resources from this episode:
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Read the Transcript Below:
John Mason: Welcome to the Federal Employee Financial Planning Podcast. In today’s episode, we’re discussing tax specifically. We’re gonna hit three or four main topics today. We’re gonna talk about the Trump accounts. We’re gonna talk about some Virginia tax changes and net investment income tax, and then finally, we’re going to hit on estimated tax payments. And because this is what we do all day, it’s probably gonna go off in a few tangents to some other tax topics as well. Thank you for being with us today, and before we dive into the episode, we wanna give a big thanks from everybody at Mason and Associates.
We’ve had so much positive feedback recently from the introductory calls we’ve been having. We’ve made a lot of new clients this year, and the positive feedback on you following this episode, following the podcast, joining us for many years now. It’s been very heartwarming and we really appreciate the positive feedback.
Tommy, Ben, welcome to the Federal Employee Financial Planning Podcast.
Ben Raikes: Good to be here.
Tommy Blackburn: Thanks for kicking us off, John.
John Mason: Yeah, dude, it’s my pleasure. Ben, it’s been a minute, so welcome back, man.
Ben Raikes: Thanks. Man, time has just gone by so, so fast. I’m sure you guys can experience the same thing, but last weekend was Elsie’s very first birthday. So you blink and they turn one and they’re trying to walk around and they’re eating solid foods and saying words and, man, life just comes at you fast. But it’s been an awesome year.
John Mason: Well, you’ve gotta embrace all of the different moments in life, and we don’t subscribe to the philosophy of everything in the book that Bill Perkins wrote, Die with Zero. But one of the things I took away from that book was there are certain opportunities that you have in your life. You know, from when Elsie’s zero to five, and then five to 12, and then 12 to 18, and all of a sudden she’s gone and she’s out of the house.
And you start thinking about how much you want to get accomplished with your family, your parents, your kids, and you start carving your life out into these segments and you’re like, man, I only have one shot at this, and it goes so fast. I thought that was a healthy exercise. Just thinking about like what I want to get accomplished with Carter before he’s 12. Because at 12, he’s probably not gonna like me as much. He’s probably gonna be busy doing other things. But also at 12 or to 18, it’s like, well, that’s when the Alaska cruise sounds fun. Or an African safari, something that you have to be a little bit bigger for. Obviously, Disney goes in the six to 12 timeframe. So yeah, it’s fun to think about the segments of life and trying to fit things in at the appropriate time.
Ben Raikes: It’s awesome, and I’m sure it’s cool for you guys to kinda look—I feel like you’re looking at me like in the rearview mirror seeing, “Oh, Ben’s going through the zero to one phase right now, and then he is gonna enter the two to five,” or whatever it is. And you guys are a couple of steps ahead of me and they’re in school now, and it’s just been, it’s been cool to watch all of our kids grow. And John, I think the same way that you do, just trying to capture every moment that you can, trying to do the things now. And even when you said, I think you said 12 to 18 timeframe, like my heart sank a little bit. I’m like, that’s going to happen. That’s going to happen. They’re not gonna be this age forever. And so it does put it on your mind to use the time that you have now.
John Mason: How you feeling, Tommy?
Tommy Blackburn: I’m good. I was thinking that we have a very unique perspective, not only from reading books like you’re talking about, but just from working with clients who have raised children, seeing them off to college, have their own family started, as well as go through entire careers. So we get a lot of wisdom from that, and that’s a constant theme is: enjoy every stage. They’re all different. It’s gonna go by very quickly, which it is.
As you were talking, I’m thinking about Zoe, how old she is now at five and the things she’s doing, which are really cool to see that growth. And what’d be neat, man, is you can already see when you look at pictures the difference, how much Elsie has changed. But once they get even further along, it’s amazing to look back at those baby pictures and how much they’ve changed where they are now. And a picture popped up of Nathan the other day and he was riding his balance bike with his helmet on. And I’m thinking back, and then I think another picture popped up to like, him newborn infant, and it’s amazing how much has changed. And at times it feels like a snail’s pace every day, and other times it’s like, wow, we’ve covered a lot of ground.
Ben Raikes: Part of the decorations for her first birthday party was this, like, balloon arch, and underneath it, it had pictures every month. So newborn, all the way to 1-year-old. And every picture had her next to this little stuffed animal bear that she got when she was born. And like for the first three months, the bear was bigger than her. And then month four, five, and six, she was the same size, and now she like holds it with one hand and throws it around and it’s hard to get a picture of her sitting still. So, yeah, it’s amazing, man. It’s been a really fun journey, the short amount of time I’ve been in it.
Tommy Blackburn: Well, since we’re talking about change, maybe we can talk taxes because even when they say it’s permanent, it’s only permanent until the next change of administration or the next political party until it flips.
John Mason: I definitely want to talk tax and jump into the topics here. I have one kind of like announcement from Mason and Associates, maybe one or two announcements, but then Tommy, you said something that just registered in my head. One of our sayings is, “You only live, retire, and die once.” And we’ve done these things hundreds of times. And how fortunate are we that we get to help hundreds of families and see their mistakes, see what they did really well. Like through serving clients, we get to see the clients that vacation really well. The clients that have regrets. The clients that don’t have regrets. And we get to take, just like we give them advice, we get to take in all of that experience from the 400 families to try and be the best parents we can be. So we are pretty fortunate in the sense that we obviously have the financial planning skills, but then we’re able to soak up life skills from 400 other families, which is pretty neat. So a couple announcements at Mason.
