Have you ever met someone whose retirement was wrecked by poor tax planning? While tax planning is essential, one big-named figure in the financial community who’s a tax expert says that tax planning may be over-emphasized. But is it? Today, we’re joined by experts Deb Meyer (Beyond Budgets podcast), Sean Mullaney (FI Tax Guy YouTube Channel), and the guy behind the Earn & Invest podcast, Doc G. The group explores the vital distinction between effective versus marginal tax rates and how they impact financial decisions, especially in retirement planning. They emphasize the importance of understanding one’s current and future tax brackets, addressing myths and realities around tax planning, and discussing strategies like Roth contributions or conversions and handling required minimum distributions (RMDs). The conversation also touches on the challenges faced by small business owners and the need for tax status diversification in the unpredictable landscape of tax laws and brackets to optimize financial outcomes effectively.
In the second half of our discussion, we shift focus to practical financial advice. Discussions revolve around the temptation to overly optimize tax shelters and the importance of finding a balance between tax efficiency and accessible funds. We cover concerns related to the ‘tax torpedo’ affecting Social Security taxes and highlight the nuanced approaches required for better tax planning in an investor’s journey. The insights shared aim to demystify tax planning for listeners, helping them shape sound financial strategies tailored to their personal circumstances.
Be sure to stick around for Doug’s tax evasion-related trivia, too!
RUN OF SHOW
- Welcome to the Stacking Benjamin Show
- Meet the Money Nerds
- Tax Talk with Experts
- Introducing the Guests
- Beyond Budgets with Deb Meyer
- Tax Nerd Hat On with Sean Mullaney
- Effective vs Marginal Tax Rates
- Tax Planning in Financial Plans
- Tax Strategies for Entrepreneurs
- The Importance of Tax Diversification
- Doug’s Trivia!
- Financial Nerds and Tax Concerns 41
- Debating Tax Strategies and Investments
- The Role of Annuities and Life Insurance
- Podcast Highlights and Final Thoughts
Deeper dives with curated links, topics, and discussions are in our newsletter, The 201, available at https://www.StackingBenjamins.com/201
Enjoy!
Watch On Our YouTube Channel:
Our Topic:
Effective vs. Marginal Tax Rate in Retirement: Why Taxes Don’t (Usually) Cause People to Go Broke (Oblivious Investor)
During our conversation, you’ll hear us mention:
- Importance of Flexibility in Financial Planning
- The Tax Torpedo
- Contribution Rate as a Key Determinant of Success
- Robo-Advisors and Young Investors
- Tax-Loss Harvesting Overemphasized
- Cash Flow Management for Young Investors
- HSAs and Health Decisions
- HSAs as a Winning Strategy
- The “Tax Tail Wagging the Wealth Dog”
- Annuities and Their Tax Ramifications
- Misuse of Annuities in Portfolios
- Life Insurance as a Financial Tool
- Faith-Based and Values-Based Investing
- Opportunities for Owning Businesses in Stock Market
- The Role of a Financial Coach
- Tax Planning for Early Retirees
- Maximizing Employer 401(k) Match
- Modified Endowment Contracts (MEC) and Tax Sheltering
- Importance of a Suitable Financial Plan
- Early Retirement and the Roth Conversion Ladder
- Downsides of Excessive Tax Deferral
- Impact of Changes in Tax Laws
- The Role of Behavioral Finance in Decision-Making
- Simplification Over Optimization
- Estate Planning and Taxes
- College Savings with 529 Plans
- Social Security Optimization
- Rebalancing Investment Portfolios
- Diversification in Retirement Accounts
Our Contributors
A big thanks to our contributors! You can check out more links for our guests below.
Deb Meyer, CFP®
Another thanks to Deb Meyer, CFP® for joining our contributors this week! Hear more from Deb on her show, Beyond Budgets Podcast at Beyond Budgets Podcast Podcast Series – Apple Podcasts.
Sean Mullaney, CPA
Another thanks to Sean Mullaney, CPA for joining our contributors this week! Hear more from Sean on his YouTube channel at Sean Mullaney – YouTube
Check out his book Solo 401(k): The Solopreneur’s Retirement Account.
Doc G
Another thanks to Doc G for joining our contributors this week! Hear more from Doc G on his show, Earn & Invest podcast at Earn & Invest on Apple Podcasts.
Check out his book Taking Stock: A Hospice Doctor’s Advice on Financial Independence, Building Wealth, and Living a Regret-Free Life.
Doug’s Game Show Trivia
- The government asserted Al Capone made how much money which had never been taxed?
Join Us on Monday!
Tune in on Monday when we’re joined by THE Seth Godin! We’re talking life strategy with THE Seth Godin
Miss our last show? Check it out here: Score Big with Creative Income Strategies (SB1588).
Written by: Kevin Bailey
Episode transcript
[00:00:00] bit: Ignition sequence starts 6, 5, 4, 3, 2, 1, 0. All engine running. Lift off. [00:00:17] Doug: Live from the basement of the YouTube headquarters. It’s the Stacking Benjamin Show. [00:00:32] I’m Joe’s mom’s neighbor. Duggan is the key to a happy retirement eating dinner at four 30 and a great tax strategy. Duh. Today we nerd out on taxes with the guy who’s Chief Money Nerd at Our Brother Podcast. Earn and Invest G and joining him from the Beyond Budgets podcast. Does tax savings go in the budget? [00:00:54] We’ll ask her CFP, Deb Meyer and also the guy behind the PHI Tax Guy, YouTube channel, Sean Mullaney. But of course, today we won’t just tax you with Tax Talk at the half. See what I did there at the halfway mark of today’s show. We’ll see how our contributors do. Answering my incredible trivia question. [00:01:17] And now the guy who says he couldn’t have ruined his wife’s birthday celebration because he didn’t even know it was her birthday. It’s Joe. Oh, Saul. See? Hi. [00:01:30] Joe: It’s right Doug. How can you ruin it if you had no idea? Heck, we were never there. Welcome to, we have no clue how this whole thing works. Podcast. I am Joe Saul-Sehy. Hi, and happy Friday to all of you. We are ready to have a robust conversation. What do you do to celebrate Friday? You talk tax planning. [00:01:47] That’s what we do. Doug, we, we, we know how to light this weekend candle. It’s like happy hour for money, nerd. Settle [00:01:53] Doug: down party people. [00:01:54] Joe: Yes, it’s gonna be great. Let’s meet this, uh, band of characters. Well, we’re gonna flex the fact that we know some people that know what they’re talking about when it comes to financial planning and taxes. [00:02:04] Let’s start off with the gentleman behind our brother Earned Invest Doc Cheese here. How are you, man? I’m good. It’s like, let’s start with the one who [00:02:12] Doc G: doesn’t know about tax planning. Doug was like, it’s Meyer, CFP, and Sean Malaney and that other guy, doc G from ER and invest. No letters behind his name. We gotta [00:02:23] Joe: have one person though. [00:02:23] Who’s the everyman? You filed taxes before? [00:02:26] Doc G: I have. And I have a mother who is a CPA who’s always made my life so easy. So I am the case study here of someone who doesn’t understand things [00:02:35] Joe: Well, that’s the, we’re gonna find out if Doc G maybe needs to know more to get where he is going. I understand a little. [00:02:41] I understand a little. Yes. And let’s talk next to the woman from the Behind Budgets podcast. I was just thinking, I’m like, I’m listening to her latest show and I realized I don’t think she’s been on since like 2017. Deb Meyers back. How are you? [00:02:54] Deb: I’m great. Thanks so much for having me, Joe. [00:02:56] Joe: I remember you and I sitting at a restaurant in Orlando. [00:03:01] Planning your first visit, and that feels like it was like four days ago. Deb, where’d the time go? [00:03:06] Deb: I don’t know. At that time I think I was living in Missouri, then I moved to Florida. Now I’m back in Missouri. So all this craziness [00:03:14] Joe: moving, you need to get out before the hurricanes. That was Well, [00:03:16] Deb: yeah, it’s uh, that’s a scary, scary situation for those down there. [00:03:21] I know this is going live next week, but Yeah. [00:03:23] Joe: Yeah. We’re recording this, uh, before the second hurricane, so. We’re thinking about all of our friends in Florida right now, but Deb, for the four people that don’t know about the Beyond Budget Podcast out there, there’s gotta be one. Tell everybody what you do. [00:03:37] Deb: Yeah. I started Beyond Budgets in November of, uh, last year and it’s really just to help parents get a solid foundation that’s beyond just basic budgeting. So as the name implies, we go into concepts around tax planning, uh, saving for college. It’s really just designed for parents that are raising kids. [00:03:56] They’re in that life stage where they need a little bit of extra education and I wanna help give it to them. [00:04:03] Joe: The last episode I