March 2, 2024 • 56 mins
Dive headfirst into the world of taxes and chuckle along as we explore the comedic side of CPAs' March Madness—a frenzy of number crunching that rivals any basketball tournament. Our latest episode offers a spirited look at the humorous anecdotes that pepper tax season, from deductions so wild they border on mythical to the truth behind splurging for tax breaks. We also unravel the concept of tax-efficient funnels, providing savvy insights into how smart planning with 401(k)s and other financial strategies can bolster your savings and ease the burden come tax time.
When it comes to the future, it's about making choices today that secure a comfortable tomorrow. This episode, featuring Dave Alison, Conrad Levesque, & David Roth, lays out a map for navigating the complex terrain of retirement accounts—from the dependable traditional IRA to the modern appeal of the Roth IRA—tailored for high-income earners seeking to optimize their golden years. We debate the merits of pre-tax contributions versus Roth's after-tax appeal, and even crack the code on backdoor conversions and the power of Solo-K plans for the entrepreneurial spirits tuning in.
Don't miss out as we pivot to the more strategic aspects of financial planning, examining tax-advantaged savings vehicles that do more than just shelter your money from the taxman—they serve as pillars in a robust financial framework. Learn how HSAs can be more than mere savings accounts, but rather investment opportunities with tax-free growth potential. And for those looking to diversify, we delve into the intricacies of real estate and cryptocurrency investments, assuring you that starting with maximizing your 401(k) is just the tip of the iceberg. Whether you're looking for a laugh or a lesson in finance, this episode strikes the perfect balance between entertainment and education.
Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.
All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Mr Conrad, you're looking all dressed up for a
Friday afternoon of doing taxes.
Speaker 2 (00:05):
Oh, don't remind me about the tax work.
Speaker 1 (00:08):
You guys are pretty busy.
Speaker 2 (00:10):
Oh my gosh.
Yeah, let's just say ready fortax season.
We'll be over with already andwe're just getting you into the
meat and potatoes of it.
Speaker 1 (00:19):
I was going to say it's March 1st.
People are just starting toupload their documents.
Speaker 2 (00:25):
Oh, so everybody thinks the NCAA is about March
Madness, but really it's the CPAthat goes through March Madness
.
Right, we're just and it's likewe'll get 30 returns in a day
just pummeled.
It's going to be an interestingrest of the tax season.
Speaker 1 (00:47):
Nice.
Well, when I'm in Vegas in twoweeks, I can see if I can bet on
your taxes, like we can bet onthe NCAA.
Speaker 2 (00:55):
Wait.
So I'm stuck in the rainyweather doing taxes and you get
to go to.
Speaker 1 (01:00):
Vegas.
I'm going with a client, conrad, it's work.
No, no, here we go.
These are.
Isn't this a tax write off,like you teach?
Speaker 2 (01:15):
Oh my gosh, put us on TikTok, let's make the video,
just write it off, throw it inan entity.
Speaker 1 (01:22):
Let's write it off Exactly.
There's going to be a lot offinancial advising and budgeting
conversations.
Speaker 2 (01:32):
Should you take some money off the table after you
want it, or do you just doubledown, put it all on red?
Speaker 1 (01:37):
Not gambling your financial future away.
I mean, if anyone else islistening.
If you need your financialadvisor to go to Vegas with you,
I am open and ready to do that.
Yes.
Speaker 2 (01:50):
I'm available.
If anybody has a beach housethat they want confirmed as a
rental, I am available for that.
That's right.
I'm trying a very reasonablefee to do that.
Speaker 1 (01:59):
Any clients that need us to travel and go on vacation
around.
Just make sure they're gettingall the deductions they can.
We are here and ready to go.
Speaker 2 (02:09):
Yeah, Listen.
You did a podcast with one ofyour clients from their boat,
right?
Speaker 1 (02:14):
I know, but I made the crucial mistake that I
should have flown out toTrinidad and Tobago and been on
the boat with them to recordthat Stupid me sitting here in
Charleston doing it on a Zoommeeting instead.
Speaker 2 (02:29):
Listen there's always part two.
Speaker 1 (02:30):
Well, here's the thing that I've always learned
about taxes.
I've heard you say this overand over At the end of the day,
there's nothing that really getsa 100% credit.
If I have to spend $1,000 totravel somewhere and I get that
as a deduction and I'm in a 40%tax rate, it still costs me 60%
(02:52):
to go do that thing.
I always love Conrad.
I'm sure you've experiencedthis with business owners.
They're like hey, I saw onYouTube, I should buy a car at
the end of the year, in December, to get a big tax write off.
It's like, yes, you could dothat, but if you spend $150,000
buying your Mercedes G-Wagon tobe able to depreciate it, you
(03:17):
still spent 60% of the moneythat you would have otherwise
Now.
If you were going to go buy aG-Wagon in the first place,
maybe it makes sense to.
But again.
Speaker 2 (03:27):
The best one I heard was and it was some lady talking
about realtors right, oh, justgo buy a new Range Rover every
year and write it off, and youdon't have to pay taxes on that
money.
I was thinking to myself allright, let's just say that
somebody could afford to do thatNumber one the depreciation
recapture rules, which she nevertalked about, because this lady
(03:47):
was not an accountant, she wasnot a CPA, she had no background
in tax.
She just read an article andthrew out some advice like we
were in a zoo, right.
And so, ultimately, who canafford to keep five Range Rovers
?
Do you have a big enough garageto keep those?
Where do you store all theseRange Rovers?
The questions that were neverasked, and the fact is I had
(04:11):
multiple clients send me thatvideo and I finally told them
and I'm going to steal this term, we're going to call it tax
porn.
Right, you're watching thesevideos and they sound too good
to be true, because they are Taxporn.
Speaker 1 (04:27):
That's all you should trademark that.
That could be your stick as aCPA.
So I guess right now, if any ofour clients need their
financial advisor to go to Vegas, I'm open to it.
If any need them to go to abeach house, they can bring
Conrad, and if any of them wantto go buy a new Range Rover and
don't have a place to park it,they can give it to you, david.
And yeah, we have six spaces inour driveway.
Speaker 3 (04:52):
We got to fill them up there you go.
Speaker 1 (04:54):
So if anyone wants to send David three Range Rovers
so you get the tax deduction,that would be great.
Speaker 2 (05:00):
Well, let's see.
I think you hit the nail on thehead, though, talking about it.
By and large taxes, you get toavoid part of what you spend,
right?
You got to ask the question ofwould I rather keep 60 cents in
my pocket and pay the 40 cents,or would I spend 100 or that
(05:21):
whole dollar, and what do I getin return?
So you better be getting morevalue than that 40 cents that
you would have paid anyway.
Speaker 1 (05:29):
Well, it brings us right into what we're going to
talk about today.
So, by vote, you guys chose todive into our tax-efficient
funnels.
You know, just by way ofbackground before we kind of
kick this podcast episode off,this is actually something that
has kind of evolved over time.
Just the backstory of this andI'll show the image when we kind
of get into it is I used to gothrough this concept with
(05:52):
clients called the order ofmoney, and I had so many clients
that would come to me confusedat how they should structure
their savings when they're inthe accumulation years, like
should I be participating in my401k?
If I should, should it be thepre-tax side or the Roth account
(06:13):
side?
Should I be participating in my403B?
Should I be doing an IRA?
Should I be investing inbrokerage accounts to invest in
stocks, bonds, mutual funds andETFs?
Should I open a cryptocurrencywallet and buy Bitcoin and
Ethereum and all these otherthings that are out there?
How much should I have in thebank account?
(06:34):
Should I be buying real estate?
Should I put money in an HSA oran FSA or a 529 planner by life
insurance?
And the reality of it is is.
The answer is yes.
The answer is yes to all ofthose things If you have enough
money and enough savings to beable to afford to do all of that
(06:54):
.
But the reality of it is mostpeople don't have enough
discretionary savings to go buyevery one of those investments,
and so what I was doing withclients is mapping out an order
to money.
Here's what you should do withyour first dollar of savings.
Once you max that out, here'swhere you should go next.
Once you max that out, here'swhat you should go to next.
(07:15):
And then vice versa, on theflip side, our retirement
planning clients were like okay,I've now accumulated this money
, I have money in a 401k, I havemoney in a brokerage account, I
have real estate, I have ahealth savings account and maybe
I have a Roth account.
How should I think about takingmoney out of these accounts to
(07:38):
be able to supplement myretirement income needs, above
and beyond what my socialsecurity or maybe pension is?
And so there's an order ofmoney to how you should take out
of those accounts so that youcould maximize your income and
minimize your taxes.
And I was teaching this to ourclients.
I was teaching this tofinancial advisors all across
(07:59):
the country through my nationalorganization, c2p, and I
remember I was teaching this tomy business partner at C2P and
at Prosperity Capital Advisors,jason Smith, and he was like we
could take this into a visualbecause I was just writing out
the order of money step one,401k, up to match step two, roth
(08:20):
.
You know all these things andyou know he's great at kind of
taking a concept and simplifyingit into a visual.
I mean, he did it with thebucket plan that we all use
three simple buckets now, soonand later.
Of course, we wrote thebestselling book on the bucket
plan.
You could go to our website,allison Wealth, and request a
copy of this book.
We'll send it out to you as acomplimentary gift.
(08:43):
It's all on our retirementplanning process, our holistic
wealth management process, butwhat we came out with was this
kind of tax efficient funnels.
There's these funnels that youcan utilize to fill your buckets
of money over time, and thenthere's these funnels of money
to take your distributions whenit's time to go take withdrawals
.
And so I'm excited to jump intothis episode with you guys
(09:05):
today.
Speaker 2 (09:05):
Yeah, absolutely.
This is a topic that I can'teven begin to explain.
How many times I talk toclients about diversification of
tax.
Location right and not takeallocation out of the picture.
Where are your assets locatedand how do you look at taxes as
a net, after tax wealth and Ithink this is a topic that you
(09:29):
know.
I don't know, you probably haveencountered the same thing, but
most of my clients have nevergone through this exercise and
every single one of them thatdoes says man, I wish I would
have done this 20 years ago.
Speaker 1 (09:41):
It's the time machine .
All my retired clients are likeI wish I would have met you 20
years ago.
So let's go ahead and let'sjump right on in and talk about
the tax efficient funnels.
Don't forget, subscribe to ourchannel here.
If you're listening to thisthrough podcast on Spotify or
Apple or any of the otherplayers, make sure you go back
and check out our YouTube page,alison Wealth.
(10:03):
Subscribe to that.
We have a ton of additionalvideos.
Some of those videos are goingto be directly related to things
that we're talking about today.
So here we go, all right, herewe are talking about the tax
(10:24):
efficient funnels and in thisvideo I'm gonna actually throw
up guys.
I'm gonna throw.
I'm not gonna throw up guys.
That sounds sick.
I don't know why that came out.
What I'm gonna put up on thescreen here is a visual.
Again, I mentioned in ouropening that my partner created
this visual around the taxefficient funnels and, you know,
(10:44):
really, as a way to help usleverage the order of money to
ultimately increase cash flow.
I think any one of our clientswould want the ability to
increase their cash flow,increase their income, minimize
their taxes, and this is really,you know, what I would say is
the foundation of what we callthe tax management journey.
(11:08):
It's our proven process that wetake our clients through to
help them maximize their incomeand minimize their taxes.
And the reason that I say thisis the foundation is that, as we
build wealth, these are theareas that we could accumulate
that wealth in outside of anoperating business.
(11:28):
Right?
I know most of us realize likemaybe I can be self employed, I
can have an S corporation or anLLC or a C corporation and you
know, I know we do a lot ofeducation, conrad, on that stuff
and the right entity set up.
If you're a small businessowner, if you're a large
business owner, if you have aside hustle, but as you're
(11:50):
accumulating that wealth andyou're either generating savings
via your W2 job or you havebusiness income that you want to
continue to start to buildpassive wealth, the way to do it
is really in these three taxefficient funnels that we have
here the pre tax funnel, thepost tax funnel and the tax
(12:11):
advantaged funnel.
