Episode 167
4 Common Tax Reduction Mistakes - EP. 167
In this episode, Travis and Steve delve into the complexities of taxation, focusing on common mistakes individuals make regarding tax reduction strategies. They discuss the difference between tax loopholes and traps, the concept of tax loss harvesting, and the risks associated with market timing. The conversation also covers the implications of deferring income taxes, the challenges of capital gains, and the strategic use of the zero percent tax bracket.
Together, Travis and Steve emphasize the importance of understanding tax rules to avoid costly mistakes and maximize financial outcomes.
Takeaways
- Understanding the difference between tax loopholes and traps is crucial.
- Tax loss harvesting can be beneficial, but it comes with risks.
- Market timing can lead to missing significant market gains.
- Deferring income taxes may create future tax burdens.
- Capital gains taxes can be avoided through strategic planning.
- Living in a zero percent tax bracket can be misleading.
- Projections are essential for effective tax planning.
- Selling investments to avoid capital gains can be detrimental.
- Tax strategies should align with long-term financial goals.
- Professional guidance is vital for navigating complex tax situations.
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About Your Host:
Travis Maus has been in financial services for over fifteen years. He is a Senior Wealth Manager and Chief Executive Officer at S.E.E.D. Planning Group. Travis also hosts the Unleashing Leadership Podcast, where he dissects some of his favorite books on leadership and how you can apply it to your business or life.
Transcript
Foreign.
Speaker B:Welcome to Ditch the Suits podcast, where we share insights nobody in the financial services industry wants you to know about.
Speaker B:We're here to help you get the most from your money in life.
Speaker B:So buckle up and welcome to Ditch the Suits.
Speaker A:Hey, Steve, wouldn't it be great if we lived in a world where we don't have to pay any income taxes?
Speaker B:It'd be awesome.
Speaker A:How many times have you heard, and especially recently, it seems like with the politics, how many times have you heard that rich people don't pay their fair share of income taxes?
Speaker B:Quite a bit.
Speaker A:Yeah.
Speaker A:So, you know, one of the things that we're gonna talk about today.
Speaker A:Well, all we're gonna talk about today really is taxes.
Speaker A:But four common tax reduction mistakes that people make.
Speaker A:But I bring up the rich people, and I kind of bring up the world with no income taxes because there's tax loopholes, and everybody hears about the loopholes.
Speaker A:And then there's also tax traps.
Speaker A:And I think people sometimes get confused between, okay, there's a legal way to do things and then there's a way that kind of looks smart, but in the end doesn't turn out to be so smart.
Speaker A:That would be the trap.
Speaker B:Interesting.
Speaker B:Yeah.
Speaker A:So I want people to think about loopholes are kind of a spot that's created or allowed to legally exist because of the way that the law is written.
Speaker A:And maybe you could say, boy, those.
Speaker A:Those interesting politicians, they just didn't know what they were doing or did they know what they were doing?
Speaker A:You never know.
Speaker A:But the whole thing is, is that there's rules to the game.
Speaker A:And taxes is a.
Speaker A:Is a giant rule book.
Speaker B:Yep.
Speaker A:In the game of life.
Speaker A:And you've got to figure out how to, you know, handle your money as best as you can within those tax rules.
Speaker A:And so there's the legal ones.
Speaker A:And then the tax traps are what happen when people actually don't understand how and when to apply the different tax that other people are trying to use that they call loopholes.
Speaker A:And instead of finding a loophole, they end up getting smacked by the tax collector, like, in the back of the head.
Speaker A:Because tax is like a boomerang.
Speaker A:If you do it wrong, it's going to come full circle and get you later.
Speaker A:So you could be like, oh, this is so wonderful.
Speaker A:I'm at the 0% tax bracket, and I see.
Speaker A:I see stuff online all the time.
Speaker A:You can live in the 0% tax bracket, too.
Speaker A:Wouldn't that be great?
Speaker A:You know, there's not much, you know, the.
Speaker A:The reality of a free lunch is eventually you're going to starve to death.
Speaker A:You know, like, like, you know, it's.
Speaker A:I don't know if that.
Speaker A:I don't know if that analogy.
Speaker B:No, it worked.
Speaker B:I'm with you.
Speaker A:Did it kind of work?
Speaker A:All right, so in this episode anyway, we're going to get into the four misconceptions that I think could actually change people's lives if they better understood how these tax things, these tax strategies or loopholes kind of work.
Speaker B:Yeah, well.
Speaker B:And I think we've done a great job of talking about there's bad decisions and then there's opportunity loss when you don't understand the rules of the game.
Speaker B:And this is ditch the suits.
Speaker B:I'm Steve Campbell, senior marketing director at Seed Planning Group, along with Travis Moss, who you've been hearing from our CEO at Seed.
Speaker B:And Seed is a fee only financial planning firm where we have a fiduciary obligation to serve our clients best interests.
Speaker B:And this show is all about us bringing years of experience, conversations we're having internally to bring to you to really help you get the most from your money in life.
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Speaker B:This episode is brought to you by Seed Planning Group.
Speaker B:If you're looking for a life giving experience working with a financial planner, then Seed is here for you.
Speaker B:Seed is a fee only financial planning firm with a fiduciary obligation to put your best interests first.
