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FEFP: Year-End Tax Planning for Federal Employees (EP101)

FEFP: Year-End Tax Planning for Federal Employees (EP101)

What’s the difference between reacting to taxes and truly planning for them? In this episode, Tommy and John break down the latest year-end financial planning and tax strategies every federal employee needs to know. With recent tax law changes and shifting financial dynamics, they tackle big questions like how the enhanced senior deduction works, when a Roth conversion makes sense, and why timing matters when harvesting capital gains.

You’ll learn why financial planning isn’t just about minimizing taxes, it’s about aligning your money with your goals. Tommy and John share real-world examples of clients choosing between Roth conversions, big purchases, and lifestyle decisions in retirement. They also unpack the ripple effects of legislation like the Social Security Fairness Act, and why looking across multiple tax years is critical to avoiding costly surprises.

Listen to the full episode here:

What you will learn:

  • The importance of growth. (7:00)
  • What the enhanced senior deduction is. (13:00)
  • Why customized plans are essential. (17:50)
  • How to tax plan versus tax react. (22:00)
  • The art and science of financial planning. (30:00)
  • Why you need a professional tax planner in your corner. (38:00)
  • What to know about real estate and taxes. (50:00)

Ideas Worth Sharing:

  • “There’s a difference between raising income, such as harvesting capital gains or doing Roth conversions, and exposing yourself to additional tax, such as literally bringing more tax to your world, intentionally for tax planning, versus spending your money to enjoy it.” – Mason & Associates
  • “There is a difference between reacting and planning.” – Mason & Associates
  • “Tax planning is a year-round sport.” – Mason & Associates

Resources from this episode:

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Read the Transcript Below:

Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.

John Mason: Welcome to the Federal Employee Financial Planning Podcast. In this episode, we’re discussing end-of-year financial planning and tax planning strategies for you, the federal employee. We’ve recorded episodes like this before, but don’t ignore this one because we’re addressing new topics from the recent tax law, as well as how things are changing from a financial planning and tax planning perspective.

Today, we’re discussing topics such as the new enhanced senior deduction, what happens when a client’s goals or spending habits change in retirement, and things like harvesting capital gains versus Roth conversions and more. Unlike many content creators, we’re financial planners first, and we do this second, and we share real life experiences of decades of helping federal employees just like you navigate the complexities of their benefit package and all areas of their financial plan.

Tommy, welcome to the Federal Employee Financial Planning Podcast.

Tommy Blackburn: Hey, John, good to see you. Always enjoy doing these episodes together. Looking forward to going through today’s topics, which we’re drawing on a lot of what we’re seeing at the moment as we’re recording. So it’s very relevant, at least right now.

And which hopefully means it’s relevant to our audience, kind of a reflection of what everybody is feeling as we approach to us. Sad to say, feels like the end of the year, even though I think technically summer is not over. But you can just see as you look ahead. It’ll be the end of the year before we know it, but yeah, really looking forward to doing this with you.

It’s always a blast. And, yeah, I guess for you and me, school is officially in session.

John Mason: School’s in session. It is certainly a change with our kids being in kindergarten compared to where we were, us doing preschool. And your daughter was in daycare, so, which was also preschool-like, but now switching to, she’s riding the bus.

I’m dropping Carter off at school. I mean, all of it is just so different. And we got a chuckle, audience, because Ben, who’s been on this podcast many times, recently, his daughter started attending daycare and she’s been sick two or three times within the first two weeks, I think. And he said something along the lines, Tommy of, “Well, I hope in a couple weeks she’s built up an immune system.”

And it’s like, “Bro, we’re dealing with this for the next 12 years.” Like, this is not getting any better anytime soon.

Tommy Blackburn: Not like you’re thinking about, yeah, he said weeks, maybe months, and was like, yeah, you need to be thinking years. The immune system does usually get better, more resilient. The children also become more hygienic as they learn to not put everything in their mouth.

I do think it will get better. It’s gonna get worse for him, though, before it gets better. And you’re talking about yes, this is, they’re gonna be on and off sick, dealing with something, as well as you, my friend, because your immune system is about to get battered as well as everything comes home. But, so we just said optimistic thinking.

I hope it works that way, but our experience tells us it’s not gonna work that way for you.

John Mason: That’s right. Well, audience, today is September 10th, 2025. We don’t have a ton of updates to share before we dive into the bulk of the content of this podcast. I guess a few quick things, we’re well on our way that we’ve hired our business coach and consultant, so that’s going well.

We are launching our, I guess first, Tommy, national hiring campaign, which I believe launches on September 15th. So by the time this airs, we’ll have a job posting on our website. We’ll have an application process, and, we’re looking for, I don’t remember exactly the term that we’re using, like associate financial planner, but essentially somebody that’s got three or four years of experience, who’s led some relationships, maybe has hit some arbitrary ceiling and is ready to kind of take the next step in their career helping federal employees retire, becoming a lead planner, helping support me and Tommy, as well as other folks in the firm.

So we hope to have that person hired, Tommy, by December 15. So as we enter almost Q4 here, a lot of good things happening at Mason & Associates. As well as we’re about to sign a contract to hire our outsourced chief marketing officer, who knows what that’s going to entail and what that’s going to benefit.

But maybe for you, audience, instead of us recording an episode on 9-10 and releasing it in October, maybe eventually, that looks like we’re releasing more episodes more frequently, or with less lag. We’re not promising anything yet, but you know, we’re excited for those couple changes coming.

Tommy Blackburn: Absolutely. Good things are happening around the firm. At least we believe them to be good as we continue to grow and appreciate the audience continuing to be loyal listeners. And I think sharing it as the audience has grown, and we’re certainly hearing from some of you, as you’re interested in becoming clients.

So it’s really cool to see all that. We hope it enhances even further. The hiring campaign, very excited about. What I was saying in there, John, too, is we try not to let titles mean too much to us, at least internally. So we are calling an associate financial planner, but if there’s somebody out there with more experience and maybe even less.

