Simply Money

Episode Transcript

Speaker 1 (00:06):
Tonight. You can save and invest and save and invest,
but what about the tax straps that can erode all
of it. You're listening to simply Money presented by all
Worth Financial Ammi Wagner along with Bob sponseller. Bob, I
have this conversation and I know you do very very
often with the investors that I work with. Right, there's
this I think desire. So many people have to be

(00:29):
laser focused on what kind of returns am I going
to get? And how can I maximize my money? The
problem with thinking about things that way is you can
also turn a blind eye to something called tax alpha, right,
if you're missing out opportunities to save on taxes. And
there's a lot of strategies that you can employ here.

Speaker 2 (00:51):
Yeah, this is really amy one of the biggest areas
of value that we add to our clients when they
come in to do planning. And you know, there's there's
really an art and a science to this as far
as doing tax planning and cash flow planning and dovetailing
that together. So there's a lot to talk about here.

(01:11):
Let's let's jump into it. A couple of tax traps
that we need to be aware of. Number one is
I think the most obvious one capital gains taxes. Obviously,
as you know, let off the show, save and invest,
Save and invest, Save and invest. People do a great
job of that. They save, they compound, they do all
the right things, and then when it comes time to
actually want to spend this money or diversify your portfolio, whoops,

(01:35):
you got to pay the taxman here in a non
IRA account.

Speaker 1 (01:39):
Yeah, and I think you brought up a non IRA account.
When you're going to pull distributions from that IRA account,
you're going to pay your regular income rate, right, But
when you have money and a taxable brokerage account, you're
going to pay a long term capital games rate. Having
money in both places first and foremost gives you more
flexibility to have choices about how you take those distributions

(02:02):
in retirement. I'm sure you've seen this many many times too.
So many people who have major, major assets, and all
of them are tied up in qualified retirement accounts, right
iras well, they're going to have to pay taxes on
every dollar they're going to pull out of those accounts.
So I think giving yourself the flexibility to have money
that's tax at a capital gains rate. A long term

(02:23):
capital gains rate gives yourself some options because for most people,
your long term capital gains rate is a lower tax
rate than what you would normally pay. However, you can
start planning for those distributions by harvesting losses in that
particular account in those accounts, and then you can be

(02:45):
incredibly tax efficient when you pull money out of them.

Speaker 2 (02:49):
Yeah, there's a couple of things that you know oftentimes
go on at once here. You know, for a long
term diversified portfolio, there are strategies in place now, and
we've got a really good one here at all Worth
to your point, Amy, where we can have an algorithm
running in the background to take advantage of short term
capital losses and offset short term capital gains. And you know,

(03:11):
I've said this a couple of times on the show. Now,
you know, over the last couple of years, we've had
really good markets, you know, portfolio you know, portfolio returns
close to twenty percent, and our client's tax bill at
the end of the year for folks that are using
this strategy is darn near zero. So it's a pretty
slick opportunity. Another opportunity on the capital gain side, and

(03:32):
I think this is something people a lot of people
aren't aware of. Up to ninety six seven hundred dollars
for a married filing joint couple in taxable income, your
long term capital gains rate is zero. Yes, so that's
a great opportunity to just slice off some of those
long term gains. Pay nothing in taxes, and you know,

(03:53):
for people that have a concentrated position or just embedded
gains in taxable accounts slight that start slicing those gains
off in pieces over time, and that can help you
out a lot in the long run.

Speaker 1 (04:06):
This is a conversation I'm having with some of the
younger investors that I'm working with too, people who are
coming to me in their early thirties, and I start
to say, listen, if retiring early before the age of
fifty nine and a half is in any way, shape
or form on your radar, we need to have one
of these accounts in place, and we should start harvesting

(04:28):
losses on this account now. Sooner the better, because you
know they can be shoveling as much money as possible
into that four one. Kay, that's great. You're going to
pay a ten percent penalty to access those dollars before
you're fifty nine and a half. I have friends who
had planned on retiring early. You know, they knew a
number that they had to hit. Problem was all the

(04:48):
money was in four and ks and iras, and a
couple of years ago it kind of hit them, Wait
a second, we don't have the flexibility unless we sho
have a lot of money and one of these tacks accounts.
Sooner the better.