was just listening to, you were talking about better diversification as an example. Mm-Hmm. [00:04:09] Deb: I talk about investing strategies. We have a mix of individual episodes that I’m just talking on, some kind of financial planning topic or investing topic. [00:04:17] And then, uh, we also have some interviews with really cool guests. [00:04:21] Joe: Well, are you ready to get your tax nerd hat on, Deb? I’m, [00:04:24] Deb: I’m stoked. [00:04:25] Joe: Well, let’s talk to our friend who we think of as a tax nerd. He’s also A-A-C-O-P. Sean Mullaney is here. How are you brother [00:04:32] Sean: Joe? It’s great to be here. You know, it’s funny, today’s sort of, you know, we got the hurricane in Florida. [00:04:38] I’m a Mets fan and a Jets fan. We just fired our head coach. We got a big playoff game in Flushing, and there’s all these letters out there in the world. C-F-P-C-P-A, Jordan, you’re an MD right? Mm-Hmm. And, uh, sometimes people get that confused about me. I’m actually a CPA, I’m not a C You’re CPA, not CFP. I’m a CPA, not a CFP, but it’s so confusing. [00:04:59] I am a financial planner. I work in that realm. But you know what, it’s all about developing your own thoughts, right? It’s great that so and so has such and such credentials behind their name, but it’s all about what we’re gonna talk about today. It’s developing your own opinion. Different people can look at different issues in a reasonable manner and come to different conclusions. [00:05:17] I’m looking forward to this one. ’cause this one’s got all sorts of balls in the air on it. [00:05:20] Joe: It, it totally does. You know what’s funny, Sean, is that Doug always tells me that I forget to put his letters behind his name, which is BMOC. He’s got BMOC. Remember those letters? [00:05:32] Sean: Anybody. I remember that. Yeah. Yeah. [00:05:34] I, I could tell you what that is. If, if that’s gonna be the trivia question, then I’m in really good shape. [00:05:38] Joe: It. It might be a little more difficult than that. Dougie, we gotta start putting the letters behind your name. Yeah. Oh yeah. [00:05:44] Doc G: I’ve [00:05:45] Joe: got all kinds of [00:05:46] Doc G: letters and maybe it should be BMOP. Big Man on Podcast. [00:05:50] Podcast. Done [00:05:51] Doug: with that. Okay. Dan [00:05:52] Joe: Podcast. Woohoo. Wow. I’m the slow guy in this show. I didn’t even see that coming when it hit me like a truck. Sean, we asked Deb about the Beyond Budgets podcast. How about the PHY Tax Guy, YouTube channel? What you got going on there? Yeah, [00:06:05] Sean: so I got my YouTube channel. I’m putting up videos every Saturday morning, and that’s gonna be largely tax focused, but not exclusively. [00:06:13] Uh, I’ve got some ideas for some different personal finance topics, and then my fi tax guide blog, uh, fi tax guide.com. It’s the intersection of tax and financial independence, so it focuses a lot on retirement accounts, a lot about how tax planning and financial independence planning intersect. [00:06:29] Joe: You know what’s great, Jordan, is that we’ve got experts, Deb and Sean with us. [00:06:35] You know what’s nearly as good as that? Tell me, Joe, tell me the fact that this episode’s brought to you by State Farm. How about that? Isn’t that wonderful? Exciting? If you own a small business, whatever your business might be, you need someone who understands, and that’s where State Farm Small Business Insurance comes in. [00:06:50] State Farm agents, they’re small business owners too, and they know what it takes. They can help you choose personalized policies that fit your budget. Small business insurance from State Farm. Everybody sing it like a good neighbor. Come on. State Farm. See we got Yeah, we’re great. Talk to your local agent today and State Farm just locked us out like your head coach. [00:07:13] Got locked out of the Jets, uh, facility today. Sean, we’ve got Deb Meyer here. Sean Malaney, doc G Neighbor Doug, the BMOC on this PO BMOP on this podcast. Before we get today’s action going, now, we do have a couple other sponsors that make sure this is free for everybody. Let’s hear from them and we’ll get this party started. [00:07:38] The inspiration for today’s discussion comes to us from the Oblivious Investor blog. Uh, Mike Piper, longtime guy in the fire community, in the personal finance community is the author of that blog, and he likes to nerd out on taxes. And we’re gonna join him today because his piece is called Effective versus Marginal Tax Rate in Retirement. [00:08:03] That’s what got me excited, doc. When I, when I read that, I was like, well, this is gonna be a great day. Mike’s writing about effective versus marginal tax rates, hashtag Dream. His subtitle is Why taxes don’t usually cause people to go broke. And that got me thinking. I’m like, wait a minute. Tech strategies, those are super important when it comes to your financial plan. [00:08:27] So, DEPA, I wanna start with you. When you’re sitting down with somebody and you are looking at their financial plan, you’re helping them build their financial plan for themselves. Where does tax planning really fit in? [00:08:39] Deb: I [00:08:39] Joe: think it’s a really important piece. [00:08:41] Deb: Like Sean, I actually have a background as a CPA as well, so I have the tax gee, uh, element going here, but it’s crucial to understand what your current tax bracket is. [00:08:51] But it’s also really important to try to kind of project out what that’s gonna look like down the road. So any client conversation I’m having, you know, and especially when we’re trying to make decisions around Roth contributions or conversions, uh, taxes are a huge piece of that, and it really does make a difference in the, not only the current financial plan, but that future financial plan as well. [00:09:13] Joe: Sean, where do you think it fits? [00:09:15] Sean: It’s sort of everywhere because, you know, you think about the three topics that folks get all worked up about investments, retirement, and taxes, right? Those are the three financial planning topics that everybody’s all excited about. Taxes is embedded in all three, even though one of them is taxes itself. [00:09:32] So I’ll just give you one example. There aren’t gonna be many in the audience. Now, there might be some self-employed folks, some artists, you know, NFL quarterbacks, but most of the folks in the audience are probably gonna need to capture the employer match in their 401k, at least that in order to get to a place where retirement is a realistic possibility, well that’s tax planning, it’s retirement planning and it’s investment planning all wrapped up in one. [00:09:58] It’s sort of odd how the financial planning industry sort of evolved around beta and investments, and it’s like, okay, that’s great, but taxes isn’t everything. And I think there’s so much great play in the joints for those of us in the audience who are still working and thinking about, well, wait a minute, how can I afford my retirement? [00:10:16] And tax planning is gonna be, I think, one of the top things in that. [00:10:21] Joe: All right. Doug. Balance out the tax nerds here. ’cause I heard a lot of tax nerdery there between Deb and Sean. Mike says people don’t usually go broke because they don’t understand taxes. Do you feel like tax planning’s been a big part of you getting where you wanna go? [00:10:39] Doc G: I think it has, but I also think we overestimate the stakes. And so people who don’t understand taxes feel exactly like that. I’m gonna do something wrong and I’m gonna be torpedoed. And if I put it in the Roth, God forbid, instead of the 401k, or I put it in the 401k, and God forbid instead of the Roth, it’s gonna cause all sorts of problems. [00:10:58] And what I think I’ve found is that we historically tend to, at least at this point in time, to pay lower taxes than we could. And that if you figure out how to be good, as opposed to be the best and get the right help, uh, I don’t think taxes are gonna hinder you. Yes, they’re gonna be something you deal with all the time. [00:11:17] And because they are a reality and we have to pay them, we’re always gonna be trying to optimize. But with the right help and being really thoughtful about it, it shouldn’t really stop you. [00:11:27] Joe: Deb Mike says that, uh, he doesn’t see people go broke ’cause they don’t understand taxes. Do you see? Oh, look at you, and you’re like, ah, yeah, I, I disagree [00:11:37] Deb: respectfully, especially for like small business owners or self-employed people, taxes are such a critical piece to plan for during those working years. [00:11:48] Now in the article, it focused more on retirees and I think there’s, um, but even in that, like there are some really smart tax strategies that you can employ. And if you don’t have the knowledge or you’re not working with an advisor to understand the repercussions, that can be really detrimental to having that big