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Different types of accounts have different tax consequences. Let’s talk about those advantages and disadvantages in different types of accounts and how you can use them (or not) in retirement planning. Important Links Website: http://www.yourplanningpros.com Call: 844-707-7381 ----more---- Transcript Of Today's Show: Speaker 1: Hey, everybody. Welcome back for another edition of Plan With the Tax Man, with Tony Mauro from Tax Doctor, Inc. We're going to talk tax consequences because, hey, it's right there in the title. So we might as well spend a little time ... pros and cons of the various account types is what we're going to get into this week here on the podcast. Speaker 1: And Tony, before we do, I got to ask you a question. I saw Costco's and stuff like that are starting to say, hey, we're going to limit the purchase of TP and cleaning supplies. I was like, are we really doing this again? Tony Mauro: I just saw that myself, and I couldn't believe the headline when I first saw it. Speaker 1: And I get it. Right now, it's logistics more than it is panic buying. Because we're still having trucking situations and clearing shipping containers and docks, and all that stuff. But it's the point of like, people just ... we overreact. They will see these news headlines and then you know they're going to run out and do it. Tony Mauro: Yeah. They run out. Yeah. It could be a sales ploy too. [crosstalk 00:00:56]. Speaker 1: That's a good point. Yeah. Tony Mauro: Just to get people in. But I do think the more as this year as has drug on, and through my travels, and even here locally, that the supply chains are suffering. Speaker 1: They're definitely suffering. Yeah. Tony Mauro: We've got labor issues. Everybody all up and down, whether it's restaurants, accounting firms, I mean, hospitality, especially is struggling to find employees. And it's crazy. I just had my car serviced. And they said that they can't ... they don't have enough ... I don't know. They're missing some chip that comes from overseas. And they can't finish the cars to get them on the lot, so they don't have a whole lot of inventory of brand new cars to sell. [crosstalk 00:01:38]. Speaker 1: That's why used car sale is up so much. Yeah. Mm-hmm (affirmative). Tony Mauro: Yeah. It's just incredible. Well, good for the remodeling and construction industry. But lumber's way up, so that's costing a lot. But it seems like a lot of my business clients, especially that we do accounting for, are having good years. Which is good. Speaker 1: Yeah. That's fantastic. Yeah. I saw that ... and here's the thing. We talk often about, just having a strategy, right? Have a plan. And you can apply that lesson to so much stuff in life, Tony. Like even buying toilet paper. When we went through what we went through last year, I would have hoped that more people ... and probably a number of them did get wise. Speaker 1: But like I told my wife, I was like, look, we never know what's going to happen when it starts to get cold again or whatever. So maybe every other trip to the store, maybe pick up an extra four-pack. Then you're not panic buying and you're not hoarding. We're just getting a little extra. Just a little, small stockpile going of whatever, just in case something does get silly again. Versus that, everybody flocking in and just cleaning the stuff out. Tony Mauro: Yeah. No, I know. It is crazy. Speaker 1: And that's a strategy. Even that is a strategy. And that's planning as well. So that's going to do it this week for the show. No, I'm kidding. So let's talk about tax consequences then, because this is planning, as well, too. So as I mentioned, let's do pros and cons of some of these account types. And you just give us some advantages, disadvantages that kind of.thing, okay? Tony Mauro: Sure. Speaker 1: Tax deferred accounts. Let's start with the traditional, the 401k, the IRA, most of the places where we are conditioned to sink our money. Tony Mauro: Yes. And these are all great accounts, by the way. I'm not going to come out and say that one is better or worse in any case than any other, but... Speaker 1: Yeah. Just pros and cons. Tony Mauro: Yeah. Just pros and cons. And so you do need to know these because they all have their place. So in the traditional tax deferred accounts, our IRAs and 401ks, of course, the big advantage is when you put money in, it's going to be a tax deduction. It means it's going to look like to the government, when you filed that tax return, that you didn't earn it. Even though it's still your money and you still own it, you just parked it somewhere for retirement. Tony Mauro: Big, big deal. Because theoretically, A, you're not paying taxes on it. You will later, which is kind of a disadvantage. But the big advantage is you're not paying taxes and it's going to grow tax deferred. So it's going to grow faster because the little tax man is not going to be there with his hand out every year, taking their cut. So that's been the traditional way to save for retirement. Tony Mauro: A couple of disadvantages. And this is kind of a hotter topic