What is Financial Planning?

When it comes to financial planning, most people think about their investments. How your investments are managed is a small piece of the pie, but it’s not financial planning.
Proper tax mitigation, proper asset protection, retirement planning, paycheck protection, cash flow, and life insurance need to be integrated correctly into a financial plan, and not simply be a bunch of financial products thrown together in a “junk drawer” with no rhyme or reason.

Tax mitigation is just as important, or more important than your investments. Your return on investments isn’t doing much if you are giving half of it away to the government. We have no idea what taxes will look like when we retire. Most folks are led to believe they are in a lower tax bracket when they retire. This simply is not true. Even if the thought were to be true today, it may not be true tomorrow, next year, or when you retire.

Most folks are taught to put their money into an IRA, 401 (K) or other tax-deferred financial vehicle. At today’s rate, 30-40% of your money in these accounts are an IOU to the IRS. What will happen to your retirement if taxes increase?

  • Do you have Insurance on Your Paycheck?
    Your income is your biggest asset, yet few people protect this asset. Without it, it would be hard to support yourself and your loved ones financially. Disability is not something we ever think about, but statistically, 1 in 4 people will have a disability in their life.
    Disability can cover everything from total disability to rehabilitation from a sickness or injury. Common disabilities include
    Accidents, injuries, and poisonings
    Cancers and tumors
    Cardiovascular and circulatory diseases
    Muscle, back, and joint disorders
    Spine and nervous system-related disorders
    Mental health conditions

Can your family afford to lose your paycheck and/or pay for services needed if you become disabled? What would you do if a spouse had to stop working? We’ve seen it happen, and it’s devastating.

What about life insurance?
Permanent Life insurance has an incredible amount of uses and is one of the most valuable assets you can own.
Most people have been taught there’s only one use for life insurance, and that is for a death benefit. That simply is not true.
There are infinite ways to design a policy. The way a policy is designed depends on the needs of the individual.
We can create a policy this is focused on the death benefit and does not focus on cash accumulation, or we can create a policy that is solely focused on cash accumulation, or we can design a policy that creates a healthy balance of both.
People are living longer than ever before. It’s important to think about how you could get the extra money you might need to take care of yourself if you get a chronic or terminal illness. Many polices offer a chronic illness rider or a long-term care rider.
Permanent life insurance can be used to fund a non-qualified retirement plan, a Defined Benefit plan, a privatized banking system, or to create tax-free cash flow in retirement.

Chronic Illness Rider or Accelerated Death Benefit
This is a feature included in some life insurance policies that allows you to receive a tax-free advance on your life insurance death benefit while you are still alive. Sometimes you must pay an extra premium to add this feature to your life insurance policy. Sometimes the insurance company includes it in the policy for little or no cost. There are different types of ADBs, They each serve a different purpose. Depending on the type of policy you have, you may be able to receive a cash advance on your life insurance policy’s death benefit if::

  • You are terminally ill
  • You have a life-threatening diagnosis, such as AIDS
  • You are incapable of performing Activities of Daily Living (ADL), such as bathing or dressing

Long Term Care Rider

Long-term care insurance is expensive and is typically “use it or lose it.” Many consumers will not buy it because they know they may never use it and don’t want to waste their money. Some insurance companies have attempted to solve this problem by combining life insurance with long-term care insurance.
The amount of money you receive from these types of policies varies, but typically the accelerated benefit payment amount is capped at 50 percent of the death benefit. Other policies allow you to use the full amount of the death benefit. If this is important to you, make sure your insurance advisor understands which companies can meet your needs.
Different companies have various products that work differently. The monthly benefit you can use for nursing home care is typically equal to two percent of the life insurance policy’s face value. The amount available for home care is typically half that amount. This coverage may or may not be available.

  • Depending on the policy amount, there may be little or no health screening required. Meaning that if you have a previous health condition, it may exclude you from long-term care insurance eligibility. You can, however, still obtain a long-term care insurance policy through the ADB feature on a life insurance policy.
  • ADB policy payouts for long-term care services are often more limited than the benefits you could receive from a typical long-term care insurance policy.
  • The face value of your life insurance policy may not be enough to allow ADB payments that are enough to cover your long-term care service needs. The benefit payments may be too low and the duration may be too short to cover your long-term care service expenses.
  • ADB riders on life insurance policies may not offer inflation protection. If the policy does not include inflation protection, the ADB payment may not be sufficient to cover your future long-term care service costs.
  • If you want to leave an inheritance, you should consider whether using your life insurance death benefit to pay for long-term care services is the right option. If you use the ADB feature for long-term care services, there may be little or no death benefit remaining for your survivors.
  • Using the ADB option may affect your eligibility for Medicaid. Check with your state Medicaid agency for more information.

Life Settlements

These plans allow you to sell your life insurance policy for its present value to raise cash for any reason. This option is usually only available to women aged 74 and older and to men age 70 and older. Additionally, the proceeds of this transaction may be taxed.

Protect your business, your business partners, and your employees.
As a business owner you have a lot of responsibility to your business, your employees, and your family. If one of your partners or key employees dies or becomes disabled, there needs to be as little impact to your business as possible. You also want to attract and retain top talent.
Permanent life insurance can help with business continuation when a partner or key employee passes away.
It can also help facilitate the exchange of business ownership should you or your partner retire, become disabled, die, or get a divorce.
Inheritance
Some people purchase life insurance with the intention of leaving the death benefit as an inheritance to their loved ones. Life Insurance is an easy way to make sure everyone in the family gets an equal share of the family estate. This is common when there is a family business or family farm.
We currently have a high rate for estate taxes. But that is set to expire in 2025. The Federal estate tax is one of the things that our government frequently likes to change. Click Here to see a history of our estate tax laws.
Depending on state laws, your heirs may need to pay an estate tax upon receiving an inheritance.
Charitable Contribution
Life insurance policies can also be created with your favorite charity as a named beneficiary. This can help ensure your philanthropic goals are met after you pass away.
A good life insurance policy provides you and your family with financial security and protection that would be unavailable from any other source. There are benefits and advantages in a life insurance policy that you won’t find in the stock market, in government-sponsored retirement plans, in a real estate portfolio, or in any other investment or financial vehicle

Ticking Tax Bomb

Ticking Tax Bomb

Don’t Blow a Hole in Your Retirement

Will you be my business partner?