Speaker B:If your goal is financial freedom and independence without sales products or really glorified salespeople, then check out Seed Planning Group.
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Speaker A:Yeah.
Speaker A:And so we're recording this.
Speaker A:You can go onto YouTube and you can see us recording this.
Speaker A:And I just.
Speaker A:We're in our new studios.
Speaker A:We just started the season.
Speaker A:I just realized I have a tendency to slouch and it kind of makes me.
Speaker B:Yeah, it makes you be accountable.
Speaker B:And Patreon head over to Patreon, head of Patreon, Ditch the suits.
Speaker B:That's where you can watch all these videos.
Speaker A:Yeah, it was looking like I had a food baby there.
Speaker A:All right, so anyway, back to the taxes.
Speaker A:We're going to talk about, number one, the first thing that we're going to talk about is taking investment losses and when the market's down.
Speaker A: we're recording this in April: Speaker A:So the market's been really shocked over the last couple weeks with the Trump tariff policy and kind of everything going on with that.
Speaker A:And so one of the things that we get sometimes is clients calling and saying, hey, should I take some losses?
Speaker A:Right now seems like a great time to sell some investments that I've lost money on and get a tax loss.
Speaker A:So I wanted to first discuss the concept of harvesting tax losses or harvesting losses so that you can potentially write them off on your taxes and kind of how that works.
Speaker A:So then we can talk about maybe, you know, whether or not it's a good strategy to employ and if you're going to employ it, what you need to know about it so that you don't get hit in the back of the head with the boomerang.
Speaker B:Yep.
Speaker A:All right.
Speaker A:So first off, the idea of harvesting losses is this idea that in your por, these are for after tax portfolios.
Speaker A:These aren't IRAs or Roth.
Speaker A:These like brokerage accounts, money that you've already paid taxes on.
Speaker A:But when you invest, you get capital gains and you have to pay taxes on dividends and stuff like that.
Speaker A:So the idea is, is that in a diversified portfolio, you're going to have some things that have made you money, and if you sold them, you pay capital gains and then you're going to have some things that lose money.
Speaker A:And if you sell them, you get a capital loss.
Speaker A:And so if you're going to have gains, so you sell an investment with a gain, let's say it's $10,000, and you sell an investment with a loss, let's say it's $10,000.
Speaker A:They would negate each other and so you wouldn't pay any taxes.
Speaker A:So you could re invest basically without getting hit by the tax bug.
Speaker B:Yep.
Speaker A:So that sounds like a pretty cool idea.
Speaker A:Although there's some wrinkles to it.
Speaker A:And a lot of times people don't understand these wrinkles.
Speaker A:So the first wrinkle is what's called the wash sale rules.
Speaker A:And this is the IRS kind of knows that people are going to try to game the system like this, right?
Speaker A:So they're saying like, so Steve, pretend you had Apple stock and your Apple stock is down 30%.
Speaker A:But you love Apple stock.
Speaker A:And so you say, okay, I'm going to sell it and get my tax loss, you know, so I can set that off against other capital gains in my tax return.
Speaker A:And then I'm gonna buy it right back.
Speaker A:Cause I really love it.
Speaker A:So I just want the tax loss, but I still wanna own it.
Speaker A:The IRS says no, you're not allowed to do that.
Speaker A:In fact, there's a thing called the wash sale rule, which basically says if you buy substantial, and a funny word here, substantially.
Speaker A:And we'll get into why it says substantially.
Speaker A:If you buy substantially in the same stock or security within 30 days before or after you take your loss, loss is negated.
Speaker A:So basically the cost basis just carries over.
Speaker A:So you could go through that activity and actually not get any benefit for it.
Speaker A:And you could potentially really hurt your portfolio by selling something and then buying it back if there's time in between when you sell it and when you buy it.
Speaker A:So there's some rules around whether or not you can even take a loss.
Speaker A:Just because you've sold it doesn't mean that you automatically get the loss.
Speaker A:There's also some stuff we're not gonna get into today, but it's with tax planning about whether or not, for instance, if you have more losses than you have gained, you can only use so much of the losses on your tax return.
Speaker A:The rest of it you're going to carry forward.
Speaker A:So there's some other wrinkles in there, and I'm not certain everybody understands those, but we're going to leave those for a different day.
Speaker A:I want to talk about some other issues.
Speaker A:I mean, this, this one topic, we have four of them to go through today.
Speaker A:This one could probably take a whole episode, you know.
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Speaker B:So visit patreon.com search ditch the suits or head to our show Notes where we got links to our channel.
Speaker B:Well, and I think this is one of those things that in financial literacy you hear Wash Sale rule, you go to Google, you go to Investopedia, you go to the Facebook chat groups, and it's a cool idea.
Speaker B:So then people, I think, try to execute it, but the way they execute it is sometimes misaligned.
Speaker B:And so they're doing, hey, I heard this thing.
Speaker B:I can get a savings on taxes.
Speaker B:I'm going to sell this stock.
Speaker B:And if you don't understand kind of what you just walk through, you can really do detrimental harm to yourself.
Speaker B:Because like you said, all of this is a game.
Speaker B:And you run a money business.
