Capitalist Investor

Ohio’s Flat Tax: A Hidden Advantage for Retirement Planning, Ep. 331

• Strategic Wealth Partners

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Ohio’s move to a flat tax is making headlines, but the real story is what it means for your money. In this episode of The Capitalist Investor, Mark and Tony explore how this shift could impact business owners, high-income earners, and retirees—and why it might open the door to smarter tax planning.

From reducing tax drag to creating new opportunities for portfolio growth, we’ll show you how to turn a policy change into a financial advantage.

👉 CTA: If you’ve got $3M+ invested and haven’t reviewed your tax strategy lately, it’s time. Feel free to email us at info@swp.com for more information.

And this episode of The Capitalist Investor, we are going to talk about how Ohio is moving to a new flat tax, as opposed to the progressive income tax that we are most used to. most people are going to say that this is just helping high income earners. But what if I told you that this is a very impactful advantage for more sophisticated retirement planning? Oh, Hey, Tony. How we doing today, man? Don't. Good, man. Don't. Good. I'm in a good mood. Let's, let's let's hit this. Absolutely. So we are talking about Ohio is moving to a new flat tax, as opposed to the progressive tax that we've all been accustomed to over the many, many years. They're moving to a flat tax, 2.75%, virtually for everybody. Yep. Anybody over like $26,000. The outcome, and but that's not happening until next year, 2026. Right, right. So there is a slight scale this year in 2025. So they're lowering the top bracket, from like, what is it, 3.75 or 3 point 5 to 3.1 through five. Yeah. Like it's I don't know why. And they just wipe the slate slate clean but whatever. But no we're going to talk about Ohio State new income tax as opposed to Ohio State Buckeyes, which is football season is. Right around the corner here. Right around the court. Let's go, let's go. It's been it's been a long offseason man. Been a long off. And I I believe this week we got, Hall of Fame game. Yeah Thursday. Yeah. And I think I saw a meme on, on, on Facebook or whatever Instagram or something or like pre-prepared for the next, what, six months of football or something like here it goes. So yeah, there's there's no more, there'll be football on Thursday for like, the next, you know, six months or something. I mean, starting on Thursday. So. Feels natural. Feels good. Yeah. It feels good. Warms the heart. Okay. So how's Ohio is moving to a flat tax as opposed to a progressive. So most people are going to look at this like great. It's just, helping the, high income earners. And because not much changes from zero income to 100,000. Right. Because above 100 it right now 2.75 is like under 100 grand and anyone over 100 grand of, of earned income and are just reported income is 3.5. Right. So this is, you know, 75 Bips, you know, 0.7 5% is, you know, the change, coming up in 2026. And again, I've mentioned there's a slight differential this year. But this is a it's a this could be a very big deal for some. Right. And we're going to talk about some of those advantages, because now the tax is just predictable. Right. You don't have to worry about the sliding scale and figuring out averages and stuff like that. It's we just know what it is. Yeah. So what's your take so far, Derek? Like, I mean. Well, certainly helps me out when I'm sending out accolades for, for the clients. And I don't have to wonder if it's 2%, 3%. What should I be withholding? Should I do a calculation? It's so funny you said that because as I was like, reading this, I'm like, man, I'm going to have to like, that's exactly what I'm going to do. Like on this. Like, everyone's got this and I don't have to figure out like, oh, I should maybe do 3 or 4 or like, I don't have to guess on what we need to do. Yeah. More. So that's. Great. So yeah, you know, number one, I thought it was a great topic because, I think, you know, well, I don't think, this was all part of all of that legislation that was surrounded by actually the, the Browns football stadium talk. Okay. And the, the unclaimed funds. Have you ever heard about those? No. That's apparently what's financing, a big part of the the stadium is unclaimed funds. So, but it's a good thing. So, you know, essentially, they're running a bit of a surplus. But I think for the every day pre retiree or retiree, it really just opens up, potential for a lot, a lot more tax discussion at least, and potentially some tax moves. So, so, so first thing is like let's talk about like some key points here. So predictability. Yeah. Like you just kind of alluded to it better planning. Like it's easy just to plan around it. So that that makes things great there. And and obviously if you're making over 100 grand, you're getting, you know, you're paying less tax. Yep. And it doesn't that doesn't happen too often. And, you know, but when it comes to more retirement planning, it can absolutely help, lessen the blow slightly for just Roth conversions. Right, right. And, and the discussion continues to happen with Roth conversions in, in clients because, you know, over the last decade, like accounts, the market has done extremely well. And there's points where I'm having discussions like, hey, Tony, RMDs are starting in a few years, and I actually have to take out more than I need and that's a problem. So can we, you know, nip it in the bud early and that would be Roth conversions before RMDs start. Right. And and that's right. Now it's age 73. And and starting in if you were born after 1960 RMDs actually start at 75. So you're runway to do conversions when you retire could be nearly a decade. Yeah. So these are things that we need to talk about because I can we can have a whole show on on the pros and cons. But primarily the pros for a Roth conversion. But the that slight save that 1% is is extremely helpful. Right. So that's kind of you know, the predictability is very, very important. One thing I'll, I'll interject while you're getting your next thought. Just because we've had