nest egg that you’re depending on in the. [00:12:09] Later years in life. [00:12:10] Joe: It’s funny though, Deb, so many people don’t know. Um, well, I, I, I’ve been a financial planner for a long time, but when I was a financial planner, so many people don’t know what Mike talks about right here in the head, or they don’t understand the difference between effective and marginal tax rates. [00:12:24] I can’t tell you, and maybe, I don’t know if this still happens or not, Deb, tell me if it does. But I just remember back in the day, like a married couple would come in and meet with me and they go, well, only one of us works because we did the math and if the second person works we’ll have less money ’cause it’s gonna throw us in the next tax bracket. [00:12:42] And I go, good news. That’s not how tax brackets work. Right? You get to go to work. Which by the way, it turns out they didn’t wanna do in the first place. Right? It turns out it was all a big smokescreen. But how often have you heard that? Do people think that more money’s going toward taxes than it really is? [00:12:57] Deb: I’ve heard it. Uh, I have a personal example but uh, I don’t wanna name names, but my sister, she’s like, well. [00:13:12] You can still earn money. Yes, you’re gonna pay taxes, but you’re still earning money [00:13:18] Doug: and you haven’t gotten a holiday gift from her since, have you? She [00:13:20] Deb: had young kids and the cost of daycare and all of that, you have to justify. Okay. But purely on a tax perspective, there’s no 100% tax rate. Right. [00:13:31] Joe: Well, and Sean, I know you enough to know, let’s keep on that entrepreneur theme that Deb just managed. [00:13:34] If somebody’s an entrepreneur, I think you would agree. Taxes can make a big difference for those people. Very much. [00:13:39] Sean: Well, and I think we have to step back and say lifecycle matters so much. Here I have a little saying that I. The tax code wants you to be early, retired and married, right? And Deb made a great point. [00:13:51] So think about a self-employed person, right? They’re paying income tax and they might, Hey, do I do a traditional 401k, a Roth 401k? Well, they have to make a decision at a marginal tax bracket. But not only are they paying income tax, they’re also paying payroll tax and they’re paying both halves, right? [00:14:08] You go to work, you have a W2 job. 6.2% goes out from your salary for social security. Another 1.45% goes out for Medicare. When you’re self-employed, you got both of those halves to deal with. So that’s your working years, your entrepreneurial years get to early retirement, and assuming you’re not taking Social Security, FICA just went from an outflow to a no flow. [00:14:29] Okay. Mm-Hmm. And then whatever age you determine to turn on social security, you’ve gone from outflow to to no flow to inflow. I think a lot of this has, you have to step back and what Mike’s doing in the article, I think very well is saying, well, it’s 65. What does this look like? Right? Because a lot of the people in the audience are trying to be retired by 65. [00:14:48] So that’s a great place to stop and say, well, what does this look like? And I think it shows that when we’re retirees, the tax code tends to favor us. Mike doesn’t make the point about the FICA taxes, but he does make the point about the progressive tax rates, right? Where you’re taking that money that you deferred all those years back into income, you’re going up the progressive tax brackets and the high standard deduction. [00:15:10] When we’re at work and we’re trying to make a decision, it’s basically a marginal tax rate issue because we just have the income. The income’s, the income, we get a bonus on New Year’s Eve, we get a bonus, we’re taxed. There’s nothing we can do about that, but we can make some marginal decisions on say, a traditional 401k versus a Roth 401k. [00:15:26] That’s why when we’re working, the marginal rate matters so much more. And as Mike is pointing out in the article, the effective rate matters so much more for lived experience when we’re 65 and retired. [00:15:38] Joe: Well, is that an issue for you, doc, that during working years, to Sean’s point, you’re looking at Texas one way, then quoting Stephen Covey, you pick up one’s end of the stick, you pick up the other end with it, right? [00:15:49] The other end looks, according to Sean, a lot different because now you’re worried about what your effective tax rate is. Are you worried about that? [00:15:56] Doc G: I was very worried about it until I started using tax calculators. So just like your average person who’s ignorant of this stuff, I had my accountant who was my mother, and she was doing everything for me. [00:16:06] So I didn’t pay a huge amount of. Attention to it. And then I started looking at my personal situation. For instance, I am very much in the tax deferred space. [00:16:14] bit: Mm-Hmm. [00:16:14] Doc G: And so I started thinking, oh my gosh, you know, at some point I’m gonna be paying this huge amount of taxes. Yeah. It’s get a huge [00:16:20] Joe: tax bomb down the road for you. [00:16:22] Doc G: It is on some level, but when you do go and you start looking at the tax calculators, et cetera, you know, most of us, again, because we don’t know the difference between marginal and effective tax rate, just pick the highest tax rate and assume we’re gonna be paying forever at the highest tax rate. And the truth of the matter is the effective tax rate actually is a lot less than that even for people who do have a tax bomb. [00:16:41] And so I think we sometimes lose track and we try to be as efficient as possible. And a lot of times we don’t realize you’re gonna be paying the taxes. You might be paying them early, you might be paying them later. Things might happen in the tax code that can change. And so there’s a lot of pieces that we actually have very little control over. [00:16:59] So we can do our best guesstimated tax plan right now and hope that we’re right. We can do that, but the truth of the matter is I think if we kind of do some really good moves and get the right professionals involved. Again, the likelihood it’s gonna blow up in our face, especially at that retirement period. [00:17:17] So I’m not talking about the small business period and when we’re actively building, but I’m talking about when you get to retirement, which is what I think a lot of people worry about. The likelihood it’s gonna really blow up in your face is small. This is maybe a different show duck, [00:17:29] Joe: but the fact that your mom is your tech professional, do you think that in some ways that might hurt you? [00:17:35] Because? Because it’s a family member, you just assume that she’s taking care of you and so you end up knowing less about it because you think she’s gotta handle Oh, for sure. [00:17:43] Doc G: Oh, for sure. And I grew up as a physician, so I thought I could offload all my financial decisions to a financial advisor. And of course then as I learned about finances and started a podcast and really did the deep dive, I realized that I had offloaded all this important stuff to someone else that I should have known about myself. [00:17:59] And I think I did a lot of that with the taxes too. I think, you know, my biggest problem is my mom’s exceedingly conservative as an accountant, so I probably pay more taxes than it [00:18:07] Doug: Hold. Hold on a second. Were you Doogie Hauser? You just told us you grew up as a physician, [00:18:12] Doc G: right? Yes, yes. Were you [00:18:13] Doug: in med school when you were like 11? [00:18:15] Doc G: It was about 13. No, it was a physician outta the world, so let me amend that. I grew up thinking that I was going to be a physician and didn’t really worry about money or investments or those kind of things. I really had my head down and was worried about taking care of people and learning the art of being a doctor. [00:18:29] So I kind of offloaded as much of that stuff as I could. And just like anything else, you know, it’s important to really educate yourself. Even if you are using a financial advisor, you’re using a good CPA. That doesn’t mean that you shouldn’t also understand because ultimately you have to help drive that chip and. [00:18:46] A lot of times, even now I’m realizing, boy, I could have known better questions to ask my CPA. And I think that’s really important as you’re doing that planning so you don’t get afraid for the future. [00:18:55] Joe: Let’s go there before the break, Deb. I love what Doc G’s saying about you hire this professional help, not just to delegate some of the tough stuff, but to make you smarter, right? [00:19:04] So that you’re better at this. What are some of the basics that the pros around you should be teaching you about taxes that you don’t see enough people know? [00:19:13] Deb: Yeah, I mean, I think for a lot of people they assume they can just delegate and give that