Speaker B:If you're not aware of the rules and the IRS catches you, you can be in, you know, potentially negate things and be in trouble.
Speaker A:And the hard part is it's not just your account the way that the IRA is going to look at the wash sale rule.
Speaker A:So if you say, well, in that account I did not buy or sell anything within the same 60 days, that was, again, substantially identical.
Speaker A:But it could be in a different account you did, including a retirement account.
Speaker A:It could be other people in your household.
Speaker A:It could be dividend reinvesting.
Speaker B:That's huge.
Speaker B:I don't.
Speaker B:I don't think people really understand that.
Speaker B:It's complicated.
Speaker B:So there's layers to it.
Speaker B:Right.
Speaker B:Some people understand, like, the highest level, and then you do something.
Speaker B:But to really understand that you can't just sell it to get a loss and then buy it over here and hope nobody sees it.
Speaker B:And when you're also talking about family members, it's like, okay, well, then I'll buy it in another member's account.
Speaker B:The IRS catches all of this.
Speaker A:What if your other family member buys it?
Speaker A:You don't even know they're buying it.
Speaker A:So your spouse, I mean, what they're really talking about.
Speaker A:Same household.
Speaker B:Sure.
Speaker A:Right.
Speaker A:They're talking about control.
Speaker A:So you buy.
Speaker A:You sell one, and your spouse buys one.
Speaker A:Even if you don't know what your spouse is doing.
Speaker A:Not a good enough excuse.
Speaker A:They could still catch you on that.
Speaker B:Yeah.
Speaker A:Enforcement on this rule is a little bit kind of murky.
Speaker B:Sure.
Speaker A:Because of all the different accounts and everything.
Speaker A:But you don't want to be the.
Speaker A:If you're a high earner or you have a lot of assets, there's a chance that eventually you're going to get audited by the irs.
Speaker A:These are not things you want kind of lurking around in there where they can come in and say, oh, by the way, you shouldn't have done that.
Speaker A:Here's some penalties.
Speaker A:So let's talk about that word, substantially identical stock and security.
Speaker A:Because I think it makes sense.
Speaker A:If you buy Apple stock and sell Apple stock, and I want to buy Apple stock back, it's pretty easy to figure out Apple's Apple.
Speaker B:Yep.
Speaker A:But what if you buy a large cap S&P 500 mutual fund, you sell it and you buy the S&P 500 ETF and you say, hey, they're different securities.
Speaker A:Yeah.
Speaker A:But they're substantially identical.
Speaker A:They're buying the same things.
Speaker A:In fact, there's not really good case law on this, but there is an argument that if you own, let's say recently, the market's been going up and down dramatically, mostly driven by Nvidia and some other tech stocks.
Speaker A:What if you sold those and bought the index and the movement in the index is primarily due to the movement of those stocks?
Speaker A:Is that a substantially similar investment?
Speaker A:So one of the issues here is that you might participate in a tax loss harvesting program or do it yourself.
Speaker A:And you sell the Vanguard S&P 500 fund and you buy the Fidelity S&P 500 fund.
Speaker A:Doesn't count.
Speaker A:Not good.
Speaker A:Even if you buy it, sell that Vanguard S&P 500 fund and you buy the Vanguard Large Cap Growth Fund, there might be so much overlap in that fund that you could actually blow yourself up with the WASH rule.
Speaker A:So first and foremost, you gotta understand the WASH rule and you gotta keep yourself from getting in trouble with the WASH rule because you could end up getting into tax time and figuring out, oh, I can't take those losses.
Speaker A:I thought I had.
Speaker A:And if you've taken other gains against those losses, now maybe you're stuck with the tax bill and it could just be a shock.
Speaker A:I mean, if you have $100,000 gains and aren't playing for it and you're in a certain tax situation, not, you know, I mean, hey, here's, here's a $20,000 tax bill.
Speaker B:Yeah.
Speaker B:And you can tell me if I'm wrong.
Speaker B:But basically what the IRS is trying to make sure is that you, when you have a position that's down, don't sell it and turn around and buy it to now get all the upside.
Speaker B:And then they don't get the money that should be coming to them.
Speaker B:Right.
Speaker A:Because, well, what they're saying is you don't get to use a loss on something that you still technically own just because you jumped out of it.
Speaker A:If you jump out of it and jump right back in it, you never really had a break of ownership.
Speaker B:And you got to wait a period of time.
Speaker B:And then once that period of time.
Speaker A:Is over would be, I think, about your house, you know, or a real estate.
Speaker A:If you own a piece of real estate and, you know real estate, you pay your taxes or get a loss on it when you sell it.
Speaker A:Well, imagine if you could just sell it for a day, get the loss, and then jump back into it and still own it.
Speaker A:What they're saying is you didn't constructively give up control of it.
Speaker A:So we're not giving you a loss.
Speaker A:You never lost control of the asset.
Speaker A:You've essentially maintained it throughout.
Speaker A:But there's better reasons why, or not better reasons, other reasons why I Think that this is maybe a troubling area too.
Speaker A:And for this we're going to talk about market timing because you might say, well, fine, I just won't buy the same thing.
Speaker A:So if I sell my Apple stock, I'll sit out of it for 30 days after I, I sold it, right?