So, david, give us a little bitof education on the pre tax
funnel.
Like what type of vehicles?
And I want to stress the wordvehicles, because these are not
investments, that's what peopleneed to realize these are not
investments, they're justvehicles.
Think about, on the highwaythere's a lot of different
vehicles.
(12:31):
Those vehicles all do adifferent thing.
You know there's an RV, there'sa truck, there's a sedan,
there's a minivan, the peopleinside of those.
That's what you can think of asthe investments.
But, david, just give us kindof a high level on the vehicles
that are available forgenerating pre tax savings and
(12:52):
wealth.
Speaker 3 (12:53):
Yeah, and Dave, as you said, the pre tax funnel
it's contributions made with pretax dollars, and so those are
going to be things like your401ks, your 403Bs, your IRAs and
pensions, and the unique partabout that is these come from
pre tax dollars, butdistributions from this account
are taxed as income.
(13:13):
So, again, you get this funnelwhere you have pre tax money
that you're putting in and thenwhen it comes out it's going to
be taxed as income.
Speaker 1 (13:21):
So kind of an easy way or an analogy to think about
this is if we were farmingfarmer would plant a seed.
They're going to then have aharvest at some point and the
decision would be like do youpay tax on the seed or do you
pay tax on the harvest?
With pre tax, you're making adecision to pay tax on the
(13:42):
harvest.
You're kicking that taxliability down the road, so
you're getting a deduction toput money in.
It's going to grow tax deferredover time.
If I go buy a bunch of stocks,bonds, mutual funds or ETFs in
my 401k or IRA and I sell someof those that have realized to
(14:03):
gain and then I buy others, I'mnot paying a tax on that, right
guys.
Speaker 3 (14:07):
No, absolutely not.
Speaker 1 (14:08):
No, it's all tax deferred, but then at some point
in my life I'm going to want totake money out of that pre tax
funnel.
And David, what you're sayingis that's when you pay tax right
?
Speaker 3 (14:19):
Yeah, exactly so.
And, dave, I think there's akey point in that for these
401ks, 401k three Bs IRAs,they're tax deferred, so you're
not paying taxes on them everyyear as they accumulate and grow
.
And that's one of the reallybig advantages to this funnel is
that you get that tax deferredgrowth so that the taxes that
you're paying each year aren'teating into the growth of the
(14:41):
account.
Speaker 1 (14:42):
Absolutely.
Now, david, you mentioned whenwe take the money out, we're
going to be taxed and so isthere a specific age that we can
start taking the money out, andwhat happens if I'm almost 40,
I'll be 40 this June and if Ihave some money in these 401ks,
403 Bs or IRAs and I wanted totake that money out right now
(15:06):
because I'm going to go do aconstruction project on the
house kind of tell me about whathappens if I take money out
right now as a 40 year old andthen kind of some of the rules
around these accounts Generallyspeaking, if you take them out
before your age 59 and a half,you're going to have to pay the
tax, but you're also going tohave to pay an additional 10%
(15:28):
penalty for the federal level.
Speaker 3 (15:30):
There might be state penalties as well, so it's kind
of incentive to hold them forthe longer term, so you couldn't
just go out and take funds outof them right away.
There are some exceptions tothose, and one of them I'll give
you is if you are a first timehome buyer, there's a $10,000
exception for taking them out,where you still have to pay the
(15:51):
tax but you don't need to paythe penalty.
So there are a couple aroundthere.
But generally speaking, youreally want to hold these until
59 and a half.
So a couple exceptions.
Speaker 1 (16:00):
I know even in like a 401k sometimes there's like
some hardship provisions ormaybe you could take a loan from
those in an IRA.
There are no loans.
But what you mentioned is a keyword Even if there is an
exception to the penalty, you'restill going to have to pay tax
at whatever your highestmarginal rate is.
(16:22):
And is that just a tax on theinvestment gain or is that a tax
on everything that comes?
Speaker 3 (16:28):
out.
That's a tax on pretty mucheverything that comes out, so
really with these accounts.
Speaker 1 (16:33):
If we're putting money in, we want to make sure
that we can leave that money inkind of cooking in the oven
until we're at least 59 and ahalf.
You know, I will say, becausewe work with a lot of what I
would call kind of earlyretirees people who have been
fortunate enough to be able toretire well before 59 and a half
(16:53):
.
There are some really advancedways to get money out of these
accounts without paying thepenalty, such as a 72t
distribution.
Or if you have a 401k and it'syour last job and you follow
some of the right rules, youmight be able to take
withdrawals at age 55 instead of59 and a half.
(17:13):
But none of those things reducethe tax of the money coming out
.
It's just the penalty, and soreally again thinking of
optimizing this.
This is long term money.
This is in the bucket planlater, bucket money Now.
Conrad, being a CPA and also Iknow you have a crystal ball
that tells us the future.
(17:35):
David mentioned earlier thatwhen you take money out of these
accounts you're going to paythe tax at that time.
Do we know what that tax rateis?
Speaker 2 (17:45):
I do, actually, and I can guarantee you that your tax
rate will be somewhere betweenzero and 100%, and that is the
crystal ball.
The real answer.
They're down for us.
I like it.
Speaker 1 (17:58):
Zero, so you might not pay anything, or you might
pay everything.
That's right.
Speaker 2 (18:02):
That's right or somewhere in between, right?
So, everybody, that's mycrystal ball.
I can give you that same answer, and I'll see you on the boat
here soon, right?
The real answer, though, isabsolutely not right.
If I had that crystal ball, Iwouldn't be here, honestly.
But if we knew exactly whattaxes we would pay at retirement
(18:24):
, then we could design a perfectplan and never have any issues.
The fact of the matter is, Idon't know about you guys.
I don't trust Congress to evenact on things that will help us
in one year, much less 20 or 30years down the road, and so we
just can't predict what thosewill be.
Taxes likely in the short runlikely go up and this is a whole
(18:49):
nother episode about where theeconomy is, where the debt limit
is and how Congress hascontinued to spend.
But, ultimately, the answer isno.
We don't have a crystal ball.
I can't tell you what tax rateyou'll pay at the time of
distribution, but we know whatyou'll pay today.
Speaker 1 (19:06):
So there's an unknown right.
We know what the deduction is,which is why, as tax planners,
we can calculate how muchsavings our clients will get to
put money into these vehiclestoday, but we have no idea what
the taxes will be when they comeout.
And if we do a good job atinvesting… Will the balances in
(19:31):
these accounts be higher orlower in the future than they
are today?
Higher?
I just ran into a client that Iwas meeting with that was in
their early 70s and they hadamassed 14 million dollars in
their IRA 14 million dollars.
They deferred tax their wholelifetime.
(19:52):
But guess what?
Somebody needs to pay it.
The government wants their cutof that money.
It's either.
This client is going to pay itwhen he's alive.
He was married.
His spouse was about sevenyears younger than he was, so if
he passes away, that money isgoing to go to his spouse.
(20:12):
His spouse is going to have topay the tax, and if neither of
them do, their children aregoing to have to pay the tax.
He had two children.
His goal was that each of thechildren gets a 50-50
inheritance.
And if you inherit an IRA or a401K or a 403B as a beneficiary
(20:34):
a non-spouse beneficiary.
How quickly do I have to takethat money out of the account
and pay tax on it?
Speaker 2 (20:43):
Ten years, Right.
The current rule requires thosefunds to be distributed.
Now there is no annualrequirement, but there is a
total 10-year requirement.
So in your client's situation,their kids would have 10 years
to withdraw $7 million from anIRA.
And so we've got that simplemath.
Speaker 1 (21:06):
That's at least 700 grand a year, putting them in
the top bracket, and that's anextreme example.
But here's the gist of thepre-tax money.
Right, it has a time and aplace and I think everybody, as
they approach retirement, shouldhave a certain amount of money
in a pre-tax account, because aswe go to build a retirement
distribution plan, we have astandard deduction in retirement
(21:28):
.
It's a certain amount of moneythat the government gives all of
us that we could take outtax-free.
I think the biggest mistakethat we see people make is they
actually over-accumulate in thepre-tax bucket.
Like you should never have a 10or $15 million pre-tax IRA
because, as my good buddy EdSlott would say, ed's a CPA.
(21:52):
What's the title of his book?
Speaker 3 (21:56):
The Retirement Savings Time Bomb and how to
Diffuse it.
Speaker 1 (21:58):
The Retirement Savings Time Bomb.
Ed is known by the Wall StreetJournal as America's IRA expert.
Right, you're building a timebomb.
It's either going to go off onyou, your spouse or your family
amongst your passing.
And so again, this is notsaying don't participate in the
401k, the IRA or the pensionplans you need to.
(22:19):
You should Absolutely All daylong.
Just don't over-accumulate inthose vehicles, because you
could have a tax time bomb onyour hands in the future.
Now let's talk about theopposite of that.
Conrad, give us a little bit ofa rundown on this other funnel
(22:39):
on the opposite side that wecall a tax-advantaged funnel.
Speaker 2 (22:45):
Yeah, this is going to be.
You know, specific accounts arelisted here your Roth plans and
ROTH.
Much like David Roth Royaltieswill be coming soon.
Not going to be, david?
Can we share also what your?
Speaker 1 (22:58):
middle name is oh yeah, absolutely Go ahead.
Speaker 3 (23:04):
Yeah, it's a middle name IRA, ira.
So David Ira Roth Come on.
Speaker 2 (23:09):
you can't make that up.
Speaker 3 (23:10):
You can't make it up I always have to recommend the
Roth IRA to everyone just byvirtue of birthright.
Speaker 2 (23:16):
Well, I better explain this properly then,
because if I don't, then therewill be a hell of a problem.
I'd say too.
Speaker 1 (23:22):
like you know, David, you're a musician, you know
music degree, and so you know.
When I always joke with peopleand say guess what his middle
name is, what does everyone say?
Of course, yeah, david Lee Roth, david Lee Roth.
But like I was like, this is aclear-cut reason that, david,
you were made to be a tax andfinancial advisor and maybe not
a musician.
Roth, ira, come on.
Speaker 4 (23:46):
This is like this is.
Speaker 1 (23:48):
This was your career calling from birth.
Speaker 3 (23:51):
It was, and I just accepted it.
Speaker 1 (23:54):
So I knew I don't even think you knew that, Conrad
, Whoa, I did that was my honestreaction.
Speaker 2 (24:00):
I'm still a little like whoa.
Speaker 1 (24:01):
that's pretty cool you need us to take over the
rest of the episode.
Do you need to?
Speaker 2 (24:06):
go.
I think I can give you some.
How's that All right?
So tell us about.
Speaker 1 (24:10):
Let's start with the Roth account, Conrad, because
that's the most common one.
I think every listener isprobably heard of a Roth account
.
You know, talk about thecharacteristics of a Roth
account.
Speaker 2 (24:22):
Yeah, so the Roth account operates.
If you think about an IRA, howit operates, it's very similar,
right?
Dollars go in, they build taxdeferred and I'm going to say
deferred in quotations and thedifference comes on the front
end of the back end, right?
So the IRA, as David mentioned,you get a deduction for those
(24:43):
contributions in.
It builds up and then when itcomes out it's taxed at ordinary
income rates.
The Roth fits that equation.
So you pay tax on the dollarsbefore you put them into the
Roth IRA.
Once you put them in, the RothIRA builds tax deferred.
But at distribution the Rothaccount is actually tax-free,
(25:04):
right?
And so the equation there.
Think about that $14 million IRA.
If we just say it's 40% tax,you're looking at $5 million,
right?
$5, $6 million of tax potentialthat could come out of that.
Flip that around and make it aRoth IRA and there's zero and
(25:26):
that's a massive difference.
So, but you are paying tax onthose dollars up front.
So if you're in the 37, 40% taxbracket or let's go back to
World War II rates you're in the80% tax bracket, right?
Do you want to pay that tax ordo you want to defer it?
If tax rates are low, let's sayyou're in the 12% bracket right
(25:47):
now.
Maybe it makes sense to pay 12%on those dollars one time in
order to have lifetimeaccumulation and tax-free
distribution.