Tommy Blackburn: It’s unique. John, I gotta tag on there for a second. ‘Cause not only does it help us with our personal lives, but it’s the same as when we learn something new and it spreads like wildfire and SPMs to the rest of the client base. So it benefits us, but we get to bring that to all of our clients when we’re having these conversations. We get to draw on the other 399 experiences to tell that one client, “Try to enjoy what you’ve built,” those kind of conversations.
John Mason: No doubt. So, quick announcements, audience: one, we are trying to get back into our dedicated YouTube content. So we’re invigorated. We’re excited to do more of that type of content that’s shorter form. So if you haven’t been there in a while, or if you’re not watching this on YouTube, head over there. It’s youtube.com/@fedemployeefinancialplanning. Shorter form content, typically one instead of two or three of us, and we wanna get that up and running again. The goal is to post at least two videos a month, maybe more. So be sure to check out that one. “Survivor Benefits” is obviously our number one video, so if you haven’t seen that, that’s a good video to check out.
Number two: we hired Kyle Eagle as our associate financial planner. I think we’ve mentioned that before. We may have him on a podcast just to kind of introduce him as a little bit of an “AMA” (Ask Me Anything) episode. We also just hired another operations person. Her name is Leah. She’ll be starting with us in March. So kind of rounding out the team here. And also searching for another associate planner. This person will be zero to two years of experience rather than Kyle, who was more experienced than that. So looks like three new hires for us in 2026. Rocking and rolling. Thank you to clients, thank you to our podcast audience for being a part of that growth with us. If you know anybody, the job posting is on LinkedIn. We’ll try to link it in the description below, but we are actively hiring that new associate planner. So, Ben, you opened up a Trump account yesterday.
Ben Raikes: I did.
John Mason: Let me just briefly give my take on what I think a Trump account is. One, you’re very lucky because your daughter was born at the right time. You get free money. I do not get free money, so congratulations to you and everybody like you that gets free money. I guess maybe does Nate qualify?
Tommy Blackburn: No, of course not.
John Mason: Of course not. No, you missed it. So, Ben gets the free money. John and Tommy don’t get the free money. Folks, this is a new savings tool that allows you to effectively put money in for your kids. The money can grow, it can be invested. There’s still quite a few unknowns, but if you hit the magical birthdays, then the government gives you some money too, which is pretty cool. So Ben, why don’t you share with us the Form 4547, which I think is pretty funny, and what you learned from opening up that account yesterday?
Ben Raikes: Yeah, so I guinea pigged myself, right? Because Elsie was born in 2025, and any children that are born between 2025 and 2028 qualify for that $1,000 of quote-unquote “seed money” that will be deposited into the account. But essentially, these specifics here are what you can open for your child. It is essentially a non-taxable IRA. And what I mean with that is it is an IRA that is funded with after-tax dollars. Unlike a traditional IRA, obviously your children don’t need wages for you to be able to contribute to the account. There are no income limitations for the parents to be able to contribute to the account, and the maximum that can be contributed into the account is $5,000.
So essentially, what is this account? What it’s supposed to be used for? What are other unique aspects of this account? You can’t withdraw any funds until your child is 18. Upon reaching the age of majority, which is 18, then the account converts really to a regular traditional IRA. So what benefits—and John, I think you kind of hit on this earlier—what benefits does this account really have? Well, one, it’s just letting you get some IRA money into your children’s accounts prior to them having wages. But a lot easier way to do this might have been, “Hey, why don’t we just rewrite the code for the IRAs and allow you to contribute for your kids’ accounts?” I don’t wanna digress down that too far.
Some of the unique things, again, of this account that I think we should look out for is the after-tax contributions. These after-tax contributions mean that upon withdrawal, the basis in the account is tax-free. The growth in the account will be taxable. Whenever it converts to an IRA, there’s still a 10% penalty and tax on the earnings after that. Tommy, I mentioned this in a prior email to the group. I don’t know if you’ve looked into it or not, but would there be a potential opportunity to do any type of after-tax contributions or isolate that basis with 401(k)s later down the line?
Tommy Blackburn: My understanding is it is all still unknown. I think many people are pontificating on what these accounts could be in the future, but I think details are very scarce at this point as to how they work. So I know I don’t know, and I guess it’s a good conversation, like just my opinions on things. I can certainly understand why Ben and anybody with a child of that age that’s getting the seed money would take advantage of it. But outside of that, my mind just goes to like a hierarchy of how we fund things and our options that are available to us. And at the moment, perhaps details will become available that make me change my opinion on this and see some great opportunities. At the moment, it feels like there are many other options to tackle, prioritize before I put too much into this.
Ben Raikes: I agree. I agree. I think that there’s still 529 accounts out there that are far superior for education if that’s your primary goal. If you’re looking towards long-term savings, maybe this Trump account is good for you. I won’t even say it’s a no-brainer. It might be a no-brainer for the children that were born between 2025 and 2028 just to get the free thousand dollars, but I agree there’s a lot of things that need to unfold and some unknowns that are still kind of TBD before we can tell whether this is a really great opportunity or not.
If you’re interested in opening the accounts, you can Google “open Trump account online.” There’s actually an online forum to do it now as well. Or with your tax return, you can file Form 4547, which again, we have to chuckle a little bit at our president, 45 and 47, as in the 45th and 47th President of the United States. Of course he had to name it that. But that would be another option for opening the accounts. The thousand-dollar deposit, again, if we’re keeping it patriotic, will be no earlier than July 4th of this year. So if you’re interested, certainly register the account online. Qualify for the thousand dollars if your child is born between 2025 and 2028. And I think the safe option before contributing more money is let’s let these play out and see how the rules work before we start cramming any money into them.
