May 13, 2025 • 37 mins
In this episode, Travis and Steve delve into the complexities of taxation, focusing on common mistakes individuals make regarding tax reduction strategies. They discuss the difference between tax loopholes and traps, the concept of tax loss harvesting, and the risks associated with market timing. The conversation also covers the implications of deferring income taxes, the challenges of capital gains, and the strategic use of the zero percent tax bracket.
Together, Travis and Steve emphasize the importance of understanding tax rules to avoid costly mistakes and maximize financial outcomes.
Takeaways
- Understanding the difference between tax loopholes and traps is crucial.
- Tax loss harvesting can be beneficial, but it comes with risks.
- Market timing can lead to missing significant market gains.
- Deferring income taxes may create future tax burdens.
- Capital gains taxes can be avoided through strategic planning.
- Living in a zero percent tax bracket can be misleading.
- Projections are essential for effective tax planning.
- Selling investments to avoid capital gains can be detrimental.
- Tax strategies should align with long-term financial goals.
- Professional guidance is vital for navigating complex tax situations.
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About Your Co-Hosts:
Travis Maus has been in financial services for over fifteen years. He is a Senior Wealth Manager and Chief Executive Officer at S.E.E.D. Planning Group. Travis also hosts the Unleashing Leadership Podcast, where he dissects some of his favorite books on leadership and how you can apply it to your business or life.
Steve Campbell has over a decade of industry experience and is a Senior Marketing Director at S.E.E.D. Planning Group. Steve also hosts the One Big Thing Podcast, an interview-style show meant to inspire and encourage 30 and 40-year-olds going through difficult seasons of navigating marriage, raising kids, and growing personally.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Foreign.
Welcome to Ditch the Suitspodcast, where we share insights
nobody in the financialservices industry wants you to know
about.
We're here to help you get themost from your money in life.
So buckle up and welcome toDitch the Suits.
(00:21):
Hey, Steve, wouldn't it begreat if we lived in a world where
we don't have to pay anyincome taxes?
It'd be awesome.
How many times have you heard,and especially recently, it seems
like with the politics, howmany times have you heard that rich
people don't pay their fairshare of income taxes?
Quite a bit.
Yeah.
So, you know, one of thethings that we're gonna talk about
today.
Well, all we're gonna talkabout today really is taxes.
(00:45):
But four common tax reductionmistakes that people make.
But I bring up the richpeople, and I kind of bring up the
world with no income taxesbecause there's tax loopholes, and
everybody hears about the loopholes.
And then there's also tax traps.
And I think people sometimesget confused between, okay, there's
(01:05):
a legal way to do things andthen there's a way that kind of looks
smart, but in the end doesn'tturn out to be so smart.
That would be the trap.
Interesting.
Yeah.
So I want people to thinkabout loopholes are kind of a spot
that's created or allowed tolegally exist because of the way
that the law is written.
(01:25):
And maybe you could say, boy, those.
Those interesting politicians,they just didn't know what they were
doing or did they know whatthey were doing?
You never know.
But the whole thing is, isthat there's rules to the game.
And taxes is a.
Is a giant rule book.
Yep.
In the game of life.
And you've got to figure outhow to, you know, handle your money
(01:46):
as best as you can withinthose tax rules.
And so there's the legal ones.
And then the tax traps arewhat happen when people actually
don't understand how and whento apply the different tax that other
people are trying to use thatthey call loopholes.
And instead of finding aloophole, they end up getting smacked
by the tax collector, like, inthe back of the head.
Because tax is like a boomerang.
(02:07):
If you do it wrong, it's goingto come full circle and get you later.
So you could be like, oh, thisis so wonderful.
I'm at the 0% tax bracket, andI see.
I see stuff online all the time.
You can live in the 0% taxbracket, too.
Wouldn't that be great?
You know, there's not much,you know, the.
The reality of a free lunch iseventually you're going to starve
(02:29):
to death.
You know, like, like, youknow, it's.
I don't know if that.
I don't know if that analogy.
No, it worked.
I'm with you.
Did it kind of work?
All right, so in this episodeanyway, we're going to get into the
four misconceptions that Ithink could actually change people's
lives if they betterunderstood how these tax things,
these tax strategies orloopholes kind of work.
Yeah, well.
And I think we've done a greatjob of talking about there's bad
(02:51):
decisions and then there'sopportunity loss when you don't understand
the rules of the game.
And this is ditch the suits.
I'm Steve Campbell, seniormarketing director at Seed Planning
Group, along with Travis Moss,who you've been hearing from our
CEO at Seed.
And Seed is a fee onlyfinancial planning firm where we
have a fiduciary obligation toserve our clients best interests.
And this show is all about usbringing years of experience, conversations
(03:11):
we're having internally tobring to you to really help you get
the most from your money in life.
Let's take a quick break tohear a word from your sponsor.
This episode is brought to youby Seed Planning Group.
If you're looking for a lifegiving experience working with a
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Seed is a fee only financialplanning firm with a fiduciary obligation
(03:32):
to put your best interests first.
If your goal is financialfreedom and independence without
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Today you can visit www.seedpg.com.
that's www.seedpg.com.
and, and the best part, youcan schedule a free consultation
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(03:54):
for you.
Yeah.
And so we're recording this.
You can go onto YouTube andyou can see us recording this.
And I just.
We're in our new studios.
We just started the season.
I just realized I have atendency to slouch and it kind of
makes me.
Yeah, it makes you be accountable.
And Patreon head over toPatreon, head of Patreon, Ditch the
suits.
That's where you can watch allthese videos.
Yeah, it was looking like Ihad a food baby there.
(04:15):
All right, so anyway, back tothe taxes.
We're going to talk about,number one, the first thing that
we're going to talk about istaking investment losses and when
the market's down.
This is, we're recording thisin April 2025.
So the market's been reallyshocked over the last couple weeks
with the Trump tariff policyand kind of everything going on with
that.
And so one of the things thatwe get sometimes is clients calling
(04:38):
and saying, hey, should I takesome losses?
Right now seems like a greattime to sell some investments that
I've lost money on and get atax loss.
So I wanted to first discussthe concept of harvesting tax losses
or harvesting losses so thatyou can potentially write them off
on your taxes and kind of howthat works.
So then we can talk aboutmaybe, you know, whether or not it's
(05:01):
a good strategy to employ andif you're going to employ it, what
you need to know about it sothat you don't get hit in the back
of the head with the boomerang.
Yep.
All right.
So first off, the idea ofharvesting losses is this idea that
in your por, these are forafter tax portfolios.
These aren't IRAs or Roth.
These like brokerage accounts,money that you've already paid taxes
(05:22):
on.
But when you invest, you getcapital gains and you have to pay
taxes on dividends and stufflike that.
So the idea is, is that in adiversified portfolio, you're going
to have some things that havemade you money, and if you sold them,
you pay capital gains and thenyou're going to have some things
that lose money.
And if you sell them, you geta capital loss.
And so if you're going to havegains, so you sell an investment
with a gain, let's say it's$10,000, and you sell an investment
(05:44):
with a loss, let's say it's $10,000.
They would negate each otherand so you wouldn't pay any taxes.
So you could re investbasically without getting hit by
the tax bug.
Yep.
So that sounds like a prettycool idea.
Although there's some wrinklesto it.
And a lot of times peopledon't understand these wrinkles.
(06:04):
So the first wrinkle is what'scalled the wash sale rules.
And this is the IRS kind ofknows that people are going to try
to game the system like this, right?
So they're saying like, soSteve, pretend you had Apple stock
and your Apple stock is down 30%.
But you love Apple stock.
And so you say, okay, I'mgoing to sell it and get my tax loss,
(06:26):
you know, so I can set thatoff against other capital gains in
my tax return.
And then I'm gonna buy itright back.
Cause I really love it.
So I just want the tax loss,but I still wanna own it.
The IRS says no, you're notallowed to do that.
In fact, there's a thingcalled the wash sale rule, which
basically says if you buysubstantial, and a funny word here,
(06:46):
substantially.
And we'll get into why it says substantially.
If you buy substantially inthe same stock or security within
30 days before or after youtake your loss, loss is negated.
So basically the cost basisjust carries over.
So you could go through thatactivity and actually not get any
benefit for it.
And you could potentiallyreally hurt your portfolio by selling
(07:07):
something and then buying itback if there's time in between when
you sell it and when you buy it.
So there's some rules aroundwhether or not you can even take
a loss.
Just because you've sold itdoesn't mean that you automatically
get the loss.
There's also some stuff we'renot gonna get into today, but it's
with tax planning aboutwhether or not, for instance, if
you have more losses than youhave gained, you can only use so
(07:29):
much of the losses on your tax return.
The rest of it you're going tocarry forward.
So there's some other wrinklesin there, and I'm not certain everybody
understands those, but we'regoing to leave those for a different
day.
I want to talk about someother issues.
I mean, this, this one topic,we have four of them to go through
today.
This one could probably take awhole episode, you know.
Do you want more of Ditch the Suits?
(07:49):
Well, let's take a break totell you about our Patreon channel.
If you're wanting moreannouncements, notifications, even
access to prior seasons, youcan head to patreon.com, search ditch
the Suits and subscribe to our channel.