Speaker 1 (25:56):
Well, and I think the difference is, I always say, if
you look at the left funnel,the pre-tax funnel, you're in
the government plan.
There You're in a partnershipwith the federal government
because you're deferring taxes.
I mean, think about it, guys,if we were to go into a business
together and here's how I wouldoutline that business it's
(26:17):
going to be a partnership andtoday we're each going to own a
third of the business, but Ihave the ability, solely at my
discretion, to change the rulesof the ownership at any time in
the future.
Where I could decide onemorning that, hey, you know what
.
Dave gets 70% of the businessand you two get 15%, would you
(26:40):
two come into business with me?
No, probably not, right.
And that's really what apre-tax account is, a 401k,
right?
We know what the rules aretoday.
Conrad, you mentioned itearlier.
We know the tax rates today.
You're either in the 12% or the22% or the 24, or the 32, or
the 35, or the 37% bracket, butwe don't know what those are
(27:04):
going to be in the future.
And so you know, we opened theepisode with me going to Vegas
in a couple of weeks.
That's a little bit of a gambleright Now with the Roth plan I
always share.
Like this is for the person thathates the government.
Like you don't want thegovernment to be able to dip
their hand into your money everagain into the future, and so
you're making a decision to sayI'm going to pay that tax.
(27:26):
Today we have clients that areultra-high income earners.
They're in the 37% marginalbracket and they still decide
that for them, they want toparticipate in the Roth account
because they don't want thegovernment to be able to take a
piece of their money later oninto the future.
And so there's a mathematicalpart of the decision-making
(27:50):
process like what's yourdeduction?
What's the tax-deferred growth?
What tax rates will you be atin the future, potentially?
But then there's also a verypersonal decision of how much
faith and trust do you have inthe federal government and what
future tax rates could be.
Because, again, in a pre-taxaccount, you are trusting that
(28:11):
you're going to be in a lowertax rate later on in life.
Versus the Roth account, you'reeliminating that public policy
risk of increasing taxes lateron in life.
Now, conrad, I just did a videoon this on our YouTube channel.
In my opinion, it is the singlebiggest myth that I hear of
(28:33):
over and over for clients, butit's that well, I can barely get
any money into a Roth accountRight now.
The contribution limits for 2024for a Roth IRA are $7,000 if
you're under age 50, $8,000 ifyou're over age 50.
And that's the same for an IRAas well.
(28:53):
The Roth IRA on the taxadvantage side and the IRA on
the pre-tax side it's 7,000 or8,000.
But with the Roth accountthere's a phase out if you make
too much income.
And so, for example, if you'resingle in 2024, that phase out
starts at $146,000.
(29:14):
And if you make over $161,000,you could not directly
contribute into a Roth account.
If you're married and file ajoint return, that phase out
starts at about $230,000.
And if you earn over $240,000of modified adjusted gross
income, you could not make adirect contribution into the
(29:38):
Roth IRA account.
But, david, how do we getaround that for our high income
earning clients?
Speaker 3 (29:44):
Yeah, I mean, there's a couple ways to get around
with it.
One is the backdoor Roth IRA,and I'll give you another one as
we go.
A lot of 401Ks, they also havea Roth contribution option, and
then there's also in 401Ks themega backdoor Roth option.
So there's actually many waysto get around that.
Speaker 1 (30:05):
And what about business owners, Conrad?
I know that's where you focusmost of your time.
Can we set up Roths forbusiness owners?
Speaker 2 (30:11):
We certainly can, and a lot of times the Roth 401Ks.
If you have employees, thesetup of your 401K could include
the Roth component.
Otherwise, we can set up what'sknown as a Roth Solo-K, which
is really just a 401K for anindividual that doesn't have
employees in their business Inthose because of that plan.
(30:35):
A lot of 401K plans requiretesting or what's called the
safe harbor design, which reallylimits what the owner can get
in as a solo-K.
We can do what's called adiscretionary plan and really
match $100 for dollar into thatplan up to the contributions and
even potentially additionalover and above that.
Speaker 1 (30:58):
Here's the thing you might have a W2 job where your
employer has a 401K plan maybethey even do a match for you and
you're participating in thatbut you might also have a side
hustle.
I love when clients have sidehustles, being entrepreneurial
minded, building some business,betting on themselves and their
(31:18):
abilities, doing something thatthey're passionate about.
If you have that side hustleagain, conrad, how many times
have we set up additionalretirement plans for the side
hustle, where then we couldcoordinate the benefits of what
they're getting from maybe theirW2 job with additional benefits
stacked on top through theirside hustle business?
Speaker 2 (31:39):
I think 100% of the time we make that recommendation
to clients.
I think the challenging partyou mentioned coordination that
the way the law is written todayis that contributions to 401Ks
are limited, meaning you canonly put in so much per year
across all 401Ks.
(32:01):
If you have five jobs where youget a 401K, you manually have
to do that math right by putting5,000 in here and 2,000 here.
It can become a challenge Ifit's one job in a side hustle.
It allows us to really targetmore of we know what percentage
you're putting in.
Speaker 1 (32:18):
This is where you really need to work with our
team, because you can't do yourstuff on your own.
There's control group issueswith the IRS if you have a
certain amount of ownership inone company and another company,
but the savings are massive.
Again, in my YouTube video thatI just did on Roths and the
biggest myth around Roths, Ishow a plan where you could get
(32:41):
cumulatively 77 or 78,000dollars per year into a Roth
account.
Now, if you're married, timesthat by two.
I mean Conrad.
If we were able to put 140,000dollars a year in a Roth account
and let's say it's invested inthe stock market, averaging a
7.2% rate of return over a10-year time period, that one
(33:07):
year of contribution 140 grandwould double to 280 grand at the
end of a decade of completelytax-free money.
Imagine if we did 140 grand ayear every year for 10 years.
You would have a $3, $4, $5million Roth account by that
point for completely tax-freemoney for you, for your spouse,
(33:29):
for your family, upon yourpassing.
That's a huge way to buildtax-efficient wealth long-term.
Again, we have so many advancedstrategies for business owners,
but that's one of the biggestones for even a W-2 income
earner that most people aren'ttaking advantage of.
With the Roth IRA, the Roth 401kor the pre-tax IRA or 401k,
(33:55):
these are not investments.
Sometimes I hear clients say,oh, my 401k has been such a
great investment, or my 401kI've heard they're horrible
investments.
They're not investments,they're just vehicles.
Inside of these vehicles, youcan pick investments.
You could buy individual stocks, mutual funds, etfs.
You could buy real estate.
You could buy cryptocurrency.
(34:15):
You could buy cryptocurrencyETFs.
Now you could really invest inalmost everything.
Not everything, though the wordalmost everything.
There are very specificprohibited transactions that are
all those the death sentencefor an IRA.
It makes it fully taxable ifyou invest in things Like if I
were to buy my primary house inmy IRA and live in the house.
(34:39):
That's a no-no.
But again, there's a lot ofreally unique things that you
can do with these accounts.
I want to move the conversationin the tax-advantaged funnel
over to actually my favoriteaccount, my favorite.
Can you guys guess which one itis?
I know, you know, because youhear me talk about it all the
time with clients.
Speaker 3 (34:55):
Yeah, it's going to be the HSA.
Speaker 1 (34:57):
Yeah, the HSA account , David.
Why is this one the most uniqueone out of all the solutions
here?
Speaker 3 (35:04):
A lot of these have advantages on one side, where
you make contributions withafter-tax money and then the
distributions are tax-free.
This is one scenario where youget a triple tax benefit.
So you get three benefits whenyou put the money in, you get a
deduction.
The second benefit is when itgrows, it grows tax-deferred.
(35:25):
And the third is that if youuse it for qualified expenses,
it comes out tax-free.
So it's the one scenario whereyou really get these three
benefits where you really don'tsee pretty much anywhere else.
So that's kind of the magic ofthe HSA.
Speaker 1 (35:38):
My business one of my businesses we didn't have an
HSA plan.
I was so excited by adding ahigh deductible plan.
2023 was my first year beingable to max out my HSA.
Of course, in January Icontributed the maximum that I
could into that HSA.
I invested it in an all equityfund.
(35:58):
That fund has gone up betweenlast year and so far this year
like 30% in value and that's alltax-free money and I got a
deduction to put the money intothat HSA.
I was just talking with a clientof ours in California about
this and this client is super,super high income.
They're in a 50% tax bracket.
(36:18):
That's 37% on the federal sideand 13.3% California income tax,
so over 50%.
That means every dollar thatthey earn over that.
You know, 600,000, whichthey're a lot, a lot, a lot over
$600,000, is essentially taxed.
51 cents on the dollar goes tothe government and they keep 49
(36:41):
cents.
I asked them if their companyhas added a high deductible
health plan and they actuallylooked in.
They did add it.
And so by adding or going to ahigh deductible health plan, a
couple of things happen.
Number one is his monthlypremiums have gone down now
because a high deductible planis less expensive than a low
(37:03):
deductible plan.
So let's use easy math and sayhe is saving about $500 a month
on his family health insuranceplan because they've gone to a
high deductible.
Now their deductible is around$6,500.
Their max out-of-pocket is$6,500.
(37:26):
So if they have catastrophichealth events, the most they're
going to pay is $6,500out-of-pocket.
But how much savings did thatclient have by moving to that
high deductible plan?
$500 a month times 12 months is$6,000.
So really they're onlyout-of-pocket $500 for that
expense.
(37:46):
But what else can we do then,conrad, if we now have a high
deductible health plan at work,what can we set up for that
client?
Speaker 2 (37:55):
You set up the HSA right the health savings account
and let's take those $500 andput them into the HSA, which
also gets the deduction going inright.
So it saved them $500 of cash.
But those same dollars nowended up saving them 50% of that
going into that HSA Absolutely,and this is one right.
(38:19):
So that specific clientprobably has the cash flow to
pay the $6,500 of deductibleright.
But I love the HSA.
For this reason, I'd utilize itand I don't actually take money
out unless it's a really bigyear.
I try to pay for those expensesand my goal is to have about
(38:40):
$150,000 at retirement of HSAfunds and right now I'm just
going to keep my receipts in mypocket and hold them for the
next 30 years and in 30 years,when I want some tax-free money,
I can reimburse myself forthose expenses.
Speaker 1 (38:58):
Now in 2024, if you're self-only coverage, you
can put $4,150 into an HSA.
If you're under family coverage, you can put $8,300 in the HSA.
So, Conrad, going back to thatexample, he takes $8,300, and he
puts it in his HSA.
(39:18):
That's tax-deductible money Ata 50% tax rate.
How much did we just save inincome taxes?
Speaker 2 (39:27):
$4,000.
Speaker 1 (39:29):
A little over that right $4,000 of savings right
out of the gate.
Now let's say that $8,300doubles twice in the next 20
years because it's invested inthe market, so that $8,000 turns
to $16,000.
The $16,000 turns to $32,000.
(39:50):
And now he withdraws that moneybecause maybe he's going to
retire early and have to coverhealth care expense before
Medicare kicks on.
Or maybe he's now past 65 andhe's on Medicare but he's got
some out-of-pocket medicalexpenses.
Or, even worse, when he's inhis 80s or 90s he has an
(40:10):
extended care or long-term careevent that's going to require
substantial health care costs.
He's got a big old funnel oftax-free money to be able to tap
into.
That's an incredible account.
We're going to do a wholepodcast episode just on that,
but again I want to distress theimportance of that.
The other two in the taxadvantage funnel are the 529
(40:32):
plan.
If you have educational fundingneeds, talk to our team about
that.
The FSA account is a flexiblespending account.
You can either structure thisif your employer allows it for
medical expenses, but you got tobe careful not to overfund it
because if you don't use it in acurrent year you lose it.
We share with our clientswhat's your average
(40:54):
out-of-pocket expense for healthcare.
If it's $1,000, put $1,000 inyour medical FSA, but don't go
put $3,000 in your medical FSAif your average expenses are
only $1,000.
There's also a dependent careFSA.
If you're working and you havechildren under the age of 13,
you can use some pre-tax moneyto help childcare again if your
(41:16):
company allows that.