Speaker A:And I didn't, I didn't sell it or buy any before I sold it within the 30 days.
Speaker A:So I'm good, I got the 60 day window or 61 day window.
Speaker A:I'm fine.
Speaker A:And so I, I just won't buy it back.
Speaker A:Well, I want you to think about this.
Speaker A: From: Speaker A:What that means is the market's doing crappy and your investments are down.
Speaker A:You're feeling like, oh, I got all these losses, I should sell these.
Speaker A:Either they don't work or I want the tax loss.
Speaker A: ays of the stock market since: Speaker A:28% were within the first two months of a bull market.
Speaker A:Here's what you don't know about a bull market.
Speaker A:You don't know you're in a bull market till after you're in the bull market.
Speaker A:So you're really talking about 78% of the best days in the stock market are when the stock market seems like it's on a daily dumpster fire.
Speaker B:Well, and how many people market timing time in, time out of the market?
Speaker B:I love this example because it's psychological to think that you make more money in uptimes, but 50% of the best days came when it was technically in bear territory.
Speaker B:Which when you have people panicking because it's their life savings, they don't think good can come from bad times.
Speaker B:Right.
Speaker B:And so I think maybe what you're alluding to is with the wash sale, if you made a decision, stocks kind.
Speaker A:Of go like you have the market and goes through bull and bear market.
Speaker A:Stocks kind of have their own cycle like that too.
Speaker A:So if you yank your money out of a stock, a really good stock, you, you bought that company because you or mutual fund because you really believed in it, right?
Speaker A:And if you don't believe in your investments, you have no business buying them.
Speaker A:You know, that's one lesson.
Speaker A:But so you bought it because you really believe in it, and then it goes down in price.
Speaker A:You say, you know what, let's get out of it and let's hang out for 61 day or 30 days after I get r, let's, let's just hang out and then we'll put it back in when it's done.
Speaker A:So you're, you're rolling the dice there, There's a se.
Speaker A:You know, 78% of the best days in the stock market have come really probably in that 30 to 60 day time period that your was shell rule is going to actually incorporate.
Speaker A:You, Your, your, your likelihood of missing one of those big days is so big.
Speaker A:And so you would say, well, what if I just miss one day?
Speaker A:Okay, we got the numbers on this.
Speaker A:We brought the receipts this time.
Speaker A: best days in the market from: Speaker A:If you missed the one best day, essentially every year, you would have made 83% less than the market.
Speaker B:That's crazy.
Speaker A:Which means, okay, you saved some tax money, but you made 83% less than the S&P 500.
Speaker A:Okay.
Speaker A:Your taxes weren't that much.
Speaker A:Okay, if you missed the 20 best days.
Speaker A:So let's say you're a little bit better at timing than average.
Speaker A:So you miss only the 20 best days.
Speaker A:73% less return.
Speaker A:Let's say you're really good.
Speaker A:You only miss ten of the best.
Speaker A:And I've been doing this a long time.
Speaker A:I'm going to tell you what.
Speaker A:If you're trying to time it, myself included, we, you cannot, you cannot hit it.
Speaker A:We can watch volatility, you can watch price to value ratios, which you can't figure out is what the headline is going to be tomorrow and whether or not that's going to go to market.
Speaker A:But if you miss the 10 best days, you lose half over half the return of the s and P500 just by missing 10 days in the last 30 years.
Speaker A:So you, you do not, I don't care who you are, you do not have a crystal ball to be able to do that.
Speaker A:And if you're going to sell your stock and not participate with it when it's down, you're probably going to miss the bet.
Speaker A:You, you have a high probability you're going to miss the best recovery days, which is gonna mean that you're gonna get a far less percentage of the actual return on that stock.
Speaker A:It's just, it's kind of like a fool's game.
Speaker A:It feels good because you're doing something, but the end of the day, it just takes, you lose money.
Speaker A:Here's a couple more stats and then we can move on.
Speaker A: ,: Speaker B:That was wild.
Speaker A:So if you were tax loss harvesting and you had sold the day before because the market was way down, you wanna get that loss and you didn't get your money back in the very following day.
Speaker B:Yep.
Speaker A:You missed out on a 12.16% return.
Speaker B:That's a year sometimes.
Speaker A:Yes.
Speaker A:But here, here's the key.
Speaker A:If you have individual investments, so you're like, I use individual investments a little bit easier tax.
Speaker A:All right.
Speaker A:Stocks themselves are always going to have more volatility than the index.
Speaker A:Metta 15% on, on April 9th.
Speaker A:So it did 3% more than the NASDAQ.
Speaker A:Tesla 22% that day.
Speaker A:Nvidia 18%.
Speaker A:Apple 15%.
Speaker A:American Airlines over 22%.
Speaker A:So when you look at trying to time this with an individual stock, so you go, okay, well, I sold Apple and I bought the Nasdaq because I was just trying to, you know, I realized I got to sit there.
Speaker A:So you sold something that was way down.
Speaker A:You bought something that made 12, but you missed something that made 15.
Speaker A:And so when you start looking at the totality of trying to manage a portfolio and trying to react and make good, prudent decisions, all of a sudden you're making investment decisions that are affecting whether or not you can make good returns based solely on whether or not you want to get a tax loss this year.