Tommy Blackburn: Well, while we’re on it, I guess I want to talk about prioritization here, if we have a moment of like accounts and maybe why I’m thinking that, and this is also the cynical part of me, it’s like, okay, a thousand dollars of free money to seed it. Very often in life we don’t get a free lunch. So there is a cynical part of me that’s like, and maybe we don’t know what these strings are yet, but something tells me like there’s gonna be some strings at some point that come with this. And I know there’s been discussion of like, maybe this is laying the ground for some type of offset to Social Security in the future. This is all pontification. Who knows.
But I think about like defense contracts and just anything with a government, education, anything where there’s government dollars attached—there can one day be all of a sudden this pullback of like, “Hey, you took money. Guess what? You get to play it by my rules you didn’t even know existed when you took this money.” So I’m not discouraging people from doing it. I’m just saying there’s a healthy bit of curiosity here as to what’s gonna come from it. Ben, I think about—
John Mason: Well, it’s par for the course if you weren’t skeptical. That would not be par for the course. I mean, Tommy’s number one reaction is always to be skeptical of anything that’s out there. So I think that’s a good healthy balance. Ben’s very excited about the account, maybe. Tommy’s a little skeptical of it. So it’s about par for the course at Mason and Associates.
Tommy Blackburn: Ben’s excited because he gets seed money. If he wasn’t getting seed money, the other side of Ben would be coming out here. He’d be talking about budget deficits and whatever else is coming to his mind. I think about, quite honestly, as I think about this, I wonder if a brokerage account is just as advantageous, if not more, because we could be taking advantage of a child’s tax rate, at least until the Kiddie Tax kicks in. We could be doing capital gains. I mean, there’s a lot of efficiency just from a brokerage account.
I also thought, as you had mentioned it, like, “Hey, it’s gonna grow tax-deferred and be an IRA.” To the extent we didn’t have that after-tax contributions in there, it’s like, well, that’s great. When I’m in my lowest years, this is being treated as an IRA. I’d really like my Roth. Yeah, like, that’s great. Let’s kick this out to when you’re a higher earner, then all of a sudden we’ll start taxing it. So again, the healthy skepticism there. But yeah, I would think as a family, typically maxing, at least getting the match on a 401(k), probably maxing it, hitting a Roth IRA. Love Roth IRAs, at least for their flexibility. After we hit those HSAs, give us a lot of flexibility, and 529s, a lot we can do with those and brokerage accounts. So to me, there’s just a big list of funding opportunities that just would take precedence other than, yeah, get your free money.
Ben Raikes: Get the thousand.
Tommy Blackburn: Don’t be surprised, though, if there’s a surprise attached to it down the road.
Ben Raikes: Listen, you can continue to be skeptical all you want. I know if Nate was born just a little bit later, you’d be excited about these accounts too. No, I’m kidding. I agree. It’s all about your goals, right? It’s all about: is education important to you? Is retirement important to you? Is tax-deferred savings important to you based—and a lot of that’s based on your stage of life. So obviously, which accounts you open up and when is gonna be based on your personal situation. But certainly the Trump account may be in the mix at some point, but nothing that we wanna say “green light, go, go, go.”
John Mason: So in summary, you guys have said a lot of good stuff. In summary, the Trump account is an IRA, but it’s different because you don’t get that tax deduction, but it’s effectively a non-deductible IRA, and we’ve waived the income requirement, the W-2 wages or the self-employment income requirement. So we’ve waived that. We probably could have done that if we had just modified the already very complicated section of the tax code that deals with IRAs. That’s not a small section, by the way. And now we have added an additional layer of complexity.
So we have a set of rules from zero to 18, and then we have the rule where it switches over at 18. Ben, I think you’re spot on. Hopefully, we’ll be able to maybe segregate those after-tax contributions again to Roth. A little bit unknown. I don’t even know if any custodians currently have the availability for you to open a Trump account. So I don’t know where your Trump account’s gonna be housed. I don’t really know how I would open a Trump account at this point. So it’s interesting because there’s all sorts of rules on expense ratios and fees and how you can be invested. So it’d just be interesting to see, like, are custodians going to adopt this and make this available?
Employers are supposed to be allowed to contribute. Is that really something that is going to be worth Mason and Associates’ time to figure out how to do that? Just, what’s the adoption rate gonna be once you’re past the free money? I think that’s my skepticism. And where does it go from here? I’d much rather figure out how to pay our three kids modeling fees so that we can fund their Roth IRA right now. To me, that sounds like a better opportunity. And then, oh, by the way, you guys mentioned 529s. Remember there’s the new—under, I think it was Secure Act or one of the tax laws that continues to make 529s more flexible. We have the ability to move $35,000 from a 529 to a Roth IRA. So there’s a lot to do here.
And ultimately, not that we always believe this a hundred percent, but you gotta take care of yourself first. So can you retire? That’s probably priority number one. Obviously, you want the free money. So Trump accounts, TBD. We’ll see how they roll out. Congratulations to Ben for the thousand dollars of free money. Maybe Tommy will have another kid just to get the thousand bucks. I don’t know.
Tommy Blackburn: I don’t think the thousand dollars is gonna move that needle.
John Mason: All right, so as we move on to the next topic for today: Virginia. And we’re not gonna get political, audience, but there was a pretty big monumental shift in Virginia. The powers that be have changed. We were a Republican-led state. We are no longer a Republican-led state, and some of the tax changes are pretty significant. They’re calling for a potential new higher tax rate. Currently in Virginia, you’re basically taxed at 5.75%. I believe over a million dollars. Guys, you correct me if I’m wrong, they’re talking about a new higher tax rate. They’re talking about bringing in a net investment income tax, and this is typically for pretty high earners. This is not the average Joe, or going back to 2008, Joe the Plumber, I think was featured in the President Obama campaign. We’re not talking about average Joe here, right? We’re talking about higher earners, top 1% type people, or maybe even higher that would be impacted by this.