You'll get notifications ofall episodes right in your inbox.
So visit patreon.com searchditch the suits or head to our show
(08:09):
Notes where we got links toour channel.
Well, and I think this is oneof those things that in financial
literacy you hear Wash Salerule, you go to Google, you go to
Investopedia, you go to theFacebook chat groups, and it's a
cool idea.
So then people, I think, tryto execute it, but the way they execute
it is sometimes misaligned.
And so they're doing, hey, Iheard this thing.
(08:30):
I can get a savings on taxes.
I'm going to sell this stock.
And if you don't understandkind of what you just walk through,
you can really do detrimentalharm to yourself.
Because like you said, all ofthis is a game.
And you run a money business.
If you're not aware of therules and the IRS catches you, you
can be in, you know,potentially negate things and be
in trouble.
And the hard part is it's notjust your account the way that the
(08:51):
IRA is going to look at thewash sale rule.
So if you say, well, in thataccount I did not buy or sell anything
within the same 60 days, thatwas, again, substantially identical.
But it could be in a differentaccount you did, including a retirement
account.
It could be other people inyour household.
It could be dividend reinvesting.
That's huge.
I don't.
I don't think people reallyunderstand that.
(09:13):
It's complicated.
So there's layers to it.
Right.
Some people understand, like,the highest level, and then you do
something.
But to really understand thatyou can't just sell it to get a loss
and then buy it over here andhope nobody sees it.
And when you're also talkingabout family members, it's like,
okay, well, then I'll buy itin another member's account.
The IRS catches all of this.
What if your other familymember buys it?
(09:33):
You don't even know they'rebuying it.
So your spouse, I mean, whatthey're really talking about.
Same household.
Sure.
Right.
They're talking about control.
So you buy.
You sell one, and your spousebuys one.
Even if you don't know whatyour spouse is doing.
Not a good enough excuse.
They could still catch you on that.
Yeah.
Enforcement on this rule is alittle bit kind of murky.
Sure.
Because of all the differentaccounts and everything.
But you don't want to be the.
(09:54):
If you're a high earner or youhave a lot of assets, there's a chance
that eventually you're goingto get audited by the irs.
These are not things you wantkind of lurking around in there where
they can come in and say, oh,by the way, you shouldn't have done
that.
Here's some penalties.
So let's talk about that word,substantially identical stock and
security.
Because I think it makes sense.
If you buy Apple stock andsell Apple stock, and I want to buy
(10:15):
Apple stock back, it's prettyeasy to figure out Apple's Apple.
Yep.
But what if you buy a largecap S&P 500 mutual fund, you sell
it and you buy the S&P 500 ETFand you say, hey, they're different
securities.
Yeah.
But they're substantially identical.
They're buying the same things.
In fact, there's not reallygood case law on this, but there
(10:37):
is an argument that if youown, let's say recently, the market's
been going up and downdramatically, mostly driven by Nvidia
and some other tech stocks.
What if you sold those andbought the index and the movement
in the index is primarily dueto the movement of those stocks?
Is that a substantiallysimilar investment?
So one of the issues here isthat you might participate in a tax
(11:01):
loss harvesting program or doit yourself.
And you sell the Vanguard S&P500 fund and you buy the Fidelity
S&P 500 fund.
Doesn't count.
Not good.
Even if you buy it, sell thatVanguard S&P 500 fund and you buy
the Vanguard Large Cap GrowthFund, there might be so much overlap
in that fund that you couldactually blow yourself up with the
(11:21):
WASH rule.
So first and foremost, yougotta understand the WASH rule and
you gotta keep yourself fromgetting in trouble with the WASH
rule because you could end upgetting into tax time and figuring
out, oh, I can't take those losses.
I thought I had.
And if you've taken othergains against those losses, now maybe
you're stuck with the tax billand it could just be a shock.
I mean, if you have $100,000gains and aren't playing for it and
(11:42):
you're in a certain taxsituation, not, you know, I mean,
hey, here's, here's a $20,000tax bill.
Yeah.
And you can tell me if I'm wrong.
But basically what the IRS istrying to make sure is that you,
when you have a positionthat's down, don't sell it and turn
around and buy it to now getall the upside.
And then they don't get themoney that should be coming to them.
Right.
Because, well, what they'resaying is you don't get to use a
(12:04):
loss on something that youstill technically own just because
you jumped out of it.
If you jump out of it and jumpright back in it, you never really
had a break of ownership.
And you got to wait a periodof time.
And then once that period of time.
Is over would be, I think,about your house, you know, or a
real estate.
If you own a piece of realestate and, you know real estate,
you pay your taxes or get aloss on it when you sell it.
(12:26):
Well, imagine if you couldjust sell it for a day, get the loss,
and then jump back into it andstill own it.
What they're saying is youdidn't constructively give up control
of it.
So we're not giving you a loss.
You never lost control of the asset.
You've essentially maintainedit throughout.
But there's better reasonswhy, or not better reasons, other
(12:48):
reasons why I Think that thisis maybe a troubling area too.
And for this we're going totalk about market timing because
you might say, well, fine, Ijust won't buy the same thing.
So if I sell my Apple stock,I'll sit out of it for 30 days after
I, I sold it, right?
And I didn't, I didn't sell itor buy any before I sold it within
the 30 days.
So I'm good, I got the 60 daywindow or 61 day window.
(13:10):
I'm fine.
And so I, I just won't buy it back.
Well, I want you to thinkabout this.
From 1995 to 2024, 50% of thebest days in the stock market was
when the market was in bear territory.
What that means is themarket's doing crappy and your investments
are down.
You're feeling like, oh, I gotall these losses, I should sell these.
(13:31):
Either they don't work or Iwant the tax loss.
50% of the best days of thestock market since 1995 came when
it looked the worst.
28% were within the first twomonths of a bull market.
Here's what you don't knowabout a bull market.
You don't know you're in abull market till after you're in
the bull market.
So you're really talking about78% of the best days in the stock
market are when the stockmarket seems like it's on a daily
(13:54):
dumpster fire.
Well, and how many peoplemarket timing time in, time out of
the market?
I love this example becauseit's psychological to think that
you make more money inuptimes, but 50% of the best days
came when it was technicallyin bear territory.
Which when you have peoplepanicking because it's their life
(14:15):
savings, they don't think goodcan come from bad times.
Right.
And so I think maybe whatyou're alluding to is with the wash
sale, if you made a decision,stocks kind.
Of go like you have the marketand goes through bull and bear market.
Stocks kind of have their owncycle like that too.
So if you yank your money outof a stock, a really good stock,
you, you bought that companybecause you or mutual fund because
(14:36):
you really believed in it, right?
And if you don't believe inyour investments, you have no business
buying them.
You know, that's one lesson.
But so you bought it becauseyou really believe in it, and then
it goes down in price.
You say, you know what, let'sget out of it and let's hang out
for 61 day or 30 days after Iget r, let's, let's just hang out
and then we'll put it back inwhen it's done.
So you're, you're rolling thedice there, There's a se.
(15:00):
You know, 78% of the best daysin the stock market have come really
probably in that 30 to 60 daytime period that your was shell rule
is going to actually incorporate.
You, Your, your, yourlikelihood of missing one of those
big days is so big.
And so you would say, well,what if I just miss one day?
(15:21):
Okay, we got the numbers on this.
We brought the receipts this time.
If you missed just 30 of thebest days in the market from 1995,
so you got about 30 years.
If you missed the one bestday, essentially every year, you
would have made 83% less thanthe market.
That's crazy.
(15:41):
Which means, okay, you savedsome tax money, but you made 83%
less than the S&P 500.
Okay.
Your taxes weren't that much.
Okay, if you missed the 20best days.
So let's say you're a littlebit better at timing than average.
So you miss only the 20 best days.
73% less return.
Let's say you're really good.
You only miss ten of the best.
(16:02):
And I've been doing this along time.
I'm going to tell you what.
If you're trying to time it,myself included, we, you cannot,
you cannot hit it.
We can watch volatility, youcan watch price to value ratios,
which you can't figure out iswhat the headline is going to be
tomorrow and whether or notthat's going to go to market.
But if you miss the 10 bestdays, you lose half over half the
(16:24):
return of the s and P500 justby missing 10 days in the last 30
years.
So you, you do not, I don'tcare who you are, you do not have
a crystal ball to be able todo that.
And if you're going to sellyour stock and not participate with
it when it's down, you'reprobably going to miss the bet.
You, you have a highprobability you're going to miss
the best recovery days, whichis gonna mean that you're gonna get
(16:46):
a far less percentage of theactual return on that stock.
It's just, it's kind of like afool's game.
It feels good because you'redoing something, but the end of the
day, it just takes, you lose money.
Here's a couple more stats andthen we can move on.
Steve, the NASDAQ on April 9,2025 record day, 12.16% return.
(17:06):
That was wild.
So if you were tax lossharvesting and you had sold the day
before because the market wasway down, you wanna get that loss
and you didn't get your moneyback in the very following day.
Yep.
You missed out on a 12.16% return.
That's a year sometimes.
Yes.
But here, here's the key.
If you have individualinvestments, so you're like, I use
individual investments alittle bit easier tax.
(17:28):
All right.
Stocks themselves are alwaysgoing to have more volatility than
the index.
