RR S4 E5 TAX MINIMIZATION [00:00:00]
BRIAN: Right. Welcome back to Save for Retirement Radio. My name is Brian Decker, your host and joining me.
CLAYTON: I’m Clayton Bradshaw.
BRIAN: We’re gonna talk about tax minimization. But before we dive into this very important topic, I wanna talk about something. It’s my birthday tomorrow, and I got myself and my wife a birthday present. Can you guess what it is?
CLAYTON: What? What is it? I don’t know. Some golf clubs? [LAUGH]
BRIAN: It is awesome. Electric bikes. I got an electric bike.
CLAYTON: Oh, I’ve heard about these.
RR S4 E5 TAX MINIMIZATION [00:00:30]
BRIAN: Oh, well you’ve got to spend 30 seconds on these. Electric bikes allow my sons, who run marathons… we go into the backcountry in mountain biking, and they think that they’re really good and in shape. My wife and I go right by them. Up the hill, we go right by them. We didn’t tell them that we had electric bikes.
CLAYTON: [LAUGH]
BRIAN: And they were ticked. But we owned the situation, we came right back down, they passed us. We said, “Let’s do that again.”
CLAYTON: [LAUGH]
RR S4 E5 TAX MINIMIZATION [00:00:59]
BRIAN: They were aghast. We went right up. [MAKES NOISE] We had to wait up at the top, and we went down, they passed us, but it was worth it. Because going up, these are technical mountain biking paths with big rocks and steep.
CLAYTON: Yeah, because you’re up at the ski resorts on the slopes, right?
BRIAN: Well, this was in another spot, but it’s where the mountain biking team at my daughter’s high school practiced, and it was spectacular. When you buy these, if you buy all carbon frame, that’s the lightest.
CLAYTON: Yep.
RR S4 E5 TAX MINIMIZATION [00:01:33]
BRIAN: And you buy the best battery, which is generation four, it’s this year, 2020, Scott, Trek, Cannondale and Specialized are the four that have this, and it is incredible. We ride every night. Come home from work, get some dinner, mow the lawn, and we go out and we ride, and it is spectacular.
CLAYTON: Yeah, one of my clients, they bought some, and they love it. Because they said they’ll go out in the hills and they’ll get to the top of their destination with some great views, and they won’t be gassed or exhausted having just climbed this big hill.
RR S4 E5 TAX MINIMIZATION [00:02:10]
BRIAN: Yeah.
CLAYTON: And they said you can adjust the settings, right?
BRIAN: You get as much cardio as you want.
CLAYTON: Yeah, so you can still put some effort in.
BRIAN: Right.
CLAYTON: Or you can do it so you hardly have to put any effort in.
BRIAN: Right.
CLAYTON: And you can enjoy the ride.
BRIAN: Right.
CLAYTON: I love that.
BRIAN: It is awesome.
CLAYTON: And it’s great to hear that too, because obviously we’ve kind of been on the lockdown, we haven’t been able to do anything, and so having a way to get out and do some of this stuff, so that’s great to hear that you’re getting out.
BRIAN: And our neighbors see us fly up these hills and they think, “There goes Brian, there goes Diane. They are in such great shape.”
RR S4 E5 TAX MINIMIZATION [00:02:40]
CLAYTON: I love that. That’s great to hear. You mentioned we were gonna talk about taxes today, but it’s just great to hear as an idea for people to get out this summer with Memorial Day and summer kind of officially starting, but let’s now dive into taxes, because we’ve got a lot of great subject on that.
BRIAN: One more tip on electronic bikes. If you’re interested in getting these, you have to move because people are buying these out from under the person looking at them. So, I called in, found out that there is none for sale on Amazon, eBay, KSL, Craigslist, there is none used. So, you go buy them new.
CLAYTON: Sure.
RR S4 E5 TAX MINIMIZATION [00:03:20]
BRIAN: And you look and you snooze, the other guy will point and say, “I want that bike.” And the people there have to sell it when you say you want it, when you commit.
