While there is still much speculation as to whether or not the U.S. is in a recession, we are all feeling the pressure of sky-high prices and rising interest rates.
During last month’s webinar, Tom Gibson, CPA, and Brian Shey discussed the current state of our economy, the implications of the inflation we are experiencing, and provided an overview of some of the silver innings you can use to protect yourself during inflationary times.
What can you do to protect yourself? Your family? Your business? Tom and Brian come together again this month to delve deeper into the proposed legislation and the strategies that can help you weather the economic storm.
During this live discussion led by Kami Elhert, Tom Gibson, CPA, and Brian Shey will discuss:
- The Inflation Reduction Act of 2022
- The one investment not affected by inflation
- One strategy that could protect you against rising tax rates
- Why a tax forecast is more important than ever during inflationary times
Transcript (edited for clarity)
Kami Elhert: Hello and good afternoon. Thank you for joining the webinar today. I’m Kami Elhert, Senior Client Relationship Manager. Today I’m joined by Tom Gibson, CPA and TSP Family Office’s very own Senior Tax Professional. Also joining us today is Brian Shey, TSP Family Office’s Family Office Strategist. Good afternoon, gentlemen.
Tom Gibson: Good afternoon.
Brian Shey: Hi, Kami. Hi, Tom. Good to be with you guys.
Elhert: Glad to have you.
During today’s webinar, we’ll be discussing the Inflation Reduction Act of 2022, investments not affected by inflation, and strategies that could protect you against rising tax rates. During last month’s webinar, Tom and Brian discussed the current state of our economy, the implications of inflation we are experiencing, and provided an overview of some silver linings you can use to protect yourself during these times.
Tom let’s talk about the new Inflation Reduction Act, if that’s what we’re calling it now.
Gibson: Yes, that is the official title of the bill.
Inflation Reduction Act of 2022
Walter Williams is an American scholar. He was the John Olin Distinguished Professor of Economics at George Mason University and loved reading. Walter Williams passed away a couple of years ago, but he had a great quote. He said, “In general, presidents and congressmen have very limited power to do good for the economy and awesome power to do bad. The best thing that politicians can do for the economy is to stop doing bad.” That seems pretty elementary.
The Inflation Reduction Act did pass the House and Senate, and the president signed it last week. I’m always amused by the names of bills. I will make a campaign promise right now. If I’m ever elected a congressman from the state of Florida, every bill that I introduce will be called the Free Beer and Apple Pie Act of whatever year we’re in. The name of any bill – and I’ve lived through, at this point, numerous tax simplification bills; we’ve had the Affordable Care Act – is something along the lines of, “How in the world could you vote against whatever the bill is?”
Many times, though, the bill can end up doing exactly the opposite of what it says it’s going to do. It’s too soon to tell with the Inflation Reduction Act. I am kind of surprised nobody’s calling it by its name anymore. The Associated Press talks about it as a climate change bill, a healthcare bill, but nobody’s calling it the Inflation Reduction Act anymore.
Taylor Eason, one of my colleagues, has covered this in an email that you all received, I think, last Friday. It’s also going to be in the newsletter. So I’ll refer you back to Taylor’s sketching out of the particulars of the bill. A lot of it, honestly, in terms of the tax provisions, at least apart from energy credits and things like that, is not really something that’s going to have a profound impact on our clients.
The bill is purported to reduce the deficit over a number of years and so this is kind of a little inside baseball about spending bills. The Congressional Budget Office (CBO) scores bills now. They’re not done scoring the Inflation Reduction Act. They have done some work, but with the way the bills are scored, it tends to overestimate the potential revenue.
The provisions in the act, particularly those that could potentially impact inflation, don’t take effect until 2026 so we’re several years down the road from that. Plus, it rests on the assumption that corporations in particular – because the corporate minimum tax was the big piece of this, and again, this applies to C corporations, not S corporations as pass-through entities – are going to change their economic behavior in light of this new law.
That’s what happens with every tax law. People do not continue to do the same things that they did in light of new legislation. And so potentially – and I’m not saying it will because I don’t have a crystal ball –if the revenue projections don’t come to fruition, I promise you one part of things that will come to fruition is suspending part of the equation. And so inadvertently, if those revenue projections come up short, this could actually end up increasing the deficit.
