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1 0:00:18 Todd: Hey everybody, welcome to another edition of The Prosperity Podcast, this is No BS Money Guy Todd Strobel. Once again, we have my cohost and bestselling financial author Kim Butler with us, welcome Kim. 0:00:30 Kim: Thank you Todd, looking forward to our discussion today, I think we re gonna be talking about pretax versus post tax dollars. And this came from a client that ed in a question about the information that he finally figured out on his Truth Concepts calculator. So yes, we do have some clients that buy the Truth Concepts calculators at truthconcepts.com. And it was that the actual dollars available after tax on a pretax account are the exact same actual dollars that are available after tax on a post-tax account, did I make that clear? 0:01:15 Todd: Well, I think it takes a little bit more explanation so, and maybe an example would help. But the 2 things that we re comparing is should we pay the taxes today and move money in to either a Roth type environment or an investment in to say a whole life insurance policy that again, would not be taxed again? So we re trying to create a tax free situation by paying tax today versus putting money in to a tax differed account which the money is gonna be higher because we re not paying those taxes so there s a higher amount to start with and to build with but then when we access the funds, we have to pay the taxes. So am I kinda setting that up a little better? 0:02:10 Kim: Yes. And I don t know that I ve gotten an example quick at hand, I agree that d be handy, we ll have that for next go around unless you have one. But it is interesting, this pre versus post discussion happens often and it is always easy on the frontend because we re such in today s society that people are going to turn towards the pretax environment which would be like a 401k or an IRA or something that you re getting a deduction for your contribution but it is so funny to hear these same clients who are, in often cases, other people that are on the other end of the spectrum, in other words, they re in their 60s and 70s and now they re looking at their accounts and thinking about how they re gonna take it out and as is often the case when we think short term versus long term or when we have the benefit of hindsight, here we have somebody in their 60s or 70s looking at all these pretax accounts that they funded and being very disappointed, mad even, that they have to pay taxes on all these dollars. I cannot tell you how many times I ve talked to somebody in their 60s or 70s especially people bumping up against the 70 ½ where it is actually required by the government that you start to take money out of your accounts in the required minimum distribution arena or RMD and they re mad that they have to do that because maybe they re still working or they don t wanna spend that money or they don t wanna be forced to take it in any event and nevertheless, because they got the deduction on the frontend and they agreed to go in to business with the government, essentially that s what 401k-s and IRAs are, then it s becoming fully taxable on the backend so that can be a challenge. Now, tell me a little bit more what our goal is here. 0:04:10 Todd: Well, one thing I would like to point out and our client did a great job of illustrating that is you have to go through a mental shift of when you are looking at a tax differed account of netting that down in your mind so you don t have the tendency to say, wow,

2 I have 100,000 dollars in this account, I ve saved 100,000 dollars because it s really not the true net so I think that s a great point that he make. 0:04:39 Kim: Absolutely. I make that mistake all the time, I look at a particular leftover 401k that s stuck in a place that I can t do anything about and I always look at that gross value when in actuality, I should be cutting that number in half and it s further problematic these days because of all the conversations that are going around about the 401k fees. You ve got congress involved, there s huge discussions because of Tony Robbins book, Money Master the Game. John???[0:05:11], the head of Vanguard is out there with his thoughts on the fees and all the things that he s been trumpeting for years so these are interesting discussions to follow and yet, I don t really think they re getting at the heart of the matter and that s what our client brought up is, okay, 401k fees, yes, they re high, yes, they create massive lost opportunity because once a fee is taken then that money is no longer in the account to earn and that s something that most people are not even addressing when they re having this conversation. But then furthermore, you have this issue of what do you do with the account when you re done with it, when you die and you either haven t spent it all or you didn t wanna spend it all and there are many, many people that have a desire to leave portions of those accounts to children and grandchildren and yet in our opinion, the 401k plan and the IRA plan money are the worst asset to leave to children and grandchildren. 0:06:24 Todd: This would be known as the stretch IRA I believe is the concept and maybe you could just kind of just briefly tell our listeners what that is. 0:06:32 Kim: Well, the stretch IRA is often recommended to families that have their 401k-s that they re gonna rollover in to IRAs or regular IRAs or self-directed IRAs, doesn t really matter. And what the accountants often recommend is stretching that IRA out through subsequent generations whereby in essence, it s 100% tax to the person that saved the money. Now of course the accountants aren t telling it that way, the accountants are saying, oh my gosh, this is so great, if you stretch this in to the next generation then they can pay tax at their lower tax bracket. But the problem is that then is I indicated turns in to a 100% tax for you, the person that saved and invested the money because there is no use of the money. You as the saver / investor don t get to use the money at all, it s passed under the next generation in a taxable environment but 100% taxed to you because you didn t get to use any of it. So if people are really wanting to benefit the next generation, it s so much more effective to split up your IRA and do 2 things with it. The first thing should be to pay it out, take a 10 or a 20 year period of time, get it paid out on purpose to yourself. Pay the taxes and then reinvest in after tax environments where you can get solid double digit returns and not lose your principal and not be taxed on the entire amount again. Of course you re gonna be taxed in the income or maybe you can even convert that in to capital gains but get it out of the IRA, 401k blocks for a portion of the money and use it, spend it, even give it away but make use of it during your lifetime and then take the other portion of the IRA and it s gonna depend on every