We know what we’re targeting, but we also can see the need for growth, or just the ability to grow the firm further, as we continue to have demand. So we’re interested, I think, in talking to a range of candidates. We have kind of like we think this as the person, but maybe if it doesn’t sound exactly like you, still would welcome you to, if you are listening or know somebody to apply, to go through the process and see where it goes.

We think there’s going to be future openings as well, probably not the too distant future. And we’re also looking, I believe, John, to add to our operations team. So this first hire will be on the financial planning team. But we’re also looking to grow our operations team, so that’ll be coming hopefully in the near future as well.

John Mason: Thank you for sharing. The thing about the operations team, because that’s coming, I think as soon as we get through the financial planner hire, we’re moving right into the operations team hire. And for clients listening as well as audience, we’ve been very protective over growth for a long time, Tommy, and I just think it’s important for everybody to know that for a while, I think, leadership here at Mason & Associates was like, “We don’t want to grow.” Like you always want to grow, but then you don’t really want the pain associated with growth, which means hiring career paths, enhanced budgeting, forecast, hiring a business coach. There’s a lot that goes into hiring, and we were kind of like pushing back against the enterprise model or becoming an enterprise firm, but you and I came to the realization along with the other leaders here at the firm, that you can either grow intentionally or unintentionally, and it’s clear to us that we were going to continue growing kind of unintentionally unless we flip the script and say, “Okay, we need to hire, we need to do this. We’re gonna design career paths.”

So we’re not trying to get to a billion dollars under management in six months. We’re just trying to say, “We know there’s demand for our services. We know that our audience is gonna continue scheduling intro calls.” And we’re gonna be ready for you. Rather than closing the doors and saying we can’t serve any more people or help more people, we’re going to be ready for that future growth and not backtrack on the commitment that we’ve made to existing clients.

Tommy Blackburn: I think that’s key, John. We are committed to what we would call sustainable growth. So we want, we have to protect, this is what we believe internally and what we believe from folks we’ve interacted with as we’ve kind of gone down this road. We have something special here and we don’t wanna lose that.

So if we just grow, whether that’s intentionally or unintentionally, if we grow without keeping in mind the service standards, and how we want our culture internally and externally to be, that would be a mistake. So it is going to be an intentional growth, but we’re excited about it and continuing to protect that family-like experience that we have internally and with our clients.

John Mason: I guess last thing, not to just bore the audience with everything, Tommy, is that I reflect back on when you came on board in 2019 and then obviously the COVID pandemic happened in 2020, but trying to build out a financial planning team locally in Newport News, Virginia, knowing that you’re gonna find the greatest and best financial planners in the world, maybe it’s pretty difficult.

Like we have a good team here, but it took 35, 40 years to get to this point, to have the team that we have in place. I don’t know that Joe across the street is the planner we want. So what I’m getting at, audience, is I think the majority, like over 50% of our new clients last year, came from outside of Virginia.

Zoom has changed the way we do business. Technology has increased. Everything has changed, which now is leading us to being able to open up a hiring campaign to the entire country. Whether we hire somebody in Virginia, North Carolina, California, Texas, wherever they’re going to be able to serve you just like we’re serving you from the Virginia area.

So I just think it really opens up our ability to find good people who are going to be able to serve our clients well. We weren’t in a position five years ago to hire somebody out of state, but now we are.

Tommy Blackburn: Yeah. I think that’s great, John. I think maybe is one of the last public service announcements I can thank on this podcast, which thank you everyone for being patient with the introduction as we get these items out there, is we are approaching the end of the year. So if you are a client, want to go ahead and get those meetings scheduled if you want to meet with us, if we need to meet, try to get that schedule now because it will be the end of the year before we know it. So the schedule will fill up if it’s not already filling up.

And same thing if you’re thinking about becoming a client. We’re probably running out of the window, like we would still do the intro phone call of are we a good fit for each other? We may, at this point, or I think in October, John, we probably cut it off, which may be around the time that this episode is airing anyway.

The next step in that process, the introductory meeting where we kinda really kick off the financial planning process, not gonna happen most likely unless there’s a fire, you have an emergency in your life, until 2026 at this point.

John Mason: Good point, Tommy. And I wanted to go there too. So, quick recap, audience, like Tommy said, intro call, 15 to 30 minutes, no fee, no obligation, jointly deciding, is there any chance in the world that we could all work together? If so, we move to an intro meeting. That’s data gathering, fact finding, one hour, no fee, really solidify like, are we going to produce a financial plan? Are we going to work together?

If so, we present the plan. After the plan, we ask if you wanna move forward in an ongoing relationship. So it’s intro call, intro meeting, initial plan, and then at that point is when you would decide if you wanna hire us ongoing. We’re trying to filter out very early who does and does not want an ongoing relationship.

So the process is slow, it’s meticulous and it’s designed and it’s successful. It’s a process for success. So we cut off intro meetings, that fact finding meetings sometime in October, November, because onboarding new clients, Tommy, in December is a nightmare for everybody. We don’t wanna do transfers during that time.

People have vacations planned. So if you are somebody who wants to get on the books, do it now because if you wait till January, we’re gonna be into our strategic planning meeting season come April, and we’re gonna cut new folks off again. So again, we’re very strategic on how we onboard new clients as well as making sure we protect our existing, so if you are interested, there’s no time like the present to get on the calendar. So I think that’s it.

Tommy Blackburn: Nice. All right. Are we ready to get into kind of end-of-year planning, what all is happening?

John Mason: Please. Let’s do it. So I think, maybe let’s do a quick recap, Tommy, of the enhanced senior deduction. Under the One Big Beautiful Bill, there was a lot of promises that social security was going to become tax-free, that all these things were going to happen.

We’ll link below to the two episodes we did with Stephen Kimberlin from Forvis Mazars, but some people still think Social Security was made tax free. It wasn’t. There was this new enhanced senior deduction, so tell our audience about that as well as if it’s above the line, below the line, a below-above,  a below-below, which one is this?