responsibility over to the advisor, but it’s really about, I. [00:19:22] Empowering you to understand, like when I’m working with a small business client on their financials, it’s not just about me understanding their financials, it’s about them understanding their financials, right? So just getting in the shoes of, okay, yes, I’m hiring this professional to better understand, but it’s still on me. [00:19:39] I’m still stewarding that business, I’m still owning that, and I need to be informed about what that looks like. So I was just having a conversation earlier with, um, one of my clients and he started another business. They, they had a primary business. Now they have a secondary business. And he is like, okay, do I have to make two different estimated tax payments? [00:19:57] And I said, no, luckily it’s just one estimated tax payment as your individual. And uh, luckily we’ll figure that all into your tax projection, things like that. But [00:20:07] Joe: save the price at one stamp. [00:20:08] Deb: Right, right. Luckily he doesn’t have to do, uh, two different federal payments. Again, using that education to understand your situation and you know, some things can happen to advisors on a moment’s notice and you don’t wanna be left an lurch if you don’t understand the underlying details, especially when it comes to taxes. [00:20:26] Joe: Yeah. I remember when I was an advisor, I would tell my clients that you hire me not to do it all for you. ’cause if I get hit by the bus and you’re in the same spot you were in before me, I haven’t really done my job, my job’s to make you smarter. Do you think, Deb, one of the basics things people should know, because I’m trying to think about what are these basic things that we all should know, maybe Roth versus pretax when it comes to our retirement plan? [00:20:48] Sean mentioned retirement plans earlier. Deb, you think that’s a basic one we should know? I. [00:20:53] Deb: Yeah, I think understanding the difference between the two, so Roth IRA or 401k, that’s already after tax money and it can grow, grow, grow. You don’t have to take it out at a certain point with an IRA or a pre-tax 401k once you turn, that require distribution age, which is like 72 and up. [00:21:13] You’re on out depending on what, what birth year you are, [00:21:15] bit: right? [00:21:16] Deb: That’s all going to be impacted where you might have a bigger tax problem if you have the vehicles in A IRA or a A pre-tax, 401k because you really do have to pay attention to your taxes as you’re withdrawing in those retirement years and the required distributions kick in. [00:21:32] And [00:21:33] Joe: then I guess, Sean, speaking of that, let’s pick up where Deb left off. She’s talking about this requirement distribution. It seems to me that that’s a basic thing everybody should know as well. [00:21:42] Sean: Yeah, I, I got a couple for you. So one is that, yes, there is a end of the line, right? So you’re in your thirties, your forties, your fifties, you’re putting money into that traditional 401k essentially tax deferring. [00:21:53] You’re saying, look, this is 23,000 going into the 401k. Don’t tax me. Now, that’s the, the equivalent of getting a tax deduction. That’s great. But the IRS says, all right, or the Congress says the party won’t last forever. So in your seventies, eventually you have to start taking money out. It’s based on an actuarial table. [00:22:11] It actually starts relatively modestly. The first RMDs, depending on your age, are in the high threes or low four in terms of a percentage. The other thing I think people should understand is basis recovery. Some people out there are worried about early retirement. They’re like, oh, you know, I built up these taxable brokerage accounts, which actually aren’t that bad, right? [00:22:30] Uh, it’s not in a 401k or an IRA. So it doesn’t have some of the tax advantages, but it turns out they’re not that bad. And one of the reasons is something called basis recovery. And what the heck is that? Well. Joe, say you bought Microsoft today, and I’m not giving investment advice to anyone, and I’m not telling you, I don’t even know what Microsoft’s stock price is, but say you buy it today for a hundred and then tomorrow you sell it for a hundred. [00:22:54] I. The people, hopefully in the five in the squares here, know that you have no tax on that. Well, why is that? It’s called basis. You have this recovery of what you invested in it. Well, early retirees get to early retirement and they have years of mutual funds. And so maybe they have 500,000 sitting in a brokerage account and they say, well, I’m gonna spend a hundred thousand in my first year of retirement. [00:23:15] Well now I’m gonna be taxed on a hundred thousand. Right. No, you have basis in those mutual funds and depends on the mutual fund, how it did. Maybe for a hundred thousand you sell, you have 40,000 a basis, you recover 50,000, 60,000 a basis. So you have to understand, okay, wait a minute, if I sell a hundred thousand of this to live, how much of that is actually gonna be taxable income? [00:23:37] And I think some people get to early retirement or think about early retirement and are forgetting to consider that tax basis thing. [00:23:43] Doc G: Yeah, and I think what’s also important to know, and I think we do a lousy job of teaching this. You know, a lot of times when you make, for instance, the Roth verse traditional decision or even what to put in a taxable brokerage, you’re really making that conclusion based on a bunch of estimates that you have no idea if they’re gonna come true or not. [00:24:01] And so the truth of the matter is, what we should really be teaching is diversification. And that’s the thing that no one taught me at the beginning. What we want is tax status diversification, because we have no idea what tax bracket we’re gonna be in when we’re retired. We have no idea what the laws are gonna be when we’re retired. [00:24:16] I mean, there are a lot of things that are gonna happen that we have no control over. And I think we as professionals do a really bad job at teaching people that diversification so that you don’t get hit too high or too low at all. You don’t, you know, you don’t either pay too much taxes now or pay too much taxes later. [00:24:31] You kind of, even out the road. I think we feed into that [00:24:34] Joe: too often. Deb, listening to one of your latest episodes of the Beyond Budgets podcast, you were talking about this too often you see the financial media. Looks into the crystal ball and we don’t know where taxes are gonna be in the future. And a lot of times people are using these calculators, projecting where they’re gonna be. [00:24:49] And frankly, I don’t think we have any clue. [00:24:51] Deb: No, it’s hard. I mean, you can take guesses based on what current tax law is, but it’s hard to go 20, 30, 40 years out. It’s hard to even go five years out. Like we know the tax cuts and job Act, it’s going to start expiring next year. But depending on who comes into office and what Congress decides to do, and that will really impact whether the tax cut and job Act provisions are extended or if they’re just completely cut off and. [00:25:19] We start back like we were pre-tax cuts and [00:25:22] Joe: general. And then the administration after that. The administration after that. Right. The administration after that. Yeah. Sean, [00:25:25] Sean: Joe, you know, one thing I do look at is congressional motivation and Congressional history in this regard, right? So did [00:25:32] Joe: you say Congressional and Motivation in the same sentence? [00:25:35] I’m sorry, I just thought I heard that. Well, so [00:25:36] Sean: think about this. And I don’t even know what the federal debt is, if that’s a trivia question, I’m in trouble. But it’s something like $35 trillion of debt, right? That’s a bad thing. That is not a good thing, at least in my opinion, not to get too political. But then people say, well, wait a minute. [00:25:49] So retirees are gonna have all these additional taxes because of this huge federal debt. And I don’t think that conclusion follows from the premise. I think there’s plenty of other deep pockets that Congress could go after for that 35 trillion of federal debt. Don’t quote me on the exact number, but then you say, well, wait a minute. [00:26:06] What has Congress done in the recent past? And if you look at the TCJA in, in 2017, you look at the delaying of RMDs twice the CARES Act, uh, canceled RMDs for a year. What you see from 2017 to 2022 is these constant small tax cuts for retirees. Even though a lot of commentators are out there saying, wait a minute, they’re gonna. [00:26:27] Be all these tax increases. So I tend to be more optimistic about the future. Now I fully say that is not a risk-free proposition. And so going back to something Jordan was saying about diversification, one wrinkle of that, I like to call it optimizing