Here are the terms: 

  1. You give me a certain amount of money on a regular basis. 
  2. You have no control over how the business is run. You probably won’t know what the company is doing. You may or may not get your money back. I cannot guarantee you any type of return or even if you’ll get any of your money back.
  3. You bear all the risks, and I make all the decisions.  
  4. If you want any of your money back before a certain age, you must give me a 10 % fee. During this time, I get to keep 1%-2% of the money you give me as a fee. And you will have to pay my other partners 1%-2% a year as a fee.
  5. If we lose money along the way, you cannot claim the loss on your taxes, like most other investments allow you to do.
  6. Even if you find a better opportunity and want to end this partnership, you cannot get your money back out of business without giving me 10% of the value of the business, even if you have already lost money.
  7. I MAY let you borrow this money back from me, but you will have to pay me interest, and I name the terms of this loan.

What problems do you see with this partnership?

It gets worse though.

Our biggest partner is the Federal Government, and they will be able to charge whatever taxes they deem necessary on your income. There are no write-offs and no way to reduce your tax bill. 

Does this look like a bad idea?

Ironically, this is the partnership millions of Americans have. It is called a 401(K) or 403 (b) or other qualified accounts.

Do you still think your retirement plan is a good idea? Let’s dive a little deeper.

From a tax perspective

There are no tax savings for putting money into a Qualified Fund; Ever.

  • We have been taught that by putting money into these accounts we will save money on taxes. The reality is, you only defer taxes from the present rate to what is likely to be a much higher rate in the future. 
  • If you do not like paying taxes today, why do you think you will want to pay them more in the future?
  • When you withdraw money, your qualified plan is taxed at the highest rate possible, the income tax rate. 

Putting Pre-tax dollars in your account does not give you more money

  • On the surface, this sounds great. But the reality is, it’s not true. Compounding fees and compounding taxes both destroy your wealth. 
  • Fees are notoriously complicated and almost impossible to decipher. According to the Bright scope and the Department of Labor, fees compounding in your 401 K can easily devour 30-50% of the money in your account. 
  • The average Fee of 401k is 2.22%, According to Smartasset.com. This means for $100,000 you have in your account; the advisor is charging $2,220 a year for their guidance and services

What is the advisor doing to your account to earn this?

  • Have you ever talked to the asset manager of your 401 (K)? Of course not. Why would you? They do not work for you.
  • As time goes on, the total amount you must pay increases. If your account grows, your percentage stays the same, but the amount you’re paying increases. This is shown in the chart below. 
  • These Compounding fees will eventually cost you hundreds of thousands of dollars over time. 
  • In later years, when your account is the highest, your fees will be compounding at the highest rate. Isn’t this when you need your money the most?

An Example of how fees affect your account

  • Bill, Joe, and Bob Each invest $100,000 in a mutual fund at age 35
  • Annualized return of 8% 
  • At age 65, they get together to compare account balances.
    • Bob, who paid 3%, has $432,194
    • Joe, who paid 2%, has $574,349
    • Bill, who paid 1%, has $761,225

Retirement and your taxes

Let us look at what the fees look like in a pretax and an after-tax account.

  • The later years have less growth because typical financial planning calls for “less risk” in retirement. 
  • Growth continues to stay steady at 4%.
  • While fees continue at 1-2% a year of the balance of the account. 
  • Inflation can be ESTIMATED at 2-3%. 
  • We have no idea what the stock market will do.

Investing with pre-tax dollars will allow the financial advisor to make more money because the fee you pay to them is based on a percentage of the money in the account; typically 1-2%. This may not seem like much, but over time it can eat up half the money in your account. The chart below shows the effect a 1% management fee has on this account. In addition, the fees in mutual funds will typically be between 1% and 2%.

AgeAnnual InvestmentGrowthAccount Value1% Annual FeeTotal Fee
25$10,00010%$11,000$110$110
30$10,00010%$82,747$828$2,689
35$10,00010%$193,163$1932$9,950
45$10,00010%$624,410$6,244$49,956
55$10,0008%$1,475,501$14,755$156,150
65$10,0004%2,676,249$26,762$370,864

 

AgeAnnual InvestmentGrowthAccount Value1% Annual FeeTotal Fee
25$800010%$8800$880$880
30$8,00010%$66205$662$2152
35$8,00010%$154,431$1545$19,530
45$8,00010%$$499,528$4995$49,956
55$8,0008%$1,180,401$11,804$124,920
65$8,0004%2,141,066$21,411$296,695

The example below compares a $10,000 investment in a pre-taxed account vs an after-taxed account.

Based on 25% Tax Bracket. If taxes rise even 1% in retirement, the pre-taxed account will pay more.

$10,000 Invested$10,000 Invested
Net: $7,500Net: $10,000
25 Years25 Years
5% Annual Return5% Annual Return
Ending Balance: $383,351Ending Balance: $511,135
After-Tax Outlay: $15,334/Yr for 25 YearsPre-Tax outlay: $20,445 /Yr for 25 Years 
After Tax: $15,334/ Yr for 25 years

 If you anticipate being in the same tax bracket in retirement as you are in your working years, you should be indifferent between the two types of accounts because both result in the same after-tax income. 

From the government’s perspective, the structure of the traditional retirement account is more beneficial. The government has a lower discount rate than private investors. As your account grows in the market, so does their future revenue stream. 

By allowing money to stay in 401 (K) and other qualified retirement accounts, the government earns more revenue through taxes as your account increases. 

One way to think about it; Would you rather pay the current tax rate on a bag of feed, or would you rather pay an unknown tax on the entire farm in the future? Before you answer this question, ask yourself; do you think taxes will increase or decrease in the future? 

Higher Tax brackets in retirement

Taxes are the biggest drain on wealth. They are an even bigger drain when not planned for correctly. 