Tommy Blackburn: Yes, we gotta work, well, one of these days, we’ll come up with the adequate terminology. This, I believe, as of now, we are referring to more of as a below the below the line being that historically on your 1040. You have income and deductions that were before what’s called adjusted gross income. So any of those deductions before your adjusted gross income that was above the line.

AGI is your line. And then below the line was things that were typically like your itemized deductions. And then now, for a couple years, we’ve had this other category where it’s like after itemized deductions, we now have some other deductions. And this enhanced senior deduction is one of the new ones.

So that’s what, we call it below the below. Maybe we’ll come up with a better way to say this, but it’s just got more complex, I guess, is ultimately where we’re going with it. It does not make Social Security free. It is for those who are aged 65 or older. You can get up to $6,000 of a deduction.

Doesn’t matter if you have Social Security, just all you gotta do is be over 65. And that’s each, so usually we tend to think about it from a married perspective, ’cause most of our clients are married. And so that’s just what we default to. So $12,000, if you’re both over age 65. Caveat there is it has an income test, which is when we’re over $150,000 of gross income, that AGI number essentially, it begins reducing. And once we’re at $250,000, it’s completely gone. So this is, it’s a win for anybody over age 65. You potentially, particularly if you’re married or getting another $12,000 of deduction. In addition, your standard deduction got bigger. Everybody’s standard deduction got bigger.

You kept the great rates we had before, and the nice big brackets we had previously. So wins. What it has done, well, again, it’s not tied to social security. Social Security, though, could be creating income that actually makes this go away. So they’re still gonna be a good 10 to 15% of the population that are somehow taxed on their social security one way or the other.

John Mason: Yeah, I wanted to say there, Tommy, ’cause you hit so many great things, is that the Social Security taxation rules, the provisional income, every time you bring in a $1.85 of social becomes taxable. That’s already hit AGI. so the things that have already hit AGI, which is like your IRA distributions, your pensions, your W2, your social security, whether or not you’ve hit IRMAA for Medicare Part B premium adjustments, all that has already happened before you get to this below the below the line enhanced senior deductions. So, if social security were to become completely tax-free, that would’ve been an above the line item that would’ve taken place, and that’s not what we saw here.

Tommy Blackburn: Exactly. So overall this is, yeah. I mean, it’s hard to be upset about this. I mean, it’s a win. You get another deduction if you’re over 65. What we’re seeing now is we launch into planning now that the law exists, and so we know what we’re working with and we kind of are looking at end of year, is it has changed.

It’s changing the advice, it is changing our kind of tactical year by year as we look at, and the reason is for many of our clients, they’re in this phase out range where they’ve got between 150 and $250,000 of income. And they’re probably, which is the 22% bracket typically for a married couple. And a lot of times we’re looking at, “Hey, do we want to do a Roth conversion before the end of the year?”

Take advantage of the 22% tax bracket, even though that’s no longer planning to sunset back to, I think it was 25 or 24%, is what it would’ve flipped back to if they didn’t change the law. That’s not the concern anymore. But there are still things of like, will RMDs come in the future and push us above a Medicare threshold if we do nothing or push us into a different tax bracket?

So there are still reasons for us to do these Roth conversions, but now, losing this deduction as income comes in effectively means while we may be on paper in the 22% tax bracket, every dollar that comes in is now actually at 24 and some change. And so as we look at that, it can now say, well, actually, the 22% tax bracket is what made sense to take advantage and maybe 24 doesn’t.

And in order for us to even get to the 24, we got across some Medicare thresholds that don’t make it worth it. So it really comes back to customized planning, John. I know that was our conversation as we were leading up to this, ’cause we see cases where it’s, “Hey, let’s blow, you know, the deduction is not gonna rule our decision,” because the bigger picture is it still makes sense to do these Roth conversions or it still makes sense to do a distribution.

But it’s a new variable and for many folks, it is, you know, never really saw you getting out of the 24, so we’re in the 24% effectively right now. It doesn’t really make sense to create more income for a variety of reasons. So a number of Roth conversions that we had on the table are probably being pulled off the table.

John Mason: I think I’ve had, in the last few weeks, maybe five or 10 client meetings where we’ve looked at Roth conversions and a lot of those we said, “I think we’re good,” for the exact reasons. You’ve said we’ve done a lot of conversions historically since 2017. We have this new enhanced senior deduction phase-out, where it’s like, “Well, maybe that doesn’t make sense anymore.”

Audiences may be thinking like, “Really, you have this many clients that all hit at $150,000 of retirement income?” And the answer is yes, we have clients that make less than that. But this, I mean, $150,000 of retirement income is awesome, by the way. But that is, I think, where the bulk, like I would venture to say easily 50% of our clients are at that number. Maybe even 75% are at the 150k plus. And audience, if you think about it, $30,000 social, $30,000 social, $30,000 pension, and a $30,000 IRA distribution. You’re at 120,000 of income right there. And we could make some of those numbers much higher, you know, all of a sudden, a 40, 50, $60,000 pension or you both have pensions, so–

Tommy Blackburn: Or you get a military pension as well as a federal pension.

John Mason: Exactly. And ultimately, we’re not gonna let the tail wag the dog, Tommy. And what I mean by that is there’s a difference between raising income, like harvesting capital gains or doing Roth conversions and exposing yourself to additional tax, like literally bringing more tax to your world intentionally for tax planning, versus spending your money to enjoy it. So I think it’s very important for the audience to know that if a client comes in and we’ve got room to take money out and they say, “I wanna buy a new boat.” We’re not gonna say don’t buy a new boat because you’re gonna lose the enhanced senior deduction.

But we may say, “Doing a Roth conversion doesn’t make sense because you’re going to lose the enhanced senior deduction.” So the same result, you took money out and you incurred taxes. One was for enjoyment and for spending, which we just get over the tax rate because you didn’t work this hard and save this amount of money to let the government tell you or let the government put on you the idea that you shouldn’t enjoy it based on the tax rate. But we’re just suggesting that the tax planning may have changed, not the enjoyment part.