And then, last but not least, ispermanent cash value life
insurance.
I'm not talking about term lifeinsurance.
I love term life insurance.
I think everybody who hasanything to protect needs to
have term life insurance.
It's the lowest cost way toprotect the ones you care about
and love.
(41:36):
When I had my first kid, Ibought my first term policy.
When I had my second kid, Ibought another term policy.
When I had my third kid, Ibought another term policy.
I know both of you guys did thesame thing as well.
It's the lowest cost way toprotect the human value of Dave
Allison.
But at some point you might havemaxed out a lot of these other
(41:58):
saving sources like the 401k orthe Roth IRA or the HSA, and
there is a life insurance policyavailable out there again of
vehicle that you couldaccumulate savings in.
It does provide a death benefitif you were to pass away.
But this is more structured tobuild tax-free savings like a
(42:18):
Roth account, but it has nocontribution limits.
And again, I say, the cashvalue life insurance, just like
the Roth account, just like thehealth savings account, just
like the IRA, is just a vehicle.
It's not an investment.
And when I say that there's manydifferent types of permanent
cash value life insurance,there's the old traditional
whole life insurance Worksreally well.
(42:41):
There's indexed universal lifeinsurance.
There's variable life insurance, where we could actually go buy
stocks, bonds, mutual funds andETFs in a life insurance policy
.
So there's a lot of differentoptions.
But at the end of the day, whatwe're doing here is we're
building a big pile of money forthe future and we're telling
Uncle Sam and the federalgovernment hey guys, you can't
(43:04):
dip your hands in any of this.
This is all tax-free for thefuture.
Speaker 2 (43:08):
Yeah.
Speaker 1 (43:10):
Now let's talk about the middle funnel.
The middle funnel is thepost-tax funnel.
I say this is kind of where youhave a double tax because you
don't get any deductions to putthe money in per se.
Hopefully that money grows invalue over time and then when
you sell the investment, you'regoing to realize a capital gain
(43:32):
and if you've held thatinvestment for at least 12
months, that is preferentiallytaxed, but you are taxed a
second time.
You're taxed on the gain andthat could be at a tax rate of
potentially zero if you don'thave a lot of other income.
But for most of our clients it'ssomewhere between 15%, 18.8% or
(43:54):
23.8% at the federal level.
These are like our brokerageaccounts, our trust accounts,
your cryptocurrency accountsthat aren't held in a retirement
plan account, things that maybeyou're buying real estate,
right.
You're buying rental propertiesor commercial real estate.
If you've got money at the bank, that's post tax money, and so
(44:18):
there's some enormous taxplanning opportunities here, but
you're not really getting adeduction on the front end and
you're not getting a tax benefiton the back end.
Conrad, for example real estateright.
Huge tax benefits to invest inreal estate for some people,
right?
Speaker 2 (44:36):
Yeah, I mean.
Ultimately, real estate underthe IRS code is considered for
most people a passive activitywhich is subject to what are
called passive activity losslimitations.
And for a married couple, thelong and short, if you make more
than $150,000, your passiveincome the losses associated
with it, will be limited in thatyear.
(44:57):
Now the limitation is up to$25,000 per property.
So it's pretty high, but youultimately will phase out at
about $180,000 of income.
So there's a lot of movingparts to that.
However, we like real estatebecause of the cash flow
generation.
If you're able to put moneyinto a vehicle and realize,
(45:20):
let's call it a $5,000 profit,but because of depreciation you
show zero taxable profit, itmeans you've got positive cash
flow.
Now that doesn't mean it'sforever right.
The IRS actually callsdepreciation.
You borrow from the asset, notactually reduce the value.
So there is a much like the IRA.
(45:40):
There's a borrowing componentor a partnership component, but
in those years that you havepositive cash flow, it allows
you to deploy it somewhere elsewithout having to take some
money for taxes.
Speaker 1 (45:51):
Yeah, and we'll do another episode just on real
estate.
With real estate, I alwaysshare with clients like is it a
good investment on paper?
A lot of times it is.
And actually, david, you helpbuild this calculator where we
help evaluate properties andwhat their cash flow is and what
their internal rate of returnand what their tax benefits are.
We've helped a lot of ourclients acquire rental
properties over time.
(46:12):
I get the misconception fromclients all the time that they
think it's a great tax write-off.
But, conrad, what they don'trealize is that it's a passive
activity.
It's not like you can write offthe losses of your rental
property against your ordinaryincome or your W2 income in most
cases.
Now there are some exceptions,right, david?
We just helped a client buy ashort-term rental.
(46:34):
That's classified as an activeactivity.
So there's some things we canhelp you think through there.
The thing I always stress withreal estate is you have to have
the desire to want to manage alot of this.
Like I know fundamentally as aninvestor, real estate is a
great investment.
I've owned rental propertybefore.
I've had that property managercalling me saying, hey, my
(46:56):
tenants toilet broke.
What should we do?
Can we get a plumber out Blah,blah, blah, like for me.
I'm at a point in my life todaywhere I've got too many other
competing priorities.
I've got young kids, I've gotmultiple other companies.
I want nothing to do withadding rentals into the mix.
That doesn't mean like in fiveor 10 years my objectives might
(47:17):
change and now I'll say, hey,maybe we could take on, maybe my
wife could help manage theseproperties because she's not so
busy with young kids.
So again, matching up thedynamic of that investment with
the phase you are at in life isreally, really important.
But these could be a tremendousway to build assets.
(47:37):
And there's some tax benefits,brokerage accounts also, because
with after-tax money andbrokerage accounts, david, what
can we do here from like a taxdeduction creation if there's a
lot of volatility or maybe someof the investments have losses
while others have substantialgains in them?
Speaker 3 (47:56):
Yeah, like you said, dave, we could create tax
deductions if there are somepositions that are showing
losses and essentially use thatto offset your other capital
gains, or up to $3,000 ofordinary income.
So there's stuff to do there.
Speaker 1 (48:13):
We have a great platform for our clients where
we invest their after-tax moneyand we have this algorithmic
trading that looks for dailydeduction creation opportunities
.
And just a couple examples ofthat in action is we had a
client in end of 2021 that movedtheir money over to us to
manage.
It was a couple million dollarsof after-tax money.
(48:35):
We deployed this strategy wherewe essentially built their
family, their own mutual fund orETF, so we acquired about 1,200
individual stocks.
Of course, any given day, someof those stocks are going to be
up, some are going to be down,but the algorithm searches for
tax deduction opportunities andwe were able to secure in 2022,
(48:56):
obviously not a great year forthe market, but a very volatile
year meaning we were able to getthese tax deductions harvested
and they ended up selling aproperty that year that had a
bunch of capital gain.
Well, guess what?
We were able to use the lossesthat we harvested from the
portfolio to offset the gainsthat came from selling the
(49:18):
property.
So net net, they didn't haveany tax exposure.
We've done that many times forour clients that have company
stock, like RSUs, that vest, andagain, we can use a portfolio
of post-tax money to createdeductions to then offset a lot
of capital gains that arerealized on your company stock
(49:38):
position.
So this is where we look at theintegration of tax management
with investment management and,again, having brokerage accounts
, trust accounts that post-taxmoney can be a great opportunity
to do so and so just landingthe airplane here of these
tax-efficient funnels you know,for me, if I'm starting off my
(50:00):
journey of savings and you'relistening to this podcast right
now, number one place to go isyour 401k up to the company.
Match right Up to the company.
Match.
That's free money.
Conrad, if my company willmatch $5,000 and I put $5,000 in
and they give me $5,000, whatrate of return is that on my
(50:21):
money?
100%?
It's 100% rate of return.
Like go get the 100% return.
I can't give you 100% return onany reliability and any
investments we choose.
So that's the first place to go.
The second place to go is theRoth account.
Start funding your Roth accountbecause with a Roth account, if
(50:43):
you need to access the money,if you have a financial
emergency, you could take yourcontributions out income
tax-free and penalty free.
It's just the earnings thatneed to stay in there.
From there, start funding yourhealth savings account.
Right, get those deductions toput the money in.
(51:03):
Build up a nice reserve in caseyou have a medical emergency.
Start building that tax-freemoney From there.
Maybe you want to go back toyour 401k and contribute up to
the maximum the IRS allows.
That could be either the Roth401k or the pre-tax, depending
on some of the things that wespoke about earlier.
(51:24):
From there you can look atadditional things like maybe a
529, if educational funding isimportant.
You want the kids to go toHarvard or MIT.
I just had a colleague theirchild's probably going to get
into Notre Dame 80 grand a year.
It's crazy.
I was like whoa, that's insane.
You better have a big fat 529plan for that and Roth accounts
(51:47):
in the names of the children,which again a whole nother
episode.
Had to set up Roth IRAs in thenames of the child.
Or you just call Conrad andhe'll or David, they'll take
care of that for you.
But then from there, brokerageaccounts, real estate, and then
the cherry on top is if you'rein a fortunate enough position
to have enough discretionarysavings.
You've maxed out the 401k,you've maxed out the Roth
(52:11):
account.
Maybe you maxed out a sidehustle retirement plan like a
Sep IRA or solo 401k, you'recontributing to your HSA and
maxing it out.
You're putting money in a 529,if that's important.
You're saving money in apost-tax brokerage account.
You're buying real estate, ifthat's your cup of tea I
mentioned.
It's not mine for now.
(52:31):
The last thing, but not least,is cash value life insurance,
being able to stuff someadditional savings in there, to
have tax deferred, growth taxfree, income tax free
inheritance to yourbeneficiaries, and so what we
could do is help you structureyour own order of money.
If you're in the accumulationphase and if you're approaching
(52:53):
retirement, maybe you only haveone of these funnels.
We just met with a client whohired us.
We're taking them through ourfinancial planning process and
they have about 90% of theirmoney in the pre-tax funnel.
They've accumulated about $5million.
About 90% of it is pre-tax andabout 10% of it is post-tax.
(53:16):
They've got plenty of money tolast them for as long as they're
in retirement.
But the one thing that we showedthem is if one of the two
spouses passes away early, thenthey go from having a 100%
probability of success in theirretirement plan down to a 70%
probability of success, andthat's just because of the
(53:38):
impact of having all of theirmoney in the pre-tax funnel
that's taxed all as ordinaryincome and then later on in life
when one spouse passes away,going from a married filing
jointly tax status to a singlefiler, where your deductions get
cut in half and all thebrackets compress, causing a lot
more tax on the same amount ofincome.
(54:00):
So what we were able to do isshow them that, even though
they're retiring now, if we liveoff of a little bit of the
post-tax money for the first fewyears and we start
strategically shifting moneyfrom the pre-tax funnel to the
tax-advantaged funnel, webasically take them from a 70%
(54:20):
probability of success if one ofthe two spouses passes away
back up to 100% probability ofsuccess.
And, conrad, what am I talkingabout when I talk about moving
money from the pre-tax funnel tothe tax-advantaged?
Speaker 2 (54:34):
It's really what's called a Roth conversion Right,
and we're converting fundsintentionally from the pre-tax
to the tax-advantaged funnel.
But how we do it is huge right.
Again, you mentioned how we'regoing to help this client and
say we're going to use after-taxdollars to live on right and
(54:55):
really keep their income as lowas possible.
We'll use up first theexemption that they have $30,000
plus thousand dollars and thenultimately move up in the tax
brackets where we know we'regoing to pay the lowest amount
of tax possible in order to dothat conversion and by doing
that we really get what you'regoing to call discounted rates.
(55:17):
all right, comparatively to whatwe know is likely to happen in
2026 in terms of making thatconversion.
Speaker 1 (55:25):
Awesome.
Well, guys, this was fantastic.
We covered a ton.
I know we went long in thisepisode, but there's going to be
so many great components thatpeople can go and zero in on and
so appreciate you, guys, andlet's go out there and help some
more clients.
Awesome that's good Thanks.
Speaker 2 (55:42):
As a reminder, I'm available for the Beach House
audit.
Speaker 1 (55:46):
That's right.
Vegas or fishing I'll throwmyself in If anyone wants to go
fishing.
