Welcome to how to retire on time, a show that answers your questions about all things retirement, including income, taxes, social security, health care, and more. The show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial advisor, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss it all. Now that said, please remember this is just a show.

Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.YourWealthAnalysis.com. With me in the studio today is mister David Fransen. Thanks for being here.

Yes. Hello. Thank you.

David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting us to (913) 363-1234. That's (913) 363-1234. Or email them to heymike@howtoretireontime.com. Let's begin.

Hey, Mike. How do the rich avoid paying taxes?

Yeah. This is a question I get all the time. And what bugs me about the question isn't that the question's being asked. I think it's a very fair question. It's this idea of elusiveness that exists.

That there's some fancy way that the rich don't pay taxes that you could just casually do yourself and that you just don't know. Uh-huh. Like there's, oh, there's this, this one loophole in the tax code. Look, look, everyone has the same tax code. We all pay the same taxes.

There's just some things that you need to understand about the tax code and how you're either paid or where you're putting your money. And the reason why is things are often taken out of context to then lure you into buying a product, more specifically things like life insurance. So let me explain two ways that the quote unquote rich get around paying taxes. Okay. If you are a w two or ten ninety nine employee and you're paid income Mhmm.

You pay income taxes. Billionaires are often not paid w two or ten ninety nine income. Yeah. They're paid in stock. Okay.

Do you know what you pay for stock capital gains? Well, it's simple. 0%, fifteen %, or 20%. Mhmm.

So there's, like, there's three little brackets.

And I you can yeah. There's, like, the net net income tax as well, like, the the NIT, which, like, an extra two or 3% on top of that if you hit a certain threshold, but it's not much. But that's that's kind of it. So instead of going up to the 30, you know, whatever tax bracket is gonna be in the future, They're capped out at 20%. That is an efficiency.

And, yeah, it'd be really cool if we all got paid by stock and then we could sell it. But that's just not how it works. People are paid on w two income. So, I mean, if you have the opportunity to negotiate with your employer, a way to get paid on stocks, maybe you can negotiate something like that, but most people don't have that opportunity and that's fine. Okay.

You're probably at an executive level or you own a business or something like that to even structure something like that. It's just, let's let's stop saying, oh, we should all do this. It's like, well, they they just negotiated that themselves to do it. That's, you know, Warren Buffett's whole bit about how he pays less in taxes than his receptionists. She's paying income tax based on income tax brackets.

He's paying it more on capital gains tax Right. Long term specifically. So that's that's one of them. Now the other one is much more technical. Others there's other ways this can happen.

Okay? This one's a bit more technical, but I'm gonna just give it a go.

Okay.

Never said this in all the years I've done radio. Oh. I've never actually shared this on the air.

This will be interesting.

I very rarely even share this in meetings because it's often just like, Oh, I kind of want to do this. No, no. Many times people don't understand the full detriments of what I'm about to say, but let me just have some fun. Let me explain it. Okay.

If you've got a lot of money and you're comfortable putting it into an irrevocable trust, So you can't touch it anymore. And then you borrow against that trust with a bank. So the trust is going to pay off this loan and then do its inheritance to whoever you could borrow against your money tax free because it's a loan. Now you're going to pay on that loan, you know, interest, but hopefully the trust grows at a faster rate than the loan against you. And so you're kind of making money on money.

That's in the market that you're never touching. So you never trigger taxes. A great word for this is called leverage. Consider how risky this whole situation is. Yeah.

You've put your money into an irrevocable trust. And now you're hoping that those funds continue to grow as in that there's no major market crash because you're borrowing against it. And if the value goes down, the whole thing blows up. Oh, boy. It's a very risky situation, but technically, you could do something like this.

I have never done this for a client nor do what I feel comfortable doing it with any client unless you have a net worth of at least 30 to $50,000,000

Okay.

But look, the reality is you could in theory, do something like that. People do things like that. There's also like premium finance where you borrow money from a bank to buy insurance policies on yourself and things like that. Things can get very, very technical, but notice how much more risky it actually is. So the reason why I bring this all up is because when people say, well, I want to get out of paying taxes.

No one gets out of paying taxes. All of these strategies have an incredible amount of risk that if they go wrong, if they go awry, it's a bad situation.

It's a

really bad situation. And once I kind of explained the detriments, people typically sober up and say, yeah, I'm okay paying some taxes. Let's just be very strategic about tax minimization phase and then the tax maintenance phase. And I'll explain what those two are in just a second. Okay.

I want to share a third strategy. So oil and gas partnerships are another way that some people will minimize their taxes and the wealthy, I'll let you know, quote unquote, the wealthy can do stuff like this. Let's say in a year that you have a great amount of profit, take the profits and invest in oil and gas partnership because it's a partnership there's pass through taxation. And so they're going to spend everything and have no returns, no growth on it. So you basically offset your taxes.

And so where there's a lot of gains, you have a lot of losses. You hope to get near zero.

Okay.

And then in year 02/03/1945, or the years afterwards that you hope to get your money back and then some. That's roughly how they're supposed to work. It's a way to minimize, but you're still making money. You're still paying taxes on the growth, but it kind of absorbs that first year where there's a high tax bracket. Well, what happens if the oil and gas partnership fails?

What happens if they think there's oil and there's no oil? Okay. You just lost your money. Uh-huh. I mean, maybe you can sell some of the equipment or something like that, sell some of the land that's worthless now.

Can you see there's high risk of these things?

So you in an effort to reduce your taxes, you had some big gains to to reduce those gains. You threw your money at this oil and gas partnership, and it may or may not work out. And so you may have just lost everything in an effort to minimize your taxes. Yeah.

And I'm being a little hyperbolical purpose here. Yeah. But yeah, they're high risk.