Speaker 2 (05:02):
Yeah, and that leads us into another tax trap. You
know that we need to talk about with clients, and
that's the required minimum distributions on iras and four to
one K plans when we reach age seventy three. And
I'm sure you have this come up all the time, Amy,
I know I do. Again, people have done a great job.
They saved on a tax deferred basis, they did everything perfectly,

(05:24):
they retired, and then when they look at the you know,
sometimes massive size of these iras and see what has
to come out on a taxable basis starting at age
seventy three, people are very surprised. So you go back to,
like your client that wants to retire at fifty nine
and a half or sixty, that gives us that ten

(05:44):
twelve thirteen year runway here where we can pull forward
some of that income in a lower tax bracket and
either spend some of that money or convert it to
a roth IRA and really level out that tax burden
over the remaining years of their life, take advantage of
the lower you know, the upper end of the lower

(06:05):
marginal tax bracket, and really do some nice tax planning
for people you're listening to.

Speaker 1 (06:10):
Simply when you're presented by all Worth Financial, I Memi
Wagner along with Bob Spahonzeller, I think it's proactive strategies.
You know that it comes down to tax planning. If
you wait until the year that you have to take
an RMD, there's not a lot we can do with that.
You know, if all of a sudden you get that
RMD amount right, which is calculated based on how much
was in that account as of December thirty, first of

(06:33):
the year before, right, and all of a sudden you
figure out that amount's going to kick you into a
higher tax bracket. Not a lot we can do at
that point. But we can be doing things in the
years leading up, charitable donations, we can be spending out
of that account. We can be doing wroth conversions so
that we're not having to pay an insanely high amount

(06:53):
in taxes because Uncle Sam has finally said, okay, RMD
your time to pay the piper.

Speaker 3 (06:58):
Yeah.

Speaker 2 (06:59):
And one thing that we can do to mitigate the
tax burden on those required minimum distributions, and this starts
when you're age seventy and a half, and you can
do this up to one hundred thousand dollars per year,
is do your charitable giving right out of your IRA account. Yes.
And I again, I run into tons and tons of
people that have no idea that you can do this.

(07:21):
They're used to just writing checks to their church or
chosen charity. You donate that money right out of your IRA.
Not one penny of that hits your tax return.

Speaker 1 (07:32):
Yeah. As we talk about tax chaps tonight, right, one
of them being this capital gains tax dilemma, one of
them being not planning for rmds from a tax planning standpoint,
And I would say the third one is social security.
The surprise that comes, the unpleasant surprise that comes for
a lot of people who are like, wait a second,
I have to pay taxes on my Social Security benefit

(07:54):
I've made into the system. The entire time I've been working.
Now you're going to tax me on this? Yeah, Yeah,
you could.

Speaker 2 (07:59):
Be Yeah, And the the amount of your Social Security
that gets taxed quickly goes up to eighty five percent
of your Social Security benefit, you know, once you get
above forty four thousand dollars for a married couple. So
for most of the folks that we work with, there's
not a whole lot we can do about that, because
a lot of people need and want more than that

(08:21):
amount to live on. But I think it's just something
to factor into your plan understanding that, yes, you are
going to pay taxes on your Social Security benefit. And
to your point, Amy, a lot of people never expected that.

Speaker 1 (08:34):
I want to talk about something else that can catch
people off guard when it comes to taxes, and that's
the Medicare surcharge penalty. We're talking about roth conversions, how
you can maybe fill up your current tax bracket so
that less of your dollars that you've saved in those
traditional iras or for O and ks could be subject
to rmds. One of the things though, that we are

(08:55):
keeping an eye on we talk about those rmds, is
we don't want to convert so much money that all
of a sudden we've blown through the IRMA and so
essentially now you're going to have to pay more in Medicare.
And this can be eye opening for a lot of people,
which is why sometimes this is not a do it
your self proposition. You don't want to be making decisions
about roth conversions necessarily on your own and miss this

(09:19):
and think, Okay, I've done all my homework, I'm going
to convert this amount into a wrath and then not realize, Oh,
for a married couple filing jointly, we converted and so
now our total income is north of two hundred and
six thousand dollars and we're going to have to pay
a lot more out of pocket now for Medicare.