Tommy Blackburn: Well, you’re correct for many of those proposals, although I believe there’s also been a proposal to introduce new brackets before you get to the million. So that could certainly hit many working Virginians as well. And then there’s just a ton of “use” type taxes that they’re proposing which will certainly hit pretty much everybody in Virginia. I mean, you think, you can’t even make it up. I think there was like a dog-walking tax. It’s just crazy. Well, I say crazy from my perspective.
It was quite the whipsaw here of going from Virginia was sending tax refunds, rebates back to the taxpayers, looking at lowering taxes, expanding the standard deduction which effectively lowers it. So we went from kind of becoming more and more friendly. So day one on change of political parties, we got smacked with all this. And it’s just in discussion now, to be fair. This is not law at this point. Remains to be seen as to what’s gonna happen with it. But the most bewildering, I think, to many—I guess a couple things that are bewildering about this, and this is of course personal opinion here, so take it for what you will. I hope I don’t offend anybody, but Virginia was running a two-plus-billion-dollar surplus. So to then come out with all these new proposed taxes makes you scratch your head a little bit. Wall Street Journal had even put an article out talking about how well-run Virginia was and the taxpayer-friendly things it was doing before this all came out. And then you’ve got states around Virginia that either don’t tax or are lowering taxes. And so from a competitive perspective, like pro-business, pro “Hey, why you wanna live here?” just seems like this is not helpful. So that’s my two cents on these proposals.
John Mason: It’s confusing, unless we’re gonna make a substantial investment somewhere, which probably we are. Whether or not you agree with where the money’s going to be spent is one thing, but like you said, we were at a surplus. So Google AI overview says it looks like between $600,000 and a million of earnings, the tax rate would go from 5.75% to 8%, and then above a million would be a 10%. And audience, we’re talking marginal tax rates. So just like federal, remember you pay from like zero to 20,000 or whatever it is, you pay 10%. From 20 to whatever, you pay 12%, and then from there, 22%. So remember, you pay through the brackets. It doesn’t mean that if you have $600,000 that all of a sudden your income in Virginia is taxed at this new 8% rate. So there’s that. Go ahead, Tommy.
Tommy Blackburn: I’m just thinking, marginal is very important to point that out like you are. But I’m just thinking, like, put this in context, right? So you could have a high-earner business owner, whatever it is, 37% federal, 3.8% net investment income tax at the federal, and previously basically at 6% Virginia. We also have Social Security taxes on there up to the earnings cap, Medicare the whole way through. So we were already at least at 46% depending on how you wanna slice it or look at it. And so now you’re talking about these people could easily be over 50% with these proposals.
John Mason: And that’s before you start seeing things like phase-outs for QBI or whatever other deductions that you’re missing. I mean, if you look at the mountain chart of their tax return or you look at the different phases, there’s places where you’re well north of 50% depending on what tax brackets or tax credits you’re losing or phase-outs, your QBI, et cetera. So we need to unpack what net investment income tax is for sure, and we need to go into that. But yeah, 50% tax rate is pretty steep. Getting up, going to work, and having to give 50 cents away. I don’t know what the right number is, and we don’t claim to know what the right number is, audience, but once you get north of 50%, it starts to feel like quite an expensive pill to swallow.
So let’s talk a little bit about net investment income tax. I didn’t fact-check this the other day, though. And this is kind of a tangent, but you guys know I like watching RV YouTube channels and one of my channels that I watch—we actually saw them on the RV trip last summer, by the way, which was kind of weird. I was like, “Do I say hi? Do I not say hi?” I said hi.
Tommy Blackburn: “I’m the biggest fan!”
John Mason: Yeah. “Hey, good to see you! I’ve known you forever, right?” Maybe that’s how our audience feels from joining us on our podcast too, hopefully. So if you ever see us, audience, at a campground, please come say hi. We’d love to see you. But in New Jersey, apparently, they came out with new e-bike requirements. So electric bikes have kind of taken over the camping world over the last few years. But now in New Jersey, they’re requiring, I think, a license, a registration, insurance, all on these e-bikes, and there’s different tiers. It’s all a money grab. It’s all a money grab. Maybe a little bit of a safety thing too. But to your point earlier, Tommy, about the other things in Virginia. Those kind of hidden taxes that are gonna impact everybody. These other ones probably are gonna be a little bit smaller group, of course, but there’s gonna be the bigger ones too.
So whichever one of you wants to take it: what is net investment income tax? Is it based on your earnings? Is it based on your IRA contributions or your IRA distributions? What are we talking about?
Tommy Blackburn: I’ve been chatting. So Ben, if you wanna run with it.
Ben Raikes: Net investment income tax is primarily going to be on your investment income. So we’re looking at things like your dividend income. We’re looking at capital gains. Normally, federally, right, your gains are, for most people, taxed at 15%. If you get over $250,000 of income, they add this net investment income tax on top of that capital gains rate of 15%. So you’re essentially taxed at 18.8%. There’s another 3.8% charge on top of that.
I’m not sure exactly how Virginia is going to work out their net investment income tax, but foreseeably it would work a very similar way, although, Tommy, I think the proposal in Virginia was up to $500,000 when the net investment income tax starts to hit you. The interesting piece, again, John, this doesn’t affect too many of our taxpayers, because there’s a, too many of our clients, because there’s a really high income threshold to get over.
But I was reading somewhere that if we add the 10% Virginia marginal tax plus the 3.8% net investment income tax, a total of 13.8% income, your investment income in Virginia. That would be the highest investment tax in the entire country based on what I was reading yesterday. Tommy, John, I’m sure I’ve missed something there, but if there’s something important, please feel free to add on.