lots of conversations over the years now, on the show about taxes, you know, we were, you know, kind of worried about the Democratic, tax plan, tax increases, all that stuff as it relates to individuals as it relates to, you know, just the general economy and how that was going to work out. So it's a very important note to always talk about, never base your entire financial plan on today's tax, legislation. Right. You know, it can always change. And I think the yeah, I wasn't a huge Roth conversion guy before, but now that that RMD has been pushed back to age 73 and like you just mentioned, 75 after 1960, that gives you such a great runway. And to do Roth conversions. And it's such a, a relatively easy and manageable, estate planning tool as well. Yeah. I mean, you're, you're you're eliminating future RMDs and a Roth IRA for yourself, tax free growth. But it's, you know, as the growth, the it's all tax free. It's been it's fantastic and it's tax deferred. And like you've mentioned, it's a great legacy tool. So if you're going to pass anything on to the next generation, if that's your one of your retirement goals, it's perfect because they can let it the way the rules are set up, they can let it cook and the account for ten years and take it all out. And there's no taxes. Yeah. If you give a traditional IRA to the next generation, I'm having conversation. I'm like, we should be very systematic about right. The we need to start the distributions now because you don't want to just have one big year of distributions because you're going to get you're going to get crushed with taxes. And usually when you pass on a, you know, you know, accounts to the next generation, you know, they're usually in their highest earning years. It's not the time you want them to experience the tax for sure, for sure. But anyway, again, Roth conversion man, that's a whole. Yeah, a. Whole show on itself. So Derek, the next key point is this is obvious. Just you know, this is obvious if you don't do Roth conversions it's just going to put more money in your pocket. You know specifically if you're, you know, making over 100 grand of, of income, whether it's pensions and Social security and distributions from your retirement accounts, it's just a lower tax. Right. Here's a fun fact that I was talking with our CPA after the big beautiful bill was passed. This is actually pretty. Is this pretty important? It's a Roth. I know if we're talking about Roth conversion, I'm going to slide this here again. But taxes are going down on the state level. But they actually changed a little bit for us, on the federal level. So if you are over age 65 on Social Security and making under 150 grand, you now have a new standard deduction. Yep. If you are married, filing jointly and making over 150 grand, you have an additional$12,000, deductions. So you can do 1 or 2 things if you're okay with the tax, you know, bubble you've been in the last, you know, eight years under the tax, Trump's tax laws, the new additional 12 grant allows you to do one of two things. You can and reap the benefits of a higher deduction. That means roughly maybe 15, 1500 bucks per year that you are now in your pocket. Right at the bottom of your checking account is what I call it. Or you can say hey I was okay paying the taxes. I was the last several years I'm going to convert 12 grand. Yep. So now you get to convert 12 grand. Still be in the same, you know, the same tax lane. I'll call it. In the past years, nothing really changes. But now you are creating a new account type of account to to draw from a tax free bucket if you don't have a Roth. So again, what do you want to do. Right. Do you want to convert or do you just want to enjoy the money? Yep. I actually have a client coming in tomorrow to have this discussion. Great. So they are, basically right at that threshold. I think they can do about a $5,000, Roth conversion and still stay under that 150,000. Yeah. So they basically got a free Roth conversion and then some, or, you know, they've been making big Roth conversions as an estate planning tool. So, so, yeah, we'll we'll just have a talk and see what they want to do. Yeah. But it is a, you know, this this is the stuff that, makes a difference in your overall plan. Just understanding the rules, and acting on them. So, you know, that's what we're working on tomorrow with one of my clients. It's, It's a good thing to take a look at it. You're in your situation. Yeah. I mean, you could be looking like. Oh, what do you do, Derek? 12 grand. But, like, you know, when we build a financial plan and we got you live in the 95. Yep. And the runway could be 2020 to 25 years, 30 whatever that number is like. Yeah, it is a big deal. It is a big difference. Yep. 12 grand that lasts another 25 years with, you know, compound interest makes a difference. Correct. So, things to think about. Right. So again, more money in your pocket that this make. That's just obvious. And then, you know, the last point would just be like timing the conversions and reallocation. Yep. So now's the time to to up front, you know, load the Roths and take care because this is actually another conversation I've been having with, one of my more analytical clients, which I can appreciate as an engineer. I get to see the whole spreadsheet. I saw the how it was strung out, you know, over the, over the course of his lifetime. And, you know, you think he built it out to age 85, and that was his breakeven, right? So essentially what he is saying, he's like, I am old enough to remember in the 70s when the tax rates were, a lot different than they are today. Yeah, like a lot higher. And he goes, you know, we could have discussions on how our government spends money, all the debt load that we have, this, this deficit that we're running all the time. And he goes, I'm just going to pay it now because I know it's just don't feel like taxes are really going to stay where they're at for a long or much longer. We don't know if we can really afford it as a country. So he's he's going to convert it all in within the next like 3 or 4 years. And so a big, big chunk of money in there, I had to