3 family what percentages are what but take that other portion of the IRA and buy life insurance with it so that your beneficiaries get a truly tax free asset. Well life insurance death benefit is income tax free, it can be paid to children or grandchildren, ideally, somebody over 18 or in trust for somebody under 18 and it s a so much more efficient structure if you really, really wanna leave something to children and grandchildren to leave them a life insurance policy. There s no probate, it goes immediately, it s cash, it s income tax free, there aren t any questions about it, in fact it even supersedes any type of will or trust work that you did get done, in other words, if you leave 100,000 dollars to your daughter but your son, the will says that your son gets all of your assets then that 100,000 is still gonna go to the daughter and the son will get everything else. And so sometimes for families, this is a much cleaner way to leave an asset base where you specify maybe a percentage or a dollar figure which you want to leave to each child, fund that desire with life insurance and then be done. You don t have to worry, you don t have to try to figure out, well, how much of this money am I gonna spend coz I want a little leftover. You already know that the leftover portion is handled so that means you get to spend all of the rest. 0:10:03 Todd: I think the thing that bothers me the most about the IRA strategy for heirs is that it relies on us hoping that our children are poor otherwise they could be is in this higher tax bracket, I would hope that my kids would earn more than I did not less. 0:10:25 Kim: Yes, that s a fabulous statement and you re making that statement assuming that tax rates stay the same. If tax rates go up, our children may be paying higher taxes even if they re not earning more income and I agree with you, I hope my kids do earn more. So this is, and as you said, it was said so well by our client who ed in, it s a shift in thought, it s a paradigm shift, it s a shift in your thinking that s why think is the number 1 principle of the 7 principles of prosperity and it enables you to really hone in on, okay, I know that this is what the government is saying, I know that this is what the media is saying but this is what I think. And to be clear that maybe investing when your partner is the government is not the best way which would be a 401k plan. Maybe you are actually better paying the tax today and doing after tax both saving and investing. So again, after tax saving to us would be the life insurance, after tax investing would be the bridge loans or the life settlements and then you get to keep the control and control is 5 th principle of the 7 principles of prosperity that we always want to be paying attention to because control and keeping control of our money and control over who gets to use it and when and for what purpose are very important things in having the financial independence that we re all seeking. 0:11:59 Todd: Now, the second part of our listener s question was looking at that same tax differed versus tax free environment for leaving money to a charity. 0:12:14 Kim: Fair enough. So that s an awesome goal and certainly something that we support and yet we support it in the exact same way that you would want to leave money for children because again, if you have life insurance that s slated for a charity then you can spend all the rest of your money now. And if you have life insurance then of course that can go tax