for known trade-offs, right? So like for example, people worry about a Roth IRA or a Roth 401k. [00:26:48] Which one should I do? I think for many, I tend to like the Roth IRA over the Roth 401k. The big reason there is if you do a Roth 401k, that’s a dollar you can’t deduct into a traditional 401k for many in the audience. The way the rules work, it’s arcane. Many can do a Roth IRA at home but can’t deduct a traditional IRA contribution. [00:27:08] So why not do the Roth IRA at home and take a deduction for the traditional 401k at work there? You’re optimizing for a known trade-off. So yeah, there’s a lot of speculation here. I’m not that, I’m not as worried as some of the other commentators are in terms of retirees. Retirees have a vote and they show up on election day, but we’ll see. [00:27:25] You know, you gotta do your own analysis on that. [00:27:28] Joe: I don’t think it’s a political statement to say the US has too much debt. I just, I think, I think it’s probably universal. I mean there might be somebody out there going, no, I just, I think we [00:27:36] Doug: deserve more debt. We need more. I don’t like that you put a bad connotation on it, Joe. [00:27:40] I’m a big fan of debt and I don’t like the negative like syrup you’re pouring [00:27:44] Joe: over the top. Yeah, right. Uh, speaking of negative connotations, I can put a negative connotation on the fact that we are late for the biggest part of every Friday episode, which is our trivia challenge between our three frequent contributors. [00:27:59] None of which are here today. Mom. Mom, who’s not usually here? Uh, Jesse Kramer’s played for her a lot lately. Sean Mulaney, you’ll play on behalf of Mom, doc G you are horrible at this. So we will have you play on behalf of OG ’cause that makes sense, Doug, right? We gotta keep this competition close Logic, and, and, and Deb just to keep genders the same. [00:28:22] Well, if you play on behalf of Paula p from Afford Anything, which means Deb play on behalf of Paula, brings up some good news and some bad news. You want the good news or the bad news, I’ll take the good news. The good news is you get to guess last, which is a position of power. Yes. Now the bad news is, is that’s because you’re in last place. [00:28:41] Um, but Paula’s had this advantage forever and Doug doesn’t seem to be able to make anything of it, but Paula slash Deb have eight points. Mom slash Sean has 11. OG slash doji has 15. So can Deb help team Paula get closer to mom for second? Can Sean help mom maybe make this a race for the win? Well, we need a tribute question to find out. [00:29:08] Doug, what do we talking about this fine Friday? [00:29:15] Doug: Well, hey there stackers. I’m Joe’s mom’s neighbor Doug, and you can’t talk taxes without thinking about the guy with the ultimate tax strategy. Al Capone. Capone. Yeah, you heard me right? That’s Cap Capone paid zero in taxes. God was a genius. He paid zero in taxes because he just plain didn’t file. Who would’ve thunk it? [00:29:37] That worked well until he was finally arrested in 1929 on 22 counts of tax evasion. You wouldn’t have seen that [00:29:44] Joe: going sideways. Doug. [00:29:46] Doug: How? How does not filing go sideways? Sometimes life just comes up and smacks you. You know, strange on today’s date, back in 1931, he finally went to prison. The government, they had to string together all of Capone’s illegal operations. [00:30:01] To assert how much he owed. They looked at all his businesses, you know, and bootlegging and drugs and prostitution, gambling, and hey, little known facts and bonus trivia for you. Burner cell phones. Dude cornered the market on those. So here’s today’s question. When the government finished estimating the income from all of those businesses, they decided he made how much money back in 1931 from all of those in total. [00:30:28] Don’t forget about the cell phones, I’ll be back right after I finish this hand to spades with Joe’s mom, Gertrude, and her friend Ruth. I got $5 on this hand and if I win, I’m afraid I’m gonna have to file a tax return this year. I don’t wanna go to jail, [00:30:44] Joe: but you definitely wanna make sure you file if you win that five bucks. [00:30:47] Doug. But, um, who’s gonna get this? I dunno, five bucks, no money, but all the glory Doc, you get to go first. Al Capone, how much money did the government say Al Capone never paid tax on back in 1931. [00:31:05] Doc G: I was gonna say, I’m, I’m happy to double down here and you guys would think that’s because I’m being optimistic and No, I just wanna cost OG as many points as possible. [00:31:14] Like, like if I win, you give me one, but if I lose, you take away two. We were joking about [00:31:18] Joe: throwing him under the [00:31:19] Doc G: bus. You said the silent part out loud. I know, I know, I know. I have no idea. Um, I’m gonna guess. So this is in today’s dollars or back in No, that’s, this is in 1930 $1. In 1930 $1, I’m gonna say 1 million. [00:31:33] $100,001. 1 million. 100,001. [00:31:40] Joe: I like my ones. Yeah. Sean, do you wanna, well, what do you wanna do with that? A million. Do you think that’s high? You think that’s low? [00:31:46] Sean: I think that’s low because the first thing that sort of came to my head is Al Capone. Right. So he’s sort of on the top of the funnel. Right. You know, or the pyramid of the mob. [00:31:56] And I know it’s inflated dollars, but I feel like it’s gotta be an eight figure number. Probably a low eight figure number. But this is just sort of my Wow. You think he’s way low? Yeah. So I’d say Jordan’s a little low. I will say 11 million. [00:32:12] Joe: $11 million. So we got 1.1 and then we got a factor A 10, Deb 11. [00:32:19] Oh [00:32:19] Deb: my goodness. I was thinking below a million. So I was like, oh, okay. What was a big salary back in the 1920s and thirties And it was probably like 5,000 a year, right? Right. Like five, 10,000. So I was gonna go like 667,328. [00:32:43] Doug: And you’re still gonna do that? You know I have to do the math on all this stuff, right? [00:32:47] Hell, we all had a conversation [00:32:51] Doc G: about this Doug before the show. I [00:32:52] Deb: thought an exact number would be helping me win or helping Paula win. [00:32:56] Doug: 663,000? [00:32:59] Deb: Nope. 667 3 [00:33:01] Doug: 28. I wrote it down 3 28, [00:33:06] Joe: you know, to round right. She would’ve said 27 95, but decided to round it to 3 28. All right, we got 67,000 3, 28, 11 million for Sean, and uh, doc’s got 1.1 million and a dollar. [00:33:22] Who’s gonna be right? We’ll find out. Just a second. We’ll be right back. Well, our voting is usually all over the place, but when it comes to Al Capone and Is money, you guys are definitely all the place. Doc, you’re at 1.1 million and a dollar, which is, uh, I’m, [00:33:40] Doc G: I’m feeling good. You know why? Why? Because I will not be in last place. [00:33:45] That’s [00:33:45] Joe: just, someone’s gonna be worse than me. You’re right in the middle, Sean. Someone’s gonna be worse than me. Deb, and Doc. Think apparently your number is, uh, well off by, over a factor of 10. What are you thinking? I. [00:33:57] Sean: I don’t know. I wouldn’t, I would not bet money on this proposition. ’cause you got inflation and it’s like how much of the activities do they get like him on versus other, I don’t know, spoken like a CPA, [00:34:07] Joe: which is Deb, I think exactly what you’re thinking. [00:34:10] Lots of inflation. So 667,000 back in 31 is a lot of money. Yeah, I think so. Alright, we need a winner. Doug, who’s it gonna be? [00:34:25] Doug: Well, hey there, stackers. I’m notable card shark and the guy who’s the most honest guy ever on his taxes. Nobody honest her than me for all the IRS agents listening, I’m Joe’s mom’s neighbor Doug. While it’s fun playing cards with Joe’s mom, I swear I can’t win with that woman. Make sure she’s on your team because she and Ruth just schooled me. [00:34:48] And Gertrude Joe’s mom says I shouldn’t be so angry about it. She says, I’ve got some kind of preoccupation with vengeance. Yeah, well, we’ll see about that old lady. What we, we will see about that. Well, for today’s question. Which I would’ve totally won had I been a contestant and not at all because I’ve already seen the answer On today’s date in 1931, noted gangster Al Capone went to prison for 22 counts of tax evasion. [00:35:16] The government asserted he made how much money? Which had never been taxed. Well, let’s replay it for you. I will tell you that, uh, doc G was off by just $83,899,999. Uh, Deb slash Paula, well, she was off by 84,332, let’s 84 80 [00:35:41] Doc G: four million [00:35:42] Doug: eighty four million three hundred and thirty two thousand six hundred and seventy two, making Sean slash Mom off by just 74 million because the real answer is $85 million. [00:35:56] Capone raked in from burner cell phones. [00:35:59] Joe: Yeah, burner cell