Metta 15% on, on April 9th.
So it did 3% more than the NASDAQ.
Tesla 22% that day.
Nvidia 18%.
Apple 15%.
American Airlines over 22%.
So when you look at trying totime this with an individual stock,
(17:57):
so you go, okay, well, I soldApple and I bought the Nasdaq because
I was just trying to, youknow, I realized I got to sit there.
So you sold something that wasway down.
You bought something that made12, but you missed something that
made 15.
And so when you start lookingat the totality of trying to manage
a portfolio and trying toreact and make good, prudent decisions,
(18:18):
all of a sudden you're makinginvestment decisions that are affecting
whether or not you can makegood returns based solely on whether
or not you want to get a taxloss this year.
It's a really interesting wayto make investment decisions.
Well, and again, when thisepisode comes out, right, we're recording
in April, so I think when youthrow out historical numbers, if
(18:41):
you're not in it, it's hard tolook back to the past and go, oh,
yeah, I remember that.
What just happened in aprilwith that 12.16 we all experienced.
And so there are peoplelistening to ditch the suits today
that felt pain that day thatthey were out of the market.
And I, I know, Travis,sometimes it's not even our own decision
making.
(19:01):
We just went through tax season.
Sometimes there are taxprofessionals that are trying to
save taxes.
And so they're looking at whatindividuals hold.
And they're not investmentmanagers, they're not financial planners.
They're just doing.
I remember a scenario yearsago where they just wanted to help
a client save money and toldthem, let's, let's sell these positions,
(19:21):
right?
So you're dealing with aprofessional going, okay, that makes
sense for taxes.
Yeah.
If you're not dealing, though,with a financial planner that's looking
at it and saying, is saving a$10,000 loss write off for Apple
or For Tesla, Nvidia reallyworth it in the long run.
And so I wonder how manypeople are also trying to do the
right thing, maybe gettingmisguided advice from.
(19:43):
I think, you know, you Googleand they talk about tax and there's
ways that tax loss harvestingdoes good.
And I think that there's waysof tax loss harvesting kind of paint
you into a corner.
And that's the whole, youknow, the tax loophole versus the
tax trap.
Yep.
And I guess here's my adviceon tax loss harvesting is if you're
going to use the strategy, youneed to make sure that when you're
(20:04):
selling investments thatyou're mapping them over to a very
similarly jargon.
I know, but correlatedinvestment with the same upward potential.
So when you look at the price,the value and the business characteristics,
people forget about.
You know, these are businesses.
You can have an amazing priceto value ratio that makes it look
(20:25):
like a great buy.
But you got, you know, majorturmoil and leadership at the company.
And you get a question, okay,just because the price to value is
split out, is this businessactually capable of recovering at
its price to where it's goingor is the price a precursor to probably
where the value is going?
So, you know, the price iskind of a leading indicator sometimes
of where things are going, butit's not, it's not, it's not going
(20:48):
to give you the concrete answer.
So you have to understand thebusiness too.
So when you're selling onecompany, so if you were to sell something
like Apple, you would need to,to move those funds to something
with a similar profile thatalso, let's say, is experiencing
the same level of volatility.
So if Apple was priced tovalue, let's say that you could buy
it for 80 cents on the dollar,you would not want to sell that and
(21:10):
buy something that was, thatwas selling at 110 cents on the dollar.
Just because they're both,they could both be down 30%.
One just started from a higher point.
Right.
And so you would want to makesure that, oh, I've sold something
that is on a, you know,selling at 80 cents on the dollar,
and I've bought somethingthat's around 80 cents on the dollar
and it's down for pretty muchthe same reason and it's got a high
(21:33):
likelihood, it kind of matchesup with the other one of recovery.
Yeah.
So there's, there's, that'snot a quick and easy decision.
There's a lot of research thatgoes into that.
So you not only have to bewatching the stocks that you invest
in.
But you have to be watchingthe stocks you don't invest in that
you would invest in if youcouldn't invest in the stocks that
you do invest in.
So you start to, you start tosee where professional management
(21:56):
comes in, but you can alsostart to see where, you know, I,
a lot of times people say,well, I've done really good with
investing.
It's like.
But compared to what?
Yeah, you know, what are youcomparing yourself to?
Oh, Well, I averaged 7%.
Well, if everybody else in thetime period averaged 9, you did okay.
You didn't do really well.
And that's what we're tryingto do here is let's make sure that
we don't make, you know, getcaught in this tax boomerang.
(22:16):
Well, and to make, let me helpthe listener who might sound like
maybe we're contradictingourselves because they don't understand.
So when we talked earlierabout the tax loss harvesting in
a substantial position, Ibelieve what you were trying to say
is if you sell Apple as anindividual security and you want
to turn around and buy an ETFthat holds Apple as a major holding,
that is a substantial thing.
(22:37):
Right.
In this case, you're talkingabout not quite.
When it comes to one securityversus a fund, the argument is you'd
have to have the majority ofthe performance.
So if the majority of thenegative performance is coming from
the largest capitalized stocksand those happen to be the ones that
(22:59):
you sold, and they make up themain driver of the up and down in
that fund, then that could be,that's not going to map over one
stock.
But if you had Nvidia, Apple,Microsoft, Tesla, Facebook, Netflix,
and then you had a tech fundand it was basically map, you know,
performance was almostperfectly correlated with those that
(23:21):
could be considered asubstantially, you know, and again,
there's, there's not a lot ofIRS enforcement on that right now.
But it's kind of like one ofthose things.
Just because you can speedand, you know, a cop's not looking
doesn't mean it's a great idea.
Right.
Great analogy.
Well, and I think to yourpoint, then what you're talking about
is making sure you have aplan, right?
You want to take a loss, butthen what?
Where are we going to put in?
If you're like, well, how do Iknow what to do?
(23:42):
A couple episodes ago, andit's been fun connecting with Ditch
the Suits listeners, we hadput out Travis's kind of top 10 investment
guidelines.
We've had a number oflisteners reach out to us and say,
hey, how do I get a copy ofthat PDF?
I think sometimes we talkabout very high level things and
we try to bring it to the massto help you understand that you can
make money buying companies,but you have to understand their
competitive advantage, theirleadership, their moats.
(24:03):
So we have a PDF that ifyou're like, hey, I want more information
guys, what do I do?
Reach out to us.
We'll, we'll send that PDF andit's just Travis's 10.
Kind of putting purpose behindwhy we're buying, what we're buying.
Yep.
So moving on because we gotthree more things that we got to
hit.
The.
What's our next one here?
The next issue is people willtry to reduce their income.
(24:25):
So you go to this, like yousaid, you go to a well meaning CPA
or accountant and they say,hey, look man, you qualify to put
some money in a retirementaccount, you get a tax deduction.
So if you put in, you know,five grand this year, we'll save
you a thousand dollars intaxes or something.
And that sounds wonderful.
Or maybe you're like, I hatepaying income taxes and I'm in my
50s, my peak earning years,I'm going to keep maxing out that
retirement, that 401k account,so I can get this big tax deduction.
(24:49):
One of the issues that comeswith that is, yes, you're reducing
your income taxes, but do youknow what your future income taxes
look like?
And somebody can say, nobodyknows their future.
We get pretty darn close whenyou do a projection because the one
thing with IRAs, so numberone, you can project your lifestyle
and your budget and yourexpenses out.
And especially, you know, whenyou're 30, it's hard to figure out
where you're gonna be whenyou're 60, but when you're 55, we
(25:12):
can pretty much figure outwhere you're gonna be in your 60s.
It's a little bit easier to do.
And so we say, okay, this iswhere we look like we're gonna be
in our 60s and 70s.
And we could come up with, youknow, oh, you're going to need money
from that retirement or not,retirement account or not.
And this is how long it'sgoing to be deferred.
And if you don't take moneyout, this is how much you're going
to, this is your projected RMDthat you're going to have.
(25:32):
And you can even underestimatethat and still come up with some
pretty wild numbers, at leastfor our clientele.
Right.
We get some Clients in that,you know, let's say 1 to $12 million
range and a bunch of monies inthose IRA 401ks.
I think when you get, when youhave, when you have clients over
the 12 million, a lot of timesthe IRAs and 401ks are a much smaller
(25:54):
part of it, right?
Because they've hadbusinesses, other things going on.
But in that 1 to 12 millionarea, normally you have some big
retirement account balancesand a lot of times that money's not
necessarily needed for aliving or not all of it.
You're not taking, you're notmaxing out those accounts as far
as withdrawing money when youhit retirement.
That's why you were able toaccumulate that much money.
(26:16):
Well, when you're in your 70s,the IRS says, hey, you're going to
take this money out whetheryou want to or not, right?
Or if you don't, your kids aregoing to have to take it out.
But if you take it out, youcan take it out over your lifetime.
If your kids have to take itout, they got to take it out in 10
years.
So you have this tax bomb thatis about to go off on your life or
your kid's life.
And so if you defer, you endup with 3, 4, 5 million dollars in
(26:37):
an IRA or 401k or more.
And you're like, I'm nottaking that till I have to.
You could go from being inlike a 12 or 22% bracket to the max
bracket.
I mean you, you could justblitz, right?