Speaker A:It's a really interesting way to make investment decisions.
Speaker B:Well, and again, when this episode comes out, right, we're recording in April, so I think when you throw out historical numbers, if you're not in it, it's hard to look back to the past and go, oh, yeah, I remember that.
Speaker B:What just happened in april with that 12.16 we all experienced.
Speaker B:And so there are people listening to ditch the suits today that felt pain that day that they were out of the market.
Speaker B:And I, I know, Travis, sometimes it's not even our own decision making.
Speaker B:We just went through tax season.
Speaker B:Sometimes there are tax professionals that are trying to save taxes.
Speaker B:And so they're looking at what individuals hold.
Speaker B:And they're not investment managers, they're not financial planners.
Speaker B:They're just doing.
Speaker B:I remember a scenario years ago where they just wanted to help a client save money and told them, let's, let's sell these positions, right?
Speaker B:So you're dealing with a professional going, okay, that makes sense for taxes.
Speaker B:Yeah.
Speaker B:If you're not dealing, though, with a financial planner that's looking at it and saying, is saving a $10,000 loss write off for Apple or For Tesla, Nvidia really worth it in the long run.
Speaker B:And so I wonder how many people are also trying to do the right thing, maybe getting misguided advice from.
Speaker A:I think, you know, you Google and they talk about tax and there's ways that tax loss harvesting does good.
Speaker A:And I think that there's ways of tax loss harvesting kind of paint you into a corner.
Speaker A:And that's the whole, you know, the tax loophole versus the tax trap.
Speaker B:Yep.
Speaker A:And I guess here's my advice on tax loss harvesting is if you're going to use the strategy, you need to make sure that when you're selling investments that you're mapping them over to a very similarly jargon.
Speaker A:I know, but correlated investment with the same upward potential.
Speaker A:So when you look at the price, the value and the business characteristics, people forget about.
Speaker A:You know, these are businesses.
Speaker A:You can have an amazing price to value ratio that makes it look like a great buy.
Speaker A:But you got, you know, major turmoil and leadership at the company.
Speaker A:And you get a question, okay, just because the price to value is split out, is this business actually capable of recovering at its price to where it's going or is the price a precursor to probably where the value is going?
Speaker A:So, you know, the price is kind of a leading indicator sometimes of where things are going, but it's not, it's not, it's not going to give you the concrete answer.
Speaker A:So you have to understand the business too.
Speaker A:So when you're selling one company, so if you were to sell something like Apple, you would need to, to move those funds to something with a similar profile that also, let's say, is experiencing the same level of volatility.
Speaker A:So if Apple was priced to value, let's say that you could buy it for 80 cents on the dollar, you would not want to sell that and buy something that was, that was selling at 110 cents on the dollar.
Speaker A:Just because they're both, they could both be down 30%.
Speaker A:One just started from a higher point.
Speaker A:Right.
Speaker A:And so you would want to make sure that, oh, I've sold something that is on a, you know, selling at 80 cents on the dollar, and I've bought something that's around 80 cents on the dollar and it's down for pretty much the same reason and it's got a high likelihood, it kind of matches up with the other one of recovery.
Speaker B:Yeah.
Speaker A:So there's, there's, that's not a quick and easy decision.
Speaker A:There's a lot of research that goes into that.
Speaker A:So you not only have to be watching the stocks that you invest in.
Speaker A:But you have to be watching the stocks you don't invest in that you would invest in if you couldn't invest in the stocks that you do invest in.
Speaker A:So you start to, you start to see where professional management comes in, but you can also start to see where, you know, I, a lot of times people say, well, I've done really good with investing.
Speaker A:It's like.
Speaker A:But compared to what?
Speaker A:Yeah, you know, what are you comparing yourself to?
Speaker A:Oh, Well, I averaged 7%.
Speaker A:Well, if everybody else in the time period averaged 9, you did okay.
Speaker A:You didn't do really well.
Speaker A:And that's what we're trying to do here is let's make sure that we don't make, you know, get caught in this tax boomerang.
Speaker B:Well, and to make, let me help the listener who might sound like maybe we're contradicting ourselves because they don't understand.
Speaker B:So when we talked earlier about the tax loss harvesting in a substantial position, I believe what you were trying to say is if you sell Apple as an individual security and you want to turn around and buy an ETF that holds Apple as a major holding, that is a substantial thing.
Speaker B:Right.
Speaker A:In this case, you're talking about not quite.
Speaker A:When it comes to one security versus a fund, the argument is you'd have to have the majority of the performance.
Speaker A:So if the majority of the negative performance is coming from the largest capitalized stocks and those happen to be the ones that you sold, and they make up the main driver of the up and down in that fund, then that could be, that's not going to map over one stock.
Speaker A:But if you had Nvidia, Apple, Microsoft, Tesla, Facebook, Netflix, and then you had a tech fund and it was basically map, you know, performance was almost perfectly correlated with those that could be considered a substantially, you know, and again, there's, there's not a lot of IRS enforcement on that right now.
Speaker A:But it's kind of like one of those things.
Speaker A:Just because you can speed and, you know, a cop's not looking doesn't mean it's a great idea.