John Mason: Well, to be clear, this is not an IRA distribution, a Roth IRA distribution, a 401(k), a TSP.
Ben Raikes: Yep.
John Mason: This is typically gonna be, I think you said it pretty well, Ben, non-qualified brokerage accounts, so individually or jointly owned accounts. Bank accounts, that’s the one that just gets offensive. It’s like, “I just need to make a couple percent on my bank accounts,” and now all of a sudden I’m getting taxed federally and state, and my 3% CD is yielding one and a half. That’s the one that just really rubs me the wrong way, because everybody needs to keep cash on hand.
To a certain extent, we can control a little bit of our investment portfolio, how many capital gains and dividends we kick off, but even that feels frustrating. Specifically, if you want traditional bonds instead of municipal bonds in your portfolio, those traditional bonds are kicking off a decent yield right now and you could be losing over 50% in that and in taxes. So, really, the audience needs to be aware that your IRAs and Roth IRAs are easy in the sense that everything is deferred until 59 and a half. The non-qualified brokerage accounts, your bank accounts, these other more liquid assets, you’ve gotta work really hard and the after-tax return really matters.
And that’s not only what we’re talking about today, but you can—I think Morningstar has like the “tax cost ratio” that you can look at, and there are certain funds and ETFs that have lower turnover or lower tax impact. So all of that has to be taken into account when you’re talking net investment income. I Googled really quickly: January 1st of 2013, looks like when the 3.8% net investment income tax came out, and I think it was originally called, Tommy, like the “Medicare surtax.”
Tommy Blackburn: Well, there was the additional—yeah, there were. I think at the same time they came out with the net investment income tax, which I think goes to Medicare. It’s to help fund Medicare, which is funny. We were just talking about Medicare recently and about how we’re suspicious about how it’s gonna be funded. This was one of the ways back then. But they also came up with the “additional Medicare tax,” and so that’s when your earned income, you pay additional, not at that 3.8%, but whichever way you go, we’re finding a way to layer on some additional taxes to you.
And I think that’s the part that’s disturbing when you start adding it out. Disturbing to me and probably those on the podcast is it’s like, it’s not just this one thing. It’s like, let’s add up our marginal brackets. Now, let’s add up every other stealth tax and way that I’m being taxed. And it begins to feel pretty burdensome from that perspective.
And John, the other thing on the net investment income tax I was gonna say was it’s not tied to inflation. So it’s been that 200, I used a married threshold, $250,000 since it came out. We know we’ve had a lot of inflation since 2013. So that number felt a lot bigger back then, and inflation is just slowly creeping more and more folks up into it. So, yet another way to raise revenue is to not tie it to inflation.
John Mason: Well, a couple ways to not be impacted by net investment income, and in my mind, net investment income tax has been there forever because it’s essentially been there our entire working career. I started in 2010, similar to Tommy. Ben, you were probably ‘12 or ‘13. So this feels like something that’s always been there. With Virginia proposing this, it feels like okay, well, remember it wasn’t there forever and it’s actually kind of frustrating.
But how can we avoid net investment income tax? There’s one way that’s not popular, and it’s probably not popular with us, but you know, you have things like life insurance contracts and annuity contracts that were created—like people started using non-qualified annuities and universal life or variable universal life back in the eighties, maybe even seventies, when tax rates were super high, as a way to have deferral, tax deferral.
So a non-qualified annuity is not completely different than a Trump account. You put money into an insurance contract on an after-tax basis, but when it’s in that contract, you can buy, you can sell, you can trade, you can have dividends and capital gains, and all of that grows tax-deferred. But when you go to take that distribution, guys, in retirement, as you know, it becomes an ordinary income distribution. Gains come out first at ordinary income, basis comes out second, tax-free. Of course, you could do things like you could annuitize and you could have an exclusion ratio. There’s fancy ways to get the money out. Not only “gains first” is what I’m getting at.
Non-qualified annuities maybe have a place going forward. We’ll see if federal tax rates continue to go up, if states continue to do this, we’re not recommending non-qualified annuities, and the three of us have talked about this a lot. If you can be smart on a typical brokerage account, we still like capital gains better, but I think we’d be remiss not to talk about some of the easy-to-attain tax deferral through insurance-type products.
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Tommy Blackburn: It has a place, and it should, like everything, it should be considered, and at least knowledgeable decisions made, so know what our options are. Non-qualified annuities—those distributions, though, they do get swept—just so our audience knows, they do get swept into that net investment income tax. So John’s absolutely right. While we’re in that deferral mode, they get the benefit of avoiding the net investment income tax. But once we start pulling and that income comes out, it gets swept into this calculation as well. Now, annuities that are inside of an IRA, that doesn’t fall into this, but I do just want everyone to be aware.
So I know we wanna talk about municipal bonds. The other thing I think about is a couple things: just being tax-aware and tax-efficient. While we as a firm really try to be thoughtful about managing gains, dividends, and interest for clients because we understand how this all gets wrapped into a tax return and the long-term consequences of it. Essentially being a drag on your money, so we wanna be tax-efficient.
I think about state tax arbitrage too, John, where, particularly if you’re a retiree, it’s a lot easier. Well, you have emotional ties, so your family may be local, your community. There are reasons that make moving unrealistic for people. But this is one of those things where you start layering on taxes where it’s like, “You know what? I’m gonna go to Tennessee, or I’m gonna go to Florida, or Texas, or maybe look at Puerto Rico.” Just something where—Florida, if I didn’t say it—where they’re not hitting me with these additional taxes now. You gotta do your research ’cause they’re probably gonna find another way to get it from you, so just understand how they’re going about raising that revenue.