phones. Congratulations, Sean. Big part of 1931 of the game. Uh, he had the technical advantage. Doug had the tech advantage. [00:36:07] Doug: Yeah. [00:36:07] Joe: Deb, I wanna go back to your answer because 80, what’d you say? Doug? 85 million. $85 million in 1931, Deb, [00:36:14] Doc G: in 19, in 1931 is a lot of money. [00:36:16] That’s [00:36:16] Joe: insane. I know you were playing the time value money game and it still was 85 million. That guy, that guy made a ton of money. That was, wow. That was amazing. I [00:36:27] Deb: wonder if he had, I mean, I don’t technically know his activities and how many people he had working under him, but I’ve gotta imagine like an enormous fleet. [00:36:35] Well, to make that much money. [00:36:36] Joe: Yeah. What I heard happen was he went around the neighborhoods of Chicago and he said, if I get one person and you get two people, and then that person gets three people. Like, everybody will make a bunch of money and you don’t have to work. Isn’t that the way it worked? Doug [00:36:49] Doug: so. [00:36:49] Oh, totally. And that one little, uh, wormy guy that was his accountant, you all, we all saw Untouchables, right? The guy with the glasses. He was the accountant. He was accounting for the equivalent of $1.7 billion in today’s [00:37:04] Joe: money, $1.7 billion. Nice job Mr. Malaney bringing mom up, uh, closer to og. [00:37:12] Sean: It’s an honor to have won Big Feather in the cap today. [00:37:15] Joe: Wow. And, uh, doc, thanks for throwing the game. We appreciate it. Nice, nice work. [00:37:20] Doc G: I anchored everybody. I did. I anchored ’em Well, I did it for you, Joe. I did it for you. So low. [00:37:24] Joe: Holy cow. Uh, let’s go to the second half of this discussion. And I wanna start off by talking about the Uber nerds out there and the things that we maybe worry too much about because financial podcast of course, are people that love this topic. [00:37:40] And let’s maybe calm people down a little bit. Sean, let’s start with you this time. Taxes on investments, it seems. It seems like when I see Uber nerds, they’re so obsessed with sheltering and yet I think Doc G nailed it. We should really be concerned about flexibility. I mean, I see so many nerds that end up with, oh boy, all my money’s optimized and now I can’t get any of it. [00:38:03] Do you think tax on investments is maybe something our, our biggest money fans pay too much attention to? [00:38:09] Sean: Well, and and Mike Piper in this article that you shared with us, Joe, makes this great point about the tax torpedo. So this is one of those money nerd things where, oh no, I make more income maybe on investments, maybe because of tax deferred retirement accounts, whatever it is. [00:38:25] And so that income makes more of my social security subject to tax, and they call that the tax torpedo, and it’s got this big scary name, the tax torpedo. But it turns out it doesn’t have much to do with anybody’s lived experience. They still tend to have a very low effective tax rate in retirement. And I think sometimes it gets to the worst outcome in all of all the outcomes of personal finance, which is not having something to worry about. [00:38:48] If we don’t have something to worry about, then we’re in big trouble, right? So some people just eat something to worry about. So if somebody can go grab, uh, the tax torpedo off the shelf, oh, thank goodness, right? We got something to worry about again. Or somebody can go grab Irma off the shelf. Oh, thank goodness we got something to worry about. [00:39:05] So, you know, one of the things I tell people is, if in doubt, just save investments tend to be relatively lightly taxed in the United States from an income tax perspective. If you’re in doubt, start saving and then figure it out later in terms of, oh, does it go into a 401k or a Roth IRA or a brokerage? [00:39:21] They talk about the biggest determinant of success is contribution rate. I think that’s true, both from an investment perspective and a tax perspective. [00:39:29] Joe: It’s so huge. I totally agree. A lot of people with not much money worried about taxes when they should be worried about contributing more money, especially Deb, when they start out. [00:39:39] And the thing that really frustrates me, I hear these commercials all the time from Robo-advisors and Roboadvisors target, in my opinion, the wrong people. They target these very young people who need a RoboAdvisor, much like camels need, uh, snow tires. Um, you just, why you need a RoboAdvisor when you’re 23 years old is beyond me. [00:40:00] Yes, Doug. I said it out loud. I said it out loud. That’s the thing that came outta your brain. You realize that. Right. The point is they don’t need it. And I just think a robo is ridiculous for a 24-year-old investor. But the thing, Deb, that they talk about, which is even more ridiculous. Tax lost Harvesting. [00:40:17] Doc G: Tax. Lost harvesting. Yeah. I’ve got a [00:40:19] Joe: 24-year-old who’s managed to save $500. They put it into robo and they do it because they offer tax lost harvesting. Right. Do we worry too much about tax lost harvesting and investing? [00:40:30] Deb: Yes. Especially in the scenario you’re painting with younger investors and even just when you think about the contributions and going like pretext on your 401k contribution, if you’re. [00:40:40] Starting off in your career and you’re making $35,000 and you’re starting job and your earnings potential is much higher, then when you’re actually earning those extra dollars, yes, you need to be more concerned about taxes and what type of vehicle to put it in. But when you’re just getting started, it’s really about cashflow management. [00:40:58] It’s about understanding. You need to save, take in your income and don’t have the expenses, exceed that income. That’s the basic, and yes, contribute enough to a retirement plan. If you have a traditional employer that’s doing a match, yes, that’s an important piece, but outside of that, just get into that habit of living, kind of frugally, living within your means. [00:41:20] Joe: Doc, I wanna turn to you for another thing. You know, we see so many of our tax nerds who really love the idea of the HSA, but what they love about it is not the fact that it’s a high deductible plan, that it’s less expensive that I put this money in an account. It’s the fact that I can invest that money. [00:41:37] I’ve come to you specifically as a medical professional because there’s a big piece of me that thinks that a lot of our Uber nerds, they’re not gonna go to the doctor because I need that money to multiply for later. Right. I’ll just go ahead and walk it off and everything will be fine. Do you think [00:41:53] Doc G: that’s really happening? [00:41:54] I don’t know if that’s happening. I like HSAs. I think they do something that, for instance, tax loss harvesting doesn’t. So a lot of, again, us non CPAs hear tax loss harvesting and think it’s the greatest thing in the world and have no idea that it actually changes your basis and therefore you one day will pay taxes. [00:42:11] Yes, it puts those taxes off. Yes. There’s some benefits. Uh, I think the same thing with the 10 31 exchange. If you die with that property, great, but if you don’t die with that property and you eventually sell it, your basis has been changed, which means you’re gonna pay more taxes eventually. Here’s what I like about HSAs. [00:42:26] It’s the one place where you’re actually winning the game, right? So you put it in tax-free, it grows tax-free, and then as long as you use it on medical stuff, you could spend it tax-free. There are very few vehicles that allow you to do that. Yes, I guess that could keep someone from going to the doctor, but you can always pay with your normal cash outta your checking account and let it grow and let it grow. [00:42:45] And then once you get Medicare age or start having all those problems and hospitalizations that older people have, you can start using it, then there will be plenty of medical costs in the future. Even if you pay out of pocket for some of those now. [00:42:57] Joe: Yeah. My problem isn’t liking the HSA. I think sometimes money nerds like it so much that we’re like, okay, I’m, I’m gonna make sure I don’t use any of this money. [00:43:04] Yeah. [00:43:05] Doc G: I mean, I guess you, this is also getting to that whole idea that, I’m surprised we haven’t said it yet in this episode, the tax tail wagging the wealth dog, right? So yes, if you’re letting taxes make you decide not to go to the doctor, and that could have really bad consequences, then we’re thinking way too much about taxes and not enough about life. [00:43:23] Life. And maybe that’s part of this conversation is again, I. It’s great to think about tax optimization and it will make your life better, but you can take it too far and at some point it becomes the thing instead of a helpful tool. [00:43:35] Joe: Deb, let’s talk about another Gotcha. Annuities. There have been all these studies done that show that all this money is trapped inside of annuities inside the United States, around the world, but in the United States specifically, I dunno how they’re taxed elsewhere, but in the US expects specifically, you know, it’s last in first out. [00:43:54] Mm-Hmm. Meaning that any money the annuity makes has to be taxed before the basis gets taxed, which means a lot of people hang onto their annuity money and they never live because they’re afraid of the tax. Mm-Hmm. Are annuities just a big tax? Gotcha. Or do we need to just feel free paying the tax? [00:44:13] Deb: Yeah, I mean, I think for annuities, I don’t use them a lot in portfolios. [00:44:17] I think if I do use them, it’s really because they already had an existing annuity and it might be too expensive to get out. Or if someone just is super risk averse and they want some security and having that kind of guarantee on what their earnings is gonna be, it could be a piece of their portfolio. [00:44:33] But, um, from a tax perspective, yeah, I mean, I don’t think it’s a great, I, I’m not a huge fan of annuities in general, just with fees and the delayed tax ramifications. [00:44:43] Joe: Well, and that’s the other piece of annuities, Deb, because I’m with you. I don’t think what annuity does is necessarily bad. I just think that an annuity people, like how often do you ever see an annuity turned into a pension, which is probably its best feature that it, that it can be income that you don’t outlive, you just never see it happen. [00:45:01] Deb: Right. Rarely. I mean, it typically you’re drawing on other assets if you have, you know, a taxable brokerage account. That’s what I always. Look for first when someone’s in that retirement withdrawal stage and there’s always an ordering of priority there. And yeah, annuities are not the first place I go. [00:45:17] Joe: It’s so frustrating. Another one, Sean, that, uh, you’ll see one smidgen of Uber nerds really talk about, you know, cash value life insurance. And you see some people online talk about all the magic you can do with cash value life insurance. [00:45:31] Sean: Yeah. I’ve even seen online people say, you know, well, Walt Disney built Disneyland. [00:45:36] With his cash value life insurance. Right. I’ve seen that. I don’t know how true or not it is. [00:45:41] Joe: You can build your own fantasy land too. Using it. Well, but [00:45:44] Sean: okay. So if you are in a situation where you’re in the 1950s and marginal tax rates are up to 90% and you happen to be a filmmaker slash theme park builder, well then yes, maybe you should base your tax planning on Walt Disney. [00:46:00] So you’re George Lu, but you know, it’s the year 2024 Wait minute [00:46:02] Joe: shot. I could see this checkbox. Oh, I matched two of the three. I’m building a theme park and I from the fifties in my brain, but I, but I don’t make movies, so. [00:46:12] Sean: Right. So yeah, I think. Sometimes these things get too cute. They solve for problems that most people don’t have. [00:46:20] Jack Bogle, he spoke about the incredible opportunity Americans have to own businesses. And I’m not here to say the stock market doesn’t have its perils, doesn’t have downsides, particularly for older retirees. But boy, isn’t it really cool that we have an opportunity to own diversified sets of businesses with very low cost. [00:46:41] As an investor, this is the greatest time ever to be alive compared to the past. So I, I think a lot of these things are solving for problems that folks don’t have, and it’s sort of foregoing this great opportunity to be an owner of thousands of businesses, which over time tends to, you know, be very valuable for most investors. [00:47:01] bit: Mm-hmm. [00:47:03] Sean: Deb. [00:47:04] Deb: Yeah, I was just gonna, uh, chime in on the cash value of life insurance. I had a client I just recently started working with and has quite a bit in the cash value life insurance realm, just in working with her prior advisor. What we were looking at were just, she needs that money for retirement. [00:47:20] She needs that for long-term care expenses. She has longevity in her family. So we even, uh, recently just exchanged her cash value life insurance policy into a long-term care hybrid policy that can give her some long-term care benefits. Uh, when she does get older in age and needs to draw on that, um, we know it’s a valuable resource she’ll use during her lifetime. [00:47:43] She doesn’t know that she’ll have assets to pass on to her kids, and that’s not her main priority. It’s really to make sure she still has enough comfort to get through the rest of her life. So even just from a non-tax perspective, just understanding why before you get invested in a particular vehicle, it’s really important to ask those hard questions and just understand the underlying premise behind them. [00:48:05] Joe: You know, the part of your story that frustrates the heck outta me is that when I was an advisor and I, the one out of a hundred people, that cash value life insurance was a great tax. Shelter, was a great place for them to be because we’d maxed out everything else, and it was beautiful. We could follow the modified endowment contract line. [00:48:20] Mm-Hmm. I couldn’t get ’em to do it because too many salespeople were selling ’em to people like your client. Right. That didn’t need it. Mm-Hmm. Right, because word on the street is that these things suck and they do for most people, but for that one person, but for other people, [00:48:33] Deb: they can be, I Exactly. Yeah. [00:48:34] It’s a case by case basis, but if you don’t have someone working in your best interest telling you exactly what’s suitable for you, it, it really can be a dangerous and slippery slope. [00:48:44] Joe: It’s so, so frustrating. I love this conversation guys. We have a link to Mr. Piper’s awesome piece that inspired this conversation on our show notes page at Stacking Benjamins dot com. [00:48:56] Let’s find out what each of you guys are doing before we say goodbye. Uh, we’ll have our guests of honor go. Uh, last, so Doc G, what’s happening over at the Earn Invest podcast, my friend. [00:49:08] Doc G: When this episode drops, uh, yesterday it will be my episode with Kelsa Dickey. She is a coach of coaches, so she’s a money coach, but she also teaches coaches how to coach. [00:49:19] And we really explore this idea of when you become the teacher of teachers, right? So what is it in your life that you’re good at, that first you get interested in, then eventually you do for a living, and do you ever get to that point where you can actually teach the teachers? Uh, and it’s a real interesting conversation as well as we just touch on what you would use a money coach for. [00:49:38] Joe: You know, it’s funny, I’ve heard her speak before and she’s amazing. And frankly, we need to have her on the show. So before I drop this joke on everybody, I just wanna make sure we’re, we’re clear on that. But they say that if you don’t know te those, those who don’t know how to do it, they teach it right? [00:49:52] And then if you don’t know how to teach, then do you teach the teacher? Is that, is that the next [00:49:57] Doc G: maybe? I don’t know. In medicine they used to call it See one, do one. Teach one. Yeah. Right. That was always what we did is so you, for a procedure, you see someone do the procedure, you do it yourself, and then you teach one. [00:50:07] And so, yeah. Yes. Hopefully you get good enough at it that you can be a teacher of teachers. And I dropped [00:50:11] Joe: that joke and she’s amazing. And we should go listen to her on Yeah, she’s fantastic. On earn and invest. Uh, let’s go ladies first. Next, uh, Deb, what’s coming up on the Beyond Buts podcast? [00:50:22] Deb: Yeah, we just had an episode not that long ago on just basics of investing, and I’m gonna take it a little step further and do another solo episode around values-based investing. [00:50:33] So for those who have more of a faith-based orientation and they want to express that through their investment choices, that episode’s gonna be for you. [00:50:41] Joe: Does that get harder over time or how, how long have you been practicing Deb? [00:50:45] Deb: Oh gosh. Uh, I started doing financial advisory work back in 2006, almost 20 years. [00:50:52] Joe: Yeah. So looking at oh six mm-Hmm. Versus today, is it harder to do value-based investing or easier or about the same? Easier for sure. [00:51:00] Deb: It’s actually easier [00:51:01] Joe: now. [00:51:02] Deb: Yeah. Well, there’s a lot more momentum in the values-based investing world. So especially like on the biblically responsible funds, um, there’s just a lot more entrance into the market. [00:51:13] And then from a performance perspective, they’re actually very close to their non-faith based peers. Yeah. So, uh, usually it’s within a one percentage