CLAYTON: Yeah.
BRIAN: So, if you’re looking, it’ll be sold right out from under you. I watched it happen.
CLAYTON: Oh, man.
BRIAN: All right, ready to dive in?
CLAYTON: Yeah, let’s talk about it.
BRIAN: Okay, tax minimization. Let’s talk about the options, and Clayton, what would you say? There are three main options anymore? There used to be a lot, but now I think we’re down to three options for tax minimization.
RR S4 E5 TAX MINIMIZATION [00:03:51]
CLAYTON: Sure, three realistic options. I mean, there’s a lot of things that people can try to do, but these are going to be the most effective, and when done correctly and implemented correctly, are the best way to save taxes.
BRIAN: Right. And each one has advantages and disadvantages, wouldn’t you agree?
CLAYTON: Oh, absolutely, yep.
BRIAN: Okay, so what’s the first one?
CLAYTON: So, we’re gonna be talking about municipal bonds today. We’re gonna be talking about something called IULs, and we’re gonna be talking about Roth conversions.
BRIAN: Right.
CLAYTON: And the reason we want to bring up taxes is there’s been a lot has been happening with the government and with the Fed lately. As the government has tried to kind of control and get ahead of this whole coronavirus and this COVID outbreak, there’s been a lot of action that’s been taken care of by the Fed.
RR S4 E5 TAX MINIMIZATION [00:04:32]
CLAYTON: And this puts us… we’re kind of in this interesting timeframe where we’ve got a close to historic low tax rate, but that’s not gonna be the case in the future, at least I feel, and maybe you see it differently.
BRIAN: No, I agree with you. I bet you my house that the tax rates will be going higher. We have a 23 trillion-dollar deficit January 1, we’ve spent 4 trillion already this year, so tax rates will be going higher. Now the Federal Reserve is lowering rates to almost 0 to keep the interest owed on that low.
CLAYTON: Sure.
RR S4 E5 TAX MINIMIZATION [00:05:06]
BRIAN: To try to spur inflation for the economy, so they get a two-fer by bringing interest rates down. But now back to municipal bonds. What are the rates for a 7- to 10-year AAA municipal bond right now?
CLAYTON: They’re, what, around two percent?
BRIAN: One and a quarter.
CLAYTON: Geez.
BRIAN: It was two percent three months ago, you were right.
CLAYTON: They just keep diving.
BRIAN: Yeah, so one and a quarter is a tax-free rate. If you’re in the 25, 30 percent tax bracket, let’s say it’s the tax equivalent of a CD at one and a half percent. It’s still low rates. So, the negative of tax-free municipal bonds are two things. One is low rates right now.
CLAYTON: Sure.
RR S4 E5 TAX MINIMIZATION [00:05:46]
BRIAN: You’re not getting anything. And the second is credit risk. So, when you have the state of Utah, Washington, California shut down for three months.
CLAYTON: Right.
BRIAN: What are the municipalities gonna do?
CLAYTON: Oh, yeah.
BRIAN: They are squeezed right now.
CLAYTON: Yep.
BRIAN: So, credit risk is the risk that your municipal bond that was rated A, AA, AAA, that its ability to pay back is compromised. That has skyrocketed.
CLAYTON: Right.
BRIAN: So… go ahead.
RR S4 E5 TAX MINIMIZATION [00:06:16]
CLAYTON: So, you mentioned, though that… I want to compare the rates really quick. So, you mentioned one and a quarter on municipal bonds, on AAA-rated municipal bonds right now. You’ve got limited options as far as the AAA-rated munis out there, right?
BRIAN: Right.
CLAYTON: But what’s the rate for a savings checking account right now?
BRIAN: Oh, taxable, there’s seven banks. Should we just say them? I mean, we can do a community service here, seven FDIC banks that are paying 1.4 to 1.6.
CLAYTON: Yep.