Speaker A:Right.
Speaker B:Great analogy.
Speaker B:Well, and I think to your point, then what you're talking about is making sure you have a plan, right?
Speaker B:You want to take a loss, but then what?
Speaker B:Where are we going to put in?
Speaker B:If you're like, well, how do I know what to do?
Speaker B:A couple episodes ago, and it's been fun connecting with Ditch the Suits listeners, we had put out Travis's kind of top 10 investment guidelines.
Speaker B:We've had a number of listeners reach out to us and say, hey, how do I get a copy of that PDF?
Speaker B:I think sometimes we talk about very high level things and we try to bring it to the mass to help you understand that you can make money buying companies, but you have to understand their competitive advantage, their leadership, their moats.
Speaker B:So we have a PDF that if you're like, hey, I want more information guys, what do I do?
Speaker B:Reach out to us.
Speaker B:We'll, we'll send that PDF and it's just Travis's 10.
Speaker B:Kind of putting purpose behind why we're buying, what we're buying.
Speaker A:Yep.
Speaker A:So moving on because we got three more things that we got to hit.
Speaker A:The.
Speaker A:What's our next one here?
Speaker A:The next issue is people will try to reduce their income.
Speaker A:So you go to this, like you said, you go to a well meaning CPA or accountant and they say, hey, look man, you qualify to put some money in a retirement account, you get a tax deduction.
Speaker A:So if you put in, you know, five grand this year, we'll save you a thousand dollars in taxes or something.
Speaker A:And that sounds wonderful.
Speaker A:Or maybe you're like, I hate paying income taxes and I'm in my 50s, my peak earning years, I'm going to keep maxing out that retirement, that 401k account, so I can get this big tax deduction.
Speaker A:One of the issues that comes with that is, yes, you're reducing your income taxes, but do you know what your future income taxes look like?
Speaker A:And somebody can say, nobody knows their future.
Speaker A:We get pretty darn close when you do a projection because the one thing with IRAs, so number one, you can project your lifestyle and your budget and your expenses out.
Speaker A:And especially, you know, when you're 30, it's hard to figure out where you're gonna be when you're 60, but when you're 55, we can pretty much figure out where you're gonna be in your 60s.
Speaker A:It's a little bit easier to do.
Speaker A:And so we say, okay, this is where we look like we're gonna be in our 60s and 70s.
Speaker A:And we could come up with, you know, oh, you're going to need money from that retirement or not, retirement account or not.
Speaker A:And this is how long it's going to be deferred.
Speaker A:And if you don't take money out, this is how much you're going to, this is your projected RMD that you're going to have.
Speaker A:And you can even underestimate that and still come up with some pretty wild numbers, at least for our clientele.
Speaker A:Right.
Speaker A:We get some Clients in that, you know, let's say 1 to $12 million range and a bunch of monies in those IRA 401ks.
Speaker A:I think when you get, when you have, when you have clients over the 12 million, a lot of times the IRAs and 401ks are a much smaller part of it, right?
Speaker A:Because they've had businesses, other things going on.
Speaker A:But in that 1 to 12 million area, normally you have some big retirement account balances and a lot of times that money's not necessarily needed for a living or not all of it.
Speaker A:You're not taking, you're not maxing out those accounts as far as withdrawing money when you hit retirement.
Speaker A:That's why you were able to accumulate that much money.
Speaker A:Well, when you're in your 70s, the IRS says, hey, you're going to take this money out whether you want to or not, right?
Speaker A:Or if you don't, your kids are going to have to take it out.
Speaker A:But if you take it out, you can take it out over your lifetime.
Speaker A:If your kids have to take it out, they got to take it out in 10 years.
Speaker A:So you have this tax bomb that is about to go off on your life or your kid's life.
Speaker A:And so if you defer, you end up with 3, 4, 5 million dollars in an IRA or 401k or more.
Speaker A:And you're like, I'm not taking that till I have to.
Speaker A:You could go from being in like a 12 or 22% bracket to the max bracket.
Speaker A:I mean you, you could just blitz, right?
Speaker A:We've, we've seen, we have clients that have three four hundred thousand dollar RMDs.
Speaker B:And this is pre tax accounts, right?
Speaker B:So as your 401ks IRAs, pre tax, we're not talking about Roth IRAs or things like that.
Speaker B:So these are people that are cash poor later in return.
Speaker A:Well, not necessarily cash poor.
Speaker A:What it means is, is that people have deferred a lot of money to get the tax deductions, right?
Speaker A:When you, let's say you're a hiring, let's say you're an engineer or a doctor or something like that, and you're making 200 grand a year or 300 or 400 or whatever you're making and you could save, just for easy math, 30% of your money by putting in a retirement account, right?
Speaker A:That's why people do it, because it's a huge amount of money in those higher tax brackets.
Speaker A:Well, the problem is in the future you got to take it out.
Speaker A:So what if you saved it at the 22 or 24% tax bracket, but now you have to take it out at the higher tax brackets in retirement.
Speaker A:That's the problem.
Speaker A:There's a delta there that gets you.
Speaker A:So you're not getting as much for the tax.
Speaker A:You're actually paying for the tax deduction later on.