But municipal bonds is a good way to avoid at least the interest being wrapped up in this. So municipal bonds, those are bonds that are issued by a state or a locality, so not the federal government, kind of your lower-down-the-chart government. The interest on those is not taxed at the federal level, at least under current law. So the rules we have currently, which they do talk about changing sometimes, are not taxed federally, and it’s not taxed typically by the state that issues it. So we could potentially avoid both of those.
An important caveat here: any capital gains we realize, if we sell those bonds, that is going to be taxed at the federal and state level. That part of it does not get this treatment. It’s just the interest income piece.
John Mason: So what we need to do is we need to calculate the taxable equivalent yield. So, earlier we were talking how if you make 4% in a bank account, and let’s assume you’re being hit by all these tax rates, and maybe 50%, well, your effective yield is 2%. So on a 2% municipal bond would be the same as a 4% bank account. So you just have to—excuse me—go up and down to figure out which source is better for you.
We can tell you almost emphatically that if you’re in a 10% or 12% bracket, municipal bonds probably don’t make sense. Once you start getting to 24% or north, and then you start getting hit by net investment income tax and some of these other things, that’s when it makes the crossover to where you would wanna have potentially municipal bonds in your portfolio. And then if you’re kind of a, I say “big time” comes to my head, but if you have money in a lot of different places, you would typically have your traditional or corporate bonds in an IRA and your municipal bonds in a non-qualified account, because we wouldn’t want to accept that lower yield inside of an IRA where we don’t need to avoid the taxation of it.
So municipal bonds can play a big part. And surprisingly—maybe it shouldn’t be surprising—but surprisingly, Ben, the correlation between stocks, bonds, and municipal bonds, they don’t all move in lockstep. And corporate bonds and muni bonds don’t always move in lockstep. And the yields on these munis can really change. I mean, we’ve been tracking this Vanguard municipal money market fund, and sometimes it’s like 3%, three and a half percent, and the next day it’s like one and a half percent. You’re like, “What happened?” So munis are more thinly traded, right? So you’re gonna see some more periods of like these blowouts and these contractions that don’t really make a lot of sense, at least not to me.
Ben Raikes: No, that’s a great point. I feel like we frequently check those muni yields to see where they are and is now a good time to get in. And for our clients, we would want this to be more of a long-term strategy, right? Not something where we’re continuing to jump in or jump out just because we think the yields look attractive for now.
I wanted to go back to just one thing quickly, John, that you mentioned about owning tax-efficient investment funds, which I think is a really big piece of this as well. Not only the annuity piece, not only munis, but owning the right types of investment vehicles in those non-qualified retirement accounts. So in your non-IRAs and your non-Roth IRAs, there are some legacy funds that our clients hold where they come over, maybe they inherited it from their father or their mother or their parents, or maybe it’s something that they just put 5,000 bucks into in 1985.
And a lot of these funds are very tax-inefficient. A lot of these funds have what’s called long-term capital gains distributions. What a long-term capital gain distribution is, essentially, is a special type of dividend that the fund sends out, typically at the end of the year. And you’ll see some of these long-term capital gains distributions where maybe your position in the account is a hundred thousand dollars, but you now have a long-term capital gain distribution at the end of the year of $15,000. So that is generated whether you sell that fund or not. It is always passed on to you. And that long-term capital gain distribution would be something that’s subject to not only the 15% capital gains rate, but the net investment income tax as well.
So in working with an advisor, you might say, “So you’re telling me I’m not selling any of this fund, it’s distributing $15,000 to me every year, I’m not getting that $15,000 in real value because the price is being adjusted by the distribution. Why in the heck am I holding onto these things?” But that’s just something in the initial portfolio construction that we can help out with, to help you pick the right funds, to help you get into our models that say we are going to be invested more tax-efficiently than this fund right here. Let’s make some changes today to help prevent some of these issues potentially in the future.
John Mason: So that’s a benefit of an ETF versus a mutual fund.
Ben Raikes: Exactly.
John Mason: So an exchange-traded fund versus a mutual fund. And audience, forgive us because these conversations are always just natural and flowing, but we know for sure some of the people that we work with, from an investment management standpoint or other big custodians or RIAs who we communicate with, we do more from a tax planning on non-qualified accounts than almost everybody we talk to.
And let’s just face it, audience, what’s happened is in the RIA world, Registered Investment Advisor world, there’s been a gigantic consolidation, and people are realizing that designing individual models for clients is inefficient. So what we do is they typically have a list of models, maybe 10 models, and it’s a 60% stock or a hundred percent stock, what have you, and clients go into a model. That’s a more efficient way to manage a book of business than it is for Ben to have a materially different allocation than Tommy. Well, because those models work, it’s gone one step too far, in our opinion. Now everybody in the 60% stock model just gets traded quarterly regardless of your tax situation.
So yes, models can be great in that they’re super efficient for the advisor team to manage, and they provide good results for the client until it comes to taxes. And then they just hit rebalance and they don’t look at the tax return, and they don’t look at the capital gains, and they don’t say, “Well, Tommy invested in June, Ben invested in July. Tommy has long-term capital gains, Ben doesn’t, but they get the same rebalance at the same time.”
Ben, you and I brought on a client and that was really the reason that they fired their advisor, because there were all of these unnecessary trades. We had inefficient capital gain distributions paired with useless trades that were doing short-term capital gains and long-term capital gains. And then from there it was just like, what are we doing? Are we getting any additional performance for all this additional tax that we’re paying? We’re much more intentional about that.
Tommy Blackburn: Yeah. I was gonna say, let’s talk about the—since you teed it up and gone down this path, I want the audience to know the middle ground that we as a firm go down. So we do essentially have our models that we make tweaks to. We have different versions of them to figure out what makes the correct sense for a client.