Tommy Blackburn: Absolutely. And it’s conversations that we had before with clients too, was, “Hey, it looks like we’ll be doing Roth conversions in these type of years, in this type of bracket. However, if it turns out that you wanted to take a trip or you did something around the house,” or we essentially, we took money out for you to enjoy, which that’s the number one priority for us. So we wanna fully encourage that. But if we do that, it just means we don’t do Roth conversions that year and we, that’s great.

We’re not gonna let Roth conversions or tax, optimizing tax planning, drive your enjoyment in life. We want you to enjoy, have a sustainable plan, of course, but you know, taxes sometimes are gonna be what they’re gonna be. You should enjoy your life. We may be able to get thoughtful of, “Hey, this year let’s use your brokerage account. Like, let’s recognize some capital gains.” That’s a better tax answer than us using your IRA to go spend money. So we’ll certainly have thoughts around that. Or maybe we do a lot this year and not much the next year on distributions to try to optimize that way. But at the end of the day, you tell us there’s something important to your life that fits in there.

Taxes are gonna be what taxes are gonna be. We’ll be as wise as we can, but you should enjoy what you’ve saved for.

John Mason: Maybe we can take a step back, too, Tommy, and just remind the audience of what tax planning is for a second, and I’ll share a story from a client meeting that I had yesterday or the day before.

But tax planning versus tax reacting are very different stories. Tax reacting is you get all of your W2s and 1099s and January, February, you plug it into TurboTax, you close your eyes, plug your nose, and you’re terrified of the outcome. And then you see, “Oh my gosh, I owe,” or, “Oh my gosh, I don’t owe.”

That’s called tax reacting, folks, when you find out in April what happened for the previous year. That’s reacting. Tax planning starts January one and ends December 31 of the current year. Tax reacting takes place after you can’t make any changes for the prior year. So what we’re talking about now is proactively doing things that will impact your return now that we already know how it’s going to impact the return when you file it come April 15th of 2026.

So there’s a difference between reacting and planning. Yesterday, Tommy, I had a client meeting and it was really cool. I wish the client would’ve told me, “My kids are joining.” But I show up and all of a sudden there’s kids in the waiting room. I’m like, oh, that’s good. So the kids joined the meeting, we’re having this awesome tax projection, tax planning meeting, and it was clear to the client that we were talking about 2025, but the kids were like, “So my parents haven’t filed their 2024 tax return yet?”

I’m like, “Oh, no. We filed that a long time ago. We’re already doing a 25 and 26, look.” They’re like, “What do you mean you’re doing this in advance?” I was like, “Well, that’s what planning is.” That’s what planning is: actually doing something in advance or doing something to have an intentional outcome.

And in this particular case, we skipped on the Roth conversion. The client, Tommy, had a little bit of questions as to why we weren’t doing it, but we’ve dialed up spending a bit and as we were looking, I said, “The conversion you did in 2017 has almost grown now tax-free for almost 10 years.”

That was a good conversion. I said, “Now we’ve gotten to the point that you may exhaust all of your IRAs in the next five or 10 years just through normal distributions, because standard withdrawal rules say taxable, tax deferred, tax free. So we’re gonna access your IRA first.” So if we kill his Roth in 10 years or his IRA in 10 years through normal distributions, but then conversions call us to exhaust the IRA in five years, well, we didn’t get a lot of benefit from the conversions because now all of a sudden we have to pivot to taking money out of a Roth. We didn’t have a lot of benefit of tax-free growth. All we did was bring taxes forward and hurt you from a present value perspective. So it was just kind of cool to talk through like, “Hey, we want this IRA to kinda last as long as we can now to allow 10 or 15 more years of tax-free growth on the $1 million we have in Roth IRAs.” So it was good conversation.

Tommy Blackburn: That’s awesome. Yeah. You and I both enjoy having these conversations with clients. As you were talking about, kind of planning, which was very well defined there, it makes me think of tax planning is a year-round sport. It’s an ongoing sport. It’s year-round.

And it is being proactive and intentional, but it is all year. The other thing, John, on that draining of IRAs where it got me thinking, we do this with clients quite a bit, is eventually we’re, most of our clients are charitable in some form or fashion. And I don’t mean like donating enough money at a college to have a building named after you necessarily, but you know, just a normal giving, tithing some organization that’s important to them. And what I’m going, where I’m going here is why would we convert everything pay tax on it when at 70 and a half we can do what are called qualified charitable distributions. And so we can begin to have our charitable donations to typically church is a good example.

Have your tithing done from the IRA at 70 and a half and that’s a tax-free distribution, so we never paid tax on it going in, hasn’t been taxed while it was growing. Comes out tax-free. It counts for RMDs. When we’re, when we have to take RMDs, it doesn’t hit our income on the tax return, so it doesn’t impact things like social security, taxability, Medicare premiums, et cetera.

So it’s the most, one of the most efficient ways to give. So that’s another reason why we actually want to keep some IRA money, because it’s a really great way to gift once we’re over 70 and a half. And so that’s part of the conversations we’re having now as well.

John Mason: Well, it’s a great point. So the client I met with last night, he and his spouse, all of a sudden now we’re gonna do qualified charitable distributions next year. We’ve had good conversations for five or 10 years about charity and donor-advised funds and et cetera. And the conversation has always been, “My kids are my charity.”

Not that his kids aren’t successful, but that him and his spouse have decided that they’d rather help the kids buy a house, do certain things to help the kids get ahead in life, rather than donating money to charities. So it’s always been, “My kids, my family is where I want to give my money.” Well, because we’re just persistent or I don’t know what another word is, nagging maybe.

We always ask like, “Are you sure you don’t wanna do QCDs?” And they were like, “Well, we don’t have any substantial gifts.” I’m like, “Are you sure?” All of a sudden, now we’ve got $5,000 next year that we’re gonna do via QCD, but for the last five or 10 years, we don’t give anything. We don’t give a lot, we don’t do this, we don’t do that.