lately is ... and this is true. When you have big sums in these accounts, you know that you've got an IOU to Uncle Sam and to your state government. Meaning that they're going to want their tax at some point. And even though we've kicked the can down the road a while, the old thinking was, well, I'm going to be in a lower tax bracket when I retire. And a lot of times nowadays, sometimes that's the exact opposite. We're actually now in a higher bracket, so when we go to pull this money out, now we owe taxes then. Tony Mauro: And again, depending on how you look at it, could be a disadvantage there as far as that goes. I think with this, like all retirement accounts, another small disadvantage is money set aside. That's what the government wants you to do is keep it set aside until you're 59 and a half. And there's penalties if you pull it out early and things like that. So you got to know the ins and outs of these. And just have a conversation with your advisor. They're going to explain the same thing and go through it and then help you decide which one is better. Speaker 1: Well, it's the education, and like I said, the conditioning that we've been getting for years that this is where we go, right? We just put the stuff in a traditional 401k, we tax defer it. And I like how you said, it's ours, but they don't view it as ours yet. The government does. And it's someplace we parked it until they want their cut later on when we take it. That's like the RMDs, so on and so forth. And that's the traditional way of thinking. But there are a lot of alternatives that maybe are better way to go. Speaker 1: And at the time we're taping this, Tony ... we don't have any official word yet to what's going to happen with the tax proposals. But there's all the talk about, well, they're going after the wealthy. But if you really look at some of the other things in there, it's not just the ultra wealthy. It's not even really just the wealthy, right? There are some things in there that's going to pinch all of us a little bit if they make these changes. Speaker 1: And over the last couple of years, tax-free accounts, like a Roth IRA, and even a newer thing, like a Roth 401k, have been very, very appealing to people because I know what my tax rate is today. I don't know what it's going to be in the future. And whether they make a change or not, they're sunsetting. So they're going back up in a couple of years, regardless. Tony Mauro: Exactly. And if you really, if you think about it, take all the politics out and whatnot ... pretty much everybody knows that the government spends more than they take in. We've got a lot of debt. At some point... Speaker 1: And they're not very efficient. Right. Tony Mauro: Yeah, they're not very efficient. And at some point, we have to start paying for some of this somehow. And some of the things that they like to do is mess around with some of this stuff and create taxes to do that. But the tax-free accounts really have gained a lot of steam, like the Roth. Because the thing with them is, is you don't get a tax deduction when you put the money in. It's all after tax dollars. So the government isn't out anything because they collect the tax on that. Tony Mauro: But the deal with them and these accounts is, well, okay, I didn't get a tax deduction, but they're saying all the earnings on these accounts is tax-free. Not tax deferred, free forever. So [crosstalk 00:07:25] the pot of money that grows ... Yeah. There's no taxes being paid on the earnings. And then when you take it out, you don't have to worry about that. Now, some of the things the government has found and tried to close ... because obviously, if there were no limits on these things, all the wealthy would stash all their money there. I mean, they're not dummies when it comes to this. Tony Mauro: But the feds say, you can only put so much in a year. Which is 6,000, then there's a catch-up. I think it's still 6,000. It might be 6,500. Speaker 1: I think it's 65 or under now. Yeah. Tony Mauro: So you can't stash too much in there. But what a lot of people are doing now though, which is a legal loophole, is really taking money they're putting in the 401ks or whatnot ... or had some money in IRAs. And they're taking it out and doing Roth conversions up to their tax limit. And saying, okay, like you said earlier, we're going to pay some tax now, we know what it is. And I'm going to keep converting until I get all my money out of the tax deferred stuff. Tony Mauro: Or they're using the newest thing, the Roth 401k, which is just like the regular IRA and 401k, it's just you don't get a tax deduction now. But you can stash a lot of money in those. So it's a very good account. I think it deserves some looks, especially if you're younger. And it's a heck of a deal. So I think you should take a look at it. Speaker 1: Yeah. No, I agree with you. And I think that's where people were trying to be more efficient. Because every time we get more efficient, then the IRS is like, well, we got to get more efficient, and it's this chess game. And it's always funny these conversations about, I found a loophole, or I want