But for those non-qualified accounts, like John is talking: one, what securities? We try to use ETFs as much as possible ’cause we know those are more tax-efficient. But then when it comes time to trade or rebalance the models, whatever it is, John mentioned in the beginning, we try to do those only once a year or so for a non-qualified. There are exceptions. There are times where it makes sense for us to trade more frequently, what we do, that’s kind of one of the parameters or one of the screens. Again, we break it sometimes.
The other is we look at every account and we say, “Hey, Jay Jones”—maybe I shouldn’t have used that name, but let’s just say, “Ricky Bobby,” somebody has X amount of gains, X amount of losses, long-term, short-term. And then the advisor is looking, “Hey, this is what’s gonna happen. Let me go to the tax projection.” So let me look at the global situation to see if this makes sense. And we drive our sub-advisor, who helps us execute on all this, we drive them crazy because we do not follow the mold. We’re very controlled when it comes to taxes, and they want to trade and get all the models buttoned up nice and pretty, and we say, “No, no, no. We’re gonna use tax equivalents. We’re not trading that account right now. We are gonna trade it.” So it’s very customized from that perspective. We’re very aware of what we’re doing.
John Mason: Well, for federal employees, guys, and then we should move to estimated tax payments. That should be quick, and then we’ll wrap up this episode.
Tommy Blackburn: I wanna hit munis again real quick before we wrap it.
John Mason: Okay. So for federal employees, the people listening to this podcast and most of America, the bulk of our wealth is in IRAs or 401(k)s or TSPs. It’s not many people that have the bulk of their wealth in a non-qualified or non-retirement account. So remember, a lot of this conversation is on these more like inefficient type of accounts that we’re talking about, but it just really adds insult to injury when you hire an RIA, they put you in a model, they trade it quarterly. It’s a hundred or $200,000 account that’s kicking off these ridiculous tax ramifications.
Meanwhile, you’ve got a million or two million in IRAs, and if this one drifts a little bit, like if this non-qualified drifts a little bit, it doesn’t materially impact your household. And how could a hundred-thousand-dollar account just come up and bite you in the butt every April 15th? It’s like, “Bro, this is one-tenth of my money and you’re causing me a hundred percent pain with this account!” Meanwhile, it could have just been like, “Well, this one-tenth of my money isn’t making me dramatically out of line.” So maybe it owns more tech stocks, maybe it’s a little bit more growth-heavy. That’s probably okay. Maybe even your non-qualified account is a hundred percent stocks, guys, because the other 90% of your money is invested more to like allocation and long-term goals. Unfortunately, people aren’t thinking through this. Tommy, hit your last thought on munis and then Ben, let’s close it down with any thoughts on estimated tax payments.
Tommy Blackburn: I gotta give a couple examples here. So one, just managing those non-qualified accounts. I just looked for a client that came to mind, this is long-term brokerage money, account’s been growing. We have $600,000 of unrealized gains in that account. And so you can imagine our sub-advisor has constantly been like, “Tommy, what are you doing?” and this and that. And it’s like, I know exactly what I’m doing. I’m not laying $600,000 of capital gains on them. And so what we’re doing is we’re just managing around the positions. It’s conversations with the client, and where we’re getting to, guys, is eventually, I’m gonna talk to them, probably this strategic planning meeting, and say, “Hey, this thing’s been drifting up with its equity allocation, John just laid up from your global situation. That’s okay.” So the conversation will be like, “Hey, do you agree? Maybe instead of us managing this at 70% stocks, we go ahead and move it up to 80 as the objective? I think we’re all okay with that.” So I just wanted to say, here’s a real-world example, here’s customized advice, that’s an actual situation.
The other one on the munis, John, you and I, as well as Kyle, had been working on a newer client that we were bringing on. They live in Florida, and as we were going through their case and working with them to become a client, this person is a high-ranking retired officer doing some self-employment contracting on the side, so great income, successful career. As we look at the account, many things John said drive people crazy were happening in this account: inefficient trading for no reason, hodgepodge of everything going on.
But in addition, we noticed, “Hey, we’ve got U.S. government bonds, Treasuries, inside of this account.” There are reasons to have Treasuries, and it’s not all tax reasons, so I’m not gonna completely say there’s not a reason for those to be in there if it was intentional and the client understood it. But from a tax perspective, it was kind of head-scratching, right? Because Treasuries don’t get taxed at the state level. They do get taxed by federal. Well, we’re in Florida, so we’re not paying any state income taxes, so we get no benefit there. And so it was just like, “Hey, you guys, to the extent we have bonds in your allocation, we probably should be looking at municipals because at least then we avoid the federal. We’re not getting taxed in Florida, and if we go to another state, maybe we’ll pick up some benefits there.” So that was the municipal conversation where, again, just when you peel back a client’s, particularly a new client or prospective client situation, sometimes we’re like, “Hey, this doesn’t make a lot of sense on the surface.”
John Mason: I love it, Tommy. And my last point on that too would be, on the flip side, if you are in Virginia and you’re comparing Langley Federal Credit Union’s interest rate to a U.S. Treasury, the U.S. Treasury is not taxable in Virginia, but the CD is when it matures or along the way. So, we use a fund called the Gabelli Money Market Fund, which is full of government obligations that aren’t taxable in Virginia. So that’s nice. So it cuts both ways. So just make sure you understand your situation. When are munis appropriate? When are government obligations appropriate? Then, this is gonna be releasing close to April 15th.
Ben Raikes: Yep.
John Mason: It’s February 12th today. We know some people are making estimated tax payments and will continue to do so, but can you just give the audience kind of our 30 seconds to two minutes on why we generally try to avoid estimated tax payments, how we fix it, and our standard rule of thumb, for instance, on how we would fix that so clients don’t have to make them?