And then all of a sudden when you start writing down the things on a napkin of where you’re giving your money away, it adds up to $5,000, which is like maybe we should have 50 or a hundred thousand in an IRA now that we weren’t originally planning on having to do the QCD. So again, just hitting that like clients’ goals change over time and that sometimes the answer that they give the planner in 2018 may be different than the answer that they give when they turn 70 and a half in 2026. So you have to keep asking the question.

Tommy Blackburn: You do have to keep asking. We all evolve and change as well, right? So maybe it wasn’t charitable giving. It wasn’t. A thing for us or that important at the moment, five, 10 years ago and now our thoughts on things may have changed, the organization may have popped up.

So that’s all normal. And just dovetailing on you said, I think giving to family, taking care of family, taking care of the kids was like the motivation there. Not that we wanna think too much about death, but it is part of financial planning. Sketching out a long-term plan is when we pass, what do we wanna leave to our heirs?

Well, your heirs would much rather get tax-free assets than they would an IRA that’s going to be taxed, which again, you’re essentially maximizing the estate by using the IRA to do that charitable giving while you’re alive, tax efficient, and you’d rather have charity get that asset and you’re, and retain the other more tax preference assets for your family if that’s part of the goal or where we’re hitting

John Mason: No doubt. So we’ve talked a little bit about how the tax law impacts the idea of Roth conversions and whatnot. I think we’ve talked how your goals in retirement can change, specifically around qualified charitable distributions and why that may change the Roth conversion.

And maybe we briefly touched on, Tommy, spending. But spending is a variable. If you’re not spending any money in retirement, Roth conversions look great because you’re just accumulating and that makes sense. But then if you start spending your IRAs, it can flip the script to the point where it’s like there’s no value or limited value and just incurring more tax.

And what I’m experiencing is clients are now saying, “We’ve been retired five or 10 years.” The guy I met with, him and his wife last night. Their account value is higher today than it’s ever been the entire time we’ve worked together. And they’ve been retired for like a decade.

Tommy Blackburn: It’s not surprising. Yeah. That’s, for our clients, not surprising. And it’s not that we don’t encourage them to enjoy. They have amazing benefits, great pension income, great health benefits, and they’re making typically as much in retirement as they were making working. So it is not uncommon for these assets to continue compounding.

John Mason: So now they have more money than they’ve ever had, and maybe they believe more now than they ever have that they can enjoy their assets more. So we’re gonna flip from doing conversions to spending and what’s interesting about that, Tommy, is for the last three years or maybe longer, we’ve been sitting on this taxable brokerage account with big gains.

And instead of harvesting gains at a 0% tax rate, we’ve been prioritizing Roth conversions. But now that the goal is switching from spending, or from converting to spending, what we’re gonna do this year is actually harvest capital gains at 0%. Use that to facilitate their spending goals. Do that for two or three years, and then start accessing the IRA for spending goals after that.

So just amazing how, again, you just, the goal changes, the financial plan changes, the source of distribution changes. It wouldn’t seem like it would, but it does.

Tommy Blackburn: The art and science of financial and tax planning. And it’s really all I continue to hear as we talk is customized planning. It’s also situational of each client’s situation as their goals and circumstances changes as, and the advice changing and evolving along with it.

Yeah, John, that is all great. I’m trying to think about, I think we wanted to hit on to, as we look to end of year, is, oh, actually no, I wanna back step for a minute. I wanted to dovetail when you’re talking about the conversion, like the layering of income and that evolving is, it’s almost like we have a license every year when we’re looking at our income with our tax projection and it’s kind of if we see a window of, we’re in a good tax bracket and we look out long term and we can see that like we need to take advantage of this tax bracket, we want to take advantage of that license every year. And so in your situation, it was, “Well, we don’t really plan to create income to enjoy it right now?”

Well, we might as well do a Roth conversion so that we give ourself flexibility in the future. So now as you’re, you don’t have to take IRA distributions, you can use your non-qualified to get that 0% cap gains. And maybe in the future you look and you start buttoning up against a Medicare premium threshold.

Maybe some Roth coming in now all of a sudden makes sense because of what you did 10 years ago. So enjoyment is typically the number one priority here, but it’s just these annual licenses that we need to make sure we’re fully utilizing them.

John Mason: It’s not okay, well, that’s a strong statement. It’s not okay to end the year with a zero tax liability for most people.

And I think that would be, to your point, maybe saying like you’ve really just let your license expire. You had this awesome year where you could have done something and you just let it go by the wayside. You could have harvested capital gains, you could have done Roth conversions, and as soon as December 31 passes, you’ve lost that opportunity.

Similar with, and maybe this is good for end-of-year planning too, is start, you know, funding a Roth IRA. Roth IRAs need to be open for five years, Tommy, before you can access the contributions and growth without a 10% penalty. And…have the tax-free growth. Just the growth. So the five-year clock is very important, and getting that started now is very important if you have a Roth TSP or a Roth 401k, because those have at their own separate five-year clock.

So you have to satisfy both independently. What’s cool about doing this is A, your license comment. You have a license to put in like 7,000 a year into a Roth. Every year that that goes by, you lost the ability to do that. So take advantage of the license and if you fund your Roth IRA now, it’s like you did it on January 1st.

You’ve already satisfied the one year of the five and it’s only been there for a day. So you have a license to fund and you can satisfy the five years.

Tommy Blackburn: You’re right. And maybe even if you’re doing like a rollover from a Roth TSP, getting it into that Roth IRA starts the clock. And the kind of nuance like interesting thing with tax, this license actually goes to April 15th, or at least for a contribution, and that you could wait all the way until the due date of the tax return to fund the previous year. So really it’s like going back, I don’t know how many months that is, 15 months or something. So really jumpstart that clock.

So just things that we look for end of year, certainly in the beginning of the following year, taking advantage of our licenses. John, so I think about kind of like interesting things for this year, like differences is the Social Security Fairness Act. So we’ve recorded on this, hopefully, we’ll link that in the show notes, but things like GPO, government Pension Offset and Windfall Elimination provision went away. So all of a sudden, many of our clients that were affected by that got a lot more social security that’s hitting the tax return for 2025, and going forward.