Speaker 2 (09:35):
Yeah, and that IRMA acronym stands for income related Monthly
Adjustment Amount. That's just a long winded way of saying, hey,
once your income gets above a certain level, Uncle Sam's
gonna charge you a little bit more for your Medicare benefits. So, Amy,
I know you do this with every client, so do I.
We've got some real nice tax planning software and I

(09:58):
liken this to kind of go only taking your vehicle
into the service department, putting it up on the rack
and hooking it up to this diagnostic equipment that can
diagnose eight or nine different things all at once. That's
what we do to help people custom craft and income
strategy and retirement. So you can look at different scenarios.

(10:21):
Do we take some of the income from capital gains?
Do we do roth conversions? Do we take some of
the income from non IRA accounts? IRA accounts? And we
can constantly monitor in real time if we add a
dollar's worth of income from this category, how does it
impact the capital gains rate? How does it impact the
taxability of your Social Security? How does it impact your

(10:45):
overall tax bracket. There's a lot of things that we
can do there, but you have to be proactive about it,
and a lot of these tools have become so sophisticated
it's very hard for people to do this on their own.

Speaker 1 (10:57):
Yeah, this is not back of napkin Mas stuff, right.
It can get incredibly complicated, But to your point, you
don't want to make a decision that appears to be
beneficial from a tax standpoint, but then knock yourself into
something else you never thought about. So that's why I
think having an advocate in your corner, someone who's helping

(11:17):
you think through these things. And I would say, if
you're currently working with an advisor and you are getting
close to retirement or in retirement and they are not
having proactive tax planning strategies, bring it up to them
because they should be.

Speaker 2 (11:33):
Yeah, and I rarely state this in this strong of terms,
but in today's day and age, if your current advisor
is not doing this type of planning for you, you
should seek out a different advisor because this kind of
planning is a game changer.

Speaker 1 (11:48):
Here's the all Worth advice. With smart planning, you can
legally minimize your tax burden, keep more of your wealth
in your own pocket, and make sure your money goes
where you wanted to, not necessarily where Uncle Sam is
telling it to go. Coming up next way, too much
cash can be a silent killer when it comes to retirement.
Will tell you why that is and what you need
to do about it. You're listening to Simply Money, presented

(12:09):
by all Worth Financial here on fifty five krs, the
talk station you Wagner along with Bob'spond Seller. If you
can't listen to our show every night, you don't have
to miss a thing we're talking about. We've got a
daily podcast for you. You can just search simply Money.
It's on the iHeart app or wherever you get your podcast.

(12:30):
Coming up at six forty three, we're gonna hope you're
gonna learn a thing or two about inheritance taxes and
a whole lot more. When it comes to your money,
we are playing fact or fiction. Okay, you've worked hard,
you've saved a lot, and now you look at what
you've got, maybe in the bank, in your portfolio, and
you're like, Okay, I think this is enough. I'm going

(12:51):
to ask you a question. How much of what you
have is just sitting in cash? I think, Bob, far
too often having money sitting and cash gives people a
false sense of security in retirement.

Speaker 2 (13:06):
Yeah, in this varies by client, and so you know,
I hesitate here to give one size fits all, you know,
kind of advice. But to your point, Amy, you know,
especially when people approach and go into retirement and those
paychecks stop psychologically and look for good reasons when those

(13:26):
paychecks stop, we tend to get a lot safer psychologically.
We don't want to you lose what we built a
lifetime to build. But we also have to keep an
eye on this this sucking sound in the background called inflation,
where if we just stick all our money in cash
or cash equivalents and have that three percent inflation running

(13:49):
in the background, you can lose purchasing power over a
reasonable period of time, and oftentimes that can rob your
retirement plan just as much as as taking investment risk
by being in the stock market. So it's something that
we have to look at and factor into an overall
comprehensive financial plan.

Speaker 1 (14:10):
If you don't believe me, right, if you're like, well,
but I really like that feeling, let's give it to
you in dollars and cents. Say you've got half a
million dollars in cash, right standard savings account, you're getting
about three percent on it. That money is only going
to have about three hundred and seventy five thousand dollars
of today's buying power twenty years from now. That's a
twenty five percent loss by having it in that bank account.