And this is an interesting point: Roll Call on June 1st of this year pointed out that individual income tax collections for the fiscal year ending September 30 – that’s this fiscal year, coming up in about six weeks – are projected to land at their highest level as a share of the U.S. economy since the advent of the income tax in 1913. So this is going to be a record year. We’re still going to run a deficit. And that would lead us to question, “Maybe it’s not a revenue problem. Maybe it’s a spending problem that we have.”
Secondly, the big thing that has a lot of press and is prompting a lot of questions from our clients as Taylor and I have been doing projections for the last week or so is the 87,000 new employees at the IRS. Couple of things on this point.
Why in the world has it taken so long? The IRS has been saying that they’re understaffed for about nine years now. Well, the reason for that – and this is a little bit of a history lesson – Forbes Magazine, back in June of 2016, had the following quote, “In 2013, then acting director of exempt organizations at the IRS, Lois Lerner, apologized to a room full of tax lawyers for the IRS’s inappropriate targeting of conservative political groups.” Back in 2013, some of you are old enough to remember the Tea Party movement – tax enough already. There were a lot of people setting up exempt organizations, and the IRS was deliberately slow-rolling the application process. They got caught, and the shakedown from that is Republicans were very hesitant to give them any more money. So the IRS budget has pretty much been flat for a number of years now. That’s why they have been underfunded for a number of years. They were playing favorites politically, and that was the fallout.
Now, hiring 87,000 people in the current economy? I know the common complaint I get from a lot of our clients is, “We’re having a horrible time hiring anybody.” I mean, we can’t find people to wait tables here in Vero Beach. The Italian place that is right down on the corner from our offices is closed on Mondays because they can’t hire enough wait staff. So given the difficulties that everybody’s having hiring people, I’m not particularly afraid that, come January 1st, there are going to be 87,000 new IRS employees ready to be unleashed, particularly agents. They’re going to have to hire people. They’re going to have to train them. And so it’s going to be a little bit more of a protracted process. Don’t worry. They’re not going to come to your door January 2nd.
The guns thing has gotten a lot of press. IRS agents who do criminal investigations have always carried firearms. They’ve done that for years. The IRS honestly seems to be buying a lot of ammunition, a lot of firearms. In a Treasury Inspector General for Tax Administration report from September of 2012, the then current IRS employees actually fired their guns accidentally more than they fired them on purpose at their jobs.
The $400,000 question is, “Are people under $400,000 going to be affected by any of this?” The New York Post, August the 15th, references an analysis by the CBO estimating that those earning less than $400,000 will pay an estimated $20 billion more in taxes over the next decade. So the idea that this legislation is not going to impact anybody making less than $400,000 – somebody needs to clue the CBO in on that because they have a different view of things.
Let me show you something because this is always a good thing to remind people. Every tax bill that I have been cognizant of over the last 31 years always begins with premise that the rich are not paying their fair share of things. Heritage.org is the group who created this 
chart, and the information is straight from the Internal Revenue Service.
On the top, you see breakdown in terms of adjusted gross income on all the returns that were filed. On the bottom, you see the actual share of the total taxes paid that the different groups represent. Let’s leave out everything below 5%. The two brackets there, the two light blue cubes on the top, are the top 5% of taxpayers. Every year, we send out Christmas gifts to our clients and, honestly, this year, I think we need to send eye monocles like the little guy in Monopoly wears because all of our clients are in the top 5%. They account for 37% of the share of income earned. They account for 60% of the taxes paid. And that’s because the United States has progressive tax system. That’s not a political term. It just means we have brackets. And as your income gets higher, you’re paying a higher percentage of your income. I don’t know in what world 5% of the people paying 60% of the taxes is not fair share. But again, that is something that is good to be reminded of.
Secretary Yellen has said that nobody making under $400,000 is going to be impacted by this bill. Senator Joe Manchin went so far as to say he’s going to make sure that the new IRS employees don’t harass anybody. As you know, when a bill is working its way through the Senate or the House for that matter, there can be amendments offered to that bill that can become part of the law. Senator Crapo from Idaho offered an amendment that specifically says, “No new IRS employees will be used to do audits of anyone making less than $400,000 a year.” The amendment was defeated on a party-line vote with Vice President Harris casting the deciding vote. I don’t want it to sound like I’m picking on the Democrats. I dislike all politicians. But when you have the opportunity to say, “No, that’s not what we intended to do at all,” and the ability to put that into part of the law, not doing so raises a few eyebrows.