For some folks, it could be outsized because maybe it was retroactive back in entire year that they got paid out for others. Maybe they filed effective this year and so they only had like half a year of social security. So we need to make sure we’re capturing this in our tax projections, this new income source is social security and also be thinking out at least for the following year, how does it look that year? Did we have this year we like doubled up on social security and it’s actually gonna be half next year and that changes the income or is it gonna be even more next year?

So that’s part of, again, looking at those year over year, and being thoughtful of where income is gonna be.

John Mason: It’s amazing how I don’t always feel like I have to do it, but. The Social Security Fairness Act or some other scenarios, it feels like you’re often looking at two or three tax years, not just one.

And I can already see Social Security Fairness Act throwing people for a loop, you know, for the exact reason you just said, is they’re gonna file their return on April 15th and get a surprise, good or bad, big refund or big liability. And then they’re going to make an action or adjustment based on what happened.

And that action or adjustment is going to be based on bad data. Because what happens in 26 is different than happened in 25. And tax preparers, if you hire a firm and software, they’re gonna generate estimated payment coupons. If you owed $5,000 this year, they’re gonna generate estimated tax payment coupons, thinking that’s your Social Security in 26, and then you may find yourself getting a five or $10,000 refund next year.

So another example of the tail wagging the dog is I just think it’s gonna throw people for a loop. People already have a hard time projecting out into the future and making tax adjustments via estimated payments or withholdings, and then you just throw in bonus money and changes. It’s really–

Tommy Blackburn: Yeah. It’ll throw everybody for a loop and we realize that we do this for a living. We are thinking about it all the time. We’re looking at it all the time. So to us it is very natural to be considering this, but for many people, this is a foreign language or something that, like you said, would you say plug our nose, close our eyes, for the best kind of, yeah, and we get it it’s overwhelming, but that’s where these surprises, all this variation comes in versus proactive planning. Usually, working with a professional such as ourselves, and it is biased for me to say that, and biased for me to even say a lot of advisors I don’t think do this work. But you know, hopefully I’m mistaken.

I realize it’s self-serving. But I truly believe it that having somebody look year by year strategically, tactically, that’s very helpful. Usually, you need a professional with good software in their corner. And you just need a professional who does it to begin with. I think a lot do not do it.

And just based on conversations I have with people, they’re usually amazed. I guess as an anecdote, my father-in-law who I helped, was saying that he recently was talking to some friends and was like, “Oh, Tommy ran some tax projections, was looking at this and that, and suggested this and was like, did your guy or your person, are they talking to you about this?” And it was like, “What are you talking about?” They had no idea. So just further my belief, like what we do is truly special here.

John Mason: At this point, if you’re not getting tax planning, you just need to say, “I’m not, I don’t have a financial planner.” You just have to say that.

Like, if I’m not receiving tax planning, I don’t have a financial planner. So then your choice as a consumer is to decide, do you want to pay somebody to not do their entire job? If you’re not getting tax projections, if you’re not getting tax advice and you’re paying them the same or about the same that you would pay somebody like us, the question is why are you paying the same fee for less value?

And just own it. Like maybe you’re too lazy, maybe you don’t want it, maybe you don’t think you need it, but at the end of the day, we have to own, as consumers, if we’re not receiving this type of advice, you’re receiving less than stellar service from your financial planning team. An easy way to vet this that just popped into my head is what tax projection software or tax planning software do you use, and what tax research software do you use to help with my complex tax questions?

And if they can’t answer that question immediately, then they’re not doing tax planning. That would be like asking them, “What’s your financial planning software?” And them saying, “I don’t have one,” or, “I don’t know it.” That wouldn’t probably be an acceptable answer for a prospective client.

Tommy Blackburn: Confidence, that’s for sure.

John Mason: So maybe getting off that soapbox, end of year, maybe you’re doing your tax projection, maybe you’re figuring out that you owe money. Well, if you owe money, right now when you’re just now finding out about it, you should probably go ahead and make an estimated tax payment, and you may still be dinged a penalty if you’re not in safe harbor, but at least you’re gonna be cutting down on some of that by getting the payments in quickly.

Alternatively, Tommy, if you owe every single year, we need to make a withholding adjustment rather, in our opinion, overdoing estimated tax payments, withholding adjustments are so easy, specifically on DFAS, military pension, but also federal, CSRS, and FERS, Social security would probably be my last go-to.

W2s are fairly easy ’cause you can specify a flat additional withholding. All of that’s better than estimated payments because it was deemed to have been there all year. So that’s our preferred method for fixing tax shortfalls, don’t you think?

Tommy Blackburn: John? I think you’re absolutely right. We definitely prefer withholding, getting it in that way because it’s honestly, I hate saying this, using this word, but it’s somewhat of a loophole and that estimates are when they made, that’s when you get credit, and we could have underpayment throughout the year. I think right now the interest rate on underpayments is roughly 8%. That changes with interest rates.

But it’s pretty significant when you think about from an interest rate perspective. And yeah, I don’t know why it’s a bit of a misnomer out there. Sometimes I feel like I have to convince clients, I don’t know about you, but do I go, I think I should just do an estimate, right? I think I’d rather do an estimate.

It’s like, no, you really should rather do a withholding adjustment, particularly if you have something like DFAS or OPM, where it’s pretty, it’s easier to customize, particularly DFAS seems very easy to customize. Of course, when we explain it to them, they didn’t get it. And I think it may be a little bit to, of our service level too, John, is well, one, we offer, most clients are perfectly fine doing this on their own, but we offer to help if you wanna have a session, we can log on together and help you navigate this, get it right. The other is if we’re controlling the withholding from like an IRA distribution, which is not a, we’ll go ahead and make that adjustment and we’ll even set a task to say, so if it’s like a choppy year or, “Hey, maybe we only need to do this to fix this year, but I can see next year it needs to be this. Okay, well we’ll have in December, we’ll just have a task already out there where we’ll go change it, so that effective January is what it needs to be.” So I think that’s, it’s amazing the amount of service and advice that gets all wrapped into something that seems so simple as being paid in.