4 free to the charity, that s not gonna matter so much but you may want to actually do some of that gifting now. Why wait to benefit the charity until you have passed on, you don t get to see any of the results. Why not go ahead and do some of that gifting now so that s actually another strategy that you could employ is to have the income go ahead and come off taxable income from that 401k or IRA and then turnaround and give that to a charity which of course will create a deduction thereby netting you in essence a very, very low, if not even possibly zero tax on that particular transaction. You take the income in, turnaround, give it as a deduction. So that s one strategy, again, to benefit charities while you re living and then go back to the life insurance strategy if you wanna benefit charities when you pass on so that you know that particular amount is set for that charity and you can spend all the rest. It s so much more valuable to have that kind of control and flexibility and freedom on your dollars rather than just hoping that there s a certain amount left in some account somewhere that can go to charity. 0:13:55 Todd: Super. So we ve talked about tax differed versus tax free. The second part that I wanna just kind of address here briefly is that we re talking again about 2 amounts, we re talking about the amount that you contribute monthly and we re also talking about if you have a bulk amount of money in a tax differed account, would you automatically say that anybody with money in a tax differed account which would be a 401k, IRA should try to take that money out, pay the taxes in penalties or are there any strategies where you could create a tax free account from a tax differed account without paying the penalties? 0:14:40 Kim: Well yes, there are definitely strategies to avoid the penalties. So there s something called a 72T, that s a text code that is available if you are in your 50s, it can work, if you re younger, it s maybe not as effective because what it says is if you take out that tax differed money over your life expectancy then you can avoid the 10% penalty. So that s a helpful thing for people to be aware of. 72T can work with a 401k that s rolled over to an IRA or regular IRA and it is 72T strategy whereby you are taking that amount of money out over your life expectancy which probably for a 50 year old, it s 40 years or so and thereby not paying the 10% penalty. But you said something else that I wanted to comment on and that is that we do have one investment whereby you can take a tax differed account like an IRA or a 401k rollover and actually convert it to a Roth IRA. Now, a lot of people don t think this is possible because they think their income is too high but contributing to a Roth has an income requirement, converting to a Roth does not and so there is a situation where somebody could take an IRA, convert portions of it, we probably would do this over time, no need to do it all in one year, to a Roth, pay the income tax so that that account would never be taxed again. So Roth IRA as we know is after tax money going in and then never be taxed again. Now, it is still heavily subject to government control which may be a problem but setting that issue aside for a moment, if you want to make that conversion, please reach out to us for help because one of the investments that we work with will actually enable you to get a discount for that conversion due to lack of marketability and lack of liquidity of this investment. So those 2

5 things, lack of marketability and lack of liquidity cause this investment to get a reduced appraise value. So as an example, you have 100,000 dollar IRA, you wanna convert it to a Roth, we can get an appraisal on this asset for 70,000 dollars and thereby when you pay taxes for that conversion, you re only paying taxes on 70 grand instead of 100,000 grand because of the lack of marketability and lack of liquidity of the investment. So that s a specialized environment but if that s something that you have an interest in, please reach out to us either on at partners4prosperity.com or by calling the office at extension 120. That will get you to Jill and she can schedule you with either me or Todd and we can walk you through that Roth conversion capability. 0:17:52 Todd: And this is absolutely something that you don t want to rush in to. There are situations particularly if you have kids in college and things like that where this is not the applicable strategy, there s no one strategy that s right for everybody so take your time, get your information, get your ducks in a row. We certainly spend a lot of time talking to accountants and attorneys before we advise you that this is a great strategy for you, so again, your situation may be somewhat different. Anything else you wanna share before we wrap up? 0:18:30 Kim: Well, just always happy to help. If people have questions, they re welcome to them in. Again, the website is partners4prosperity.com and if you haven t grabbed our ebook called Financial Planning has Failed, you can get that at partners4prosperity.com/ebook. 0:18:49 Todd: And we do these 15 minute snippets and sometimes they can be a little bit intimidating especially the subjects we ve been talking with today. There s no required minimum education required, no one will ever make you feel silly or anything like that to call in and ask questions, do we? 0:19:08 Kim: Absolutely. We love Q&A, it s our favorite game to play. 0:19:12 Todd: Super. Well I m gonna wrap this up, this is No BS Money Guy Todd Strobel for The Prosperity Podcast. Take care everybody. END

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