One of the biggest myths in financial planning is that you will be in a lower tax bracket in retirement than you are during your working years. This simply is not true.  

Think about it from this perspective: If you have achieved any measure of financial success, you should be in a higher tax bracket. If your investments have achieved any measure of the increase in value, you should be in the same or a higher bracket.   

Even if this was true in today’s environment, what do you think taxes will do in the future? Will they increase? Will they decrease? We don’t know for sure what they will do. 

What we do NOT know:

  • We do not know what the future holds. 
  • We do not know how your income will change between now and retirement.
  • We do not know how much the government will increase taxes in the future. 

What we DO know:

  • We have a massive debt problem in this country and the government loves to spend money. 
  • We have to pay for this borrowing either in the form of taxes or inflation. Inflation is another form of tax. 
  • There are trillions of dollars sitting in retirement plans. 
  • The government changes taxes surrounding retirement plans constantly
  • By deferring taxes, you are making an agreement with the US government for a small immediate tax incentive. In return, you have given them the right to not only tax all your growth in the future, but to do so at any rate they deem necessary. 

Would you rather pay taxes now, when you know what they are, and you can plan for them; or down the road when you cannot plan for them? 

Additional Tax Disadvantages

Your account is fully exposed to changes in the tax law

  • Tax status and tax laws change over time. Do you think the government will increase or decrease taxes in the future? Do you the government will continue spending money? 

Higher taxes on your Social Security

  • The money you withdraw each year can increase the taxes on your social security benefits. Proper tax strategies will allow you to pay a lower tax rate on your social security income

Estate Taxes

  • 401 (K)s are sitting ducks for estate taxes. If you want your spouse to be financially secure, this is not the account to leave behind. You are leaving behind a fully taxable account. What is worse, is that your spouse’s tax bracket will change from the lowest-obligation tax status (Filing jointly) to the highest-obligation tax status (Filing Single) 
    • Each plan has its own set of rules. The most likely scenario is that the plan will require a lump-sum distribution. This distribution will not only increase your spouse’s tax bracket, but it may be subject to local, state, and federal income tax and will be due all at once. There are tax strategies to avoid this. 
    • When a person dies, his or her plan becomes part of their estate and estate taxes may be owed on this as well. 
  • If the plan includes company stock, this gets even more complicated. 

From a Cash Flow Perspective

  • Cash flow is the lifeline of any financial plan, business, or household. Why are giving away control of our money and locking it up? Our money is locked up for the benefit of those managing the fund. It is not locked up for our benefit.  
  • Businesses follow quite different rules than personal finance. Why is that? 
  • Do you think businesses lock up their money? No!
  • Businesses focus on creating cash flow. It’s necessary for daily options, taxes, and operating costs, allows us to settle debts, reinvest, provide a buffer against future financial challenges. 
  • When times get tough, lack of cash flow can lead to the inability to pay our bills. If you need to access money in your qualified account, you have to pay taxes and a penalty to access OUR money. 
  • We have been taught to leave money in an account for 30 years, let someone else control it, and never ask questions. Does this make sense? Businesses do not lock up their cash. Why are we being told to?  
  • Cash Flow is what drives your daily behavior. You do not make financial decisions based on the amount of money in your retirement plan or the rate of return you have gotten for the year.  
  • Cash Flow is real. Numbers on a computer screen are simply numbers until the day you start taking the money. You can create more wealth and pay expenses with cash flow. You cannot do that with Zeros on a screen.  

From a Liquidity Perspective

  • Cash is not king. Liquidity is King. Cash kept underneath your mattress or in a Mason jar in the back yard is losing value due to inflation. Not only that, if you keep your money in the bank and earn interest, you will pay tax on that interest. There are tax strategies where you can avoid paying this income tax.
  • Your money should always be making you money, but you also need access to it in order to capitalize on opportunities when they arise. 
  • Liquidity is an important tool in determining the financial well-being of a business and leads to a company’s financial strength in the short term, as well as the long term. If liquidity is important to businesses, shouldn’t it be important to you? 
  • In a 401 (K) your money is tied up. If you want the money that you put into it, you have to pay a penalty. WHY would you have to pay a penalty to access your money? Perhaps because it’s not technically your money.

 Let’s think about the true cost of having your money tied up. 

  • Lack of cash flow has a high opportunity cost. Your money could be doing something more productive if it were not locked up.
  • Every time the market goes down, you have negative compounding. 
  • Inflation is eating away at your account.
  • You still lose money due to fees. 
  • This has a huge compounding effect on the value of your portfolio. 
  • Fees can eat away half of your portfolio

“But they give me free money”

The small amount of money they give you loses all value when you consider:

  • You are putting your money in an account that has the highest tax rate.  Taxes are likely to increase. There are options to put your money in accounts where your gains are taxed at a lower rate or not taxed at all. 
  • Your investment options are generally not good. By placing your money in accounts that you have more control over, you can control the risk of losing your money and place your money into stocks that have traditionally better returns than what the mutual funds in your plan have.   
  • Your fees are high. You can reduce fees by having money in accounts that you have more control over. 
  • You have control to move your money when the market drops 

Sub-Par Investment Plan Designs

  • Typically, retirement plans are filled with mutual funds and target-date funds. 
  • The average 401 (K) offers 15-30 choices of funds. Most of these choices have higher expense ratios than what you would find through a brokerage of your IRA. 
  • Mutual funds consistently underperform the market. The market may be increasing but that does not mean your 401 (K) is. Your 401 (K) only increases if the investments in the plan are increasing 
  • Usually limited to a few investment options that have been selected by your employer and may not reflect your needs
  • Mutual Funds (Lots of fees)
  • Bond Fund: a mutual fund that invests in bonds
    • Fees
    • Long term bonds get destroyed by rising interest rates
  • Target Date Funds is a mutual fund inside another mutual fund (Lots and Lots of Fees)
  • There is no guarantee that you will ever receive anything from this plan. Your entire retirement is based on something with no guarantees. Do you think that is a good idea? 
  • The fund may lose all, or a substantial part of its value in the market just as you are ready to take distributions. 
  • You are stuck watching your account lose value and there is nothing you can do about it. There are other strategies that allow you to move your money, and  guarantee you a return, no matter what the market is doing