Okay. Okay. Yeah. So is it worth it to you? Can you absorb the risk?

Are you living within your emotional and economic limits? Can you afford the loss? And so, you know, younger entrepreneurs or doctors who may be advanced in their career and they're now in their forties and they're selling some shares or, you know, 40, 40 five years old, 50 years old, and they want to sell some shares, but they've got an extra ten, fifteen years. They could make up, you know, sometimes it makes sense, but when it's your retirement and that's like your exit strategy and you're all in on that notice the absolute here, you're all in on that one thing. That's a lot.

It is a lot. So maybe I just wanna like, no, thanks. I'll just get my ten ninety nine or my w two. And I'll just look for ways to be most efficient and

it's yeah, I, I pay

more than I have to,

I think the best analogy for tax planning is knowing that maybe. Yeah, it was winter time and maybe you took on a few extra pounds. How do you get rid of them? Diet and exercise.

Uh-huh.

Right. You don't like to hear it. That's how it is. It's slowly paying your taxes over a long term period of time. That is the healthiest way to lose it.

I know you can pay doctors to do liposuction and just suck it all out. Right. But I but that's expensive. Yeah. Right.

The best way is to get rid of the tax fat is to be very strategic and deliberate about it a little bit each year. There's just no other way around it. And I had a webinar actually recently. So I I'd actually do weekly webinars. They're Wednesday at noon central time.

If anyone wants to tune in, go to kedrec dot com, k e d r e c dot com. You can sign up for our webinars. We have a lot doing them. Thirty minutes of where we just basically present a concept. We're explaining how it works, the strategy, and then there's this open Q and A afterwards.

But this last Wednesday I talked about irate about conversions. Then I proposed a point here. And I said, if the IRS, let's say simplified all tax code Mhmm. And said you can convert everything over at 20% today or you could pay 15% for life, assuming there's no state taxes anymore, everything's simplified. What would you do?

Let's say you have a million dollars, million dollars, 20 percent in taxes, you've got 800,000 left over. Not bad.

Yeah.

It's gross tax free. It pays out tax free. Or you've got a million dollars and you pay 15% for life. So it's like, yeah, you're growing this tax burden, but, you know, hey, you've got more money. Well, which one would be better?

If you did the 20% conversion all at once, you paid 200,000 in taxes over your lifetime. All things being equal, the same net income, same growth in the portfolio, same everything. But if you did 15% for life, you'd pay 412,000 in taxes. You'd pay almost double.

Uh-huh.

People get upset by that, but they forget to ask the question, well, what's the portfolio balance difference? Yeah. The person who paid 200,000 in taxes had less money overall. The person who did 15% for life had 690,000 more dollars in this simulation, more in their portfolio because they slowly paid taxes. Another way to say that is 7% growth on a million dollars equals more dollars in your pocket than 7% growth on $800,000

right.

There's a compounding difference. There's nuance to your tax strategy. And so the the lesson learned is it's not about giving the government the least amount of money possible. It's how do you strategically keep the most of your money while finding that balance of paying more upfront or less upfront. And the ideal situation in my mind is that you target an effective tax rate during the years you're minimizing your taxes, and then you target an effective tax rate when you're maintaining a tax efficient income.

Okay. So typically, 60 years old to 65 years old, maybe to 70 years old, you're doing your IRA to Roth conversions a little bit more aggressively. And then you back in and maybe half your income is pretax. The other half is after tax, and you're utilizing the standard deduction. So the taxable income is even more tax efficient because the government said you'll need to pay taxes on all that.

That's the efficiency. That's how you keep more of your hard earned money, is by understanding there's balance. And everyone's balance is different. This goes back to the it depends comment. And what's the answer?

It depends.

Oh, yeah.

If we can get you to where your taxable income after 73 years old is around $30,000 and you get 30,000 from tax free income sources, Mhmm. That's a very tax efficient situation, especially when you can include the standard deduction.

Alright.

And that might kick over as well as with have some Social Security tax efficiency. But if you can't get there because you've got too much money, those first world problems, but that that can really help as well. The point being here is how do wealthy not pay taxes? They take high risk. They they leverage.

They they do some things that most people probably wouldn't feel comfortable doing if they fully understood what it is. And I say all of this to circle back to something called the index universal life insurance policy.

Okay.

So the index universal life insurance policy, or an IUL has been touted out on many podcasts on many dinner seminars, you know, the ones where they invite you to a nice steak dinner and all that. Yeah. And what they say is, look, here's how the wealthy do it, which they explain basically what I just explained to you and how they put their money into, like, an irrevocable trust or, like, a life insurance policy. Right? And you borrow against it, as in you borrow against the life insurance policy.

Notice there's a lot of similarities here and you could, in theory, replicate a similar situation. The The only problem is you're also paying for a death benefit the whole time. Do you need to pay for that death benefit? Now, in fairness, the bank might actually ask you to have a death benefit. They might not, but do you need the death benefit?

Do you not need the death benefit? What's the cost of insurance look like? How's the funding? There's nuance to index universal life to where it's not as simple as, oh, this is how the wealthy get out of their taxes. No, it's not.

Life insurance is just life insurance. It can be used as a part of your portfolio for certain benefits, but it may not be appropriate. I'd say fifty fifty. It's a 50% chance when someone walks in my office whether the preexisting life insurance they have is appropriate or not, in my opinion. And so let's not try to be like the ultra wealthy, but not wanna take the risks they would be willing to take.

Let's understand the benefits and detriments associated with the various strategies and then pick the right one that's for us. There's no benefit in any of us trying to be like someone else. Let's be our best version of ourselves. Let's use the strategies that are most applicable to us.

That makes sense.

That's where we wanna go. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles cycles or if you're missing tax minimization opportunities that you may not even know exist.

Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.