We've, we've seen, we haveclients that have three four hundred
thousand dollar RMDs.
And this is pre tax accounts, right?
So as your 401ks IRAs, pretax, we're not talking about Roth
IRAs or things like that.
(26:58):
So these are people that arecash poor later in return.
Well, not necessarily cash poor.
What it means is, is thatpeople have deferred a lot of money
to get the tax deductions, right?
When you, let's say you're ahiring, let's say you're an engineer
or a doctor or something likethat, and you're making 200 grand
a year or 300 or 400 orwhatever you're making and you could
(27:20):
save, just for easy math, 30%of your money by putting in a retirement
account, right?
That's why people do it,because it's a huge amount of money
in those higher tax brackets.
Well, the problem is in thefuture you got to take it out.
So what if you saved it at the22 or 24% tax bracket, but now you
have to take it out at thehigher tax brackets in retirement.
(27:43):
That's the problem.
There's a delta there thatgets you.
So you're not getting as muchfor the tax.
You're actually paying for thetax deduction later on.
So the point is that youshouldn't always take the tax deduction.
Now, there's a thing called aRoth, and what the Roth does is it
says you don't get a tax deduction.
Now, Steve, but if you putmoney in here, you never have to
pay taxes again.
(28:05):
Or you also have the option ona lot of 401 plans now.
So you can max out your 401k,but we're not going to give you a
tax deduction.
You're still going to pay thatfull 24%.
You're not going to get thetax deduction.
But when you take that moneyout and all the money you've made
on it, it's going to be taxfree for you.
So the issue is if, you know,if you've already gotten to the point
(28:25):
where you're going to havethis tax bomb problem, and this is
where financial projectionscome in and tax planning comes in.
If you look in that crystalball and you go, holy cow, I'm going
to have a tax bond problem,stop taking the tax deductions today.
I know it feels good to getthe tax deduction.
You're sacrificing a lot.
First of all, you're gonnaneed a tax deduction on money you
don't need.
Right?
Because you're putting in anIRA and you're saying, I'm probably
(28:46):
not gonna use that money.
So you're getting a taxdeduction on money you don't need,
which locks it up and itcreates a bigger tax problem in the
future versus saying, look, ifI don't need the money, then I'm
gonna pay the taxes now.
We'll never have to deal withit again, no matter who inherit,
if my kids inherit it, if Iwant to use it, whatever.
So people miss that all the time.
(29:06):
I get my zero percent.
You know, I, I save, I save mytaxes, but I end up owing a big tax
bill in the future.
It's just, it's just a sillykind of thing that, that people.
But the power of projections,if you've never seen this projected
out, it's powerful to takepeople who feel stuck and then show
them that there's hope.
But you got to make some very.
Intentional decisions forclients with a couple million Dollars.
In this type of scenario,you're talking hundreds of thousands
(29:28):
of dollars.
Different difference.
It's crazy.
Possibly.
I looked at one the other day.
It was about a million and ahalf dollars.
The.
The difference between, youknow, it depends on how much you
have.
So everybody's gonna be in adifferent situation.
But it was a phenomenal difference.
It's a substantial.
In putting the money in theright account to begin with and understanding
if you should take a taxdeduction or not.
Yep.
(29:49):
Congress is not stupid.
When they give you a taxdegree, normally, there's a caveat
to when they said, okay, youdon't have to take your RMDs until
you're 75.
Do not for a second think theywere thinking, wow, you know, the
federal government has toomuch money.
What they did is they createda scenario for the people who do
not need their RMDs.
(30:10):
So these are the people withmore assets.
They allowed you to waitlonger to take the money out, which
means the money that you haveto take out, when you're forced to,
you have to take out a higherpercentage, and the balance will
be bigger.
So you have to take out ahigher percentage of a bigger balance,
which means more will be in ahigher tax bracket, more money will
be inherited by the kids.
More money will be forced tobe cashed out within 10 years.
(30:31):
They are.
The federal government ismaking money off of people not understanding
how this strategy works.
Two more.
Two more.
You tired yet?
Hang with us, folks.
Two more.
We're gonna bring it home.
This is intense.
It's been a good one, though.
All right.
The other two are a little bitquicker, too.
Refusing to take capital gain gains.
I can see the argument forthis in both directions, the problem.
(30:53):
So what I mean by this is youhave a stock that's done really,
really well for you over theyears, but you don't want to sell
it because you'll have to pay cap.
You'll have to pay capitalgains taxes on it.
Okay?
There's two ways out ofcapital gains taxes for you, really.
You could die, or you can givethe money away.
So if.
And I talk to clients all the time.
They're, like, in their 50s or 60s.
Like, well, if I don't.
If I don't sell this stock, mykids will inherit it.
(31:15):
Okay?
The average life cycle of aFortune 500 company is less than
15 years.
So when you're 60 and you'resaying, I'm gonna just leave the
stock to my kids, what you'resaying is you're either gonna die
within the next 15 years oryou're gonna bet that that company
is well above average.
And that's just not the natureof corporations, not in today's world.
(31:39):
So the problem is, is that youmay want to do something with that
money, or if you sit on thatcompany, that company could become
a shell of what it once was.
And so you basically goingbackwards when you account for inflation
and everything, or you couldhave even negative returns.
I've seen people during 2008because I was new to the industry
(31:59):
in 2007.
So in 2008, I had a clientwith a million dollars of bank of
America.
And after 2008, he had afraction of that.
And they didn't sell itbecause of the capital gains.
And then they gave it all backto the stock market.
God.
Someplace.
And we've had over the years,Apple employees that were gifted
(32:20):
stock early on that just tookoff in after tax accounts.
Nvidia if you got in at theright time, taken off and so you
see this huge capital gain andit's like, what do I do with it?
The blessing is you've mademoney, but now you feel trapped.
So you got two options.
Die or give it away.
So just, just be aware.
And maybe, maybe what you dois you look at a comb.
Yeah.
(32:41):
Selling some of it and doingsome charitable gifting or something.
Gifting.
And kind of knocking down.
Knocking down some of thetaxes on that.
And then the last one that we had.
You've kind of touched on thisa little bit.
Yeah.
Was whether or not you shouldlive in that.
Kicking the can down the roadto live in 0%.
This happens with retirees allthe time.
(33:02):
You retire.
You know, sometimes peopleretire early in their 50s, where
you're in your 60s and youretire and you can actually get to
the 0% tax bracket because yougot your mortgage pay, everything's
paid off, you're in good shapeand you got your Social Security,
maybe a little bit of pensionand a bunch of cash in the bank.
And that's more than what you need.
You know, you got good cashflow on Social Security, unless your
(33:24):
income's over a certainthreshold, isn't going to be taxed.
So it's very easy for you tokind of get to that 0% tax bracket
and be like, I'm good.
Peace out, yo.
I don't want to do any of this.
But if you got that $2 millionin the IRA or the 401k and you're
going to let that bake fromthe time you're in your late 50s
to the time you're in yourmid-70s, that 2 million is going
(33:44):
to turn into probably 4million or something like that, depending
on what your investmentstrategy is.
And then you're going to havethis much higher RMD in the future.
What if you just, you hatepaying taxes.
If you looked at a projectionwith a what if scenario of what if
I just pay up to what if Ijust filled the 12% tax bracket,
right?
So I'm not talking aboutgetting crazy, right?
(34:04):
What if I just filled the 12%tax bracket?
And what I'm going to do isI'm going to convert my IRA money
over to my Roth.
So I'm going to pay the 12%taxes now, and I'm going to be in
well above the 12% bracket inthe future, but I'm going to pay
the 12% now so that I neverhave to pay any more taxes on it.
Then I can also do another thing.
I can shift my portfolio.
(34:25):
I can put the most aggressiveinvestments in the Roth so I can
displace the growth from theIRA to the Roth.
So I might still average my.
Let's pretend you average 8.5%a year.
I might still average my 8.5%a year.
But when you look at the Roth,maybe the roth is returning 10 and
the IRA is returning seven,and so it averages out at eight and
(34:48):
a half.
So you can do some things togoose the future benefit of that
and get an even better return.
But when you have a zeropercent tax bracket, you should not
be rejoicing.
You should be saying, great,how can I, how can I basically stick
it to the man?
How can I move money aroundhere and, and pay a tiny tax bill
(35:08):
compared to what I'll pay inthe future and get out of that future
tax bill for me, my kids, mygrandkids, the next generation, when,
as soon as you see zero taxbracket, it's not dancing.
You should be dancing for thefact that, bam, I can move a ton
of money around and make a sixfigure or bigger difference for the
(35:28):
future of my family.
You never want to just belike, that's great.
I hate paying taxes.
I'm just going to move on.
You really actually want topay a little bit of taxes if you
have that kind of money?
Some people literally willhave assets that there's no deferred
tax on it.
But if you have assets withdeferred tax, that's when you want
to take, take advantage ofthat stuff.
That's also where, by the way,with that, I don't want to sell my
(35:51):
investments because thecapital gains people don't understand
how capital capital gains work.
If you're in that 0% bracket,you're not going to pay anything
on your capital gains anyway,other than maybe state level depending
on what state you live in.
So you should be looking atand saying, okay, that's a perfect
year to max out that 0%capital gains bracket.