I'm in Conrad's got the beachand send all your Range Rovers
and G-Wagons to David.
He needs them.
That's right.
All right, guys, it was awesome.
Thanks, I'll see you soon.
Speaker 4 (56:01):
Financial planning and advisory services are
offered through Prespair, theCapital Advisor, PCA, an SEC
registered investment advisorwith its principal place of
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Mr Conrad, you're looking all dressed up for a
Friday afternoon of doing taxes.
Speaker 2 (00:05):
Oh, don't remind me about the tax work.
Speaker 1 (00:08):
You guys are pretty busy.
Speaker 2 (00:10):
Oh my gosh.
Yeah, let's just say ready fortax season.
We'll be over with already andwe're just getting you into the
meat and potatoes of it.
Speaker 1 (00:19):
I was going to say it's March 1st.
People are just starting toupload their documents.
Speaker 2 (00:25):
Oh, so everybody thinks the NCAA is about March
Madness, but really it's the CPAthat goes through March Madness
.
Right, we're just and it's likewe'll get 30 returns in a day
just pummeled.
It's going to be an interestingrest of the tax season.
Speaker 1 (00:47):
Nice.
Well, when I'm in Vegas in twoweeks, I can see if I can bet on
your taxes, like we can bet onthe NCAA.
Speaker 2 (00:55):
Wait.
So I'm stuck in the rainyweather doing taxes and you get
to go to.
Speaker 1 (01:00):
Vegas.
I'm going with a client, conrad, it's work.
No, no, here we go.
These are.
Isn't this a tax write off,like you teach?
Speaker 2 (01:15):
Oh my gosh, put us on TikTok, let's make the video,
just write it off, throw it inan entity.
Speaker 1 (01:22):
Let's write it off Exactly.
There's going to be a lot offinancial advising and budgeting
conversations.
Speaker 2 (01:32):
Should you take some money off the table after you
want it, or do you just doubledown, put it all on red?
Speaker 1 (01:37):
Not gambling your financial future away.
I mean, if anyone else islistening.
If you need your financialadvisor to go to Vegas with you,
I am open and ready to do that.
Yes.
Speaker 2 (01:50):
I'm available.
If anybody has a beach housethat they want confirmed as a
rental, I am available for that.
That's right.
I'm trying a very reasonablefee to do that.
Speaker 1 (01:59):
Any clients that need us to travel and go on vacation
around.
Just make sure they're gettingall the deductions they can.
We are here and ready to go.
Speaker 2 (02:09):
Yeah, Listen.
You did a podcast with one ofyour clients from their boat,
right?
Speaker 1 (02:14):
I know, but I made the crucial mistake that I
should have flown out toTrinidad and Tobago and been on
the boat with them to recordthat Stupid me sitting here in
Charleston doing it on a Zoommeeting instead.
Speaker 2 (02:29):
Listen there's always part two.
Speaker 1 (02:30):
Well, here's the thing that I've always learned
about taxes.
I've heard you say this overand over At the end of the day,
there's nothing that really getsa 100% credit.
If I have to spend $1,000 totravel somewhere and I get that
as a deduction and I'm in a 40%tax rate, it still costs me 60%
(02:52):
to go do that thing.
I always love Conrad.
I'm sure you've experiencedthis with business owners.
They're like hey, I saw onYouTube, I should buy a car at
the end of the year, in December, to get a big tax write off.
It's like, yes, you could dothat, but if you spend $150,000
buying your Mercedes G-Wagon tobe able to depreciate it, you
(03:17):
still spent 60% of the moneythat you would have otherwise
Now.
If you were going to go buy aG-Wagon in the first place,
maybe it makes sense to.
But again.
Speaker 2 (03:27):
The best one I heard was and it was some lady talking
about realtors right, oh, justgo buy a new Range Rover every
year and write it off, and youdon't have to pay taxes on that
money.
I was thinking to myself allright, let's just say that
somebody could afford to do thatNumber one the depreciation
recapture rules, which she nevertalked about, because this lady
(03:47):
was not an accountant, she wasnot a CPA, she had no background
in tax.
She just read an article andthrew out some advice like we
were in a zoo, right.
And so, ultimately, who canafford to keep five Range Rovers
?
Do you have a big enough garageto keep those?
Where do you store all theseRange Rovers?
The questions that were neverasked, and the fact is I had
(04:11):
multiple clients send me thatvideo and I finally told them
and I'm going to steal this term, we're going to call it tax
porn.
Right, you're watching thesevideos and they sound too good
to be true, because they are Taxporn.
Speaker 1 (04:27):
That's all you should trademark that.
That could be your stick as aCPA.
So I guess right now, if any ofour clients need their
financial advisor to go to Vegas, I'm open to it.
If any need them to go to abeach house, they can bring
Conrad, and if any of them wantto go buy a new Range Rover and
don't have a place to park it,they can give it to you, david.
And yeah, we have six spaces inour driveway.
Speaker 3 (04:52):
We got to fill them up there you go.
Speaker 1 (04:54):
So if anyone wants to send David three Range Rovers
so you get the tax deduction,that would be great.
Speaker 2 (05:00):
Well, let's see.
I think you hit the nail on thehead, though, talking about it.
By and large taxes, you get toavoid part of what you spend,
right?
You got to ask the question ofwould I rather keep 60 cents in
my pocket and pay the 40 cents,or would I spend 100 or that
(05:21):
whole dollar, and what do I getin return?
So you better be getting morevalue than that 40 cents that
you would have paid anyway.
Speaker 1 (05:29):
Well, it brings us right into what we're going to
talk about today.
So, by vote, you guys chose todive into our tax-efficient
funnels.
You know, just by way ofbackground before we kind of
kick this podcast episode off,this is actually something that
has kind of evolved over time.
Just the backstory of this andI'll show the image when we kind
of get into it is I used to gothrough this concept with
(05:52):
clients called the order ofmoney, and I had so many clients
that would come to me confusedat how they should structure
their savings when they're inthe accumulation years, like
should I be participating in my401k?
If I should, should it be thepre-tax side or the Roth account
(06:13):
side?
Should I be participating in my403B?
Should I be doing an IRA?
Should I be investing inbrokerage accounts to invest in
stocks, bonds, mutual funds andETFs?
Should I open a cryptocurrencywallet and buy Bitcoin and
Ethereum and all these otherthings that are out there?
How much should I have in thebank account?
(06:34):
Should I be buying real estate?
Should I put money in an HSA oran FSA or a 529 planner by life
insurance?
And the reality of it is is.
The answer is yes.
The answer is yes to all ofthose things If you have enough
money and enough savings to beable to afford to do all of that
(06:54):
.
But the reality of it is mostpeople don't have enough
discretionary savings to go buyevery one of those investments,
and so what I was doing withclients is mapping out an order
to money.
Here's what you should do withyour first dollar of savings.
Once you max that out, here'swhere you should go next.
Once you max that out, here'swhat you should go to next.
(07:15):
And then vice versa, on theflip side, our retirement
planning clients were like okay,I've now accumulated this money
, I have money in a 401k, I havemoney in a brokerage account, I
have real estate, I have ahealth savings account and maybe
I have a Roth account.
How should I think about takingmoney out of these accounts to
(07:38):
be able to supplement myretirement income needs, above
and beyond what my socialsecurity or maybe pension is?
And so there's an order ofmoney to how you should take out
of those accounts so that youcould maximize your income and
minimize your taxes.
And I was teaching this to ourclients.
I was teaching this tofinancial advisors all across
(07:59):
the country through my nationalorganization, c2p, and I
remember I was teaching this tomy business partner at C2P and
at Prosperity Capital Advisors,jason Smith, and he was like we
could take this into a visualbecause I was just writing out
the order of money step one,401k, up to match step two, roth
(08:20):
.
You know all these things andyou know he's great at kind of
taking a concept and simplifyingit into a visual.
I mean, he did it with thebucket plan that we all use
three simple buckets now, soonand later.
Of course, we wrote thebestselling book on the bucket
plan.
You could go to our website,allison Wealth, and request a
copy of this book.
We'll send it out to you as acomplimentary gift.
(08:43):
It's all on our retirementplanning process, our holistic
wealth management process, butwhat we came out with was this
kind of tax efficient funnels.
There's these funnels that youcan utilize to fill your buckets
of money over time, and thenthere's these funnels of money
to take your distributions whenit's time to go take withdrawals
.
And so I'm excited to jump intothis episode with you guys
(09:05):
today.
Speaker 2 (09:05):
Yeah, absolutely.
This is a topic that I can'teven begin to explain.
How many times I talk toclients about diversification of
tax.
Location right and not takeallocation out of the picture.
Where are your assets locatedand how do you look at taxes as
a net, after tax wealth and Ithink this is a topic that you
(09:29):
know.
I don't know, you probably haveencountered the same thing, but
most of my clients have nevergone through this exercise and
every single one of them thatdoes says man, I wish I would
have done this 20 years ago.
Speaker 1 (09:41):
It's the time machine .
All my retired clients are likeI wish I would have met you 20
years ago.
So let's go ahead and let'sjump right on in and talk about
the tax efficient funnels.
Don't forget, subscribe to ourchannel here.
If you're listening to thisthrough podcast on Spotify or
Apple or any of the otherplayers, make sure you go back
and check out our YouTube page,alison Wealth.
(10:03):
Subscribe to that.
We have a ton of additionalvideos.
Some of those videos are goingto be directly related to things
that we're talking about today.
So here we go, all right, herewe are talking about the tax
(10:24):
efficient funnels and in thisvideo I'm gonna actually throw
up guys.
I'm gonna throw.
I'm not gonna throw up guys.
That sounds sick.
I don't know why that came out.
What I'm gonna put up on thescreen here is a visual.
Again, I mentioned in ouropening that my partner created
this visual around the taxefficient funnels and, you know,
(10:44):
really, as a way to help usleverage the order of money to
ultimately increase cash flow.
I think any one of our clientswould want the ability to
increase their cash flow,increase their income, minimize
their taxes, and this is really,you know, what I would say is
the foundation of what we callthe tax management journey.
(11:08):
It's our proven process that wetake our clients through to
help them maximize their incomeand minimize their taxes.
And the reason that I say thisis the foundation is that, as we
build wealth, these are theareas that we could accumulate
that wealth in outside of anoperating business.
(11:28):
Right?
I know most of us realize likemaybe I can be self employed, I
can have an S corporation or anLLC or a C corporation and you
know, I know we do a lot ofeducation, conrad, on that stuff
and the right entity set up.
If you're a small businessowner, if you're a large
business owner, if you have aside hustle, but as you're
(11:50):
accumulating that wealth andyou're either generating savings
via your W2 job or you havebusiness income that you want to
continue to start to buildpassive wealth, the way to do it
is really in these three taxefficient funnels that we have
here the pre tax funnel, thepost tax funnel and the tax
(12:11):
advantaged funnel.
So, david, give us a little bitof education on the pre tax
funnel.
Like what type of vehicles?
And I want to stress the wordvehicles, because these are not
investments, that's what peopleneed to realize these are not
investments, they're justvehicles.
Think about, on the highwaythere's a lot of different
vehicles.
(12:31):
Those vehicles all do adifferent thing.
You know there's an RV, there'sa truck, there's a sedan,
there's a minivan, the peopleinside of those.
That's what you can think of asthe investments.
But, david, just give us kindof a high level on the vehicles
that are available forgenerating pre tax savings and
(12:52):
wealth.
Speaker 3 (12:53):
Yeah, and Dave, as you said, the pre tax funnel
it's contributions made with pretax dollars, and so those are
going to be things like your401ks, your 403Bs, your IRAs and
pensions, and the unique partabout that is these come from
pre tax dollars, butdistributions from this account
are taxed as income.
(13:13):
So, again, you get this funnelwhere you have pre tax money
that you're putting in and thenwhen it comes out it's going to
be taxed as income.
Speaker 1 (13:21):
So kind of an easy way or an analogy to think about
this is if we were farmingfarmer would plant a seed.
They're going to then have aharvest at some point and the
decision would be like do youpay tax on the seed or do you
pay tax on the harvest?