Average Rate of Return

  • According to Investopedia: The Average Rate of Return for 401 (K)s is 5-8%; Based on   60% Equities and 40% debt/cash ( Then you must subtract fees of 1-2 %). HOWEVER, A significant amount of this growth is due to your contributions, not from market returns
  • You cannot spend “Rate of Return”. It is just fake money until you take it out. 
  • Averages fail to account for the true power of losses.  
  • To determine your actual returns, you will need to determine the difference in account value between your start and endpoint.  You will need to account for management fees, taxes, inflation rate, and how much money you put into the account over time
  • The belief that average returns over the long run work in our favor has been at the cornerstone of the “buy and hold” strategy for years. 
  • It’s an unproven truth accepted by almost all of us. 
  • We don’t talk about the losses in your account affect income in retirement the Impact of losses
  • Negative and positive returns of equal amount carry the same weight in determining AVERAGE RATE OF RETURN, but losses in your account have a greater impact on the REAL RATE OF RETURN  
  • Losses are more severe as we get older because of withdrawing money. We do not have time to make it up.

 

Ticking Tax Time Bomb Chart

From the graph above compare the following: 

  1. Bear Market of 1980s to early 1930s
  2. 1929 Peak vs the Mid 1970s vs 2000
  3. 1966 Peak to 2009
  4. The Dow will always have a natural increase. Companies get replaced. Bigger companies replace smaller companies. The Dow started with 12 companies and now has 30.  

After a loss, how much does the market have to increase just to break even?

If you Lose this MuchYou need this much to Break Even
30%43%
40%67%
50%100%
60%150%
70%233%
80%400%
90%900%

Not only do you lose money due to the stock market, fees, and inflation, but you are also losing money due to opportunity costs. Your money could have been making money elsewhere.  

  • The government controls your retirement account by imposing numerous restrictions and penalties if you don’t follow their rules. 
  • Typically, you have to be at a company for 4-6 years to be vested and keep the company match. 
  • Your Retirement plan is at the mercy of the market and at the mercy of the government. 
  • Why are you gambling your retirement on the market performance from now until you reach retirement? And then from retirement to the day, you die?
  • The performance of these funds is dependent on market factors that we have absolutely no control over. Why would you put your money into something that you have no control over? Does that make sense? Maybe it does because this is what you have been taught. But it’s not true. You can still make money on your money AND have total control. 
  • Why are you gambling your retirement on the decisions the US government will make about tax laws?

Is putting your money in the stock market risky? Maybe. Maybe Not. I would argue that it depends on if you are investing in the stock market or gambling in the stock market. To understand what I mean by this, we much first understand the difference between Investing and gambling.  

Any investment can be risky if you don’t understand the investment. Think about the area you’re an expert in or the field you work in. Would you consider it riskier to put money into this area, an area you know well, or riskier to invest in, say, day trading, or real estate? 

I know nothing about the oil industry, so I would not invest in it. I will invest in the stock market and in real estate because those are areas I have experience and knowledge in. 

Risk is more about the investor than necessarily the investment. The difference between the two comes down to is risk control, having a purpose, due diligence, being pro-active, and invest in what you know and understand. 

Characteristics  of Investing

  1. Devoting time and energy to do due diligence  and understanding your investment
  2. Creating strategies to prevent total loss of risked capital.

Characteristics of Gambling

  1. Take Risky action in the hope of a desired result.
  2. Very little to no strategy to mitigate loss. 
  3. The House Makes the Rules

We have established that the government makes all the rules when it comes to your retirement plan. 

Let’s test your due diligence

  • Do you know what a 401 K is?
  • By Definition: It is a section of the tax code. 
  • This means:  The rules around it can be changed at any time
  • The tax rules around retirement plans have been changed many times
  • Your biggest partner in your retirement plan is the Government.
  • How much do you know about your 401k?
  • What strategies do you use to mitigate loss?
  • What strategies do use to get higher returns on your Retirement Plan? 
  • Do you know about the funds you are invested in? 
  • Do you know about the companies you are invested in? 
  • Have you seen their financials?
  • Do you know anything about the fund manager, their history, investment philosophy, or their performance?
  • How much are the Fees?
  • How much are the fees for the investments inside your plan?
  • Do you know your Vesting Schedule?
  • How many years do you have to work at your job to receive a company match?
  • How much does your employer match?
  • Do you have better options?
  • Have you sat down with an advisor to have it analyzed? 

Based on the answers to these questions, do you believe you are investing in your retirement plan or gambling with your retirement plan by putting money into something you know little-to-nothing about, hoping for the desired result?

We have been taught from a young age that a 401 K is the foundation of our financial plan. But Why? The first thing we need to do is think about who benefits most from this? 

What is your 401 (K) really doing for you now or for your future? Of course, we need to save money for retirement, but after reading the above don’t you think it’s possible to find other philosophies, products, and strategies that will give you more control, better exit strategies, reduce your tax burden, and increase your cash flow and wealth? 

 

A Few Tax Rules Used By The Wealthy

A Few Tax Rules Used By The Wealthy

 

 

The rich play by different rules than we do

 

Not because the tax rules don’t apply to them, but because they take the time to learn more. Tax law is constantly changing and is difficult. Those that do not spend time learning  about their tax situation and actively work with their tax professional to reduce taxes, will pay more taxes. 

 

Tax planning is an on-going activity and you should be meeting with your tax professional at least once a year. This is not something you should expect to have done for free. Good tax planners work diligently to keep up with changing tax laws. They deserve to get paid.

 

Below are some advanced ways to save on taxes

 

As the number of moving parts in your financial world increase, and the more flows of income you have, the more important tax planning becomes. 

 

In order to utilize the tax law, you have to do tax planning services. Taxes are most likely the biggest expense in your life.

 

Cash-Flow Planning and Tax Planning can create much bigger returns than what you are getting in your 401 (K), IRAs, and other investments 

 

These strategies are for informational purposes only. Do not take any of this as financial or tax advice. Some of these strategies may apply to your specific situation and some may not. Consult your tax professional to see if any of these strategies apply to your specific situation.    