So again, it's justunderstanding how these things work.
But these are traps thatpeople fall into.
(36:13):
It feels good, all these things.
That feels good.
Yep.
But at the end of the day, ithurts you.
Four Traps Travis and I arehere to help you get the most from
your money in life.
A little bit longer anepisode, digest it, go back re listen
before traps that if you canunderstand how these work, can set
you up for getting the mostfrom your money in life.
Until then, thanks forstopping by.
Ditch the Suits thanks forchecking out Ditch the Suits.
(36:35):
Be sure to write a review ordrop a comment about this episode.
And if you want more likethis, head over to ditchesuits.com
you can send us a message andget in touch.
Let us know how we can helpand be sure to share any topics you'd
be interested in having uscover on the show.
We're here to help you get themost from your money in life.
Thanks for being our guest andchecking out Ditch the Suits.
Foreign.
Welcome to Ditch the Suitspodcast, where we share insights
nobody in the financialservices industry wants you to know
about.
We're here to help you get themost from your money in life.
So buckle up and welcome toDitch the Suits.
(00:21):
Hey, Steve, wouldn't it begreat if we lived in a world where
we don't have to pay anyincome taxes?
It'd be awesome.
How many times have you heard,and especially recently, it seems
like with the politics, howmany times have you heard that rich
people don't pay their fairshare of income taxes?
Quite a bit.
Yeah.
So, you know, one of thethings that we're gonna talk about
today.
Well, all we're gonna talkabout today really is taxes.
(00:45):
But four common tax reductionmistakes that people make.
But I bring up the richpeople, and I kind of bring up the
world with no income taxesbecause there's tax loopholes, and
everybody hears about the loopholes.
And then there's also tax traps.
And I think people sometimesget confused between, okay, there's
(01:05):
a legal way to do things andthen there's a way that kind of looks
smart, but in the end doesn'tturn out to be so smart.
That would be the trap.
Interesting.
Yeah.
So I want people to thinkabout loopholes are kind of a spot
that's created or allowed tolegally exist because of the way
that the law is written.
(01:25):
And maybe you could say, boy, those.
Those interesting politicians,they just didn't know what they were
doing or did they know whatthey were doing?
You never know.
But the whole thing is, isthat there's rules to the game.
And taxes is a.
Is a giant rule book.
Yep.
In the game of life.
And you've got to figure outhow to, you know, handle your money
(01:46):
as best as you can withinthose tax rules.
And so there's the legal ones.
And then the tax traps arewhat happen when people actually
don't understand how and whento apply the different tax that other
people are trying to use thatthey call loopholes.
And instead of finding aloophole, they end up getting smacked
by the tax collector, like, inthe back of the head.
Because tax is like a boomerang.
(02:07):
If you do it wrong, it's goingto come full circle and get you later.
So you could be like, oh, thisis so wonderful.
I'm at the 0% tax bracket, andI see.
I see stuff online all the time.
You can live in the 0% taxbracket, too.
Wouldn't that be great?
You know, there's not much,you know, the.
The reality of a free lunch iseventually you're going to starve
(02:29):
to death.
You know, like, like, youknow, it's.
I don't know if that.
I don't know if that analogy.
No, it worked.
I'm with you.
Did it kind of work?
All right, so in this episodeanyway, we're going to get into the
four misconceptions that Ithink could actually change people's
lives if they betterunderstood how these tax things,
these tax strategies orloopholes kind of work.
Yeah, well.
And I think we've done a greatjob of talking about there's bad
(02:51):
decisions and then there'sopportunity loss when you don't understand
the rules of the game.
And this is ditch the suits.
I'm Steve Campbell, seniormarketing director at Seed Planning
Group, along with Travis Moss,who you've been hearing from our
CEO at Seed.
And Seed is a fee onlyfinancial planning firm where we
have a fiduciary obligation toserve our clients best interests.
And this show is all about usbringing years of experience, conversations
(03:11):
we're having internally tobring to you to really help you get
the most from your money in life.
Let's take a quick break tohear a word from your sponsor.
This episode is brought to youby Seed Planning Group.
If you're looking for a lifegiving experience working with a
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Seed is a fee only financialplanning firm with a fiduciary obligation
(03:32):
to put your best interests first.
If your goal is financialfreedom and independence without
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Today you can visit www.seedpg.com.
that's www.seedpg.com.
and, and the best part, youcan schedule a free consultation
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(03:54):
for you.
Yeah.
And so we're recording this.
You can go onto YouTube andyou can see us recording this.
And I just.
We're in our new studios.
We just started the season.
I just realized I have atendency to slouch and it kind of
makes me.
Yeah, it makes you be accountable.
And Patreon head over toPatreon, head of Patreon, Ditch the
suits.
That's where you can watch allthese videos.
Yeah, it was looking like Ihad a food baby there.
(04:15):
All right, so anyway, back tothe taxes.
We're going to talk about,number one, the first thing that
we're going to talk about istaking investment losses and when
the market's down.
This is, we're recording thisin April 2025.
So the market's been reallyshocked over the last couple weeks
with the Trump tariff policyand kind of everything going on with
that.
And so one of the things thatwe get sometimes is clients calling
(04:38):
and saying, hey, should I takesome losses?
Right now seems like a greattime to sell some investments that
I've lost money on and get atax loss.
So I wanted to first discussthe concept of harvesting tax losses
or harvesting losses so thatyou can potentially write them off
on your taxes and kind of howthat works.
So then we can talk aboutmaybe, you know, whether or not it's
(05:01):
a good strategy to employ andif you're going to employ it, what
you need to know about it sothat you don't get hit in the back
of the head with the boomerang.
Yep.
All right.
So first off, the idea ofharvesting losses is this idea that
in your por, these are forafter tax portfolios.
These aren't IRAs or Roth.
These like brokerage accounts,money that you've already paid taxes
(05:22):
on.
But when you invest, you getcapital gains and you have to pay
taxes on dividends and stufflike that.
So the idea is, is that in adiversified portfolio, you're going
to have some things that havemade you money, and if you sold them,
you pay capital gains and thenyou're going to have some things
that lose money.
And if you sell them, you geta capital loss.
And so if you're going to havegains, so you sell an investment
with a gain, let's say it's$10,000, and you sell an investment
(05:44):
with a loss, let's say it's $10,000.
They would negate each otherand so you wouldn't pay any taxes.
So you could re investbasically without getting hit by
the tax bug.
Yep.
So that sounds like a prettycool idea.
Although there's some wrinklesto it.
And a lot of times peopledon't understand these wrinkles.
(06:04):
So the first wrinkle is what'scalled the wash sale rules.
And this is the IRS kind ofknows that people are going to try
to game the system like this, right?
So they're saying like, soSteve, pretend you had Apple stock
and your Apple stock is down 30%.
But you love Apple stock.
And so you say, okay, I'mgoing to sell it and get my tax loss,
(06:26):
you know, so I can set thatoff against other capital gains in
my tax return.
And then I'm gonna buy itright back.
Cause I really love it.
So I just want the tax loss,but I still wanna own it.
The IRS says no, you're notallowed to do that.
In fact, there's a thingcalled the wash sale rule, which
basically says if you buysubstantial, and a funny word here,
(06:46):
substantially.
And we'll get into why it says substantially.
If you buy substantially inthe same stock or security within
30 days before or after youtake your loss, loss is negated.
So basically the cost basisjust carries over.
So you could go through thatactivity and actually not get any
benefit for it.
And you could potentiallyreally hurt your portfolio by selling
(07:07):
something and then buying itback if there's time in between when
you sell it and when you buy it.
So there's some rules aroundwhether or not you can even take
a loss.
Just because you've sold itdoesn't mean that you automatically
get the loss.
There's also some stuff we'renot gonna get into today, but it's
with tax planning aboutwhether or not, for instance, if
you have more losses than youhave gained, you can only use so
(07:29):
much of the losses on your tax return.
The rest of it you're going tocarry forward.
So there's some other wrinklesin there, and I'm not certain everybody
understands those, but we'regoing to leave those for a different
day.
I want to talk about someother issues.
I mean, this, this one topic,we have four of them to go through
today.
This one could probably take awhole episode, you know.
Do you want more of Ditch the Suits?
(07:49):
Well, let's take a break totell you about our Patreon channel.
If you're wanting moreannouncements, notifications, even
access to prior seasons, youcan head to patreon.com, search ditch
the Suits and subscribe to our channel.
You'll get notifications ofall episodes right in your inbox.
So visit patreon.com searchditch the suits or head to our show
(08:09):
Notes where we got links toour channel.
Well, and I think this is oneof those things that in financial
literacy you hear Wash Salerule, you go to Google, you go to
Investopedia, you go to theFacebook chat groups, and it's a
cool idea.
So then people, I think, tryto execute it, but the way they execute
it is sometimes misaligned.
And so they're doing, hey, Iheard this thing.
(08:30):
I can get a savings on taxes.
I'm going to sell this stock.
And if you don't understandkind of what you just walk through,
you can really do detrimentalharm to yourself.
Because like you said, all ofthis is a game.
And you run a money business.
If you're not aware of therules and the IRS catches you, you
can be in, you know,potentially negate things and be
in trouble.