RR S4 E5 TAX MINIMIZATION [00:06:46]
BRIAN: They’ve come down a little bit. They are Ally, CIT, Capital One, Discover, American Express, Goldman Sachs, Synchrony and Nationwide. So, there’s eight of them.
CLAYTON: Yeah.
BRIAN: They’re FDIC banks, they pay a 1.4 to 1.6 percent rate on cash.
CLAYTON: Right. And so, because of that, you’re saying that you can put a municipal bond for 5 to 7 years, get one and a quarter percent, or have fully liquid funds that don’t have that credit risk.
RR S4 E5 TAX MINIMIZATION [00:07:26]
BRIAN: Right.
CLAYTON: And that’s…
BRIAN: It’s a good point.
CLAYTON: Yeah.
BRIAN: Rates… in 1940, we had the 10-year treasury hit 2 percent and it bounced higher. The 10-year treasury is at 0.7, that shows you how low rates are right now.
CLAYTON: So, you’ve been in the industry for thirty-five years now. Have you ever seen a time like this?
BRIAN: Nobody has seen a time. If you lived three hundred years, you’ve never seen rates this low in the United States.
CLAYTON: That’s a…
BRIAN: The United States is not quite three hundred years old.
CLAYTON: [LAUGH]
BRIAN: I’m just saying.
RR S4 E5 TAX MINIMIZATION [00:08:00]
CLAYTON: Right. History of the United States.
BRIAN: We’ve never seen lower rates than right now.
CLAYTON: Yeah.
BRIAN: So, the problem with tax-free municipal bonds is that you’re not getting paid much. Yes, it’s all tax-free, but the risk is higher than ever before because of credit risk in the economy, and the rates are lower. Not a good combination, would you agree?
CLAYTON: Right. Yeah, exactly. And you’ve seen, when you see clients come in, you see a fair bit of clients that have municipal bonds as part of their portfolio.
BRIAN: Right.
RR S4 E5 TAX MINIMIZATION [00:08:30]
CLAYTON: Why is that? I mean, what are the pros? We’ve talked about the cons, so what are the pros now? We talked about tax minimization.
BRIAN: It’s habit. It’s just a habit. People have laddered tax-free municipal bonds for years because, in the past, it has worked. Now rates have dove down to all-time record lows so you’re not getting paid much, and now with the economy being shut down, which has caught everyone off-guard, you have significant credit risk.
RR S4 E5 TAX MINIMIZATION [00:09:00]
BRIAN: So, we as fiduciaries to our clients would not recommend a municipal bond option for tax-free or tax minimization.
CLAYTON: Sure. And two, even prior to 2020 when the markets went all haywire, how many states had fully-funded pension obligations that kept that credit risk up in kind of an acceptable level?
BRIAN: Lots of them.
CLAYTON: Well there were only two, right?
BRIAN: Oh, you’re right, before that. You’re right. You’re right.
CLAYTON: Yeah, before 2020.
RR S4 E5 TAX MINIMIZATION [00:09:31]
BRIAN: Right.
CLAYTON: And so now, obviously, is those funds and the states are kind of racking up that debt as things are shutting down. It’s creating some bigger issues that are compounding that credit risk.
BRIAN: Right. That’s right.
CLAYTON: Okay, so that’s municipal bonds that we talked about.
BRIAN: Right.
CLAYTON: Pretty common instrument, I think most people probably have them in their portfolio. Anything else that people should watch for if they see a statement with their municipal bonds?
BRIAN: Oh, the price. Good point. So, the price of your municipal bonds. How do you know that you’re having credit risk and that your bond is at risk of trouble?
RR S4 E5 TAX MINIMIZATION [00:10:02]
BRIAN: Don’t call your banker or broker, because he or she is going to be protective of why they sold it to you, they didn’t make a mistake. Watch the price, because the price, if it breaks par, 100.00, you have a problem with your bond. Unless it’s a zero-coupon bond.
CLAYTON: Sure.