to find ... and it's like, well, the code is the code is the code, right, Tony? As a tax professional, there's not technically really loopholes, right? There's just the code and the people who are willing to find the ways to manipulate it to their best advantage. Tony Mauro: To their best advantage, yeah. It really is. And then sometimes the IRS says, well, too many people are doing this, and then they change the code. So you can't do that legally anymore. Speaker 1: And that's closing the loop, right? Yeah. Tony Mauro: That's closing the loop. Speaker 1: Yeah. Exactly. Speaker 1: All right. Well, talk to me about number three, after tax brokerage accounts. What are those? First of all, just kind of explain them a little bit just for people ... taxable accounts, though? Tony Mauro: Yeah. So a taxable account really is no different ... I mean, you could call anything a taxable account. Your savings account, CDs, money markets. But brokerage account would fall under that. Meaning that you just decided that you were going to start investing in some securities. And it might be equities might be mutual funds, whatever. [crosstalk 00:09:51] Speaker 1: So it's just to tax your E-Trade account, for example? Tony Mauro: Yeah. Like E-Trade or whatnot. And that's called a taxable account. Meaning that even though you own securities, when you buy and sell, if you have gains, you're going to be taxed on the gains, only when you sell them though. And if your securities generate dividends and interest income and things inside of that account, you're going to be taxed on it. So at the end of the year, you're going to get a statement called 1099-B, and it's going to summarize all this. And you have to give that to your tax person because you have to claim that on your taxes. Tony Mauro: So what's the advantages and disadvantages? Well, the advantages really are, again, you're paying your taxes now. And you're not into all the rules. You don't have to take money out at any certain time. You know exactly where you're at. I think another advantage ... but this is in any type of account. Long-term capital gains are taxed at a lower rate than your potential income is. And you could do some tax loss harvesting, which is a tax planning move, where if you've got a lot of gains and you've got a few losses, you can offset the tax on those gains by selling and deducting your losses. Tony Mauro: So they have a spot, especially if you've maxed out the other two things we've just talked about. People say, well, I still want to save more. And we say, well, I mean, there's a couple other things, but just a regular account sometimes make some sense. Or if it's just a trading account, a lot of people use E-Trade and Schwab and things, and they do a lot of trading. And that's where you do that at. Speaker 1: I forgot to ask you, whenever I asked you to give us some pros and cons, to ask you whether or not you use some of these tools in your retirement planning process. And I'd imagine for these first three, you use all of these, right? Tony Mauro: We use all of them, yeah. We do. I mean, we start at the top and try to get the most tax savings or deferral that we can. And if people want to keep going ... we try to set high savings rates, and then we break it out between the different accounts. But if somebody has got the wherewithal to say, I want to save 10, 15% of my income. A lot of times we can't get it all in one type of account, because of the rules. The IRS says it's too advantageous. Speaker 1: As a CFP, a certified financial planner and professional, I imagine ... and obviously a tax person. So you get to kind of look at this through both lenses, right? So when you're thinking about these things, where a lot of times, if you're working with someone who's just a financial planner, they will say things like, well, let's ... they have tax knowledge, of course. But they'll say let's consult a tax person. You get that nice advantage, unless I'm wrong, of looking through it with both lenses at the same time. Tony Mauro: We do. And we get some calls from clients that work with financial planners. And they're tax clients, and of course, they want ... I think some financial planners, it's probably something they don't want to get into if they get too far into some of the tax stuff. But it is good, especially with tax clients, because we already have their tax returns and just... Speaker 1: Yeah. You're right there looking at it. Yeah. Tony Mauro: ...plug some numbers into the tax software, into the financial planning software. And try to find the best route based on what they want to do. Using all of these different kinds of accounts. It's almost a must these days to be able to do that. Speaker 1: That's for sure. Well, I got two more. Let's see if we can knock them out. You mentioned CDs, so let's bring that one up. I know we're trying to be pros and cons, I'm finding a hard time finding any pros to CDs right this minute. I mean, other than the fact that, I guess they're safe. But I mean, talk to me a little bit about CDs. Tony Mauro: Well, yeah. I mean, CDs, they're always the whipping boys of the