 

If you enjoy over-paying on taxes, there is no reason to do tax-planning. If you don’t enjoy giving the government money call us today we will help you stop giving your money away. 

 

  • Life Insurance
    • The wealthy not only use life insurance to pass down tax-free money to their heirs, but they also use the cash value in life insurance to create access to cash, tax-free.
  • Rule 72 T
    • You can avoid paying the 10% early withdrawal penalty by taking advantage of Internal Revenue Code 72(t). That’s shorthand for a provision in the tax code that allows you to take early distributions from your retirement plan or IRA and avoid the 10% penalty.
    • You can avoid that penalty as long as the distributions are made as part of a “series of substantially equal periodic payments” (or SOSEPP for short).
    • Once you start taking these distributions, you have to keep it going for the longer of five years or until you reach age 59-1/2.
  • Financial Organization
    • Avoid overpaying on taxes and make audits easier with a good bookkeeper.
    • Bad Bookkeeping is one of the top reasons people over-pay on taxes.
  • Build a coordinated Financial Team
    • Your team must communicate and work together in order for you to have an efficient and integrated strategy.
    • Lawyer
    • CPA
    • Insurance Specialist
    • Cash Flow Specialist
    • Financial Advisor
    • Use tax-free Ways to Extract Income.

 

  • Salary, bonuses, and distributions of your share of business profits are taxable. However, there are ways to benefit from your business without triggering the tax. 
  • Income-Flow Planning in Retirement.
    • A tax professional is needed to do this. 
    • Start preparing for this a minimum of about 5 years before retirement. If you want to do a Roth Conversion, at least 10 years before retirement is better. 
    • A financial advisor does not have the knowledge or legal ability to do this.
    • Make sure as little of your money as possible is taxable as regular income. This is especially important in retirement. Twenty years of retirement and a change of tax laws can dramatically destroy your lifestyle. 
  • Qualified Plans create a massive tax burden in retirement.
    • There are ways to create tax-free flows of cash that most financial advisors are unaware of, such as LIRPs and 412(e)(3) plans
  • Charitable Remainder Trust/Tax-exempt Trust.
    • Contribute Assets to the trust.
    • The trust owns the asset.
    • Sell the Asset.
    • No Tax is Allowed.
    • You get a lifetime Payout from the Trust if you give away 10% to Charity.
    • You pay tax on the distributions, normally at Capital Gains Rate.
  • Business Owners can open Retirement Account and have them tax-deductible.
    • Traditional IRA
    • Roth IRA
    • Solo 401 (K)
    • 412 (e)(3) plans 
    • There are other Retirement accounts most financial advisors and CPAs have never heard of that are used for high-income earners. These accounts allow you more safety and allow you to put much more money into them than a 401(K) or SIMPLE plan.
  • Put Family Members to work
    • Several Benefits to this.
    • Kids: Teach value and work ethic.
    • Kids will earn money to pay for stuff you otherwise would have paid for. 
    • They can even open an IRA account.
  • Health Insurance Premiums are Tax-Deductible for business owners.
    • Be sure to pay out of your business account.
  • REAL ESTATE has a lot of tax benefits.
  • Tax Loss Harvesting.
    • There are Capital Gains and Incomes Tax Strategies when harvesting losses

 

  • Take advantage of the massive tax savings Life Insurance gives you. 
    • This is a strategy used by the wealthy.
  • Specialized Trusts
  • Grantor Retained Annuity Trust
  • Manage your capital tax gains properly.
  • Re-categorize income
    • Income is taxed as regular income, capital gains, or as a dividend rate. Change how the money coming in is taxed
    • Shift income to a lower bracket.
    • Understand Marginal Vs Average Tax Rate.
  • Turn your sole-proprietor business into a corporation. 
    • These are taxed very differently. 
    • This strategy allows the owner to make money at a lower tax rate and claim expenses.
    • An example of how business structure can make a difference: Musicians can have the corporations hold the rights of the performer, and the money he’s paid goes to the corporation, not the individual.
  • Keep an eye on AGI

 

  • Many tax breaks, limitations, and additional taxes tee off of adjusted gross income (AGI) or modified adjusted gross income (MAGI). For example, you’ll avoid the 0.9% additional Medicare tax on earned income if your AGI does not exceed a certain threshold.
  • Make Smart Tax Elections.
  • There are several ways for how to reduce taxable income by being strategic about your business expenditures. When you acquire machinery, you can deduct the equipment in full, up to a certain dollar amount.  
  • However, if your business is just starting up or is not yet profitable, you can depreciate these expenses.  It might be better for your overall tax situation if you spread out the value of the purchases across multiple years.  This can help produce deductions for future years when you have more income to protect.
  • Manage your assets like a business. Create LLCs or corporations for each asset. 
  • Buy cars and lease your house in the business if related to the business.
  • Pay employees compensation through stock options. 
    • This creates additional opportunities
  • Pay employees through profit sharing or Phantom Stock Options
  • Incorporate in places with lower tax rates.
  • IRC Section 280A allows you to rent your entire home to your S corporation for 14 days or less during the year and get big tax deductions
    • There are some rules that must be followed when using this strategy. 
  • Reduce self-employment tax with an S corporation.
  • Evaluate the benefits of a C corporation.
  • “Conservation Easements” and Historical Sites With “Conservation easements”
    • you can give up your development rights for a piece of property that you own, so you’re unable to build on the property (but you could still use it for camping, recreation, or to temporarily park a trailer on, etc.)
  • “Historical easements”. If you buy a building in a historic district, you can get a tax deduction on it. With this rule, you give up the right to rebuild or change the historical aspect (or facade) of the building, but you can still remodel the inside and use it for business.
  • If the LLC is a management company that provides oversight and advice to owners of the assets, under certain circumstances, the expenses incurred by the LLC will be deductible as business expenses.”
  • Restricted Property Trust
  • HSA

 

Some of these strategies are more basic, while many of them are more complicated, but the bottom line is, they will all help you keep more of the money you are making. Start making an effort today to keep more of your money. 