BRIAN: Those are always below zero until they get to par. But when you have your bond price break zero… or I’m sorry, 100.00, that’s called breaking par, and that’s happening right now in the New England, the Northeast states, it’s happening in the state of Illinois, Chicago specifically.
RR S4 E5 TAX MINIMIZATION [00:10:42]
BRIAN: It’s happening in many municipalities in California, and it’s a warning that you should… we would just advise you to sell it. Once it breaks par, you just sell it. This is your safe money. So, we had this years ago, do you remember Puerto Rico?
CLAYTON: Yeah.
BRIAN: Five years ago, we saw bonds breaking par in Puerto Rico. We told our clients to sell them. Most of them did. The people who did are grateful, because those bonds, now Puerto Rico is broke.
CLAYTON: Right.
RR S4 E5 TAX MINIMIZATION [00:11:13]
BRIAN: Those municipalities are trading at twenty cents on the dollar today. And, again, this is supposed to be your safe money, so good point on bond prices.
CLAYTON: And I know with all of that, I know we’ve gotten a little jargony as we’ve talked about municipal bonds, we’ve talked about kind of the effect of the prices and the credit risk and what’s going on with the economy. That being said, if you’re looking at your statement and you think you’ve got a municipal bond, and you don’t know what all the numbers mean next to it, just give us a call. We can talk you through it. Fifteen minutes, it’s free, we’re not gonna try to sell you anything, we just want to make sure you understand what you have.
RR S4 E5 TAX MINIMIZATION [00:11:48]
CLAYTON: Our number is 833-707-3030. Again, that number, 833-707-3030. We’d love to talk you through it, that way you know if you see a risk on there, you can get away from it before it becomes a problem.
BRIAN: Right. On municipal bonds, to sum up, low interest rates right now, you’re not getting paid much. High-risk right now because of the municipality and the credit risk, and you can see in your monthly statement, or you can see by logging on and checking your account to see the price that your bond is trading at. If your bond is trading less than 100 point 00, it’s flagging you that there is a problem.
RR S4 E5 TAX MINIMIZATION [00:12:29]
CLAYTON: Yep, yeah. Okay, so we mentioned municipal bonds, we were gonna talk IULs, and then we’ll wrap up today with Roth conversion. So, let’s talk IULs. Some people might not know what that acronym is. Brian, do you want to dive into it for us?
BRIAN: Yeah, index universal life. There’s many of them. Most of them are not good.
CLAYTON: You said index universal life insurance, right?
BRIAN: Right.
CLAYTON: Yep.
BRIAN: Okay. Many of them are not good because they have high fees, they have low returns, high commissions to the broker. There are many problems with these.
RR S4 E5 TAX MINIMIZATION [00:13:05]
BRIAN: So, we as fiduciaries go through all of the databases like Wink, and we find the bank and the insurance company offerings in the IUL space, and we as fiduciaries choose the A-rated companies that are offering the highest rates. So, let’s break down what the IUL is. It’s like a Roth conversion in a principal-guaranteed account. So, an IUL, you cannot lose money based on the index.
RR S4 E5 TAX MINIMIZATION [00:13:36]
BRIAN: The index, if the index drops, then let’s call the index XYZ index. If the index drops then that year you wouldn’t make any money. You cannot lose money with these, which I think is a good thing, right?
CLAYTON: Oh yeah, absolutely. So, I mean, these… so when you’re saying that they can’t lose money, this falls into the category of something like a CD, or a municipal bond, or a US Treasury, or your savings account, or a fixed annuity, or one of those indexed annuities, right?
RR S4 E5 TAX MINIMIZATION [00:14:11]
BRIAN: Yes.
CLAYTON: The money that goes in is still your money, and if the market takes a 50 percent dive, your principal, you don’t lose any of your principal.
BRIAN: That’s right. So, the index can drop, but you cannot lose money. This is a principal-guaranteed account. This is a part of your portfolio for safe money. The second positive is that the index itself, in the last 30 years, has averaged over 9 percent. Where in the world can you get a principal-guaranteed account where the index… this is key… uncapped has averaged over 9 percent?