Speaker A:So the point is that you shouldn't always take the tax deduction.
Speaker A:Now, there's a thing called a Roth, and what the Roth does is it says you don't get a tax deduction.
Speaker A:Now, Steve, but if you put money in here, you never have to pay taxes again.
Speaker A:Or you also have the option on a lot of 401 plans now.
Speaker A:So you can max out your 401k, but we're not going to give you a tax deduction.
Speaker A:You're still going to pay that full 24%.
Speaker A:You're not going to get the tax deduction.
Speaker A:But when you take that money out and all the money you've made on it, it's going to be tax free for you.
Speaker A:So the issue is if, you know, if you've already gotten to the point where you're going to have this tax bomb problem, and this is where financial projections come in and tax planning comes in.
Speaker A:If you look in that crystal ball and you go, holy cow, I'm going to have a tax bond problem, stop taking the tax deductions today.
Speaker A:I know it feels good to get the tax deduction.
Speaker A:You're sacrificing a lot.
Speaker A:First of all, you're gonna need a tax deduction on money you don't need.
Speaker A:Right?
Speaker A:Because you're putting in an IRA and you're saying, I'm probably not gonna use that money.
Speaker A:So you're getting a tax deduction on money you don't need, which locks it up and it creates a bigger tax problem in the future versus saying, look, if I don't need the money, then I'm gonna pay the taxes now.
Speaker A:We'll never have to deal with it again, no matter who inherit, if my kids inherit it, if I want to use it, whatever.
Speaker A:So people miss that all the time.
Speaker A:I get my zero percent.
Speaker A:You know, I, I save, I save my taxes, but I end up owing a big tax bill in the future.
Speaker A:It's just, it's just a silly kind of thing that, that people.
Speaker B:But the power of projections, if you've never seen this projected out, it's powerful to take people who feel stuck and then show them that there's hope.
Speaker B:But you got to make some very.
Speaker A:Intentional decisions for clients with a couple million Dollars.
Speaker A:In this type of scenario, you're talking hundreds of thousands of dollars.
Speaker A:Different difference.
Speaker A:It's crazy.
Speaker A:Possibly.
Speaker A:I looked at one the other day.
Speaker A:It was about a million and a half dollars.
Speaker A:The.
Speaker A:The difference between, you know, it depends on how much you have.
Speaker A:So everybody's gonna be in a different situation.
Speaker A:But it was a phenomenal difference.
Speaker B:It's a substantial.
Speaker A:In putting the money in the right account to begin with and understanding if you should take a tax deduction or not.
Speaker B:Yep.
Speaker A:Congress is not stupid.
Speaker A:When they give you a tax degree, normally, there's a caveat to when they said, okay, you don't have to take your RMDs until you're 75.
Speaker A:Do not for a second think they were thinking, wow, you know, the federal government has too much money.
Speaker A:What they did is they created a scenario for the people who do not need their RMDs.
Speaker A:So these are the people with more assets.
Speaker A:They allowed you to wait longer to take the money out, which means the money that you have to take out, when you're forced to, you have to take out a higher percentage, and the balance will be bigger.
Speaker A:So you have to take out a higher percentage of a bigger balance, which means more will be in a higher tax bracket, more money will be inherited by the kids.
Speaker A:More money will be forced to be cashed out within 10 years.
Speaker A:They are.
Speaker A:The federal government is making money off of people not understanding how this strategy works.
Speaker B:Two more.
Speaker A:Two more.
Speaker A:You tired yet?
Speaker B:Hang with us, folks.
Speaker B:Two more.
Speaker B:We're gonna bring it home.
Speaker A:This is intense.
Speaker B:It's been a good one, though.
Speaker A:All right.
Speaker A:The other two are a little bit quicker, too.
Speaker A:Refusing to take capital gain gains.
Speaker A:I can see the argument for this in both directions, the problem.
Speaker A:So what I mean by this is you have a stock that's done really, really well for you over the years, but you don't want to sell it because you'll have to pay cap.
Speaker A:You'll have to pay capital gains taxes on it.
Speaker A:Okay?
Speaker A:There's two ways out of capital gains taxes for you, really.
Speaker A:You could die, or you can give the money away.
Speaker A:So if.
Speaker A:And I talk to clients all the time.
Speaker A:They're, like, in their 50s or 60s.
Speaker A:Like, well, if I don't.
Speaker A:If I don't sell this stock, my kids will inherit it.
Speaker A:Okay?
Speaker A:The average life cycle of a Fortune 500 company is less than 15 years.
Speaker A:So when you're 60 and you're saying, I'm gonna just leave the stock to my kids, what you're saying is you're either gonna die within the next 15 years or you're gonna bet that that company is well above average.
Speaker A:And that's just not the nature of corporations, not in today's world.
Speaker A:So the problem is, is that you may want to do something with that money, or if you sit on that company, that company could become a shell of what it once was.
Speaker A:And so you basically going backwards when you account for inflation and everything, or you could have even negative returns.
Speaker A: I've seen people during: Speaker A: So in: Speaker A: And after: Speaker A:And they didn't sell it because of the capital gains.
Speaker A:And then they gave it all back to the stock market.
Speaker A:God.
Speaker A:Someplace.