 

The rich play by different tax rules than we do. Not because the tax rules don’t apply to them, but because they take the time to learn more.

 

 

 

 

 

The rich play by different rules than we do

 

Not because the tax rules don’t apply to them, but because they take the time to learn more. Tax law is constantly changing and is difficult. Those that do not spend time learning  about their tax situation and actively work with their tax professional to reduce taxes, will pay more taxes. 

 

Tax planning is an on-going activity and you should be meeting with your tax professional at least once a year. This is not something you should expect to have done for free. Good tax planners work diligently to keep up with changing tax laws. They deserve to get paid.

 

Below are some advanced ways to save on taxes

 

As the number of moving parts in your financial world increase, and the more flows of income you have, the more important tax planning becomes. 

 

In order to utilize the tax law, you have to do tax planning services. Taxes are most likely the biggest expense in your life.

 

Cash-Flow Planning and Tax Planning can create much bigger returns than what you are getting in your 401 (K), IRAs, and other investments 

 

These strategies are for informational purposes only. Do not take any of this as financial or tax advice. Some of these strategies may apply to your specific situation and some may not. Consult your tax professional to see if any of these strategies apply to your specific situation.    

 

If you enjoy over-paying on taxes, there is no reason to do tax-planning. If you don’t enjoy giving the government money call us today we will help you stop giving your money away. 

 

  • Life Insurance
    • The wealthy not only use life insurance to pass down tax-free money to their heirs, but they also use the cash value in life insurance to create access to cash, tax-free.
  • Rule 72 T
    • You can avoid paying the 10% early withdrawal penalty by taking advantage of Internal Revenue Code 72(t). That’s shorthand for a provision in the tax code that allows you to take early distributions from your retirement plan or IRA and avoid the 10% penalty.
    • You can avoid that penalty as long as the distributions are made as part of a “series of substantially equal periodic payments” (or SOSEPP for short).
    • Once you start taking these distributions, you have to keep it going for the longer of five years or until you reach age 59-1/2.
  • Financial Organization
    • Avoid overpaying on taxes and make audits easier with a good bookkeeper.
    • Bad Bookkeeping is one of the top reasons people over-pay on taxes.
  • Build a coordinated Financial Team
    • Your team must communicate and work together in order for you to have an efficient and integrated strategy.
    • Lawyer
    • CPA
    • Insurance Specialist
    • Cash Flow Specialist
    • Financial Advisor
    • Use tax-free Ways to Extract Income.

 

  • Salary, bonuses, and distributions of your share of business profits are taxable. However, there are ways to benefit from your business without triggering the tax. 
  • Income-Flow Planning in Retirement.
    • A tax professional is needed to do this. 
    • Start preparing for this a minimum of about 5 years before retirement. If you want to do a Roth Conversion, at least 10 years before retirement is better. 
    • A financial advisor does not have the knowledge or legal ability to do this.
    • Make sure as little of your money as possible is taxable as regular income. This is especially important in retirement. Twenty years of retirement and a change of tax laws can dramatically destroy your lifestyle. 
  • Qualified Plans create a massive tax burden in retirement.
    • There are ways to create tax-free flows of cash that most financial advisors are unaware of, such as LIRPs and 412(e)(3) plans
  • Charitable Remainder Trust/Tax-exempt Trust.
    • Contribute Assets to the trust.
    • The trust owns the asset.
    • Sell the Asset.
    • No Tax is Allowed.
    • You get a lifetime Payout from the Trust if you give away 10% to Charity.
    • You pay tax on the distributions, normally at Capital Gains Rate.
  • Business Owners can open Retirement Account and have them tax-deductible.
    • Traditional IRA
    • Roth IRA
    • Solo 401 (K)
    • 412 (e)(3) plans 
    • There are other Retirement accounts most financial advisors and CPAs have never heard of that are used for high-income earners. These accounts allow you more safety and allow you to put much more money into them than a 401(K) or SIMPLE plan.
  • Put Family Members to work
    • Several Benefits to this.
    • Kids: Teach value and work ethic.
    • Kids will earn money to pay for stuff you otherwise would have paid for. 
    • They can even open an IRA account.
  • Health Insurance Premiums are Tax-Deductible for business owners.
    • Be sure to pay out of your business account.
  • REAL ESTATE has a lot of tax benefits.
  • Tax Loss Harvesting.
    • There are Capital Gains and Incomes Tax Strategies when harvesting losses

 

  • Take advantage of the massive tax savings Life Insurance gives you. 
    • This is a strategy used by the wealthy.
  • Specialized Trusts
  • Grantor Retained Annuity Trust
  • Manage your capital tax gains properly.
  • Re-categorize income
    • Income is taxed as regular income, capital gains, or as a dividend rate. Change how the money coming in is taxed
    • Shift income to a lower bracket.
    • Understand Marginal Vs Average Tax Rate.
  • Turn your sole-proprietor business into a corporation. 
    • These are taxed very differently. 
    • This strategy allows the owner to make money at a lower tax rate and claim expenses.
    • An example of how business structure can make a difference: Musicians can have the corporations hold the rights of the performer, and the money he’s paid goes to the corporation, not the individual.
  • Keep an eye on AGI

 