point return difference. Oh yeah. Without all the [00:51:26] Joe: sin stocks in there that, um, you know, Mm-Hmm. But well, seriously, people talk about well, those make all the money. [00:51:31] Yeah. So you don’t have to go against your values. [00:51:33] Deb: Yeah. I’ve been offering that as like another portfolio option for clients of worth nest. Um, I guess now for three years. And, uh, it’s been been really neat. [00:51:43] Joe: Awesome, and we’ll link to your website at worthiness and to the podcast on our show notes page. [00:51:48] Sean, thanks for hanging out with us too. Again, my friend. Thanks for having me, Joe. What’s happened at the PHI tax [00:51:54] Sean: guy? So this week I’m publishing a post on, it’s the fourth quarter, and some folks, especially some early retirees, maybe haven’t paid in their income tax estimates for the year. So I’ve got a post about using an IRA to make up any difference, avoid penalties, that sort of thing, getting those 2024 income taxes paid up. [00:52:15] Dude, you do all the fun topics. [00:52:19] Joe: And actually, if you need to know, make sure it’s at the phy tax guy that you go to, and we’ll link to Sean’s amazing YouTube page. I almost forgot what it was, Sean YouTube page on our show notes as well, at, uh, stacky Benjamins dot com. All right, Doug, you got it from here, man. [00:52:34] Finish this thing out. Lots to learn. But what were our big three today? Well, Joe, [00:52:39] Doug: here’s what’s stacked up on our to-do list for today. First, remember that educational and hilarious thing that Deb Meyer said about the, the tax stuff. Deb, I, I’d say it, but I’ll never have your comedic timing. So, uh, so why, why, why don’t you just tell us again? [00:52:54] Go ahead. [00:52:55] Deb: Alright, on the tax side. Roth IRA versus traditional IRA or Roth 401k versus pre-tax 401k. Just understand the difference. Roth. It’s gonna grow. You’re putting after-tax dollars in Grow, grow, grow. It has an amazing potential to even be a legacy vehicle. Uh, whereas pre-tax, you’re eventually gonna pay the piper. [00:53:21] Doc G: Pay the Piper. Oh my God. Was [00:53:22] Doug: so like Mike Piper. That was so funny. Oh, I thought it was even better the second time. Second, I don’t know about you, but I know my life was changed forever when Sean Mullaney brought sexy backs to taxes. [00:53:35] Sean: Give it to us one more time, Sean. If you’re listening to the Stacking Benjamins podcast in 2024 later, you probably shouldn’t use Walt Disney as an avatar for your tax planning. [00:53:48] That said, if you happen to be listening to the Stacking Benjamins Podcast in the 1950s, you might wanna consider using Walt Disney as your tax planning example. [00:53:58] Doug: See what I’m talking about? [00:53:59] Sean: Damn. I could listen to him all day, [00:54:01] Doug: but the big lesson don’t question whether I’ll get revenge when you beat me at cards. [00:54:07] Joe’s mom told me upstairs that for Christmas, I should get her something with diamonds. Oh, I think I’m buying her a deck of cards. Ha. She’ll never see it coming. [00:54:19] Thanks to Doc G for joining us today. You’ll find him and his brilliant work at the Earn and Invest podcast. We’ll also include links in our show notes at Stacking Benjamins dot com. Thanks to Deb Meyer for hanging out with us today. You’ll find her fabulous Beyond Budgets podcast wherever you listen to finer podcasts. [00:54:38] And thanks also to Sean Malaney for joining us today. You’ll find him hanging out on his YouTube channel, PHI Tax Guy. Subscribe right now. Or uh uh, smash that subscribe button. Isn’t that what all the YouTube bros say? I’m down with it. This show is the property of SB podcasts LLC, copyright 2024, and is created by Joe Sulci High. [00:55:01] Joe gets help from a few of our neighborhood friends. You’ll find out about our awesome team at Stacking Benjamins dot com, along with the show notes and how you can find us on YouTube and all the usual social media spots. Come say hello. Oh yeah. And before I go, not only should you not take advice from these nerds, don’t take advice from people you don’t know. [00:55:22] This show is for entertainment purposes only. Before making any financial decisions, speak with a real financial advisor. I’m Joe’s Moms Neighbor, Duggan. We’ll see you next time back here at the Stacking Benjamin Show. [00:56:23] Joe: You know, it’s funny, we performed this live on YouTube and I totally, uh, forgot that Aaron in the audience had a question. So here’s Aaron’s question. Uh, by the way, if you wanna join us, we’re normally, today, we’re on a Tuesday. Usually we’re on Wednesday afternoons about, uh, 3:00 PM Central. So do the math at wherever you are. [00:56:42] 4:00 PM Eastern, 1:00 PM Pacific. Okay. 2:00 PM Mountain. We’ll do all of them. Aaron asks this, guys, if you have a small business, is it better to have an s-corp versus a sole proprietor? I’ve heard the S-Corp allows you to pay yourself as an employee. Does that really help with taxes? Let’s, let’s go. If you guys don’t mind, let’s go right to the FI tax guy. [00:57:03] Sean: What do you think of Sean? All right, so I tend to think s corporations are oversold in the world. The main planning concept is something we talked about earlier in the podcast. Payroll taxes. If you’re working sole proprietorship, there’s a form on your tax return every year. Schedule C, here’s the revenue from the business, here’s the expense from the business, and then you get to a net profit line. [00:57:26] Well, that net profit is then subject to self-employment tax. And people don’t like that because, hey, it’s another tax you gotta pay. And so let’s say your net profit was a hundred thousand dollars. Well. By my quick and dirty math, a little over $14,000 of self-employment tax. Well, what could we do to reduce that self-employment tax? [00:57:44] Well, we could have our business in a legal entity, usually an LLC, but you know, could be another one. And we make an S corporation election. Now what we do is we say, well, we had a hundred thousand a profit. We’ll, W2 payroll ourselves, like we’re a regular employee. Maybe it’s 50,000, maybe it’s 60,000, maybe it’s 40,000. [00:58:03] It has to be some, some reasonable compensation. That’s a whole other podcast episode, so let’s not go down that rabbit hole. But the cool thing about that is if our reasonable compensation’s only 50,000, now we’re only paying payroll tax on the 50,000, not the full 100,000. So it’s a way to reduce payroll tax. [00:58:22] We say, well, why doesn’t everybody just do that? Well, you’ve created a new tax return. You gotta do W2 payroll. There are services that do that for you, but it’s still, you know, an administrative task and you’ve reduced stuff like uh, a solo 401k contribution or a SEP IRA contribution. I think for a lot of people, the benefits of an S corp may not be worth the squeeze, may not be worth the administrative tasks and the hassles that come with it, but it’s absolutely a valid planning option. [00:58:53] I do think it tends to be a little overhyped. Deb, I’m curious your thoughts on it. I’m hoping Deb fights with you. Yan, come [00:59:00] Joe: on Deb, bring it, [00:59:02] Deb: fight with them. Well, I think it’s important to evaluate what stage of the business you’re in. So for a lot of startups they think, oh yeah, S corp, I’m gonna save on taxes. [00:59:11] And that’s not always the answer is, as Sean pointed out, you really do have to have a solid base of not only income but profit. So after the expenses are paid, you still need to have a decent amount of earnings coming your way. For a lot of people, getting an LLC set up is a great first step because that is a legal entity that from a liability perspective, it kind of separates you as an individual from the business, uh, which is in the, under that LLC umbrella. [00:59:41] Then if you set it up individually, you could be taxed as a sole proprietorship early on. And then maybe as you’re building the business, you’re starting to have more recurring revenue, you have more of a predictable profit, then you could consult with a CPA. I always recommend consulting with a CPA before doing an S selection. [00:59:59] I had a client, uh, not that long ago, that set up her own LLC, did an S selection, and by the time we talked about it, her business wasn’t going to be profitable. She only had expenses, no income, and I was like, no, you need to resend that immediately. Again, I’m not a lawyer. I’m not giving legal advice. I am a CPA and I do help clients with some of those conversations. [01:00:22] But depending on where you’re at in that business journey, it’s important to think about going through those financials with your CPA before making that big decision. [01:00:31] Joe: Doc, that was one of the most hilarious after shows we ever had. [01:00:34] Deb: It was, it was so funny. I couldn’t help myself. My [01:00:36] God.