The final thing in all of this – and this is kind of how the sausage is made – is the horse-trading that goes on behind the scenes. Senator Manchin’s support for this bill – because as you know, Senator Manchin and Senator Sinema have kind of been the flies in the ointment for a lot of things for the Democrats since President Biden took office – Senator Manchin’s support on this was predicated on an understanding he had reached with Majority Leader Schumer in the Senate and House Speaker Pelosi in the House about a second bill, a bill that would ease permitting requirements for oil, natural gas, and – you guessed it – coal, which is a big deal in West Virginia. Senator Manchin’s support for this bill was predicated on the second bill passing by the end of September. That bill right now is floundering in the House. So unfortunately, sometimes, you need to get things done first. If he had gotten that bill done first, it would have been supported by Republicans and Democrats. It would have been bipartisan. But now, it remains to be seen if that will ever happen. So that’s where we are on the Inflation Reduction Act.
Shey: And for everyone out there, and that’s the monologue.
So, Tom, I was thinking during your short monologue. This isn’t a political thing by any means because I don’t know the name of anyone over at CNN, but I was thinking about The Angle at 10:00 at night on Fox. So, Tom, I think we should name and get something going, the Gibson Gab, the Gibson Gain. And we should just start every webinar off that way.
Gibson: Well, tax legislation is honestly some of the most political legislation that congress deals with, and you can’t separate the two things.
Where to Invest During Inflationary Times
Shey: Tom, you said one thing really early on when you brought up the Inflation Act of 2022 or when Kami introduced it. You said, “This act won’t hurt our clients.” And I wrote it down. And then, right underneath it, I wrote, “Actually, this bill will probably help our clients.” Obviously, we work with the top 5% income earners in the United States of America. And obviously, in an inflationary area, we start looking at – and we’re going to get into it a little bit – where to put money, where to invest money, different areas. And I was just thinking that the inflationary economy that we’re all living in right now obviously hurts the middle class the most, low-income, middle-class, where everything costs more. And those are the people that are really struggling. A lot of our clients are in the real estate sectors and natural gas and oil and areas like that which tend to perform well in these times.
Elhert: Thanks Brian because I want to talk a bit about silver linings. We discussed this some in last month’s webinar as well. Are there any silver linings? I know that we do have and talk to our clients and consult with our clients about investments that may be the silver lining for these times.
Shey: I can jump in on that.
Obviously, just to piggyback a little bit off of what I just said. If you’re the conservative person out there, you can start looking at Treasury Inflation-Protected Securities (TIPS). Real estate is always good in this time. We have a lot of people who don’t want to be a landlord. But we do have clients who have real estate holdings. And in inflationary times, rents normally increase. Natural gas. Oil is another area.
Private Lending
It’s interesting. As I was doing a little bit of research for today’s conversation, I ran across high-yield loans. And interestingly, it was bank high-yield loans. But we have some clients that do private lending. If anyone out there has met with me, you know that I operate in the area of protection. I use permanent life insurance a lot as a tax strategy. We have a number of clients right now who are doing high-yield lending, and they’re using their life insurance policies to do it.
I’ll just use the analogy because everyone knows I try to keep mature simplicity. I loan Tom $100,000, but I take $100,000 out of my life insurance policy for the loan. The interest and the dividend that I’m going to get at the end of the year inside of my policy is going to happen regardless of whether or not I loan Tom $100,000. So I’m going to get my interest. I’m going to get my dividend. And I’m also going to get Tom’s interest payment. If I put Tom’s interest payments back into my policy, all of that interest and the dividend are all compounding inside of a tax-free shelter. So little tip there for the percentage of clients out there who are using permanent insurance as a tax strategy in today’s times. It’s another area that you can actually compound growth inside of a tax shelter. So a couple of different ideas there.
Tom, anything spark your interest there besides $100,000 out of my policy?
Gibson: That got my attention!
A couple of things. As I mentioned, there are, as part of the Inflation Reduction Act, energy credits, there are vehicle credits, credits for doing energy efficiency on buildings and things. And so, potentially, I think what I said was, Brian, not that it wouldn’t hurt our clients but that it wouldn’t impact our clients too much.