  • Many tax breaks, limitations, and additional taxes tee off of adjusted gross income (AGI) or modified adjusted gross income (MAGI). For example, you’ll avoid the 0.9% additional Medicare tax on earned income if your AGI does not exceed a certain threshold.
  • Make Smart Tax Elections.
  • There are several ways for how to reduce taxable income by being strategic about your business expenditures. When you acquire machinery, you can deduct the equipment in full, up to a certain dollar amount.  
  • However, if your business is just starting up or is not yet profitable, you can depreciate these expenses.  It might be better for your overall tax situation if you spread out the value of the purchases across multiple years.  This can help produce deductions for future years when you have more income to protect.
  • Manage your assets like a business. Create LLCs or corporations for each asset. 
  • Buy cars and lease your house in the business if related to the business.
  • Pay employees compensation through stock options. 
    • This creates additional opportunities
  • Pay employees through profit sharing or Phantom Stock Options
  • Incorporate in places with lower tax rates.
  • IRC Section 280A allows you to rent your entire home to your S corporation for 14 days or less during the year and get big tax deductions
    • There are some rules that must be followed when using this strategy. 
  • Reduce self-employment tax with an S corporation.
  • Evaluate the benefits of a C corporation.
  • “Conservation Easements” and Historical Sites With “Conservation easements”
    • you can give up your development rights for a piece of property that you own, so you’re unable to build on the property (but you could still use it for camping, recreation, or to temporarily park a trailer on, etc.)
  • “Historical easements”. If you buy a building in a historic district, you can get a tax deduction on it. With this rule, you give up the right to rebuild or change the historical aspect (or facade) of the building, but you can still remodel the inside and use it for business.
  • If the LLC is a management company that provides oversight and advice to owners of the assets, under certain circumstances, the expenses incurred by the LLC will be deductible as business expenses.”
  • Restricted Property Trust
  • HSA

 

Some of these strategies are more basic, while many of them are more complicated, but the bottom line is, they will all help you keep more of the money you are making. Start making an effort today to keep more of your money. 

 

The rich play by different tax rules than we do. Not because the tax rules don’t apply to them, but because they take the time to learn more.

 

 

 

Are you Gambling, Investing, or Saving With Your Retirement Plan?

Are you Gambling, Investing, or Saving With Your Retirement Plan?

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1”- Warren Buffet

Mindset of a Sensible Investor

  • Be Informed
  • Be Serious and have a purpose
  • Be Proactive
  • Do your homework and invest in what you know and understand
  • Do not Gamble
Definition of Gambling

1. Play games of chance for money; Bet
2. Take Risky action in the hope of a desired result.

Very Little Strategy 

Definition of Investing

1. An act of devoting time, effort, or energy to an undertaking with the expectation of a worthwhile result

Key Differences:


Gambling: The House Makes the Rules. Who is making all the rules in your retirement plan? The government and Wall Street.  
Gambling: No Limit to your Losses; No strategies to reduce your risk. What strategies do you have to control your loss inside your retirement plan?

Investing: Has Strategies to prevent total loss of risked capital. 

How Much Do You Know About Your Retirement Plan?

  • What are the plan fees, investment fees, and other fees?
  • What companies are your holdings in? What do you know about them?
  • What threats do those businesses have? 
  • How do they make their cash flow?
  • How do they compare to the competition?
  • Do you know why you own those holdings? 
  • Do you know your Vesting Schedule in your qualified plan?
  • How much does your employer match?
  • Do you have better options?

The key principle is to minimize Risk while maximizing Profits


Are you investing in your retirement plan, or are you gambling with your retirement plan?

We have been taught that a Retirement Plan is just a set-it and forget it. Sounds like you are just throwing money into a bucket and hoping for the desired result. This is gambling.

Saving money is not putting money into a retirement plan

A critical difference between “saving” and ”investing” is this: saving is what you do with the money you cannot afford to lose. You should have no risk of losing the money you are saving. Even with the money in your bank account, you have the risk of taxes, the risk of inflation, and the risk of opportunity costs. 

Is the money in your retirement accounts money you can afford to lose? Probably not. By “saving” in your qualified plan, you are paying fees to someone else. You take all the risk. This money is not liquid and you must pay a tax to use it. 

How enthusiastic are you about gambling with the funds you will need when you are no longer working? 

Stocks are part of a business. Would you own a business, run a business, or invest in a business without knowing anything about it? Of course not! But that is what most people have been trained to do.  

It’s time to take control of your finances and quit gambling with your money. 

Let us help you quit gambling with your retirement and start investing.

Contact us today!

Bank Owned & Corporate Owned Life Insurance

Bank Owned & Corporate Owned Life Insurance

Bank Owned & Corporate Owned Life Insurance: What’s the difference?

BOLI – Bank-Owned Life Insurance

BOLI is Bank-owned life insurance. Banks are the biggest buyers of high cash value life insurance because they understand the economic benefits they receive from life insurance companies. 

Banks own 100’s billions of dollars in life insurance. The most important asset in any bank is its Tier One Capital, as this determines the amount of money a bank can multiply and lend out to the public. Not only is BOLI a core component of Tier One Capital, but it is also a substantial percentage of overall bank assets.

This type of insurance is typically used as a tax shelter for financial institutions, which leverage its ability to generate tax-free savings provisions as funding mechanisms for employee benefits. 

This asset class has continued to increase since the FDIC began tracking it in 2006. 

COLI – Corporate Owned Life Insurance

COLI is corporate-owned life insurance. Corporations buy insurance policies for a variety of reasons, including key man insurance. 

Policies bought by corporations are utilized as ways to protect themselves against the loss of a key employee or executive; a way to offset other costs; a way to create their own funding, instead of relying on a bank; a way to protect their workers’ families in case of sudden death or disability; or to create bonus plans for employees. They allow corporations to offer additional benefits while also providing a predictive long-term return on investment.   

These types of plans are more complex than standard life insurance policies IBC policies, but they use life insurance because of the growth, liquidity, and tax advantages life insurance offers. If banks and big corporations use life insurance, shouldn’t you?

Make Tax Planning Part of Your Financial Plan

Make Tax Planning Part of Your Financial Plan

Increasing your wealth is much more than simply accumulating assets or giving your money to a financial advisor and having them put it into the stock market. Many folks have a financial planner they sit down with once or twice a year, but they neglect to make tax-saving strategies a part of their plan. What they don’t think about is the big picture and how tax-savings strategies can have a much larger impact on one’s wealth than what “average rate of return” has. 

Taxes represent one of the largest, if not the largest drain on a family’s financial assets, so managing them is important. It does not do much good to accumulate a bunch of assets if the government is going to take them. 

Lack of tax planning can cost you hundreds of thousands of dollars over your lifetime. This will have a compounding effect on every dollar that is taxed. Think about this; If you pay $25,000 a year in taxes on the money you make, and you pay that for 30 years, that is $750,000 you pay in taxes. What if we could cut that in half? That is another $375,000 you have made by doing almost nothing and you have not put a single penny at risk. 