With pre tax, you're making adecision to pay tax on the
(13:42):
harvest.
You're kicking that taxliability down the road, so
you're getting a deduction toput money in.
It's going to grow tax deferredover time.
If I go buy a bunch of stocks,bonds, mutual funds or ETFs in
my 401k or IRA and I sell someof those that have realized to
(14:03):
gain and then I buy others, I'mnot paying a tax on that, right
guys.
Speaker 3 (14:07):
No, absolutely not.
Speaker 1 (14:08):
No, it's all tax deferred, but then at some point
in my life I'm going to want totake money out of that pre tax
funnel.
And David, what you're sayingis that's when you pay tax right
?
Speaker 3 (14:19):
Yeah, exactly so.
And, dave, I think there's akey point in that for these
401ks, 401k three Bs IRAs,they're tax deferred, so you're
not paying taxes on them everyyear as they accumulate and grow
.
And that's one of the reallybig advantages to this funnel is
that you get that tax deferredgrowth so that the taxes that
you're paying each year aren'teating into the growth of the
(14:41):
account.
Speaker 1 (14:42):
Absolutely.
Now, david, you mentioned whenwe take the money out, we're
going to be taxed and so isthere a specific age that we can
start taking the money out, andwhat happens if I'm almost 40,
I'll be 40 this June and if Ihave some money in these 401ks,
403 Bs or IRAs and I wanted totake that money out right now
(15:06):
because I'm going to go do aconstruction project on the
house kind of tell me about whathappens if I take money out
right now as a 40 year old andthen kind of some of the rules
around these accounts Generallyspeaking, if you take them out
before your age 59 and a half,you're going to have to pay the
tax, but you're also going tohave to pay an additional 10%
(15:28):
penalty for the federal level.
Speaker 3 (15:30):
There might be state penalties as well, so it's kind
of incentive to hold them forthe longer term, so you couldn't
just go out and take funds outof them right away.
There are some exceptions tothose, and one of them I'll give
you is if you are a first timehome buyer, there's a $10,000
exception for taking them out,where you still have to pay the
(15:51):
tax but you don't need to paythe penalty.
So there are a couple aroundthere.
But generally speaking, youreally want to hold these until
59 and a half.
So a couple exceptions.
Speaker 1 (16:00):
I know even in like a 401k sometimes there's like
some hardship provisions ormaybe you could take a loan from
those in an IRA.
There are no loans.
But what you mentioned is a keyword Even if there is an
exception to the penalty, you'restill going to have to pay tax
at whatever your highestmarginal rate is.
(16:22):
And is that just a tax on theinvestment gain or is that a tax
on everything that comes?
Speaker 3 (16:28):
out.
That's a tax on pretty mucheverything that comes out, so
really with these accounts.
Speaker 1 (16:33):
If we're putting money in, we want to make sure
that we can leave that money inkind of cooking in the oven
until we're at least 59 and ahalf.
You know, I will say, becausewe work with a lot of what I
would call kind of earlyretirees people who have been
fortunate enough to be able toretire well before 59 and a half
(16:53):
.
There are some really advancedways to get money out of these
accounts without paying thepenalty, such as a 72t
distribution.
Or if you have a 401k and it'syour last job and you follow
some of the right rules, youmight be able to take
withdrawals at age 55 instead of59 and a half.
(17:13):
But none of those things reducethe tax of the money coming out
.
It's just the penalty, and soreally again thinking of
optimizing this.
This is long term money.
This is in the bucket planlater, bucket money Now.
Conrad, being a CPA and also Iknow you have a crystal ball
that tells us the future.
(17:35):
David mentioned earlier thatwhen you take money out of these
accounts you're going to paythe tax at that time.
Do we know what that tax rateis?
Speaker 2 (17:45):
I do, actually, and I can guarantee you that your tax
rate will be somewhere betweenzero and 100%, and that is the
crystal ball.
The real answer.
They're down for us.
I like it.
Speaker 1 (17:58):
Zero, so you might not pay anything, or you might
pay everything.
That's right.
Speaker 2 (18:02):
That's right or somewhere in between, right?
So, everybody, that's mycrystal ball.
I can give you that same answer, and I'll see you on the boat
here soon, right?
The real answer, though, isabsolutely not right.
If I had that crystal ball, Iwouldn't be here, honestly.
But if we knew exactly whattaxes we would pay at retirement
(18:24):
, then we could design a perfectplan and never have any issues.
The fact of the matter is, Idon't know about you guys.
I don't trust Congress to evenact on things that will help us
in one year, much less 20 or 30years down the road, and so we
just can't predict what thosewill be.
Taxes likely in the short runlikely go up and this is a whole
(18:49):
nother episode about where theeconomy is, where the debt limit
is and how Congress hascontinued to spend.
But, ultimately, the answer isno.
We don't have a crystal ball.
I can't tell you what tax rateyou'll pay at the time of
distribution, but we know whatyou'll pay today.
Speaker 1 (19:06):
So there's an unknown right.
We know what the deduction is,which is why, as tax planners,
we can calculate how muchsavings our clients will get to
put money into these vehiclestoday, but we have no idea what
the taxes will be when they comeout.
And if we do a good job atinvesting… Will the balances in
(19:31):
these accounts be higher orlower in the future than they
are today?
Higher?
I just ran into a client that Iwas meeting with that was in
their early 70s and they hadamassed 14 million dollars in
their IRA 14 million dollars.
They deferred tax their wholelifetime.
(19:52):
But guess what?
Somebody needs to pay it.
The government wants their cutof that money.
It's either.
This client is going to pay itwhen he's alive.
He was married.
His spouse was about sevenyears younger than he was, so if
he passes away, that money isgoing to go to his spouse.
(20:12):
His spouse is going to have topay the tax, and if neither of
them do, their children aregoing to have to pay the tax.
He had two children.
His goal was that each of thechildren gets a 50-50
inheritance.
And if you inherit an IRA or a401K or a 403B as a beneficiary
(20:34):
a non-spouse beneficiary.
How quickly do I have to takethat money out of the account
and pay tax on it?
Speaker 2 (20:43):
Ten years, Right.
The current rule requires thosefunds to be distributed.
Now there is no annualrequirement, but there is a
total 10-year requirement.
So in your client's situation,their kids would have 10 years
to withdraw $7 million from anIRA.
And so we've got that simplemath.
Speaker 1 (21:06):
That's at least 700 grand a year, putting them in
the top bracket, and that's anextreme example.
But here's the gist of thepre-tax money.
Right, it has a time and aplace and I think everybody, as
they approach retirement, shouldhave a certain amount of money
in a pre-tax account, because aswe go to build a retirement
distribution plan, we have astandard deduction in retirement
(21:28):
.
It's a certain amount of moneythat the government gives all of
us that we could take outtax-free.
I think the biggest mistakethat we see people make is they
actually over-accumulate in thepre-tax bucket.
Like you should never have a 10or $15 million pre-tax IRA
because, as my good buddy EdSlott would say, ed's a CPA.
(21:52):
What's the title of his book?
Speaker 3 (21:56):
The Retirement Savings Time Bomb and how to
Diffuse it.
Speaker 1 (21:58):
The Retirement Savings Time Bomb.
Ed is known by the Wall StreetJournal as America's IRA expert.
Right, you're building a timebomb.
It's either going to go off onyou, your spouse or your family
amongst your passing.
And so again, this is notsaying don't participate in the
401k, the IRA or the pensionplans you need to.
(22:19):
You should Absolutely All daylong.
Just don't over-accumulate inthose vehicles, because you
could have a tax time bomb onyour hands in the future.
Now let's talk about theopposite of that.
Conrad, give us a little bit ofa rundown on this other funnel
(22:39):
on the opposite side that wecall a tax-advantaged funnel.
Speaker 2 (22:45):
Yeah, this is going to be.
You know, specific accounts arelisted here your Roth plans and
ROTH.
Much like David Roth Royaltieswill be coming soon.
Not going to be, david?
Can we share also what your?
Speaker 1 (22:58):
middle name is oh yeah, absolutely Go ahead.
Speaker 3 (23:04):
Yeah, it's a middle name IRA, ira.
So David Ira Roth Come on.
Speaker 2 (23:09):
you can't make that up.
Speaker 3 (23:10):
You can't make it up I always have to recommend the
Roth IRA to everyone just byvirtue of birthright.
Speaker 2 (23:16):
Well, I better explain this properly then,
because if I don't, then therewill be a hell of a problem.
I'd say too.
Speaker 1 (23:22):
like you know, David, you're a musician, you know
music degree, and so you know.
When I always joke with peopleand say guess what his middle
name is, what does everyone say?
Of course, yeah, david Lee Roth, david Lee Roth.
But like I was like, this is aclear-cut reason that, david,
you were made to be a tax andfinancial advisor and maybe not
a musician.
Roth, ira, come on.
Speaker 4 (23:46):
This is like this is.
Speaker 1 (23:48):
This was your career calling from birth.
Speaker 3 (23:51):
It was, and I just accepted it.
Speaker 1 (23:54):
So I knew I don't even think you knew that, Conrad
, Whoa, I did that was my honestreaction.
Speaker 2 (24:00):
I'm still a little like whoa.
Speaker 1 (24:01):
that's pretty cool you need us to take over the
rest of the episode.
Do you need to?
Speaker 2 (24:06):
go.
I think I can give you some.
How's that All right?
So tell us about.
Speaker 1 (24:10):
Let's start with the Roth account, Conrad, because
that's the most common one.
I think every listener isprobably heard of a Roth account
.
You know, talk about thecharacteristics of a Roth
account.
Speaker 2 (24:22):
Yeah, so the Roth account operates.
If you think about an IRA, howit operates, it's very similar,
right?
Dollars go in, they build taxdeferred and I'm going to say
deferred in quotations and thedifference comes on the front
end of the back end, right?
So the IRA, as David mentioned,you get a deduction for those
(24:43):
contributions in.
It builds up and then when itcomes out it's taxed at ordinary
income rates.
The Roth fits that equation.
So you pay tax on the dollarsbefore you put them into the
Roth IRA.
Once you put them in, the RothIRA builds tax deferred.
But at distribution the Rothaccount is actually tax-free,
(25:04):
right?
And so the equation there.
Think about that $14 million IRA.
If we just say it's 40% tax,you're looking at $5 million,
right?
$5, $6 million of tax potentialthat could come out of that.
Flip that around and make it aRoth IRA and there's zero and
(25:26):
that's a massive difference.
So, but you are paying tax onthose dollars up front.
So if you're in the 37, 40% taxbracket or let's go back to
World War II rates you're in the80% tax bracket, right?
Do you want to pay that tax ordo you want to defer it?
If tax rates are low, let's sayyou're in the 12% bracket right
(25:47):
now.
Maybe it makes sense to pay 12%on those dollars one time in
order to have lifetimeaccumulation and tax-free
distribution.
Speaker 1 (25:56):
Well, and I think the difference is, I always say, if
you look at the left funnel,the pre-tax funnel, you're in
the government plan.
There You're in a partnershipwith the federal government
because you're deferring taxes.
I mean, think about it, guys,if we were to go into a business
together and here's how I wouldoutline that business it's
(26:17):
going to be a partnership andtoday we're each going to own a
third of the business, but Ihave the ability, solely at my
discretion, to change the rulesof the ownership at any time in
the future.
Where I could decide onemorning that, hey, you know what
.
Dave gets 70% of the businessand you two get 15%, would you
(26:40):
two come into business with me?
No, probably not, right.
And that's really what apre-tax account is, a 401k,
right?
We know what the rules aretoday.
Conrad, you mentioned itearlier.
We know the tax rates today.
You're either in the 12% or the22% or the 24, or the 32, or
the 35, or the 37% bracket, butwe don't know what those are
(27:04):
going to be in the future.
And so you know, we opened theepisode with me going to Vegas
in a couple of weeks.
That's a little bit of a gambleright Now with the Roth plan I
always share.
Like this is for the person thathates the government.
Like you don't want thegovernment to be able to dip
their hand into your money everagain into the future, and so
you're making a decision to sayI'm going to pay that tax.