RR S4 E5 TAX MINIMIZATION [00:14:48]
BRIAN: That’s what we have found. Now, like a Roth account, it grows tax-free, it distributes income back to you tax-free, and it passes to your beneficiaries tax-free. Those are huge benefits of what we’re talking about. So, Clayton, do you want to cover why it’s tax-free?
CLAYTON: Yeah, so with these, when you’re using one of these… and again, we’re gonna get a little jargony here. We don’t want to go too far into the details, because ultimately there’s a lot of options and a lot of ways and reasons why somebody might want to use one of these. We want to make sure that you just have an understanding of what these tools are at your disposal.
RR S4 E5 TAX MINIMIZATION [00:15:28]
CLAYTON: Because, quite frankly, an IUL, one of the cons to them is that they’re not a good fit for everyone. I have people come in that I meet with that….
BRIAN: We’re gonna go through the cons in a minute.
CLAYTON: Okay, so we’ll go through the cons in a minute. So, with these, when you’re setting up one of these, you put money into it. That allows you then to get growth on that account without having to take those big dips. So, on the IUL, be cautious when you’re using one of these.
RR S4 E5 TAX MINIMIZATION [00:15:57]
BRIAN: Okay. So, the reason that you can pull money out tax-free is because, when you fund that account with like an IRA, you pull money out, it is deemed as a loan. And there is an agreement between the IRS and the insurance company that when you pull money out and it’s deemed a loan, it is tax-free. So that agreement goes back over a hundred years. So that income comes back to you tax-free. Now, like a Roth conversion, if you fund an IUL with IRA money, you pay taxes on it and the growth is all tax-free.
RR S4 E5 TAX MINIMIZATION [00:16:40]
BRIAN: The agreement with the IRS and the insurance companies is you have to fund it over at least three years.
CLAYTON: Right.
BRIAN: So, we as fiduciaries have found that five years works out to be what lowers the cost the most and gives the most growth.
CLAYTON: Right.
BRIAN: So again, here’s the positive. We’re gonna talk about the negatives in a second. Positives are principal guarantees, you cannot lose money from the index. Number two, an uncapped index that has averaged over 9 percent. Number three, when you pull money out, it’s tax-free.
RR S4 E5 TAX MINIMIZATION [00:17:17]
BRIAN: Number four is that if you die during this period, then the money goes and transfers to your beneficiaries tax-free. So those are pretty strong positives. So, any more positives before we talk about the negatives?
CLAYTON: No, I think that’s it, and we’ll dive into what the IRA to Roth conversion looks like in just a minute, but that’s what you were talking about. When you’ve got money that you’re putting in, it’s either pretax or after-tax, right? In the case of the IUL, it’s like you’re converting your pretax money to your after-tax money, which we’ll go into some depth in in just a minute.
BRIAN: Correct. Yep.
RR S4 E5 TAX MINIMIZATION [00:17:52]
CLAYTON: So, let’s talk about the cons now of the IUL.
BRIAN: All right. The negatives, there’s two, and they’re always with us when you talk about anything that’s principal-guaranteed. One is liquidity.
CLAYTON: Sure.
BRIAN: A one-year account is gonna pay less than a five-year count. Because if you’re willing to part with your money for five years, you’ll get paid more than if you’re willing to part for just one year.
CLAYTON: Right.
BRIAN: Liquidity is an issue. So, on these, we don’t…
CLAYTON: And that’s the case for any of those principal-guaranteed accounts, right?
BRIAN: Any of them.
CLAYTON: Bonds, CDs. I mean, anything of any length of time is going to generally… and it will in a healthy environment, right? It’s going to pay you more the longer it’s with that institution.