(14:33):
Now compare that to a diversified investment strategy, right, that's
earning you not a ton five percent or more a year.
Now you're looking at one point three million instead of
your cash. Slowly eroding. I recently had someone in my
office Bob. They had about eight hundred thousand dollars sitting
in cash. There had been an inheritance that they had

(14:55):
gotten over the course of the last year. And I said, Okay,
what is this my sitting in cash? Where are we
buying a house? Is there a question about how much
taxes we're going to have to pay here? And the
response was no, we just didn't know what to do
with it. And I said, this hurts my heart when
I think about how well the markets have done over

(15:18):
the past year that money could have been invested. You know,
you don't want to cry over spilled milk. At the
same time, like, let's figure out what your and I
call it kind of your Goldilocks point, is there is
an amount that you should have in cash. And I
would argue that when you're retired, it's more that you
would need maybe a year's worth a year and a
half in some cases of critical living expenses in cash

(15:42):
that is not exposed to the market. Beyond that, though,
to have hundreds of thousands sitting in there, you are
really missing out.

Speaker 2 (15:49):
I think, yeah, And this comes down to the point
we talk about all the time Amy, it's just putting
your money in buckets and telling your money in advance
what it needs to do for you and when So
again we are not anti cash, we are pro cash.

Speaker 1 (16:04):
Yes, well the right amount of yes.

Speaker 2 (16:06):
So you know, three to six months of living expenses,
absolutely have that in your emergency fund. And then on
top of that, if you're putting a down payment down
in a house, or you're replacing a vehicle, or you're
doing major renovations to your home, that's going to involve
a lump sum distribution of cash within the next you know,
one to two years. By all means that should be

(16:29):
out of the market and in a high yield type
of savings account FDIC insured. But what you're talking about, Amy,
is the longer term money, the five, the seven, the ten,
the twenty year money. You got to have that in
a diversified portfolio that gives you the best chance of
beating inflation over the long term, so you can not

(16:51):
only maintain but grow your purchasing power.

Speaker 1 (16:54):
Yeah, it's a balancing act. I want the clients that
I'm working with to have enough money in cash, especially
if they are living off of their investments in retirement,
because if markets go south by twenty percent. I don't
want them to have to lock in the losses by
taking out distributions to live off of. Instead, let's turn

(17:15):
off that spickett. Let's go to the cash reserves that
we've built and live off of that for a while.
We can replenish that cash when markets rebound to new huts,
but we haven't locked in major losses because we need
to live off of that money. So that's why I think, yes,
a certain amount absolutely belongs in cash. But I've seen
people go both ways in this. You either want to

(17:37):
curl up in a fetal position when you get to
retirement around your money and put it all in cash.
I've also seen people who like a little more risk,
and they will want money exposed to the markets that
they're going to need for their daughter's wedding next year,
or we're going to help so and so with college,
and you know, let's have that exposed to them. What
if the markets go south? Right, So it's really figuring

(17:59):
out how much do we really need in cash, and
then how much then should be exposed to the market.

Speaker 2 (18:07):
Yeah, and again it comes down to exactly what you
did with your client in your example, education right. If
people don't know any different, if they don't know any
better and no one's ever sat down with them and
actually constructed a plan for them, the default is always
going to be safety. Safety. Safety. Yeah, I mean that's
human nature. But I like your one to three year

(18:28):
approach because even in these times where we've had significant
corrections in the market, you know, going back over the
last twenty to thirty years, in almost every case, within
three to four years, the market's back up the new highs. So,
as you pointed out, if you've got that first one
to three years, you know, kind of insulated, so to speak,

(18:49):
you can let the rest go. And I think when
people understand how that all works and they have an
advisor help them construct that plan, they sleep a lot
better at night, and they're going to love the amount
of purchasing power their portfolio provides for them fifteen twenty
years from now.

Speaker 1 (19:06):
I think it's one of the biggest light bulb moments
that happened for my clients who are getting close to
retirement is when we have this conversation about having the
right amount and cash reserves, because there's an anxiety kind
of going into this of wait a second, I'm not
going to have a regular paycheck coming in. I'm going
to I'm going to be paying myself. And if markets
are all over the place, what is that going to

(19:27):
mean for us long term? Will we have enough? This
is a strategy that you can have in place. Usually
when you do, everyone sleeps much better.