(27:26):
Today we have clients that areultra-high income earners.
They're in the 37% marginalbracket and they still decide
that for them, they want toparticipate in the Roth account
because they don't want thegovernment to be able to take a
piece of their money later oninto the future.
And so there's a mathematicalpart of the decision-making
(27:50):
process like what's yourdeduction?
What's the tax-deferred growth?
What tax rates will you be atin the future, potentially?
But then there's also a verypersonal decision of how much
faith and trust do you have inthe federal government and what
future tax rates could be.
Because, again, in a pre-taxaccount, you are trusting that
(28:11):
you're going to be in a lowertax rate later on in life.
Versus the Roth account, you'reeliminating that public policy
risk of increasing taxes lateron in life.
Now, conrad, I just did a videoon this on our YouTube channel.
In my opinion, it is the singlebiggest myth that I hear of
(28:33):
over and over for clients, butit's that well, I can barely get
any money into a Roth accountRight now.
The contribution limits for 2024for a Roth IRA are $7,000 if
you're under age 50, $8,000 ifyou're over age 50.
And that's the same for an IRAas well.
(28:53):
The Roth IRA on the taxadvantage side and the IRA on
the pre-tax side it's 7,000 or8,000.
But with the Roth accountthere's a phase out if you make
too much income.
And so, for example, if you'resingle in 2024, that phase out
starts at $146,000.
(29:14):
And if you make over $161,000,you could not directly
contribute into a Roth account.
If you're married and file ajoint return, that phase out
starts at about $230,000.
And if you earn over $240,000of modified adjusted gross
income, you could not make adirect contribution into the
(29:38):
Roth IRA account.
But, david, how do we getaround that for our high income
earning clients?
Speaker 3 (29:44):
Yeah, I mean, there's a couple ways to get around
with it.
One is the backdoor Roth IRA,and I'll give you another one as
we go.
A lot of 401Ks, they also havea Roth contribution option, and
then there's also in 401Ks themega backdoor Roth option.
So there's actually many waysto get around that.
Speaker 1 (30:05):
And what about business owners, Conrad?
I know that's where you focusmost of your time.
Can we set up Roths forbusiness owners?
Speaker 2 (30:11):
We certainly can, and a lot of times the Roth 401Ks.
If you have employees, thesetup of your 401K could include
the Roth component.
Otherwise, we can set up what'sknown as a Roth Solo-K, which
is really just a 401K for anindividual that doesn't have
employees in their business Inthose because of that plan.
(30:35):
A lot of 401K plans requiretesting or what's called the
safe harbor design, which reallylimits what the owner can get
in as a solo-K.
We can do what's called adiscretionary plan and really
match $100 for dollar into thatplan up to the contributions and
even potentially additionalover and above that.
Speaker 1 (30:58):
Here's the thing you might have a W2 job where your
employer has a 401K plan maybethey even do a match for you and
you're participating in thatbut you might also have a side
hustle.
I love when clients have sidehustles, being entrepreneurial
minded, building some business,betting on themselves and their
(31:18):
abilities, doing something thatthey're passionate about.
If you have that side hustleagain, conrad, how many times
have we set up additionalretirement plans for the side
hustle, where then we couldcoordinate the benefits of what
they're getting from maybe theirW2 job with additional benefits
stacked on top through theirside hustle business?
Speaker 2 (31:39):
I think 100% of the time we make that recommendation
to clients.
I think the challenging partyou mentioned coordination that
the way the law is written todayis that contributions to 401Ks
are limited, meaning you canonly put in so much per year
across all 401Ks.
(32:01):
If you have five jobs where youget a 401K, you manually have
to do that math right by putting5,000 in here and 2,000 here.
It can become a challenge Ifit's one job in a side hustle.
It allows us to really targetmore of we know what percentage
you're putting in.
Speaker 1 (32:18):
This is where you really need to work with our
team, because you can't do yourstuff on your own.
There's control group issueswith the IRS if you have a
certain amount of ownership inone company and another company,
but the savings are massive.
Again, in my YouTube video thatI just did on Roths and the
biggest myth around Roths, Ishow a plan where you could get
(32:41):
cumulatively 77 or 78,000dollars per year into a Roth
account.
Now, if you're married, timesthat by two.
I mean Conrad.
If we were able to put 140,000dollars a year in a Roth account
and let's say it's invested inthe stock market, averaging a
7.2% rate of return over a10-year time period, that one
(33:07):
year of contribution 140 grandwould double to 280 grand at the
end of a decade of completelytax-free money.
Imagine if we did 140 grand ayear every year for 10 years.
You would have a $3, $4, $5million Roth account by that
point for completely tax-freemoney for you, for your spouse,
(33:29):
for your family, upon yourpassing.
That's a huge way to buildtax-efficient wealth long-term.
Again, we have so many advancedstrategies for business owners,
but that's one of the biggestones for even a W-2 income
earner that most people aren'ttaking advantage of.
With the Roth IRA, the Roth 401kor the pre-tax IRA or 401k,
(33:55):
these are not investments.
Sometimes I hear clients say,oh, my 401k has been such a
great investment, or my 401kI've heard they're horrible
investments.
They're not investments,they're just vehicles.
Inside of these vehicles, youcan pick investments.
You could buy individual stocks, mutual funds, etfs.
You could buy real estate.
You could buy cryptocurrency.
(34:15):
You could buy cryptocurrencyETFs.
Now you could really invest inalmost everything.
Not everything, though the wordalmost everything.
There are very specificprohibited transactions that are
all those the death sentencefor an IRA.
It makes it fully taxable ifyou invest in things Like if I
were to buy my primary house inmy IRA and live in the house.
(34:39):
That's a no-no.
But again, there's a lot ofreally unique things that you
can do with these accounts.
I want to move the conversationin the tax-advantaged funnel
over to actually my favoriteaccount, my favorite.
Can you guys guess which one itis?
I know, you know, because youhear me talk about it all the
time with clients.
Speaker 3 (34:55):
Yeah, it's going to be the HSA.
Speaker 1 (34:57):
Yeah, the HSA account , David.
Why is this one the most uniqueone out of all the solutions
here?
Speaker 3 (35:04):
A lot of these have advantages on one side, where
you make contributions withafter-tax money and then the
distributions are tax-free.
This is one scenario where youget a triple tax benefit.
So you get three benefits whenyou put the money in, you get a
deduction.
The second benefit is when itgrows, it grows tax-deferred.
(35:25):
And the third is that if youuse it for qualified expenses,
it comes out tax-free.
So it's the one scenario whereyou really get these three
benefits where you really don'tsee pretty much anywhere else.
So that's kind of the magic ofthe HSA.
Speaker 1 (35:38):
My business one of my businesses we didn't have an
HSA plan.
I was so excited by adding ahigh deductible plan.
2023 was my first year beingable to max out my HSA.
Of course, in January Icontributed the maximum that I
could into that HSA.
I invested it in an all equityfund.
(35:58):
That fund has gone up betweenlast year and so far this year
like 30% in value and that's alltax-free money and I got a
deduction to put the money intothat HSA.
I was just talking with a clientof ours in California about
this and this client is super,super high income.
They're in a 50% tax bracket.
(36:18):
That's 37% on the federal sideand 13.3% California income tax,
so over 50%.
That means every dollar thatthey earn over that.
You know, 600,000, whichthey're a lot, a lot, a lot over
$600,000, is essentially taxed.
51 cents on the dollar goes tothe government and they keep 49
(36:41):
cents.
I asked them if their companyhas added a high deductible
health plan and they actuallylooked in.
They did add it.
And so by adding or going to ahigh deductible health plan, a
couple of things happen.
Number one is his monthlypremiums have gone down now
because a high deductible planis less expensive than a low
(37:03):
deductible plan.
So let's use easy math and sayhe is saving about $500 a month
on his family health insuranceplan because they've gone to a
high deductible.
Now their deductible is around$6,500.
Their max out-of-pocket is$6,500.
(37:26):
So if they have catastrophichealth events, the most they're
going to pay is $6,500out-of-pocket.
But how much savings did thatclient have by moving to that
high deductible plan?
$500 a month times 12 months is$6,000.
So really they're onlyout-of-pocket $500 for that
expense.
(37:46):
But what else can we do then,conrad, if we now have a high
deductible health plan at work,what can we set up for that
client?
Speaker 2 (37:55):
You set up the HSA right the health savings account
and let's take those $500 andput them into the HSA, which
also gets the deduction going inright.
So it saved them $500 of cash.
But those same dollars nowended up saving them 50% of that
going into that HSA Absolutely,and this is one right.
(38:19):
So that specific clientprobably has the cash flow to
pay the $6,500 of deductibleright.
But I love the HSA.
For this reason, I'd utilize itand I don't actually take money
out unless it's a really bigyear.
I try to pay for those expensesand my goal is to have about
(38:40):
$150,000 at retirement of HSAfunds and right now I'm just
going to keep my receipts in mypocket and hold them for the
next 30 years and in 30 years,when I want some tax-free money,
I can reimburse myself forthose expenses.
Speaker 1 (38:58):
Now in 2024, if you're self-only coverage, you
can put $4,150 into an HSA.
If you're under family coverage, you can put $8,300 in the HSA.
So, Conrad, going back to thatexample, he takes $8,300, and he
puts it in his HSA.
(39:18):
That's tax-deductible money Ata 50% tax rate.
How much did we just save inincome taxes?
Speaker 2 (39:27):
$4,000.
Speaker 1 (39:29):
A little over that right $4,000 of savings right
out of the gate.
Now let's say that $8,300doubles twice in the next 20
years because it's invested inthe market, so that $8,000 turns
to $16,000.
The $16,000 turns to $32,000.
(39:50):
And now he withdraws that moneybecause maybe he's going to
retire early and have to coverhealth care expense before
Medicare kicks on.
Or maybe he's now past 65 andhe's on Medicare but he's got
some out-of-pocket medicalexpenses.
Or, even worse, when he's inhis 80s or 90s he has an
(40:10):
extended care or long-term careevent that's going to require
substantial health care costs.
He's got a big old funnel oftax-free money to be able to tap
into.
That's an incredible account.
We're going to do a wholepodcast episode just on that,
but again I want to distress theimportance of that.
The other two in the taxadvantage funnel are the 529
(40:32):
plan.
If you have educational fundingneeds, talk to our team about
that.
The FSA account is a flexiblespending account.
You can either structure thisif your employer allows it for
medical expenses, but you got tobe careful not to overfund it
because if you don't use it in acurrent year you lose it.
We share with our clientswhat's your average
(40:54):
out-of-pocket expense for healthcare.
If it's $1,000, put $1,000 inyour medical FSA, but don't go
put $3,000 in your medical FSAif your average expenses are
only $1,000.
There's also a dependent careFSA.
If you're working and you havechildren under the age of 13,
you can use some pre-tax moneyto help childcare again if your
(41:16):
company allows that.
And then, last but not least, ispermanent cash value life
insurance.
I'm not talking about term lifeinsurance.
I love term life insurance.
I think everybody who hasanything to protect needs to
have term life insurance.
It's the lowest cost way toprotect the ones you care about
and love.
(41:36):
When I had my first kid, Ibought my first term policy.
When I had my second kid, Ibought another term policy.
When I had my third kid, Ibought another term policy.
I know both of you guys did thesame thing as well.
It's the lowest cost way toprotect the human value of Dave
Allison.
But at some point you might havemaxed out a lot of these other
(41:58):
saving sources like the 401k orthe Roth IRA or the HSA, and
there is a life insurance policyavailable out there again of
vehicle that you couldaccumulate savings in.
It does provide a death benefitif you were to pass away.
But this is more structured tobuild tax-free savings like a
(42:18):
Roth account, but it has nocontribution limits.
And again, I say, the cashvalue life insurance, just like
the Roth account, just like thehealth savings account, just
like the IRA, is just a vehicle.
It's not an investment.
And when I say that there's manydifferent types of permanent
cash value life insurance,there's the old traditional
whole life insurance Worksreally well.
(42:41):
There's indexed universal lifeinsurance.