John Mason: Expanding on that just a tad, because I love how you mentioned us and what we do in there is sometimes we’ll take, I know frequently we do this for inherited IRAs where they have required distributions. We’ll just have a hundred percent with health for tax and treat that as kind of the estimated tax payment for the year or use that to offset additional tax.

We can do that for RMDs. We can do one-time IRA distributions. But also we have on file, and I think we’re probably allowed to say this on the podcast, is authority to help clients with distributions that doesn’t require any action on their part. So when we update that tax withholding for January, we’re not having to go back to the client and ask them to re-sign something or do something. We can just go in and make the change internally, which is pretty cool.

Tommy Blackburn: Yeah. And typically, there’s communication around it. So you’re right, what John was talking about is the standard of standing letter of authorization, which just says we can distribute money to you or adjust withholding for you, which goes into your IRS or state account.

So it’s all still moving basically between your accounts. We’re just able to execute on that on your behalf. We usually are gonna give like a, “Hey, we’re gonna make this change for you. But you don’t have to do anything,” so you know it–and that’s what most people like. Yeah, let me know and I don’t have to do anything. That sounds fantastic.

John Mason: So make sure, audience, that if you have an inherited IRA, that you’re taking your life expectancy or RMD, understand that if it was, yeah, understand if it was pre-SECURE Act, you have RMDs over your life expectancy if it’s inherited, versus secure act, you’ve got 10 years to close it, so the material difference between those two.

If you’re approaching 73 years old, RMDs, we have to watch out for those. Make sure we satisfy those in time. Also, Tommy, the client I met with yesterday or the day before in Virginia, I guess there’s a little bit of a tax penalty for married couples. And we have this thing called the spouse tax adjustment credit.

It’s like $259 and you’ll probably laugh at me for doing this, but the couple needs to do a $40,000 needs to do. We’re going to do a Roth conversion and the 12% tax bracket. Whether it adds value or doesn’t add value, I think it does, but it’s hard to pass up converting money at 12. And for them, we’re specifically gonna do two $20,000 conversions.

One for him. One for her, ’cause she doesn’t have any income in Virginia right now. So if we do 20,000 for her, we pick up the $259 tax credit, which I know is silly. And it’s like really? $260? But it’s like it’s free money. How do you not do it?

Tommy Blackburn: Yeah. And you’re able to do it easily. So that’s a good, that’s a really good point.

Yeah, it is, as we would say, small ball, but it still is clearly an attention to detail and it’s value. So, and it’s not difficult to just do another separate Roth conversion, particularly for that amount. So that’s great. On the inherited IRAs, you had me thinking too, because I had this conversation with clients, I know we all do this. The conversation was, “Hey, well, when we inherit this money, can I convert? Can I convert that IRA then into a Roth IRA?” And the answer’s no. We cannot convert an inherited IRA into like, we just can’t do it. We have to take our RMDs, no conversion. However, a couple thoughts there for the client was without knowing mom’s situation, it may make sense for her to proactively do some Roth conversions now while she’s got control of it.

So you inherit a Roth, inherited Roth. The other part, which we do quite frequently with clients is we can’t convert that when you get it, but we can use that to pay the conversions on your IRA conversion. So it’s kind of a back doorway. Now we still have to account for where we’ve got additional income and things to monkey with and the projection.

But yeah, we can’t convert that inherited, but we’ll just use that to do the 100% withholding, like you said, and we’ll then convert your actual IRA to Roth. So creative thinking, or at least we think it’s creative.

John Mason: I love it, man. I guess a few other, just like quick hit items is, I bonds. If you cash those out this year, remember that you have to log back into treasurydirect.gov to get those 1099s.

They’re not going to mail them to you, is our understanding. If you account for it correctly, it should be taxable federal, but not at the state level. So that’s something to keep an eye out. Also, keep an eye out if you transferred accounts this year or did a TSP rollover; 1099s are going to be generated.

If you moved an account from IRA to IRA or non-qualified to non-qualified, you may have 1099s or tax documents that were generated at Schwab and Fidelity, for example, rather than just Fidelity. So just keep an eye out for anything that’s moved. We don’t do this comprehensively or fully for every client yet.

It’s something that we’re demoing. But Tommy, you and I try to produce these tax letters, which is effectively a fancy 1099 letter that says, “Here’s where we think all of your tax documents are for the year. Here’s what happened that we know about.” And we try to identify, “Well, you had money at Morgan Stanley. Then it switched over to Axo. Don’t forget to go grab that 1099.” We try to highlight that. It’s a very labor-intensive process for us, which is why we’re not doing it for like rolling out to everybody yet. We’re just trying to figure out how we can do this at a high level of success and provide a high level of value.

If you’re a client listening, leave in the comments or send us an email, yes, we love the tax letter, we’d love to hear from you, MasonFP@masonllc.net, like Mason Financial Planning. If you, audience, are watching this on YouTube or listening and you would like a tax letter, leave it in the comments section.

At the end of the day, nobody’s emailing me and saying, “John, boy, I really love that tax letter.” So I’m kind of saying I don’t know if it’s that valuable yet at this point, which is another reason we haven’t rolled it out, so.

Tommy Blackburn: That’s why we’re testing it. Yeah, we’re trying to see if it’s, it sounds like it’s valuable, but we always have to see in practice, are these things valuable or not?

And we certainly don’t wanna waste anybody’s time, including ours, if it’s not. If it is valuable, something we wanna have a good process around to do it successfully like you said. John, as I think about, I realize we’re probably trying to wrap here. Some other things that come to mind as I think about conversations we’ve been having is one, if we had real estate sale, so that could show up on the tax letter just from a reporting perspective, even if it’s not taxable.