RR S4 E5 TAX MINIMIZATION [00:18:33]
BRIAN: Correct. So, with liquidity, you have to be wise in how much you pull out. We don’t touch the IULs in the first ten years. We want to see them grow, and then we start to pull income from those accounts after ten years. But the first negative is liquidity. The second… anything else you’d want to say on liquidity?
CLAYTON: No. I mean, with life insurance it’s something that, how it’s set up, consider it carefully, because generally this is going to be with you the rest of your life.
RR S4 E5 TAX MINIMIZATION [00:19:09]
BRIAN: Right. The second negative is fees. They have high fees. And so, this is something you want to make sure that when the policy comes back, here’s what we do. We take all the fees and dump them into a spreadsheet, and then we… I hate to use this term; we kill them off at age 85 and 90. So we want to see…
CLAYTON: And we do that just realistically for life expectancy, right?
BRIAN: Right.
CLAYTON: We know that the actuary… well, the actuaries tell us we’re all gonna die in our early 80s, so we just wanna have a realistic timeframe.
RR S4 E5 TAX MINIMIZATION [00:19:44]
BRIAN: Right. And we see what the fees are with an average rate of return, and I just didn’t love telling people, this this is why an IUL is on our list for tax minimization. Net of fees, a lot of our clients are seeing seven and eight percent net of fee returns on these IULs to age 85 and 90. But there is a third negative. It’s life insurance, and you have to qualify for it. If your health is not good and you’re older than, what would you say? Age 70.
RR S4 E5 TAX MINIMIZATION [00:20:19]
CLAYTON: It depends on the person. I’ve seen some folks come back where they’re in their mid- to late-60s and health hasn’t been favorable to them, but I’ve also seen people in their early 60s that are cancer survivors and still had great-looking figures for these.
BRIAN: Right. So, this is something that if you don’t know about, they should give us a call. Because when it comes to tax minimization, I’ve been in this business thirty-five years, I don’t of any income stream tax-free that beats an IUL. It’s not around.
RR S4 E5 TAX MINIMIZATION [00:20:49]
CLAYTON: Well. and one other pro to this, Brian, that I want you to talk to, is the estate planning aspect of the IUL, because this can-do wonders as a way to pass assets on to beneficiaries for the next generation.
BRIAN: Tax-free.
CLAYTON: Tax-free.
BRIAN: Correct.
CLAYTON: As a benefit to life insurance, of course.
BRIAN: Right.
CLAYTON: So, and again, these don’t work for everybody. There is a select few that they do work for. And when they work, they can work amazingly well as a way to minimize taxes, provide a pretty substantial and comfortable source of income in the later part of someone’s life, as well as transfer assets to beneficiaries in an incredibly tax efficient way.
RR S4 E5 TAX MINIMIZATION [00:21:30]
BRIAN: Correct. I want to emphasize that there is a lot of bad product out there, so I hope that you’re very careful in making sure that you get an uncapped index that its average return in the last 30 years is eight plus, and that you run, when you get your policy back, that you run a cost analysis where you put all the fees in a spreadsheet, have the average return and see what your returns are if you were to die at age 85 and 90. And if it’s seven or 8 percent plus, no-brainer. Wouldn’t you say?
RR S4 E5 TAX MINIMIZATION [00:22:09]
CLAYTON: Yeah. Oh yeah, absolutely. I think it’s something that everyone should consider. And if your advisor hasn’t brought it up already, they should… I mean, give us a call and we can tell you. If your advisor has brought it up, we should probably talk to you because we want to see, do you have the right pieces in place for it, right? Is it uncapped? I mean, because all of this stuff, again, we’ve talked a lot of jargon that I think some of our listeners probably don’t understand, or wouldn’t know where to look it up because there’s a stack of papers that you get, I mean, with any financial document. When you sign up for a bank account, when you buy anything from a bank or you do a loan of any kind, the stack of papers you get is massively thick, and these are no different from those other things that most people are used to.
RR S4 E5 TAX MINIMIZATION [00:22:51]
CLAYTON: And so, we know where to look. We know how to dive into the details on these to tell you if you’re getting the right structure for your investment that works the best for you.