Ben Raikes: Yeah, absolutely. So probably for 90-plus percent of our federal retirees, there is almost no reason to make federal estimated tax payments. Federal estimated tax payments are typically used if you have income that isn’t paid to you in the form of wages or paid to you in the form of a pension where you can elect automatic withholding on those sources. So think about somebody that has really high rental income. Think about somebody that has a lot of self-employment income. They can’t withhold on those wages, so what they might do is make estimated tax payments to the federal and state government to cover those things.
Outside of those scenarios, if you find yourself owing taxes each year as a federal employee, what you should do is you should go to Services Online. You should click the withholding section, and whatever your tax bill was this most recent year, take that amount, divide it by 12, and add that onto your federal withholding, that is the easiest way that you can do that. Not only is that easier than making your estimated tax payments, it’s actually more advantageous. The federal government wants to see that. Not only do you pay the correct amount of taxes, they want to see that you pay your taxes as your income hits.
So sometimes if you’re making these federal estimated payments, you’ll have your amount of tax paid in down to the dollar, but if you didn’t make the exact amount of estimated payment at the exact time, you can have a refund and actually have a tax penalty as well. So what withholding does, withholding says, “We’ve automatically not only paid the right amount of tax in, but we’ve paid it throughout the year, equal throughout the year.” And that way you can avoid that really weird scenario where you’d have a refund and then also have a tax penalty on top of that. Last thought on this: a lot of you are gonna file your own taxes. TurboTax will always want to make you have estimated payments for the amount that you owe. Again, by and large, we would suggest ignoring that. What do you owe on your 1040? Take that amount, divide by 12, go to Services Online, tack that onto your withholding.
John Mason: I think we should mention DFAS as well.
Ben Raikes: DFAS. Yep.
John Mason: Yep. And if you’re not there, you can also do a flat extra withholding if you’re still working through your LES. So we’ve got a lot of options to increase those withholdings.
Tommy Blackburn: I think it is a—I like sprinkling in some actual client stories. Don’t know if you guys agree or not, but we had another—
John Mason: We don’t. I’m just kidding.
Tommy Blackburn: Well, I’m gonna do it anyway. We had another client, retired military. So again, I usually think DFAS seems to be, so this is for retired military, even easier, seems to be the easiest system to go change withholding on. And again, retired officer doing a second career. Highly paid, engineer-type guy, and he’s getting bonuses and these other things being kicked off. And every year he’s owing and he’s being penalized.
And so the advice is exactly like you two were suggesting, like, “Hey, we should adjust withholding.” But I did think it’s, he being nice, I joke, hopefully not offend anybody, being like an engineer, followed it exactly. And so his retired military pay went from a few thousand-plus per month to basically nothing. It’s all being withheld. But we fixed the glitch. So it was, it has been hilarious ’cause even going forward, he gets concerned about stuff, rightfully so, consults with us and it’s like, “Hey man, we solved that problem. No more estimated tax payments for you. Your withholding is great.” I just, I had to chuckle when I see his new RIAs, the Retiree Annuity Statement, for that military. Yeah, you get nothing for him ’cause it’s all being withheld. But we fixed the problem. It’s easy. No more penalties. It is a great solution, but somewhat, you feel a little bad. You’re like, “Man, you don’t even get a paycheck anymore,” but you were gonna pay it one way or the other. We get back to the same answer.
John Mason: It’s very efficient to do it, and you don’t have to worry about the estimated tax due dates. And I think they just sneak up on you because they’re not even every 90 days. They’re like random days. It’s April, June, whenever and whenever. And it’s like, man, they don’t even follow like the times they should. And I have to either log into an account or mail a check. Come on, man, let’s just do the withholdings and move on.
There’s so many more efficiencies, and we’ll do this occasionally. Hopefully, this will wrap up this part of the conversation, but you can also make up for withholding by doing extra withholding on an IRA distribution. Or if you have an inherited IRA, we can have a hundred percent of that RMD withheld for taxes. So there’s a lot of ways that you can get creative in fixing your projected liability. The standard thing here, guys, for the audience is: folks, this should not be a surprise to you. Like, if you owed $8,000 last year, you’re probably gonna owe $8,000 again this year. So just holding your mouth differently is not gonna change your stars here, right? Like, unless something changed in your world, you’re gonna keep owing. So let’s take the bull by the horns. Let’s make a change.
If you’re CSRS, in 2025 you received some back pay. CSRS, GPO, and WEP were eliminated. That kind of monkeys with your tax situation. Maybe now you’ve got more Social Security coming in. Selfish plug: we should make sure we do this because I wrote an article the other day talking about this. Hopefully, it’ll be published on some of the big federal employee websites. We should post it as a blog on our website regardless. So be on the lookout for that. It’s an article that specifically talks about, like, the tax trap with WEP and GPO being eliminated. And then also keep an eye out, audience, for our ebook on Survivor Benefits, which is in its final revision. You’ll be able to download that online. We’re not gonna spam your inbox, but we are gonna ask for your email to allow you to get that free download. So we promise we’ll hold that sacred. We’re not gonna take advantage of you once you give us your email address for that ebook. So keep an eye out for those two things. Guys, any closing thoughts?
Tommy Blackburn: I think we’ve covered it. I’m gonna let our audience take a break. So it’s been fun.
Ben Raikes: I’m good. No, thank you. Taxes change. That’s the one constant: taxes change and you gotta work with somebody that can help you figure it out.
John Mason: No doubt. Well, audience, we hope you’re enjoying—
Tommy Blackburn: It’s a year-round sport.
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