Cost segregation definitely is a strategy that we’ve used with a number of our clients who own particularly commercial properties. There could be in this bill some new opportunities to utilize that going forward.
The other one that sprang to mind for me was the Roth conversion. The majority of the folks I work with are busily moving money out of pre-tax retirement accounts over to a Roth. The silver lining to a down market is you’re able to move because, when you do the Roth conversion, if you’re doing an asset transfer – which is definitely what we would recommend – the amount of the conversion is calculated on the day that you move it, whatever the stock price is on that day. That’s what is charged as the conversion. So if the stock is down, you move it into the Roth. It comes back up. All that gain is inside a vehicle that you’ve already paid a tax on. You’re never going to pay tax on it again. So that’s another silver lining.
Elhert: And Brian, I know that asset-based long-term care has been one of those alternative strategies as well, utilizing 401(k) funds as well, right? So that’s one that could also be utilized in tandem.
Asset-Based Long-Term Care Strategy
Shey: Absolutely, Kami. It’s one of the strategies a small percentage of our clientele have started to use. In today’s environment, it makes sense to at least look at it and see whether or not it fits into what I call your overall asset allocation. This is a strategy that one of our strategic partners out of Indianapolis, Indiana, by the name of OneAmerica invented. They invented it and patent it almost, I think, 32 years ago. Very few people have heard of OneAmerica, mainly because they’re an insurance company that doesn’t advertise during The Masters or put their name on the side of a football stadium.
It has to do with asset allocation. You have moderate, aggressive, and conservative risk. But one of the areas that you’re able to use, part of the patent, if you will, is their strategy that allows us to use IRA or 401(k) – what we call qualified retirement money – to be able to fund this strategy.
You can reposition $100, $200, $300,000 out of an IRA or 401(k) plan or something like that, and you can move it over into this strategy. What you’re doing is repositioning taxable money into a tax shelter arena. By doing that, you are leveraging a certain amount of life insurance, a certain amount of cash value, and then, most importantly, you are creating an unlimited lifetime benefit for not only yourself but – if you’re married – your spouse also because the second part of the patent put a husband and a wife or partners all on one policy. From an actuarial standpoint, the underwriting is easier, the cost is lower, and the funding options that you have to be able to use qualified money to position that into an unlimited lifetime benefit – it’s unheard of. They’re the only company in America that even offers the ability to do it. And properly designed, properly crafted, properly funded, you can take $200,000 and leverage it into $2 million, $20 million, $200 million.
Elhert: And just alone, the unlimited long-term care benefits are a win in itself with inflation. We can only imagine what the costs are going to be 20, 30 years down the road for those benefits when they may be needed.
Shey: One other point that I didn’t mention. Perfectly healthy, psychologically well-adjusted human beings, we’re all in denial of our mortality. And therefore, no one ever wants to talk about dying, and certainly, no one really ever wants to talk about long-term care. The problem with long-term care is 40 years ago, the insurance carriers, the insurance industry, they mispriced the product. 40 years ago, people would work till they were 60, retire at 62, and die before they were 70. So there wasn’t even a need. There wasn’t even a product 40 years ago called long-term care. The reason nobody wants to talk about it today is they still believe that you put money into some insurance company out there and if you never use your product, they win the bet. You lose, they win. You gave them all kinds of money over 10, 20, 30 years. And if you never use it, they keep all your money. You get nothing.
Asset-based long-term care, what I was just talking about, what I am talking about, no matter what happens, someone gets the money. You’re going to put money into the strategy, but if you never use it, there’s a life insurance component to it. And most of the time, the death benefit, if you never use it, surpasses your cost basis for the amount of premium that you would put into the strategy over a 10- to 20-year period. So regardless, someone wins. Either you win because you’re using it, or your estate or your family wins because they receive the tax-free death benefit.
Elhert: Great strategy.
Tom, we’ve been talking to our clients for many years about captive insurance, another alternative strategy.
Captive Insurance
Gibson: Captive insurance has been a part of the code for decades. I love it because it does a lot of different things. Many of our clients are business owners. A lot of them are involved in healthcare. You have plenty of insurable risk as a physician, as a dentist. And the captive insurance company, first of all, is going to definitely strengthen your risk management plan. Secondly, the captive typically is going to be a great vehicle in terms of asset protection. So you have your practice. You have maybe your building if you own your building, and then you have your captive insurance company, which you own. And the other two entities pay insurance premiums to the insurance company that you own.