 What if you invested that money? How much money does $375,000 make you over your lifetime? How many more vacations could you take with your family? Would you have less debt? Would your retirement look better? Where else can you make that kind of money by doing nothing? 

What about taxes in retirement? In today’s tax environment, it is reasonable to estimate we will pay approximately 25% of the balance of our retirement fund in taxes. We are taught to put money in certain financial vehicles that have a “tax-deferred advantage”. 

This is perceived as a tax-savings strategy, but in reality, it is simply kicking the can down the road and forcing you to pay taxes on a potentially larger bucket of money at what will most likely be, a higher tax bracket. Contrary to the popular myth, most people are not in a lower tax bracket in retirement.  

With the correct tax strategies, we can cut your lifetime tax liabilities in half and create a stream of tax-free cash flow. We are not referring to a Roth. 

tax planning is to ensure tax efficiency and reduce your tax liability

What Is Tax Planning?

Tax planning is the analysis of a financial situation or financial plan from a tax perspective.  The purpose of tax planning is to ensure tax efficiency and reduce your tax liability.  

 Some CPAs only look at your current year and can help you reduce your taxes for the current year. Reducing taxes in the current year is important, but a balanced, long term view is also important. It doesn’t do any good to save a few dollars today on taxes just to pay a much larger bill in the future.  

Tax planning covers several considerations. A few considerations include timing of income, size, and timing of purchases, and planning for other expenditures. The selection of investments and types of retirement plans are also taken into consideration.  

But my Financial Advisor helps me with my taxes

Often, people will say their financial advisor helps with their tax planning. While most financial planners are familiar with taxes and may even know how certain investments are taxed, their expertise is not in taxes, or how various transactions affect your bottom line. They are simply two different skill sets with different knowledge. 

If your financial advisor happens to be a CPA or an Enrolled agent, I still suggest a team effort. Tax laws can be overly complex, and they frequently change. There are simply not enough hours in the day for a professional to keep up with the constant changes in the market, the economy, and the tax law AND maintain good service. 

We can’t control the tax law or the stock market, but we can control and adapt our strategies. By adapting our strategies we can create a better life for ourselves and our family. 

Some Basic Tax Planning Opportunities

By reviewing your portfolios, we can assess taxes, fees, and returns. Oftentimes we can save you fees and taxes and increase your total rate of return.  

  • Tax brackets should also be considered when deciding whether to place certain investments in an IRA or a taxable investment account.
  • Taxable income – Clients with taxable income under certain thresholds do not pay taxes on realized capital gains.  A surprising number of investors are missing out on tax-free rebalancing opportunities. 
  • Loss carryforwards – Some clients have accumulated losses that are available to offset future gains.  Your advisor is missing potential trade opportunities if they are unaware of this information. An investor may be able to take advantage of these losses in an IRA, but cannot take advantage of these in 401K 
  • Controlling taxable income can reduce taxes on Social Security benefits, reduce premiums on Medicare Part B, allow IRA contributions to be deductible, or make Roth IRA contributions an option.
  • Taxable gains in some areas can be offset by selling assets with losses (“loss harvesting”).  On the flip side, “gain harvesting” might make sense in some cases.
  • Charitable giving opportunities can be maximized by gifting appreciated assets, using “double-up” strategies incorporating Donor Advised Funds, or taking advantage of Qualified Charitable Distribution opportunities.
  • Roth conversions can allow a client to take advantage of an unusually low tax bracket.

Reclassify How Your Income is Taxed 

Oftentimes, when people invest in retirement plans, we generate cash flows without much thought.  utilizing deposits, interest, dividends, and withdrawals, the tax costs can be minimized and net returns enhanced.

We can also reduce taxes by strategically withdrawing from accounts in a particular order.  The default for many is to first withdraw from taxable accounts, then deferred, then Roth IRAs. This usually lowers taxes today but these savings are often lost via higher taxes in the future, making other methods preferable.

Phantom gains are a situation where an investor owes capital gains taxes even though their overall portfolio declined in value. Phantom Income refers to income recognized by the IRS, but not actually received by the investor. This most often comes from the mutual funds inside your retirement account. 

Many times we can increase your rate of return and reduce your taxable income while increasing liquidity and reducing your market risk. We do this simply using tax strategies and cash flow strategies   by shift money 

Constant changing of tax laws. Your financial professional doesn’t have the time to keep up with these laws and to know it will affect you in your individual situation. Keeping up with tax law changes is a full-time job in itself. 

We can control and adapt our strategies. We cannot control the stock market.

Increasing your wealth is much more than simply accumulating assets or giving your money to a financial advisor and having them put it into the stock market. Proper tax management has a much larger impact on one’s wealth than an average rate of return on investments does.

Investment advisors and tax planners have two extremely different skillsets and should always work as a team on your family’s financial plan. But Attorneys, Life Insurance experts, and succession planners also need to be brought into the conversation. 

 One of the most important pieces of your financial plan is having a plan that incorporates taxes while making financial decisions throughout the year.  

The reason for this is simple: almost every financial decision has an impact on your taxes. If this impact isn’t taken into consideration while making financial decisions throughout the year, you could be paying more taxes than you otherwise would. It’s important that tax planning is not seen as separate from financial planning. Instead, tax planning should be done as you make financial decisions and incorporated into your overall plan. 

Few financial planners are proficient in taxes, and few tax professionals are proficient in investments or financial planning. They are simply two different skill sets with different knowledge. 

I don’t suggest using a tax advisor as a financial advisor, nor do I suggest using a financial advisor as a tax advisor. Rather, I suggest choosing someone both sets of skills, or, make sure your tax advisor and financial planner work on your plan together. 

Typically, a tax professional will look at what’s best for you in a particular tax year, while a financial planner looks at creating a long term financial plan, but which may have devising tax implications

By employing effective tax planning strategies, you can have more money available to save and invest or more money to spend. … Keep in mind that tax laws are often complex and frequently change. 

Through effective tax planning, all elements of the financial plan fall in place in the most efficient manner.