Speaker 3 (19:35):
Right.

Speaker 1 (19:35):
Here's the all Worth advice. Keeping too much in cash
right is going to guarantee you're going to lose purchasing
power over time. Smart investing is going to make sure
that your money is truly working for you. Coming up next,
we're going to tackle some opportunities your mortgage might create
as it relates to tax efficiency, stuff you may have
never thought about before. You're listening to Simply Money, presented

(19:56):
by all Worth Financial here on fifty five krs the
talk station. You're listening to Simply Money because I'm by
all Worth Financial. I'm Amy Wagner along with Bob's spondseller.
We live in interesting times. I think you know right now, Gosh,
when you look at the real estate market and you

(20:17):
look at you know, mortgage rates right now, for a
lot of people, it's like, wait a second, does it
make sense to stay or to go? Maybe you want
to you know, downsize, upsize, make a change for whatever reason.
But how favorable are the current conditions? Joining us tonight,
Britt Scarce, our credit expert, Britt kind of start with

(20:39):
the state of the state. What are you seeing right
now in the mortgage market, in the real estate market
or I mean, obviously I would assume people aren't necessarily refinancing,
or are we jumping too new homes right now?

Speaker 3 (20:55):
Well, new home sales are still you know, selling, I mean,
homes are still selling. But it certainly slowed down the
interest rates, you know, when they jumped, you know, in
like twenty twenty two, you know, from trees and the fours,
you know, up into the eighths and the sevens. Obviously,
that made people's you know, desire to purchase a home

(21:16):
and where they were preapproved for maybe a two thousand
dollars a month mortgage payment, you know, and that goes
to four or five thousand dollars a month. That certainly
affected people's behaviors. And we were certainly hoping that the
trajectory over the last year or so that interest rates
would continue to kind of come back down, and everyone
was kind of hoping they didn't expect them to come

(21:37):
back to the two threes and fours, but they were
hoping to get them back down maybe into the fives,
and they've you know, with just all the different things
going on with inflation and the things that the Fed's
doing and different policy changes, interest rates have not come
down quite as fast. So you know, the ability to
you know, to purchase a home right now that say,

(21:57):
is a new bill construction. You know, they're not building
a lot of first time home buyer homes out there,
so you know, homes have gone up quite a bit,
and value and affordability has certainly suffered for it.

Speaker 2 (22:10):
So Brett, we we hear a lot of times, you know,
the magic number and interest rates is right around seven.
You know, as soon as it gets right up around seven,
that tends to kind of freeze everybody, right the people
that might move up from that first time home to
their dream house or the larger house, they don't want
to move because rates are too high and the payment's

(22:31):
too high, and then we end up having a supply
shortage of homes. Is that kind of what you're seeing.
Are people just kind of staying put right now?

Speaker 3 (22:43):
They are? And there's there's also something that we kind
of talk about the lock in effect where you know,
if you got your mortgage on your home back when
rates were in the threes and fours, well you're kind
of locked into that in that you don't really want to,
you know, go from that interest rate to something in
the sixers or seven because obviously the payment would be higher.

(23:05):
Now there are things that would all set that, like
current home equity that could you know, that could be
put toward another purchase, that would you reduce the loan
amount to where maybe your payment could be similar. But
a lot of people psychologically just have a lot of
issue being able, you know, to you know, wrap their
mind around you know, I'm going to go from a
three and a half or a four or a three
and a quarter, you know, to you know, six and

(23:27):
three quarters or seven percent.

Speaker 1 (23:30):
Let's level set here, Britt, because you know, I think
for those people who have rates three three and a
half percent, it feels like, you know, well, I'm going
to wait for them to come back down before I
ever considering if I ever consider moving again. Do you think,
as someone who's day in and day out in this industry,
are we going to see a time like that anytime soon.