Potentially could be taxable even as our primary residence if we actually had over $500,000 of gain. So we wouldn’t be planning for that. And then not uncommon for clients to have rental real estate that sells. Maybe it’s not common, but it’s not rare either. And so now I’ve seen some of that where it’s, hey, in the conversation was, the one I’m thinking about in particular was I’m retiring, talking about distributions and it was like, “Hey, you talked about using IRAs or doing some Roth this or that,” and it was like, “Well, not this year, because we have a really large capital gain from this rental real estate that you know you’ve had forever. That’s sold. Next year, 100% your income is projected to drop down. We’re gonna hit the IRA, we do Roth.”

This client also has a brokerage account with us, what we call non-qualified. So it was, “Hey, this year we’re gonna use the non-qualified to meet your cash flow need. And then next year we’ll probably switch it to IRA based on what we’re seeing.” Some other is, I think you probably are experiencing this too, but it just seems like a lot of estate stuff has been happening recently.

Thankfully, not so much clients passing, but a lot of clients from what I’m experiencing, at least, are inheriting. People are unfortunately passing away in the family and they’re now dealing with these estate issues. And some of that, where I’m going particularly from a year-end, is what type of income could we potentially have coming from this estate or trust to the extent we can control it, let’s control it. To the extent we can’t, what can we control on your individual situation, to work around it. So just being aware too of, and I’ve had at least one or two clients where, yeah, we’ve talked about doing Roth conversions or just taking advantage of that license.

Now things have happened. Somebody’s passed, inherited IRA, whatever. We had a lot of income flow through this year, and it’s like, yeah, we’re backpedaling on that plan. We’ll delay any creation of additional income until next year, which hopefully this just helps everybody understand like the customized nature, the individualized, and also it adapts. It adapts throughout the year and through the years.

And so it may have been early on, “Hey, we probably do a Roth conversion, but we tabled it because we just wanted to see what happened as we went through the rest of the year.” And sure enough, some things happened. So now the advice is changing.

John Mason: I think about a family that we’ve helped that had to sell an inherited property in New York that was held in an irrevocable trust and we’re reading through New York regs and federal regs and trying to look at this deed of transfer, trying to decide like, is there gonna be a step up in basis?

Is there not? And trying to get the attorneys involved and everybody involved to agree. Well, that has a material impact on a tax plan, not getting a step up in basis. And it also just occurs to me that our clients and the audience, like you have to be very good at communicating with your financial planner on what’s going on.

Like if you don’t tell us that mom died and that she forgot to take her RMD on a million-dollar IRA and she’s 92, and that million-dollar IRA has an 80,000 RMD or something, and she didn’t take it, and now you have to, and then that shows up on your 1040. Oh, it’s a game-changer.

Tommy Blackburn: Yeah. It matters. Yeah.  Particularly if we make decisions in a vacuum, right? Like we’re looking at it from–

John Mason: Don’t make us look bad.

Tommy Blackburn: Yeah. Absolutely. And John, you talk about proactive. I guess this one is not as common either, but we do have clients who either, maybe a spouse owns a business, or they’re retired doing consulting work.

So like, business owner is where I’m going with this, or at least from a tax perspective, it shows up that way. Not as common. But there are things around if we have extra income from the business, do we either just fund IRAs or Roth IRAs if we qualify? But taking a step further, do things like funding step IRAs.

And in particular what I’m thinking about now is solo 401k or Roth Solo 401k. So we’re funding those and those can have some advantages over doing something like a SEP IRA, it’s easier at a lower amount of income to get more in there, but it’s important at the risk of like going too far down the rabbit hole when you do something like a solo 401k.

So for those with TSP, it’s like TSP, except this is your individual plan for that business that you can fund. We have the employee part and we have the employer. You as the business owner are both, but there’s a difference from a tax perspective. And the important thing here is 99% of the time we need to get the employee part in before the end of the year.

Then the business owner portion of that calculation can wait until the tax, the due data, the tax return. So that’s just, again, it’s not a common thing, but it is something we do see and work with clients here. Have a few right now, and it’s, let’s kind of figure out what that employee part looks like and get it in before December 31st.

John Mason: That’s a wonderful point. Also, maybe we can close with charitable giving. Charitable giving changes in 2026. Not material probably for most of the people listening to this podcast, but if you had a large income year and you’re looking to do some charitable giving to offset the sale of a business or sale of a rental property, doing a donor-advised fund, maximizing highly appreciated securities.

Technically, 2025 is going to be a better year to do that than 2026. Not so much that we can’t do it next year, but this is a good year to do big charitable giving if you want to.

Tommy Blackburn: You are right. And just thinking about it from the long, the long-term tax plan. Yeah. All of that make looking for appreciated securities, if that’s there.

Thinking forward, we mentioned this in our episodes with Stephen Kimberlin, was that below the line $2,000 charitable deduction that’s coming, which will probably help a number of people. So if you are giving in the future and it’s going to be $2,000 or less, and it’s not a qualified charitable distribution, QCDs still win over this.

But if it’s just outside of that, keeping track of what you’ve given because you can still take the standard deduction and pick up another $2,000 starting next year.

John Mason: Awesome. Well, we’re gonna wrap up this podcast. Audience, we hope you enjoyed end of year tax planning and financial planning for 2025.

Two really quick public safety announcements or public service announcements.

Tommy Blackburn: Safety. Where are we going?

John Mason: Safety. The safety announcement is if you bought a house somewhat recently and you have a seven or 8% mortgage, you can probably refi. And look at Cap Center’s website, capcenter.com. Maybe if we’re on our A game, we’ll link some of those episodes that we’ve done in the description below, but it looks like maybe about 6% on a 30-year, which, boy, times have changed. I was excited when I got my two and a quarter. Now I’m getting excited to see 6% again. So yeah, it’s better than seven, better than almost eight. So cap, or I’m sorry, capcenter.com refinances could be a thing for you. Could be helpful if you’re looking to purchase your next retirement home.

It could be helpful for your children. So a nice public service announcement there. And then finally, again, if you want to be a client, that process starts at masonllc.net, masonllc.net. We’d love to hear from you in the comment section, or again, an email, MasonFP@masonllc.net.

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