I tell my clients when we’re looking at captives, “If this didn’t save you a nickel in tax, I would think it was a good idea for you strictly from the asset protection side of things.” There are some tax implications, though. The premiums that you pay to your captive are deductible business expenses, just like your malpractice insurance, your casualty insurance, liability insurance, and so on.
On the flip side of things, though, inside the captive, because of the code section that these small insurance companies are organized under, the captive does not pay corporate income tax on its underwriting income, so you’re getting a deduction, let’s say, in your S corporation. It is ultimately lowering your taxable income at the level of your personal return because less is passing through. And on the flip side of things, your C corporation, your captive is not paying corporate income tax on that underwriting income.
And again, from an asset protection standpoint, when you pay those premiums to the captive, you’re effectively moving that cash that you’re paying in premiums out of the place where you have the greatest potential of being involved in a lawsuit, which is and always will be your medical or dental practice. You’re moving that over into a completely separate entity. The money can be invested inside the captive. It can grow in the captive.
Ultimately, 15, 20 years down the road, you’ve sold your practice, you’re getting ready to ride off into the sunset. At that point, you don’t need the coverage. Therefore, you don’t need the captive. At that point, you distribute the assets of the captive in what’s called a liquidating distribution. Liquidating distributions are taxed at long-term capital gains rates. And so even on the wind-up of things, there are still some additional tax benefits on top of that. As I said, I like it for a lot of different reasons. The tax part of it is actually my least favorite part of the reasons.
Elhert: And I know that broker dealers like Green Vista Capital, have commodity investments as well that can be utilized that our clients have taken advantage of.
Tax Forecasting
Gibson: Absolutely. We’re about to go into the most wonderful time of year as we start doing tax projections for our clients. This year is going to be a little bit different. In the past, when we were doing projections, I’d normally like to get some statements, at least through the end of September. This year, we’re on a little bit of a different timeline, and I’ll explain why in a moment.
Your relationship manager is going to be reaching out to you. They’re going to be scheduling calls with myself and Taylor Eason to do a tax forecast. First, when they call you, they’re going to tell you what we need. Kami is going to go over that in just a minute. But scheduling the call is good. Sending the paperwork is even better because we need to see certain things to be able to do a projection.
In the past, normally, we would say, “Let’s just try to have all of our forecasting done, strategies that we’re going to use in place, have it all wrapped up with a bow by Thanksgiving.” This year, we selected another holiday, Halloween. This year, we want to have our forecasting done, projections done, and have everything wrapped up with the bow on it, which practically means October 15th.
First, as those of you who’ve experienced a year end understand it’s a hectic time of year, and with some of the strategies, there is a limited supply. We don’t want anyone to be left out. And because of that, it’s better to fund early based on a good number than to try to wait until the last minute and have the perfect number.
We don’t want to make you feel hurried – and this brings me the second reason – but there is some legislation that’s working its way through the Senate. It’s actually not a bad deal, the Secure Act 2.0. I think the actual title of the act is the Earn It Act, but everybody refers to it as the Secure Act 2.0. It gives me a lot of hope because they’re liberalizing the Roth rules in a way that we’ve not seen up to this point. For employees of nonprofit organizations and governmental units, they’re covered by 457 plans, 403(b) plans. Those type plans have never had the ability to have a Roth side to their pension arrangements. So a government employee, in many cases, can’t make Roth retirement contributions. Secure Act 2.0 will change that. And, as I say, that gives me hope. As all of you know, the ability to do Roth conversions without regard to income is going to expire at the end of 2025. This makes me think it may go on past that. That would be a good thing. However, we’ve got to act like it’s going to go away at the end of 2025 in our planning.
This brings me to an amendment that may be attached to the Secure Act 2.0. The act has very broad bipartisan support, so we believe it’s going to pass. Because of the congressional midterms, though, we don’t think anything’s going to happen until after the election is over. They’ve all scurried home to try to keep their jobs at this point. And so, once we get into November, and Congress has come back, those of you who’ve been on the webinars have always heard me say, “I’m a little concerned about that lame duck session of Congress.”