And the hard part is it's notjust your account the way that the
(08:51):
IRA is going to look at thewash sale rule.
So if you say, well, in thataccount I did not buy or sell anything
within the same 60 days, thatwas, again, substantially identical.
But it could be in a differentaccount you did, including a retirement
account.
It could be other people inyour household.
It could be dividend reinvesting.
That's huge.
I don't.
I don't think people reallyunderstand that.
(09:13):
It's complicated.
So there's layers to it.
Right.
Some people understand, like,the highest level, and then you do
something.
But to really understand thatyou can't just sell it to get a loss
and then buy it over here andhope nobody sees it.
And when you're also talkingabout family members, it's like,
okay, well, then I'll buy itin another member's account.
The IRS catches all of this.
What if your other familymember buys it?
(09:33):
You don't even know they'rebuying it.
So your spouse, I mean, whatthey're really talking about.
Same household.
Sure.
Right.
They're talking about control.
So you buy.
You sell one, and your spousebuys one.
Even if you don't know whatyour spouse is doing.
Not a good enough excuse.
They could still catch you on that.
Yeah.
Enforcement on this rule is alittle bit kind of murky.
Sure.
Because of all the differentaccounts and everything.
But you don't want to be the.
(09:54):
If you're a high earner or youhave a lot of assets, there's a chance
that eventually you're goingto get audited by the irs.
These are not things you wantkind of lurking around in there where
they can come in and say, oh,by the way, you shouldn't have done
that.
Here's some penalties.
So let's talk about that word,substantially identical stock and
security.
Because I think it makes sense.
If you buy Apple stock andsell Apple stock, and I want to buy
(10:15):
Apple stock back, it's prettyeasy to figure out Apple's Apple.
Yep.
But what if you buy a largecap S&P 500 mutual fund, you sell
it and you buy the S&P 500 ETFand you say, hey, they're different
securities.
Yeah.
But they're substantially identical.
They're buying the same things.
In fact, there's not reallygood case law on this, but there
(10:37):
is an argument that if youown, let's say recently, the market's
been going up and downdramatically, mostly driven by Nvidia
and some other tech stocks.
What if you sold those andbought the index and the movement
in the index is primarily dueto the movement of those stocks?
Is that a substantiallysimilar investment?
So one of the issues here isthat you might participate in a tax
(11:01):
loss harvesting program or doit yourself.
And you sell the Vanguard S&P500 fund and you buy the Fidelity
S&P 500 fund.
Doesn't count.
Not good.
Even if you buy it, sell thatVanguard S&P 500 fund and you buy
the Vanguard Large Cap GrowthFund, there might be so much overlap
in that fund that you couldactually blow yourself up with the
(11:21):
WASH rule.
So first and foremost, yougotta understand the WASH rule and
you gotta keep yourself fromgetting in trouble with the WASH
rule because you could end upgetting into tax time and figuring
out, oh, I can't take those losses.
I thought I had.
And if you've taken othergains against those losses, now maybe
you're stuck with the tax billand it could just be a shock.
I mean, if you have $100,000gains and aren't playing for it and
(11:42):
you're in a certain taxsituation, not, you know, I mean,
hey, here's, here's a $20,000tax bill.
Yeah.
And you can tell me if I'm wrong.
But basically what the IRS istrying to make sure is that you,
when you have a positionthat's down, don't sell it and turn
around and buy it to now getall the upside.
And then they don't get themoney that should be coming to them.
Right.
Because, well, what they'resaying is you don't get to use a
(12:04):
loss on something that youstill technically own just because
you jumped out of it.
If you jump out of it and jumpright back in it, you never really
had a break of ownership.
And you got to wait a periodof time.
And then once that period of time.
Is over would be, I think,about your house, you know, or a
real estate.
If you own a piece of realestate and, you know real estate,
you pay your taxes or get aloss on it when you sell it.
(12:26):
Well, imagine if you couldjust sell it for a day, get the loss,
and then jump back into it andstill own it.
What they're saying is youdidn't constructively give up control
of it.
So we're not giving you a loss.
You never lost control of the asset.
You've essentially maintainedit throughout.
But there's better reasonswhy, or not better reasons, other
(12:48):
reasons why I Think that thisis maybe a troubling area too.
And for this we're going totalk about market timing because
you might say, well, fine, Ijust won't buy the same thing.
So if I sell my Apple stock,I'll sit out of it for 30 days after
I, I sold it, right?
And I didn't, I didn't sell itor buy any before I sold it within
the 30 days.
So I'm good, I got the 60 daywindow or 61 day window.
(13:10):
I'm fine.
And so I, I just won't buy it back.
Well, I want you to thinkabout this.
From 1995 to 2024, 50% of thebest days in the stock market was
when the market was in bear territory.
What that means is themarket's doing crappy and your investments
are down.
You're feeling like, oh, I gotall these losses, I should sell these.
(13:31):
Either they don't work or Iwant the tax loss.
50% of the best days of thestock market since 1995 came when
it looked the worst.
28% were within the first twomonths of a bull market.
Here's what you don't knowabout a bull market.
You don't know you're in abull market till after you're in
the bull market.
So you're really talking about78% of the best days in the stock
market are when the stockmarket seems like it's on a daily
(13:54):
dumpster fire.
Well, and how many peoplemarket timing time in, time out of
the market?
I love this example becauseit's psychological to think that
you make more money inuptimes, but 50% of the best days
came when it was technicallyin bear territory.
Which when you have peoplepanicking because it's their life
(14:15):
savings, they don't think goodcan come from bad times.
Right.
And so I think maybe whatyou're alluding to is with the wash
sale, if you made a decision,stocks kind.
Of go like you have the marketand goes through bull and bear market.
Stocks kind of have their owncycle like that too.
So if you yank your money outof a stock, a really good stock,
you, you bought that companybecause you or mutual fund because
(14:36):
you really believed in it, right?
And if you don't believe inyour investments, you have no business
buying them.
You know, that's one lesson.
But so you bought it becauseyou really believe in it, and then
it goes down in price.
You say, you know what, let'sget out of it and let's hang out
for 61 day or 30 days after Iget r, let's, let's just hang out
and then we'll put it back inwhen it's done.
So you're, you're rolling thedice there, There's a se.
(15:00):
You know, 78% of the best daysin the stock market have come really
probably in that 30 to 60 daytime period that your was shell rule
is going to actually incorporate.
You, Your, your, yourlikelihood of missing one of those
big days is so big.
And so you would say, well,what if I just miss one day?
(15:21):
Okay, we got the numbers on this.
We brought the receipts this time.
If you missed just 30 of thebest days in the market from 1995,
so you got about 30 years.
If you missed the one bestday, essentially every year, you
would have made 83% less thanthe market.
That's crazy.
(15:41):
Which means, okay, you savedsome tax money, but you made 83%
less than the S&P 500.
Okay.
Your taxes weren't that much.
Okay, if you missed the 20best days.
So let's say you're a littlebit better at timing than average.
So you miss only the 20 best days.
73% less return.
Let's say you're really good.
You only miss ten of the best.
(16:02):
And I've been doing this along time.
I'm going to tell you what.
If you're trying to time it,myself included, we, you cannot,
you cannot hit it.
We can watch volatility, youcan watch price to value ratios,
which you can't figure out iswhat the headline is going to be
tomorrow and whether or notthat's going to go to market.
But if you miss the 10 bestdays, you lose half over half the
(16:24):
return of the s and P500 justby missing 10 days in the last 30
years.
So you, you do not, I don'tcare who you are, you do not have
a crystal ball to be able todo that.
And if you're going to sellyour stock and not participate with
it when it's down, you'reprobably going to miss the bet.
You, you have a highprobability you're going to miss
the best recovery days, whichis gonna mean that you're gonna get
(16:46):
a far less percentage of theactual return on that stock.
It's just, it's kind of like afool's game.
It feels good because you'redoing something, but the end of the
day, it just takes, you lose money.
Here's a couple more stats andthen we can move on.
Steve, the NASDAQ on April 9,2025 record day, 12.16% return.
(17:06):
That was wild.
So if you were tax lossharvesting and you had sold the day
before because the market wasway down, you wanna get that loss
and you didn't get your moneyback in the very following day.
Yep.
You missed out on a 12.16% return.
That's a year sometimes.
Yes.
But here, here's the key.
If you have individualinvestments, so you're like, I use
individual investments alittle bit easier tax.
(17:28):
All right.
Stocks themselves are alwaysgoing to have more volatility than
the index.
Metta 15% on, on April 9th.
So it did 3% more than the NASDAQ.
Tesla 22% that day.
Nvidia 18%.
Apple 15%.
American Airlines over 22%.
So when you look at trying totime this with an individual stock,
(17:57):
so you go, okay, well, I soldApple and I bought the Nasdaq because
I was just trying to, youknow, I realized I got to sit there.
So you sold something that wasway down.
You bought something that made12, but you missed something that
made 15.
And so when you start lookingat the totality of trying to manage
a portfolio and trying toreact and make good, prudent decisions,
(18:18):
all of a sudden you're makinginvestment decisions that are affecting
whether or not you can makegood returns based solely on whether
or not you want to get a taxloss this year.
It's a really interesting wayto make investment decisions.