BRIAN: Correct.
CLAYTON: Because I’ve seen these come across my desk that somebody else bought some from the other guy and it wasn’t structured properly, and I knew exactly where they went wrong, and a simple tweak could’ve made all the difference to get them more and to better benefit them.
BRIAN: Correct.
CLAYTON: But it was in, the other guy sold it to them with the wrong intentions.
BRIAN: Right.
RR S4 E5 TAX MINIMIZATION [00:23:23]
CLAYTON: And so that’s something to be cautious of when you’re looking at IULs. But they can be a good tool, and they can fit for those that qualify if the rest of the plan is structured correctly.
BRIAN: Right. So, we talked about why we think tax rates are going higher with the country’s debt at twenty-three, plus another four trillion. We talked about municipal bonds. We’ve talked about index universal life. Anything more to say before we jump into what I believe is the most universal last bastion of tax minimization that’s available?
RR S4 E5 TAX MINIMIZATION [00:23:59]
CLAYTON: Yeah.
BRIAN: How is that for a superlative?
CLAYTON: [LAUGH] This is one that whenever in my conversations with folks, I bring up using a Roth or doing a Roth conversion, one of the bigger regrets that I see for most couples is “I wish this would’ve been around 30 years ago when I started saving in my 401(k), when I started putting money aside, because I would’ve loved the benefit that this would’ve provided.”
BRIAN: Right.
CLAYTON: Because I want to be able to enjoy that tax-free retirement, and a Roth is one of the ways to help somebody get there in doing that. So, I’m excited to talk about it because it has a massive impact on future income.
RR S4 E5 TAX MINIMIZATION [00:24:39]
BRIAN: For most of our clients that come through and the planning that we do, the Roth conversion is at least a six-figure tax savings strategy. Over a hundred thousand in taxes saved by doing the Roth conversion. We’re a math-based firm, so we know how much money our clients have at risk. A Roth does three things, I’m going to repeat this. It grows tax-free, it distributes income back to you tax-free, and it passes to beneficiaries tax-free. There is a confusion that happens a lot, people will say, “Well, I don’t qualify for a Roth, so this is not for me.” What would you say to that?
RR S4 E5 TAX MINIMIZATION [00:25:19]
CLAYTON: I would have them explain to me why they think that’s the case.
BRIAN: They’ll say, “I make too much. I can’t do it.” And they’re thinking of Roth contributions instead of a Roth conversion.
CLAYTON: Right. So those two words are important to know the distinction between. There are contributions to a Roth, which there are quite a bit of limitations with that. But then there are conversions, and you’ve got a lot more wiggle room when it comes to doing conversions.
BRIAN: So, let’s talk through the conversion. Should you convert a bucket one, two, three, four, five that are principal-guaranteed accounts that you’re drawing from in the first five, ten, fifteen years? No. No. A Roth is something that you want for your longer-term money, at least fifteen to twenty years out.
RR S4 E5 TAX MINIMIZATION [00:26:02]
BRIAN: You want that money growing and at-risk. So, these are accounts that you want to see growing. This would be where you’d have your stock market or your risk money. Now we… this is a separate conversation… use six managers that are computer trend following models, that when the trend is higher, they’re long the market, but when the trend goes down, they’re able to make money as the markets go down. That’s another story. Another conversation.
CLAYTON: Yeah.
RR S4 E5 TAX MINIMIZATION [00:26:33]
BRIAN: So, in our Roth conversion, the average returns are very, very high net of fees for those accounts. So, are we doing our clients a favor putting 300,000 at risk and having that money in twenty years multiply several times, so that when they pull that money out, they’re not paying taxes on 300,000, they’re paying taxes on 2 million dollars?
CLAYTON: Right. And that’s where the problem lies, right?
BRIAN: Right.
RR S4 E5 TAX MINIMIZATION [00:27:04]
CLAYTON: Is that you can pay, I mean, 10 percent of 300,000 is a lot less money than 10 percent of 2 million dollars.