investment world, especially now. The CDs, the advantages of them ... back in the day when you could earn a reasonable rate of interest, that's mostly what retirees put their money in. If you could get five ... I remember the days when it was 8%. And the big advantage is, that's FDIC insured, so there's no risk to your principal. It's a contract between you and the bank and they're going to give you X amount of dollars or interest rate. And at the end, they're going to return your money and you could do it again. And all different kinds of time horizons and whatnot. Tony Mauro: The problem has been, over the years, rates have shrunk. These rates now are what I would call very, very low. I mean, you can't even keep up with inflation on these things. Speaker 1: No, no. Not at all. Tony Mauro: And if you take inflation into account, your tax rate into account ... because these things, unless you put them in an IRA, are taxable. Sometimes there's actually, if you show it to people, a negative return in real dollars. But a lot of retirees still like to cling to them. They complain a lot, they're just not earning. And we tell them... Speaker 1: To your point, the whipping post, right? Tony Mauro: Yeah. You're not going to get that. And you're going to have to come up with something else and venture out a little bit. But they still have their place. I mean, you could say, for children. You could do some things. You could use them for college. It depends on your risk appetite, but these are ultra, ultra conservative. And if rates ever come back to something respectable, I'm sure you'll see them not being talked about like they are today. Speaker 1: Gotcha. Okay. And then my final one, the fifth one here, Tony, is life insurance. Now we're talking about tax consequences and that might strike people as strange sounding. So are there tax consequences to life insurance? Tony Mauro: There are tax consequences. And everybody loves to hate the life insurance sales guy these days. But life insurance still has a great, I think, value in planning, and not only for your estate and retirement. But everybody always wants to ... you know the old saying. What is it? Buy term and invest the difference. I still think that a cash value life insurance, in certain situations, makes some sense. Because it's going to build up cash value, it's growing tax deferred. You can borrow against it because it's your money. No questions asked. Tony Mauro: Life insurance, of course, for the death benefit is tax free to the beneficiaries. It doesn't matter how much it is. And you can use it in some really sophisticated planning techniques, depending on what you want to do and how you want to leave your money for children. And I think it still makes some sense. People ask me, well, hey, I've got X amount of dollars in my nest egg. I want to leave my kids something, but I want to spend my money. And we tell them, well, you can do that. Just go out and you can buy a life insurance policy. Make sure you're paying on it or it's a paid up policy. Tony Mauro: And then you can go out and spend every dime and at least you know your kids are going to have what you want them to have, should you pass away. So there's a lot of uses for it. It does get complex. Sometimes it's not sold properly, and for all the wrong reasons, but I think you should at least take a look at it as a planning tool. Speaker 1: Yeah. And I think a lot of people don't realize ... we think of life insurance as just life insurance. And not thinking about necessarily the tax consequences. So I wanted to bring that up and have you address that a little bit this week on the show. Speaker 1: All right. So thanks for hanging out with us this week as we talked about tax consequences with the tax man. So that's why we do the show, Plan With the Tax Man. So if you've got questions, as always, get on the calendar. Talk with a qualified professional before you take any action, if you're not already working with Tony. Make sure you check with a professional before you take any action on something here on our show or any others. Speaker 1: And don't forget to subscribe to us on Apple, Google, Spotify, iHeart, Stitcher, all that fun stuff. Find it all at yourplanningpros.com. That is yourplanningpros.com. Tony, thanks for hanging out and explaining some of the tax ramifications and some of these things. I appreciate you. Tony Mauro: Yeah, you bet. Talk to you soon. Speaker 1: Yeah, we'll see you next time. We'll be in November the next time we get together. So that'll be nice, and maybe the chilliness will really be rolling in. And we'll be talking about Christmas in November, when it should wait until December, but whatever. I'll get on my pumpkin spice high horse again so I won't do that. Tony Mauro: I like that. Speaker 1: We'll see you next time, folks. Have a great week. Don't forget to subscribe to us here on the podcast Plan With the Tax Man, with Tony Mauro. We'll talk to you next time. Member FINRA, S.I.P.C. Investment advisory services offered through Avantax Advisory Services. Insurance services offered through an Avantax affiliated insurance agency.