Speaker 3 (23:53):
I do not see that in the in the foreseeable
future now, I mean the things that would affect interest rates.
You know that it's you know, things like bond yields,
like the tenure treasuries. When you look at tenure treasure yield, okay,
that has a huge effect on what mortgage rates do.
They tend to be about, you know, three percent above
whatever the tenure treasure yield is. And the things that

(24:13):
make those kind of swings to you know, to make
that drop are usually bad things like what we saw
with the crash and O eight, the things that we
saw with the pandemic, where you know, the FED is
coming in and purchasing you know, bonds and everything and
driving their yields down, and you know that was to
help keep the economy going. So you know, we don't

(24:33):
really see any major catastrophes that you know, obviously got
things happen every day. But uh, you know, we're not
going to be seeing I don't think rates back in
the twos and threes and fours anytime soon, and you know,
maybe maybe not in our lifetimes. It just depends on
what happens, you know in the world. You know, things
like wars and pandemics and things like that tend to

(24:55):
you know, affect that kind of thing. But of course
we don't want to wish any of that on us.
That's the bad thing about the mortgage industry is we
tend to benefit sometimes from bad things happening, So we
certainly don't want to wish for it. But you know,
barring something like that, you know, major things like that,
we're not going to see ches I don't believe back
down in the threes and fours.

Speaker 2 (25:16):
Well, Brett, let's pivot for a moment to folks who, hey,
instead of you know, in spite of rates being in
the high sixes to seven, they're like, I don't care.
I see this great opportunity out there for investment, real estate,
taught and the returns that we might get. Talk about
some cases where people are like, hey, interest rates be damned.

(25:37):
I like this opportunity out here, and I like getting
access to the credit markets because I see it as
an opportunity to build you know, net worth for my situation.
What kind of situations are you seeing, you know that
that just want to use leverage money.

Speaker 3 (25:54):
Yeah, that's still that opportunity is still there. People are
still buying and investing in rental properties. And you know,
a lot of folks, instead of putting money down on
their you know, personal residence, they might they might conserve
some of that cash and and do just what you're saying,
buy rental properties. There are certainly tax advantages to buying
rental properties. You know, there's mortgage interest deduction and improvements

(26:18):
and things like that. And if you can serve your cash, uh,
you know, you could you know, by utilizing mortgages, you
can you could purchase more rental properties that could you know,
produce more rental income and to your point, build more wealth.

Speaker 1 (26:33):
You know, brit you you brought up an interesting point
in talking about this, you know, thinking through your mortgage
from a tax efficiency standpoint. Right, we often talk about
our investments and how we draw money out of our accounts.
You know, is there a way that we can be
looking at our mortgage uh from a tax efficiency standpoint?
Are there opportunities there?

Speaker 3 (26:55):
Certainly? I mean, your mortgage interest based on the current
tax law you know, from the tax cuts back in
twenty seventeen, basically say that you can deduct mortgage interest
up to a seven hundred and fifty thousand dollars mortgage amount,
and if those expire, which I think they're going to
be extended by the current administration, you know that would

(27:15):
that would revert back up to a million dollar amount.
So you know, if you have a mortgage at seven
hundred and fifty thousand dollars, you can deduct that interest.
You know, certainly there's benefits, you know to that. Now
some people ask, you know, well, you know, should I
do things like you know, reef and ants or you know,
cash out or things like that, and you know, the

(27:38):
deductibility on that up to that seven hundred and fifty
thousand dollars threshold. The deductibility is more for if you're
purchasing a house, if you cash out, that is only
deductible for capital improvements on your home. So if you're
using it for things like debck consolidation and things of
that nature, that mortgage interest would not be deductible. But
you know, there's everybody situation is different. Someone might want

(28:02):
to do that not so much for the tax benefit
that maybe if they're consolidating debt and it's going to
free up thousands of dollars a month, it could still
make some sense for them.