BRIAN: Right.
CLAYTON: Right? And that’s the point we’re trying to make is that when you do the Roth conversions early with a low amount of money, and then let that grow in that Roth account over time, over 10 to 15 to 20 years, then you can reap all of the benefits of that tax-free money that’s coming out of the Roth because you already paid the taxes on it.
BRIAN: Right. So, you said something that’s very important. When you convert the Roth, would we just convert all 300,000 in one year? No.
RR S4 E5 TAX MINIMIZATION [00:27:37]
BRIAN: We look at the tax table. So, when you’re married filing jointly, you have twenty-two, twenty-four, and then it jumps to thirty percent. We don’t want your income to be jumping into the thirty percent bracket. We want to make sure that we keep your conversions, plus your salary, plus your Social Security, plus your pension, plus your rental income.
CLAYTON: [LAUGH]
BRIAN: We take all that into consideration when we try to keep you under that thirty percent bracket, and we do Roth conversions, so over five to seven years we get everything converted so that that money can grow tax-free.
RR S4 E5 TAX MINIMIZATION [00:28:13]
CLAYTON: Right. And we geek out about this stuff because this is what we eat and breathe, and we live this stuff, right? And I’m sure some people are listening and they’re thinking, “Oh, that doesn’t make sense to me.” Just call us and we can talk you through what we’re talking about, because there is so much that goes into calculating the proper amount for a Roth conversion. We’ve got spreadsheets and we’ve got ways to do that simply on our end, because this is what we do, and we live for this stuff.
RR S4 E5 TAX MINIMIZATION [00:28:45]
CLAYTON: So, if you’re wondering, “Well, how does this apply to me? Is there something I can do with my current situation to make this work?” Give us a call. Again, 15 minutes, we’re not gonna try to sell you on anything or pitch you on anything, we just want to help answer some questions and talk you through what this can look like. Because right now with debt being at an all-time high, GDP is taking a massive dive right now, we know that we’ve gotta pay for that bill at some point in the future of the national debt. Interest rates will probably go up in the future.
RR S4 E5 TAX MINIMIZATION [00:29:19]
CLAYTON: So let’s take advantage of this time now when interest rates are so low, and taxes are so low, to get proper tools and proper things in place on your plan so that you can benefit from that later on in life, so you don’t have to stress when the day of reckoning finally comes for all of this.
BRIAN: Right.
CLAYTON: So, we can help with those Roth conversions, we can help talk through the IUL and what that might look like, and maybe just to even explain it or answer some questions if you’ve got some. We can talk you through municipal bonds or any of the other investments that you might have questions about.
RR S4 E5 TAX MINIMIZATION [00:29:50]
CLAYTON: Our number is 833-707-3030. Again, that number, 833-707-3030. We’d love to talk you through kind of some of these points. We’ve talked today about tax minimization, we’ve talked through municipal bonds, we’ve talked through IULs, we’ve talked through Roth conversions. Brian, is there anything else you wanted to cover on that?
BRIAN: Just using superlatives. I personally don’t know of any higher tax break than doing the Roth conversion. The six-figure tax saving strategy, superlative intended.
RR S4 E5 TAX MINIMIZATION [00:30:24]
BRIAN: I secondly don’t know of any way to get a higher income stream tax-free on a principal-guaranteed account than an IUL. And we want to warn you, number three, of your municipal bonds to check the price because of significant credit risk that’s happening since the coronavirus hit and has brought the economy in the United States to a standstill.
CLAYTON: Okay. Well, if anybody has any questions, again, give us a call, 833-707-3030. Again, 833-707-3030. We love being on the show, and it’s a lot of fun to do this. I’m Clayton Bradshaw.
RR S4 E5 TAX MINIMIZATION [00:31:06]
BRIAN: Brian Decker, your host. Thanks very much for tuning in to Save for Retirement Radio.
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