Speaker B:And we've had over the years, Apple employees that were gifted stock early on that just took off in after tax accounts.
Speaker B:Nvidia if you got in at the right time, taken off and so you see this huge capital gain and it's like, what do I do with it?
Speaker B:The blessing is you've made money, but now you feel trapped.
Speaker B:So you got two options.
Speaker B:Die or give it away.
Speaker B:So just, just be aware.
Speaker A:And maybe, maybe what you do is you look at a comb.
Speaker A:Yeah.
Speaker A:Selling some of it and doing some charitable gifting or something.
Speaker B:Gifting.
Speaker A:And kind of knocking down.
Speaker A:Knocking down some of the taxes on that.
Speaker A:And then the last one that we had.
Speaker B:You've kind of touched on this a little bit.
Speaker A:Yeah.
Speaker A:Was whether or not you should live in that.
Speaker B:Kicking the can down the road to live in 0%.
Speaker A:This happens with retirees all the time.
Speaker A:You retire.
Speaker A:You know, sometimes people retire early in their 50s, where you're in your 60s and you retire and you can actually get to the 0% tax bracket because you got your mortgage pay, everything's paid off, you're in good shape and you got your Social Security, maybe a little bit of pension and a bunch of cash in the bank.
Speaker A:And that's more than what you need.
Speaker A:You know, you got good cash flow on Social Security, unless your income's over a certain threshold, isn't going to be taxed.
Speaker A:So it's very easy for you to kind of get to that 0% tax bracket and be like, I'm good.
Speaker A:Peace out, yo.
Speaker A:I don't want to do any of this.
Speaker A:But if you got that $2 million in the IRA or the 401k and you're going to let that bake from the time you're in your late 50s to the time you're in your mid-70s, that 2 million is going to turn into probably 4 million or something like that, depending on what your investment strategy is.
Speaker A:And then you're going to have this much higher RMD in the future.
Speaker A:What if you just, you hate paying taxes.
Speaker A:If you looked at a projection with a what if scenario of what if I just pay up to what if I just filled the 12% tax bracket, right?
Speaker A:So I'm not talking about getting crazy, right?
Speaker A:What if I just filled the 12% tax bracket?
Speaker A:And what I'm going to do is I'm going to convert my IRA money over to my Roth.
Speaker A:So I'm going to pay the 12% taxes now, and I'm going to be in well above the 12% bracket in the future, but I'm going to pay the 12% now so that I never have to pay any more taxes on it.
Speaker A:Then I can also do another thing.
Speaker A:I can shift my portfolio.
Speaker A:I can put the most aggressive investments in the Roth so I can displace the growth from the IRA to the Roth.
Speaker A:So I might still average my.
Speaker A:Let's pretend you average 8.5% a year.
Speaker A:I might still average my 8.5% a year.
Speaker A:But when you look at the Roth, maybe the roth is returning 10 and the IRA is returning seven, and so it averages out at eight and a half.
Speaker A:So you can do some things to goose the future benefit of that and get an even better return.
Speaker A:But when you have a zero percent tax bracket, you should not be rejoicing.
Speaker A:You should be saying, great, how can I, how can I basically stick it to the man?
Speaker A:How can I move money around here and, and pay a tiny tax bill compared to what I'll pay in the future and get out of that future tax bill for me, my kids, my grandkids, the next generation, when, as soon as you see zero tax bracket, it's not dancing.
Speaker A:You should be dancing for the fact that, bam, I can move a ton of money around and make a six figure or bigger difference for the future of my family.
Speaker A:You never want to just be like, that's great.
Speaker A:I hate paying taxes.
Speaker A:I'm just going to move on.
Speaker A:You really actually want to pay a little bit of taxes if you have that kind of money?
Speaker A:Some people literally will have assets that there's no deferred tax on it.
Speaker A:But if you have assets with deferred tax, that's when you want to take, take advantage of that stuff.
Speaker A:That's also where, by the way, with that, I don't want to sell my investments because the capital gains people don't understand how capital capital gains work.
Speaker A:If you're in that 0% bracket, you're not going to pay anything on your capital gains anyway, other than maybe state level depending on what state you live in.
Speaker A:So you should be looking at and saying, okay, that's a perfect year to max out that 0% capital gains bracket.
Speaker A:So again, it's just understanding how these things work.
Speaker A:But these are traps that people fall into.
Speaker A:It feels good, all these things.
Speaker A:That feels good.
Speaker B:Yep.
Speaker A:But at the end of the day, it hurts you.
Speaker B:Four Traps Travis and I are here to help you get the most from your money in life.
Speaker B:A little bit longer an episode, digest it, go back re listen before traps that if you can understand how these work, can set you up for getting the most from your money in life.
Speaker B:Until then, thanks for stopping by.
Speaker B:Ditch the Suits thanks for checking out Ditch the Suits.
Speaker B:Be sure to write a review or drop a comment about this episode.
Speaker B:And if you want more like this, head over to ditchesuits.com you can send us a message and get in touch.
Speaker B:Let us know how we can help and be sure to share any topics you'd be interested in having us cover on the show.
Speaker B:We're here to help you get the most from your money in life.
Speaker B:Thanks for being our guest and checking out Ditch the Suits.