Speaker 1 (28:11):
Great, I think you bring up a lot of excellent points.
Right the situation that we were in where you're going
to get three four percent for a mortgage and people
are going to stay forever. I think we will eventually
adjust to whatever the new normal rate is and make
decisions on whether to buy or sell moving forward, but
doing that always with an eye on tax efficiency. Just

(28:34):
a standard deduction makes sense. Can you itemize? You should
be looking at your individual situation every year because things
can change your toyear great insights and expertise as always
from Brit Scarce, our credit expert. You're listening to Simply Money,
presented by all Worth Financial here on fifty five KRC,
the talk station. We're listening to Simply Money percent as

(29:00):
financial I mean you Wagner along with Bob Sponsel or
do you have a financial question it's keeping you up
at night. You and your spouse not on the same
page about it. There's a red button you can click
them while you're listening to the show right there on
the iHeart opp record your question. It's coming straight to
us right now. Time to play Simply Money's fact or fiction? Bob,
straight to it factor fiction, sir, without proper planning, your

(29:22):
wealth could disappear within three generations.

Speaker 2 (29:26):
Unfortunately, that's a fact, and it just has to do
I think with human behavior. I used to think, you know,
thirty years ago, it had a lot to do with
the state taxes, which sometimes it did because the you know,
the amount that you could shelter from federal state tax
was much lower than it is now. Unfortunately, now I
think the reason wealth disappears is there's you know, you

(29:48):
go down three generations, there's usually some components of those
three generations that just likes to spend money, yeah, and
not plan accordingly, and then not you know, keep things
in place and leave it for the next generation.

Speaker 1 (30:02):
There have been a few celebrities over the past couple
of years. I feel like Shaquille O'Neil is one of
them that have come out and said, you know what,
like I'll pay for my kids to go to college.
But this is not a free ride in life. Obviously,
the man has so much wealth his kids to the
nth generation would probably never have to work, and he's like, wait,
I want them to understand how to earn a paycheck.

(30:24):
And the fact that I did a lot of work,
no one else got me here they're going to have
to get themselves. They're going to have to make smart
decisions on their own and learn how to be responsible
with money. I think that's a fantastic way of looking
at it. Whether you have the money that your kids
could live off of for generations or you don't, the
importance of learning a dollar is a gift I think

(30:46):
that you give to them.

Speaker 2 (30:48):
Yeah, and that's part of all of our responsibilities as
parents is to you know, you know, train up a
child as the way or she should go. I mean,
that's our job. But this is all. This is all
also a good time to bring up the benefits of
using a trust. If you're in a situation where your
kids or grandkids or whomever, you just know that this

(31:11):
is a problem waiting to happen.

Speaker 1 (31:13):
Daughter in law, son in law, I see that pretty often.

Speaker 2 (31:15):
So yeah, and so we won't we won't get into
the weeds on all that. But with a with a
properly drafted trust, you can put some provisions in place
to make sure that money just doesn't disappear within a
few years, and and put some quote unquote strings attached
to it.

Speaker 1 (31:33):
You can have some control after you're gone, all right,
factor fiction. Leaving an inheritance in cash best thing you
can do, best way to provide for your errors.

Speaker 2 (31:44):
That's fiction in almost every case. And and this is
where you want to take advantage of the stepped up
cost basis with capital gained type of property, whether that's
your home or your stock, you know, portfolio. So it's
you know, it's not a one size fits all proposition,

(32:04):
but leaving it leaving the money in cash. Oftentimes, if
you do that, you've passed up some ways to be
tax efficient in the way you plan for the next generation.

Speaker 1 (32:16):
Yeah, you mentioned stepped up basis. That's you know, for
those of you who have Procter and Gamble stock, right
that maybe you've held for generations. Right, if you were
to sell that before you pass give that cash to
your kids, there's going to be a larger tax of
burden than if that that stock is passed on to them.
Stepped up basis simply means it's not what your grandpa

(32:38):
or you initially paid for that stock between the time
it was purchased in the time that your kids or
the grandkids or whatever get it. The stepped up basis
is what that stock or that property is worth on
the day that you pass away and that inheritance takes place.
That's the that's the cost basis. Then then they start
to look at it. It resets when you pass and

(33:02):
there are significant tax benefits to that. Important to understand
factor fiction a high income means I can't contribute to
a roth ira fiction.

Speaker 2 (33:14):
And we do this all the time with our clients,
and what we're going to talk about as a backdoor
roth IRA. In simple terms, this is what this means.
You can make a non tax deductible contribution to a
regular IRA and then turn right around and convert that
to a WROTH and that's the way to get those

(33:34):
WROTH contributions going. The only caveat to that is that
you can't do this WROTH conversion if you have an
existing IRA balance. But if you have a four to
one K account and you want to do Roth contributions,
this is a beautiful way to do that for high
income earners, and we do this all the time.