Well, and again, when thisepisode comes out, right, we're recording
in April, so I think when youthrow out historical numbers, if
(18:41):
you're not in it, it's hard tolook back to the past and go, oh,
yeah, I remember that.
What just happened in aprilwith that 12.16 we all experienced.
And so there are peoplelistening to ditch the suits today
that felt pain that day thatthey were out of the market.
And I, I know, Travis,sometimes it's not even our own decision
making.
(19:01):
We just went through tax season.
Sometimes there are taxprofessionals that are trying to
save taxes.
And so they're looking at whatindividuals hold.
And they're not investmentmanagers, they're not financial planners.
They're just doing.
I remember a scenario yearsago where they just wanted to help
a client save money and toldthem, let's, let's sell these positions,
(19:21):
right?
So you're dealing with aprofessional going, okay, that makes
sense for taxes.
Yeah.
If you're not dealing, though,with a financial planner that's looking
at it and saying, is saving a$10,000 loss write off for Apple
or For Tesla, Nvidia reallyworth it in the long run.
And so I wonder how manypeople are also trying to do the
right thing, maybe gettingmisguided advice from.
(19:43):
I think, you know, you Googleand they talk about tax and there's
ways that tax loss harvestingdoes good.
And I think that there's waysof tax loss harvesting kind of paint
you into a corner.
And that's the whole, youknow, the tax loophole versus the
tax trap.
Yep.
And I guess here's my adviceon tax loss harvesting is if you're
going to use the strategy, youneed to make sure that when you're
(20:04):
selling investments thatyou're mapping them over to a very
similarly jargon.
I know, but correlatedinvestment with the same upward potential.
So when you look at the price,the value and the business characteristics,
people forget about.
You know, these are businesses.
You can have an amazing priceto value ratio that makes it look
(20:25):
like a great buy.
But you got, you know, majorturmoil and leadership at the company.
And you get a question, okay,just because the price to value is
split out, is this businessactually capable of recovering at
its price to where it's goingor is the price a precursor to probably
where the value is going?
So, you know, the price iskind of a leading indicator sometimes
of where things are going, butit's not, it's not, it's not going
(20:48):
to give you the concrete answer.
So you have to understand thebusiness too.
So when you're selling onecompany, so if you were to sell something
like Apple, you would need to,to move those funds to something
with a similar profile thatalso, let's say, is experiencing
the same level of volatility.
So if Apple was priced tovalue, let's say that you could buy
it for 80 cents on the dollar,you would not want to sell that and
(21:10):
buy something that was, thatwas selling at 110 cents on the dollar.
Just because they're both,they could both be down 30%.
One just started from a higher point.
Right.
And so you would want to makesure that, oh, I've sold something
that is on a, you know,selling at 80 cents on the dollar,
and I've bought somethingthat's around 80 cents on the dollar
and it's down for pretty muchthe same reason and it's got a high
(21:33):
likelihood, it kind of matchesup with the other one of recovery.
Yeah.
So there's, there's, that'snot a quick and easy decision.
There's a lot of research thatgoes into that.
So you not only have to bewatching the stocks that you invest
in.
But you have to be watchingthe stocks you don't invest in that
you would invest in if youcouldn't invest in the stocks that
you do invest in.
So you start to, you start tosee where professional management
(21:56):
comes in, but you can alsostart to see where, you know, I,
a lot of times people say,well, I've done really good with
investing.
It's like.
But compared to what?
Yeah, you know, what are youcomparing yourself to?
Oh, Well, I averaged 7%.
Well, if everybody else in thetime period averaged 9, you did okay.
You didn't do really well.
And that's what we're tryingto do here is let's make sure that
we don't make, you know, getcaught in this tax boomerang.
(22:16):
Well, and to make, let me helpthe listener who might sound like
maybe we're contradictingourselves because they don't understand.
So when we talked earlierabout the tax loss harvesting in
a substantial position, Ibelieve what you were trying to say
is if you sell Apple as anindividual security and you want
to turn around and buy an ETFthat holds Apple as a major holding,
that is a substantial thing.
(22:37):
Right.
In this case, you're talkingabout not quite.
When it comes to one securityversus a fund, the argument is you'd
have to have the majority ofthe performance.
So if the majority of thenegative performance is coming from
the largest capitalized stocksand those happen to be the ones that
(22:59):
you sold, and they make up themain driver of the up and down in
that fund, then that could be,that's not going to map over one
stock.
But if you had Nvidia, Apple,Microsoft, Tesla, Facebook, Netflix,
and then you had a tech fundand it was basically map, you know,
performance was almostperfectly correlated with those that
(23:21):
could be considered asubstantially, you know, and again,
there's, there's not a lot ofIRS enforcement on that right now.
But it's kind of like one ofthose things.
Just because you can speedand, you know, a cop's not looking
doesn't mean it's a great idea.
Right.
Great analogy.
Well, and I think to yourpoint, then what you're talking about
is making sure you have aplan, right?
You want to take a loss, butthen what?
Where are we going to put in?
If you're like, well, how do Iknow what to do?
(23:42):
A couple episodes ago, andit's been fun connecting with Ditch
the Suits listeners, we hadput out Travis's kind of top 10 investment
guidelines.
We've had a number oflisteners reach out to us and say,
hey, how do I get a copy ofthat PDF?
I think sometimes we talkabout very high level things and
we try to bring it to the massto help you understand that you can
make money buying companies,but you have to understand their
competitive advantage, theirleadership, their moats.
(24:03):
So we have a PDF that ifyou're like, hey, I want more information
guys, what do I do?
Reach out to us.
We'll, we'll send that PDF andit's just Travis's 10.
Kind of putting purpose behindwhy we're buying, what we're buying.
Yep.
So moving on because we gotthree more things that we got to
hit.
The.
What's our next one here?
The next issue is people willtry to reduce their income.
(24:25):
So you go to this, like yousaid, you go to a well meaning CPA
or accountant and they say,hey, look man, you qualify to put
some money in a retirementaccount, you get a tax deduction.
So if you put in, you know,five grand this year, we'll save
you a thousand dollars intaxes or something.
And that sounds wonderful.
Or maybe you're like, I hatepaying income taxes and I'm in my
50s, my peak earning years,I'm going to keep maxing out that
retirement, that 401k account,so I can get this big tax deduction.
(24:49):
One of the issues that comeswith that is, yes, you're reducing
your income taxes, but do youknow what your future income taxes
look like?
And somebody can say, nobodyknows their future.
We get pretty darn close whenyou do a projection because the one
thing with IRAs, so numberone, you can project your lifestyle
and your budget and yourexpenses out.
And especially, you know, whenyou're 30, it's hard to figure out
where you're gonna be whenyou're 60, but when you're 55, we
(25:12):
can pretty much figure outwhere you're gonna be in your 60s.
It's a little bit easier to do.
And so we say, okay, this iswhere we look like we're gonna be
in our 60s and 70s.
And we could come up with, youknow, oh, you're going to need money
from that retirement or not,retirement account or not.
And this is how long it'sgoing to be deferred.
And if you don't take moneyout, this is how much you're going
to, this is your projected RMDthat you're going to have.
(25:32):
And you can even underestimatethat and still come up with some
pretty wild numbers, at leastfor our clientele.
Right.
We get some Clients in that,you know, let's say 1 to $12 million
range and a bunch of monies inthose IRA 401ks.
I think when you get, when youhave, when you have clients over
the 12 million, a lot of timesthe IRAs and 401ks are a much smaller
(25:54):
part of it, right?
Because they've hadbusinesses, other things going on.
But in that 1 to 12 millionarea, normally you have some big
retirement account balancesand a lot of times that money's not
necessarily needed for aliving or not all of it.
You're not taking, you're notmaxing out those accounts as far
as withdrawing money when youhit retirement.
That's why you were able toaccumulate that much money.
(26:16):
Well, when you're in your 70s,the IRS says, hey, you're going to
take this money out whetheryou want to or not, right?
Or if you don't, your kids aregoing to have to take it out.
But if you take it out, youcan take it out over your lifetime.
If your kids have to take itout, they got to take it out in 10
years.
So you have this tax bomb thatis about to go off on your life or
your kid's life.
And so if you defer, you endup with 3, 4, 5 million dollars in
(26:37):
an IRA or 401k or more.
And you're like, I'm nottaking that till I have to.
You could go from being inlike a 12 or 22% bracket to the max
bracket.
I mean you, you could justblitz, right?
We've, we've seen, we haveclients that have three four hundred
thousand dollar RMDs.
And this is pre tax accounts, right?
So as your 401ks IRAs, pretax, we're not talking about Roth
IRAs or things like that.
(26:58):
So these are people that arecash poor later in return.
Well, not necessarily cash poor.
What it means is, is thatpeople have deferred a lot of money
to get the tax deductions, right?
When you, let's say you're ahiring, let's say you're an engineer
or a doctor or something likethat, and you're making 200 grand
a year or 300 or 400 orwhatever you're making and you could
(27:20):
save, just for easy math, 30%of your money by putting in a retirement
account, right?
That's why people do it,because it's a huge amount of money
in those higher tax brackets.
Well, the problem is in thefuture you got to take it out.
So what if you saved it at the22 or 24% tax bracket, but now you
have to take it out at thehigher tax brackets in retirement.