There's variable life insurance, where we could actually go buy
stocks, bonds, mutual funds andETFs in a life insurance policy
.
So there's a lot of differentoptions.
But at the end of the day, whatwe're doing here is we're
building a big pile of money forthe future and we're telling
Uncle Sam and the federalgovernment hey guys, you can't
(43:04):
dip your hands in any of this.
This is all tax-free for thefuture.
Speaker 2 (43:08):
Yeah.
Speaker 1 (43:10):
Now let's talk about the middle funnel.
The middle funnel is thepost-tax funnel.
I say this is kind of where youhave a double tax because you
don't get any deductions to putthe money in per se.
Hopefully that money grows invalue over time and then when
you sell the investment, you'regoing to realize a capital gain
(43:32):
and if you've held thatinvestment for at least 12
months, that is preferentiallytaxed, but you are taxed a
second time.
You're taxed on the gain andthat could be at a tax rate of
potentially zero if you don'thave a lot of other income.
But for most of our clients it'ssomewhere between 15%, 18.8% or
(43:54):
23.8% at the federal level.
These are like our brokerageaccounts, our trust accounts,
your cryptocurrency accountsthat aren't held in a retirement
plan account, things that maybeyou're buying real estate,
right.
You're buying rental propertiesor commercial real estate.
If you've got money at the bank, that's post tax money, and so
(44:18):
there's some enormous taxplanning opportunities here, but
you're not really getting adeduction on the front end and
you're not getting a tax benefiton the back end.
Conrad, for example real estateright.
Huge tax benefits to invest inreal estate for some people,
right?
Speaker 2 (44:36):
Yeah, I mean.
Ultimately, real estate underthe IRS code is considered for
most people a passive activitywhich is subject to what are
called passive activity losslimitations.
And for a married couple, thelong and short, if you make more
than $150,000, your passiveincome the losses associated
with it, will be limited in thatyear.
(44:57):
Now the limitation is up to$25,000 per property.
So it's pretty high, but youultimately will phase out at
about $180,000 of income.
So there's a lot of movingparts to that.
However, we like real estatebecause of the cash flow
generation.
If you're able to put moneyinto a vehicle and realize,
(45:20):
let's call it a $5,000 profit,but because of depreciation you
show zero taxable profit, itmeans you've got positive cash
flow.
Now that doesn't mean it'sforever right.
The IRS actually callsdepreciation.
You borrow from the asset, notactually reduce the value.
So there is a much like the IRA.
(45:40):
There's a borrowing componentor a partnership component, but
in those years that you havepositive cash flow, it allows
you to deploy it somewhere elsewithout having to take some
money for taxes.
Speaker 1 (45:51):
Yeah, and we'll do another episode just on real
estate.
With real estate, I alwaysshare with clients like is it a
good investment on paper?
A lot of times it is.
And actually, david, you helpbuild this calculator where we
help evaluate properties andwhat their cash flow is and what
their internal rate of returnand what their tax benefits are.
We've helped a lot of ourclients acquire rental
properties over time.
(46:12):
I get the misconception fromclients all the time that they
think it's a great tax write-off.
But, conrad, what they don'trealize is that it's a passive
activity.
It's not like you can write offthe losses of your rental
property against your ordinaryincome or your W2 income in most
cases.
Now there are some exceptions,right, david?
We just helped a client buy ashort-term rental.
(46:34):
That's classified as an activeactivity.
So there's some things we canhelp you think through there.
The thing I always stress withreal estate is you have to have
the desire to want to manage alot of this.
Like I know fundamentally as aninvestor, real estate is a
great investment.
I've owned rental propertybefore.
I've had that property managercalling me saying, hey, my
(46:56):
tenants toilet broke.
What should we do?
Can we get a plumber out Blah,blah, blah, like for me.
I'm at a point in my life todaywhere I've got too many other
competing priorities.
I've got young kids, I've gotmultiple other companies.
I want nothing to do withadding rentals into the mix.
That doesn't mean like in fiveor 10 years my objectives might
(47:17):
change and now I'll say, hey,maybe we could take on, maybe my
wife could help manage theseproperties because she's not so
busy with young kids.
So again, matching up thedynamic of that investment with
the phase you are at in life isreally, really important.
But these could be a tremendousway to build assets.
(47:37):
And there's some tax benefits,brokerage accounts also, because
with after-tax money andbrokerage accounts, david, what
can we do here from like a taxdeduction creation if there's a
lot of volatility or maybe someof the investments have losses
while others have substantialgains in them?
Speaker 3 (47:56):
Yeah, like you said, dave, we could create tax
deductions if there are somepositions that are showing
losses and essentially use thatto offset your other capital
gains, or up to $3,000 ofordinary income.
So there's stuff to do there.
Speaker 1 (48:13):
We have a great platform for our clients where
we invest their after-tax moneyand we have this algorithmic
trading that looks for dailydeduction creation opportunities
.
And just a couple examples ofthat in action is we had a
client in end of 2021 that movedtheir money over to us to
manage.
It was a couple million dollarsof after-tax money.
(48:35):
We deployed this strategy wherewe essentially built their
family, their own mutual fund orETF, so we acquired about 1,200
individual stocks.
Of course, any given day, someof those stocks are going to be
up, some are going to be down,but the algorithm searches for
tax deduction opportunities andwe were able to secure in 2022,
(48:56):
obviously not a great year forthe market, but a very volatile
year meaning we were able to getthese tax deductions harvested
and they ended up selling aproperty that year that had a
bunch of capital gain.
Well, guess what?
We were able to use the lossesthat we harvested from the
portfolio to offset the gainsthat came from selling the
(49:18):
property.
So net net, they didn't haveany tax exposure.
We've done that many times forour clients that have company
stock, like RSUs, that vest, andagain, we can use a portfolio
of post-tax money to createdeductions to then offset a lot
of capital gains that arerealized on your company stock
(49:38):
position.
So this is where we look at theintegration of tax management
with investment management and,again, having brokerage accounts
, trust accounts that post-taxmoney can be a great opportunity
to do so and so just landingthe airplane here of these
tax-efficient funnels you know,for me, if I'm starting off my
(50:00):
journey of savings and you'relistening to this podcast right
now, number one place to go isyour 401k up to the company.
Match right Up to the company.
Match.
That's free money.
Conrad, if my company willmatch $5,000 and I put $5,000 in
and they give me $5,000, whatrate of return is that on my
(50:21):
money?
100%?
It's 100% rate of return.
Like go get the 100% return.
I can't give you 100% return onany reliability and any
investments we choose.
So that's the first place to go.
The second place to go is theRoth account.
Start funding your Roth accountbecause with a Roth account, if
(50:43):
you need to access the money,if you have a financial
emergency, you could take yourcontributions out income
tax-free and penalty free.
It's just the earnings thatneed to stay in there.
From there, start funding yourhealth savings account.
Right, get those deductions toput the money in.
(51:03):
Build up a nice reserve in caseyou have a medical emergency.
Start building that tax-freemoney From there.
Maybe you want to go back toyour 401k and contribute up to
the maximum the IRS allows.
That could be either the Roth401k or the pre-tax, depending
on some of the things that wespoke about earlier.
(51:24):
From there you can look atadditional things like maybe a
529, if educational funding isimportant.
You want the kids to go toHarvard or MIT.
I just had a colleague theirchild's probably going to get
into Notre Dame 80 grand a year.
It's crazy.
I was like whoa, that's insane.
You better have a big fat 529plan for that and Roth accounts
(51:47):
in the names of the children,which again a whole nother
episode.
Had to set up Roth IRAs in thenames of the child.
Or you just call Conrad andhe'll or David, they'll take
care of that for you.
But then from there, brokerageaccounts, real estate, and then
the cherry on top is if you'rein a fortunate enough position
to have enough discretionarysavings.
You've maxed out the 401k,you've maxed out the Roth
(52:11):
account.
Maybe you maxed out a sidehustle retirement plan like a
Sep IRA or solo 401k, you'recontributing to your HSA and
maxing it out.
You're putting money in a 529,if that's important.
You're saving money in apost-tax brokerage account.
You're buying real estate, ifthat's your cup of tea I
mentioned.
It's not mine for now.
(52:31):
The last thing, but not least,is cash value life insurance,
being able to stuff someadditional savings in there, to
have tax deferred, growth taxfree, income tax free
inheritance to yourbeneficiaries, and so what we
could do is help you structureyour own order of money.
If you're in the accumulationphase and if you're approaching
(52:53):
retirement, maybe you only haveone of these funnels.
We just met with a client whohired us.
We're taking them through ourfinancial planning process and
they have about 90% of theirmoney in the pre-tax funnel.
They've accumulated about $5million.
About 90% of it is pre-tax andabout 10% of it is post-tax.
(53:16):
They've got plenty of money tolast them for as long as they're
in retirement.
But the one thing that we showedthem is if one of the two
spouses passes away early, thenthey go from having a 100%
probability of success in theirretirement plan down to a 70%
probability of success, andthat's just because of the
(53:38):
impact of having all of theirmoney in the pre-tax funnel
that's taxed all as ordinaryincome and then later on in life
when one spouse passes away,going from a married filing
jointly tax status to a singlefiler, where your deductions get
cut in half and all thebrackets compress, causing a lot
more tax on the same amount ofincome.
(54:00):
So what we were able to do isshow them that, even though
they're retiring now, if we liveoff of a little bit of the
post-tax money for the first fewyears and we start
strategically shifting moneyfrom the pre-tax funnel to the
tax-advantaged funnel, webasically take them from a 70%
(54:20):
probability of success if one ofthe two spouses passes away
back up to 100% probability ofsuccess.
And, conrad, what am I talkingabout when I talk about moving
money from the pre-tax funnel tothe tax-advantaged?
Speaker 2 (54:34):
It's really what's called a Roth conversion Right,
and we're converting fundsintentionally from the pre-tax
to the tax-advantaged funnel.
But how we do it is huge right.
Again, you mentioned how we'regoing to help this client and
say we're going to use after-taxdollars to live on right and
(54:55):
really keep their income as lowas possible.
We'll use up first theexemption that they have $30,000
plus thousand dollars and thenultimately move up in the tax
brackets where we know we'regoing to pay the lowest amount
of tax possible in order to dothat conversion and by doing
that we really get what you'regoing to call discounted rates.
(55:17):
all right, comparatively to whatwe know is likely to happen in
2026 in terms of making thatconversion.
Speaker 1 (55:25):
Awesome.
Well, guys, this was fantastic.
We covered a ton.
I know we went long in thisepisode, but there's going to be
so many great components thatpeople can go and zero in on and
so appreciate you, guys, andlet's go out there and help some
more clients.
Awesome that's good Thanks.
Speaker 2 (55:42):
As a reminder, I'm available for the Beach House
audit.
Speaker 1 (55:46):
That's right.
Vegas or fishing I'll throwmyself in If anyone wants to go
fishing.
I'm in Conrad's got the beachand send all your Range Rovers
and G-Wagons to David.
He needs them.
That's right.
All right, guys, it was awesome.
Thanks, I'll see you soon.
Speaker 4 (56:01):
Financial planning and advisory services are
offered through Prespair, theCapital Advisor, PCA, an SEC
registered investment advisorwith its principal place of
business in the state of Ohio.
Allyson wealth management andPCA are separate, non-affiliated
entities.
Pca does not provide tax orlegal advice.
Insurance and tax servicesoffered through Allyson wealth
(56:21):
management are not affiliatedwith PCA.
Information received from thisvideo should not be viewed as
individual investment advice.
Contact may have been createdby a third party and was not
written or created by a PCAaffiliated advisor and does not
represent the views and opinionsof PCA or its subsidiary.
For information pertaining tothe registration status of PCA,
please contact the firm or referto the investment advisor
(56:44):
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, including fees and services.
Send for our disclosurestatement as set forth on Form
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I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
Ridiculous History
History is beautiful, brutal and, often, ridiculous. Join Ben Bowlin and Noel Brown as they dive into some of the weirdest stories from across the span of human civilization in Ridiculous History, a podcast by iHeartRadio.