Speaker 1 (33:54):
I think there's a lot of confusion about roth irase
versus putting money into a WROTH account within your four
oh one K. So there are income limits, which is
why you have to do the backdoor WRATH on iras. Right,
if you earn above a certain amount, you can't contribute.
It's so simple. You open an IRA, you open a

(34:15):
wroth IRA, the money flows through. It's a it's a
really easy thing that you can do. But for those
of you, I often have this conversation of let's let's
be putting money into your four one k in a
wrath and someone will say I make too much money.
There are no income limitations on putting money into a
wroth account within your four to one K.

Speaker 2 (34:35):
Great great tool, fantastic point Amy, because most people have
no clue they can even do this.

Speaker 1 (34:41):
This is tax code here, right, I mean, tax code
is like as clear as mud, and so figuring out
how to use it to your advantage. Find an advisor,
find someone who does this day in and day out
that can help you figure out how do I use
these things to my advantage long term? Coming up next,
we're going to take you inside Bob's world of wealth.

(35:02):
You're listening to Simply Money presented by all Worth Financial
here on fifty five KRZ the talk station. You're listening
to Simply Money presented by all Worth Financial. I mean
you Wagner along with Bob's spond seller money money money
means Bob's talking about money here, taking us inside Bob's

(35:24):
world of wealth. Bob, I was actually learn a lot
when you talk about this.

Speaker 2 (35:28):
All right, well, Amy, we today, I thought we'd spend
a little time talking about investment risk tolerance. We talk
about this all the time when we talk about you know,
tech stocks and volatility and all the things that we
talk about with the headlines. I want to break down
how we actually take clients through determining what their risk
tolerance actually is. And I want to start at kind

(35:51):
of the thirty thousand foot value. To me, there's two
components of risk tolerance once you build out an actual
financial plan. Number one, what rate of return does the
client have to earn in order to have a high
probability of meeting his or her goals? That's step one.
What do we got to achieve here? And that'll help

(36:12):
drive how much of this portfolio needs to be in
stocks versus bonds and cash. The second part of that
is what i'll call your emotional ability to handle investment volatility.
You know, people can agree that they got to have
a certain amount of money in stocks, But then when
we get that inevitable pullback or market correction, and people

(36:35):
aren't ready for that because they haven't emotionally bought in
to what on paper their risk tolerance needs to be.
That's where they can get nervous and make mistakes and
want to move money to cash and blow up their
whole plan. So I like to make sure we talk
about both because if people can't handle the amount of

(36:55):
risk that they need to take to hit their goals, well,
then we need to have an another conversation about adjusting goals.
And there's there's different ways to do that. You can
work a couple extra years, you can spend a little
bit less. What I try to do is help every
client find that sweet spot or you know the term
you like to use goldilock spot, where hey, we know

(37:18):
we're going to earn enough return to meet our goals.
And that's within the context of a risk profile or
volatility tolerance that can help you sleep at night. And
I find when people walk out of the office knowing
both of those numbers, they tend they tend to feel
a lot better about things and have a lot more

(37:40):
confidence on the why behind what we're doing. In terms of.

Speaker 1 (37:44):
Investment risk, this is a conversation I have really often
with someone in my office and we walk through their
financial plan and then we get into the really detailed
analysis at the end of you know, how many dollars
could be left in their plan, you know, assuming some
of the forecasting things that we put into there. And
they'll look at the rate of return that we're assuming
in their plan and they'll be like, oh, five point

(38:05):
one percent, you know, and they're kind of looking at
me like, why would you assume, you know, rate of return.
I'm like, this is how you want your plan belt right,
you know, you want your plan to assume a conservative
rate of return. If you get more than that, great,
it's gravy. But you also don't want a plan built
that's assuming a ten percent rate of return.

Speaker 3 (38:25):
Right.

Speaker 1 (38:25):
The risk in that I think can be a lot greater.
Thanks for listening. You've been listening to Simply Money, presented
by all Worth Financial here on fifty five KRC, the
talk station