(27:43):
That's the problem.
There's a delta there thatgets you.
So you're not getting as muchfor the tax.
You're actually paying for thetax deduction later on.
So the point is that youshouldn't always take the tax deduction.
Now, there's a thing called aRoth, and what the Roth does is it
says you don't get a tax deduction.
Now, Steve, but if you putmoney in here, you never have to
pay taxes again.
(28:05):
Or you also have the option ona lot of 401 plans now.
So you can max out your 401k,but we're not going to give you a
tax deduction.
You're still going to pay thatfull 24%.
You're not going to get thetax deduction.
But when you take that moneyout and all the money you've made
on it, it's going to be taxfree for you.
So the issue is if, you know,if you've already gotten to the point
(28:25):
where you're going to havethis tax bomb problem, and this is
where financial projectionscome in and tax planning comes in.
If you look in that crystalball and you go, holy cow, I'm going
to have a tax bond problem,stop taking the tax deductions today.
I know it feels good to getthe tax deduction.
You're sacrificing a lot.
First of all, you're gonnaneed a tax deduction on money you
don't need.
Right?
Because you're putting in anIRA and you're saying, I'm probably
(28:46):
not gonna use that money.
So you're getting a taxdeduction on money you don't need,
which locks it up and itcreates a bigger tax problem in the
future versus saying, look, ifI don't need the money, then I'm
gonna pay the taxes now.
We'll never have to deal withit again, no matter who inherit,
if my kids inherit it, if Iwant to use it, whatever.
So people miss that all the time.
(29:06):
I get my zero percent.
You know, I, I save, I save mytaxes, but I end up owing a big tax
bill in the future.
It's just, it's just a sillykind of thing that, that people.
But the power of projections,if you've never seen this projected
out, it's powerful to takepeople who feel stuck and then show
them that there's hope.
But you got to make some very.
Intentional decisions forclients with a couple million Dollars.
In this type of scenario,you're talking hundreds of thousands
(29:28):
of dollars.
Different difference.
It's crazy.
Possibly.
I looked at one the other day.
It was about a million and ahalf dollars.
The.
The difference between, youknow, it depends on how much you
have.
So everybody's gonna be in adifferent situation.
But it was a phenomenal difference.
It's a substantial.
In putting the money in theright account to begin with and understanding
if you should take a taxdeduction or not.
Yep.
(29:49):
Congress is not stupid.
When they give you a taxdegree, normally, there's a caveat
to when they said, okay, youdon't have to take your RMDs until
you're 75.
Do not for a second think theywere thinking, wow, you know, the
federal government has toomuch money.
What they did is they createda scenario for the people who do
not need their RMDs.
(30:10):
So these are the people withmore assets.
They allowed you to waitlonger to take the money out, which
means the money that you haveto take out, when you're forced to,
you have to take out a higherpercentage, and the balance will
be bigger.
So you have to take out ahigher percentage of a bigger balance,
which means more will be in ahigher tax bracket, more money will
be inherited by the kids.
More money will be forced tobe cashed out within 10 years.
(30:31):
They are.
The federal government ismaking money off of people not understanding
how this strategy works.
Two more.
Two more.
You tired yet?
Hang with us, folks.
Two more.
We're gonna bring it home.
This is intense.
It's been a good one, though.
All right.
The other two are a little bitquicker, too.
Refusing to take capital gain gains.
I can see the argument forthis in both directions, the problem.
(30:53):
So what I mean by this is youhave a stock that's done really,
really well for you over theyears, but you don't want to sell
it because you'll have to pay cap.
You'll have to pay capitalgains taxes on it.
Okay?
There's two ways out ofcapital gains taxes for you, really.
You could die, or you can givethe money away.
So if.
And I talk to clients all the time.
They're, like, in their 50s or 60s.
Like, well, if I don't.
If I don't sell this stock, mykids will inherit it.
(31:15):
Okay?
The average life cycle of aFortune 500 company is less than
15 years.
So when you're 60 and you'resaying, I'm gonna just leave the
stock to my kids, what you'resaying is you're either gonna die
within the next 15 years oryou're gonna bet that that company
is well above average.
And that's just not the natureof corporations, not in today's world.
(31:39):
So the problem is, is that youmay want to do something with that
money, or if you sit on thatcompany, that company could become
a shell of what it once was.
And so you basically goingbackwards when you account for inflation
and everything, or you couldhave even negative returns.
I've seen people during 2008because I was new to the industry
(31:59):
in 2007.
So in 2008, I had a clientwith a million dollars of bank of
America.
And after 2008, he had afraction of that.
And they didn't sell itbecause of the capital gains.
And then they gave it all backto the stock market.
God.
Someplace.
And we've had over the years,Apple employees that were gifted
(32:20):
stock early on that just tookoff in after tax accounts.
Nvidia if you got in at theright time, taken off and so you
see this huge capital gain andit's like, what do I do with it?
The blessing is you've mademoney, but now you feel trapped.
So you got two options.
Die or give it away.
So just, just be aware.
And maybe, maybe what you dois you look at a comb.
Yeah.
(32:41):
Selling some of it and doingsome charitable gifting or something.
Gifting.
And kind of knocking down.
Knocking down some of thetaxes on that.
And then the last one that we had.
You've kind of touched on thisa little bit.
Yeah.
Was whether or not you shouldlive in that.
Kicking the can down the roadto live in 0%.
This happens with retirees allthe time.
(33:02):
You retire.
You know, sometimes peopleretire early in their 50s, where
you're in your 60s and youretire and you can actually get to
the 0% tax bracket because yougot your mortgage pay, everything's
paid off, you're in good shapeand you got your Social Security,
maybe a little bit of pensionand a bunch of cash in the bank.
And that's more than what you need.
You know, you got good cashflow on Social Security, unless your
(33:24):
income's over a certainthreshold, isn't going to be taxed.
So it's very easy for you tokind of get to that 0% tax bracket
and be like, I'm good.
Peace out, yo.
I don't want to do any of this.
But if you got that $2 millionin the IRA or the 401k and you're
going to let that bake fromthe time you're in your late 50s
to the time you're in yourmid-70s, that 2 million is going
(33:44):
to turn into probably 4million or something like that, depending
on what your investmentstrategy is.
And then you're going to havethis much higher RMD in the future.
What if you just, you hatepaying taxes.
If you looked at a projectionwith a what if scenario of what if
I just pay up to what if Ijust filled the 12% tax bracket,
right?
So I'm not talking aboutgetting crazy, right?
(34:04):
What if I just filled the 12%tax bracket?
And what I'm going to do isI'm going to convert my IRA money
over to my Roth.
So I'm going to pay the 12%taxes now, and I'm going to be in
well above the 12% bracket inthe future, but I'm going to pay
the 12% now so that I neverhave to pay any more taxes on it.
Then I can also do another thing.
I can shift my portfolio.
(34:25):
I can put the most aggressiveinvestments in the Roth so I can
displace the growth from theIRA to the Roth.
So I might still average my.
Let's pretend you average 8.5%a year.
I might still average my 8.5%a year.
But when you look at the Roth,maybe the roth is returning 10 and
the IRA is returning seven,and so it averages out at eight and
(34:48):
a half.
So you can do some things togoose the future benefit of that
and get an even better return.
But when you have a zeropercent tax bracket, you should not
be rejoicing.
You should be saying, great,how can I, how can I basically stick
it to the man?
How can I move money aroundhere and, and pay a tiny tax bill
(35:08):
compared to what I'll pay inthe future and get out of that future
tax bill for me, my kids, mygrandkids, the next generation, when,
as soon as you see zero taxbracket, it's not dancing.
You should be dancing for thefact that, bam, I can move a ton
of money around and make a sixfigure or bigger difference for the
(35:28):
future of my family.
You never want to just belike, that's great.
I hate paying taxes.
I'm just going to move on.
You really actually want topay a little bit of taxes if you
have that kind of money?
Some people literally willhave assets that there's no deferred
tax on it.
But if you have assets withdeferred tax, that's when you want
to take, take advantage ofthat stuff.
That's also where, by the way,with that, I don't want to sell my
(35:51):
investments because thecapital gains people don't understand
how capital capital gains work.
If you're in that 0% bracket,you're not going to pay anything
on your capital gains anyway,other than maybe state level depending
on what state you live in.
So you should be looking atand saying, okay, that's a perfect
year to max out that 0%capital gains bracket.
So again, it's justunderstanding how these things work.
But these are traps thatpeople fall into.
(36:13):
It feels good, all these things.
That feels good.
Yep.
But at the end of the day, ithurts you.
Four Traps Travis and I arehere to help you get the most from
your money in life.
A little bit longer anepisode, digest it, go back re listen
before traps that if you canunderstand how these work, can set
you up for getting the mostfrom your money in life.
Until then, thanks forstopping by.
Ditch the Suits thanks forchecking out Ditch the Suits.
(36:35):
Be sure to write a review ordrop a comment about this episode.
And if you want more likethis, head over to ditchesuits.com
you can send us a message andget in touch.
Let us know how we can helpand be sure to share any topics you'd
be interested in having uscover on the show.
We're here to help you get themost from your money in life.
Thanks for being our guest andchecking out Ditch the Suits.
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