sit down. But I can't argue with him on on the interpretation. And then I looked at his spreadsheet. And, you know, there's assumptions here and there, but he's okay with it because he goes like, I just feel like he that's the thing with the Roth conversion, you have to have conviction of just not like I'm don't want to pay the tax or like it seems like a lot of money like you, if you have you have to have multiple convictions. Are you doing it legacy? Are you doing it because you feel like taxes are going up? Does it help your financial plan? Right, right. Like there's all these things on how to do it. And plus he's got another bucket of money, a non-qualified account to pay the tax. That's the most efficient way to do it. It's not that you can't do it another way where you pay the tax out of the IRA, but it's just more efficient if you have cash to. Yeah. Pay the tax. Yeah. You know, we were, you know, during the election season, you know, we're we're talking Roth conversions because, you know, the for the, the potential risk of higher taxes in the future. Even though that has subsided in the short term, that doesn't mean there's not still a long term possibility. Yeah. So prepaying your taxes as part of your overall strategy? I have no problem with whatsoever. You know, it's it's pre paying the taxes and getting them out of the way. You know, I think a lot of people don't realize that when they get their, you know, 401 K statement or, or IRA statement in the mail. Like that's not all your money, you know. Temporarily on your life. Exactly, exactly. So the one thing that I did is like, okay, how impactful is this flat tax for us and how does it compare to like, other states? So I, I just pick Florida. Everyone loves Florida loves going there and you know snow birding and all this. And they're they're known for their 0% state tax. Yep. So that made me kind of dig in. I'm like okay, well maybe maybe there's some other taxes that, you know, kind of exist to say, hey, maybe we are on par with a state like Florida. So I started like taking a look at, you know, sales tax. In Ohio, it's, 5.75, but and if you live in Cuyahoga County, Cleveland area. Right. You're paying like eight. Yeah. Right. So then I went down in the Florida, you know, and there are zero, zero income, tax rate, but their sales tax is like 6 to 8, so like 8 to 8. So we're actually paying more in taxes. So what would be the benefit of just not uprooting and moving to Florida if you want. And then I then you start kind of thinking about Florida and whole and the cost of living is extremely different, right? Maybe not. I don't want to say extremely, but it's definitely different. Housing is more, utilities are higher. Insurance is definitely higher. I don't think a hurricane has over time through and hit here, here in Ohio any time. So, you got like, all of that hurricane insurance, you got properties that just won't be insured, right? You got they're rocking a seven figure house, you know, and it doesn't have insurance on it. I have a client like that, you know, and he just loves the place. He hurricane demolished it, and he rebuilt it, you know? But that's a lot of money. You know, to refurbish the whole house. And then they have higher property tax. So the headline is like, well, you know, other states are still better. Yeah. But, you know, a lot of people ask me when I go out of town, like, what do you love about Ohio? And I'm like, it's simple and and it's cheap. Yep. He really is right. It's just I'm going to be anywhere in 30 minutes around here that. That's that's going to be my one of my main points here. Obviously the the flat tax rate isn't really pushing me much over the edge, but it's a great it's a great place to live, honestly. It really is. It's got low cost of living as reasonable taxes. It has a lot to do. You know, until the the mayor screwed up the airport, it was it was one of the greatest, and it still is. But having that the the hub. The continental hub. Yeah. And in Cleveland, the those those were the days. Yeah. So it's harder to travel out of here now. But other than that, you know, it's, it's a very affordable place to live. And, people only like, you know, you know, clear cut arguments these days, you know, you know, black, white, right or wrong, whatever. There's nuance to a lot of this stuff, and a more favorable tax rate is probably going to keep more people in Ohio full time than moving down to Florida. That's the big thing, right? Like lowering the taxes, incentivizing people to stay here. Right. Or come here. Right. And that that's actually a very you know we talk a little more about like retirement planning and stuff like that. But like that's actually the key right. Like hey where we are now. And I was looking at we're like in the bottom third of you know, state tax across the country. I mean I think there's like I don't know if I look like like call it 15 plus or minus states that don't have state tax. But we're like one of the lowest when you get out of the zero. Yeah. It's the second lowest flat tax. Is it okay. With with when it goes down to the two seven. Five. Awesome. Well yeah. So I mean again it's not it is, you know, for for some of our listeners, it could be about retirement planning. It could just be about more money in your pocket. It could have it could be about growth, like lower taxes historically has stimulated growth. Yeah. Right. So like that's that's those are the three keys. Yep. So all right. Well fun fact on I new flat tax and what it means to you and how you can take advantage of it. Yep. Absolutely. All right. Well, good show. You know something? I didn't research a lot before we came up with this topic, so I thought it was very, timely and important. So, thanks everyone out there for listening. If you guys have any questions, comments, concerns. Hit us up at info@connect.com and we'll talk to you next week. The opinions expressed in the podcast. Are for general informational purposes only, and are not intended to provide specific advice or recommendations for any investment, legal, financial or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.