But there’s an amendment that could potentially affect – and I’m going to use the term because it’s the term the code uses – conservation easements. That is what code section 178 is all about. It could affect that going forward. It’s not going to be retroactive. And I’m about to caveat this even more. We don’t know that the amendment is going to get in the bill. We think the bill might pass, but we don’t know if the amendment gets in the bill if it’s going to stay in the bill. And I think there’s a good chance the president will sign it. But we don’t know that. Right now, there are some things being negotiated. I don’t want to get down into the weeds, but it’s not something that would do away with this deduction going forward forever. It would modify itself. But again, as we know more, obviously, we’ll keep you all abreast of the details.
So the reason October is important, as I mentioned, there is no retroactivity to this bill. It will be effective if the president signs it from the date he signs it going forward, which means if you’ve taken care of all of your tax planning for the year by the end of October and something passes in November or December or not at all, you won’t be any worse off. You will have secured your planning for this year. And if nothing changes, again, no harm, no foul. But we have to plan that there might be a change and help folks do efficient planning for this year, and then we’ll see what the future holds.
Shey: Tom, let me make one comment. As you’re preparing for the tax forecast and sitting down with Taylor and Tom, sending in all of your documents to Kami and Crystal, for the people out there whose income is down this year but you still have those funds sitting over in a traditional IRA or your 401(k) plan allows conversions, if you think about it, if I can get this right, I think we had it as a win-win-win, meaning if your income is down and Tom does what Tom does, works the Gibson magic with the tax forecast, then it’s an even better year to look at the Roth conversion because your effective tax rate is going to be at a lower level. So there’s our first win. The market is down, so there’s win number two. And then, by converting an amount of money from a qualified taxable environment and moving it over to the Roth, reinvesting it, or just leaving it in the current holding so you don’t have to sell and buy, then you can take advantage of the market as it rebounds, which is your win three. Again, we’re going to talk with you about it at your tax forecast but start thinking about it along those lines.
Elhert: Yes. And even more, all the reason to encourage our clients to make those connections on e-Money. It’s really important for Tom and the team to be able to see that information and really prepare as we are planning a little bit earlier this year. All real great information.
Gibson: And Kami, maybe you could mention the typical things that we’re asking for.
Elhert: Absolutely. As Taylor and Tom are getting scheduled with you, we need to be sure you accept the meeting. If you’re a new client this year, it may be new for you to obtain the requested documents. For any of our senior clients, we ask for the same items year after year. We’re looking for the year-to-date pay stubs, year-to-date P&L cash basis – and comparative would be great, too – comparative year-to-date balance sheets as well as your 202 tax returns, personal and, if applicable, your business as well.
One of the things that Tom has suggested as well since a lot of our clients extend and we want to have all of this completed by October 15th, is carry-forward amount. So if your CPA does not have the returns complete, obtaining any carry-forward amounts would be helpful for those forecasts. Also, make sure we have both your and your spouse’s year-to-date pay stubs. Those can all be uploaded through your e-Money portal through the vault, and we encourage you to do so. We will get notice when the information has been uploaded, and then make sure that Tom and Taylor have it. If you have not been set up on your e-Money, please send the documents via your relationship manager’s secure link.
Best practice is not five minutes before the meeting. There is some behind-the-scenes work that Tom and Taylor do, and five minutes is not giving them the time they need to prep for the meeting make it as productive as possible. As we are running up against time restraints, it’s going to be a busy time of year. We need to make sure that we have enough time in the day for the forecast but also that we are utilizing the calendars time. Having to reschedule and push things back only creates a long-term domino effect, if you will, for everybody. Just a little reminder there. Anything else, Tom? Did I get it?
Gibson: No, I think you covered it all. Like I said a few minutes ago, it’s going to be a little bit shorter time frame this year than we’re accustomed to. But for many of you who have been clients in prior years, we’ve done this before. I’m familiar with your financial statements. And again, we never have the perfect number. It’s never going to be exactly the number that ends up on the tax return the next year. We want it to be close, but that’s why they’re called a projection. So again, we want to have the best numbers that we can get. But I’d rather have a good number in late September, early October, than a perfect number the last day of the year because that’s not going to do a thing.
Elhert: That’s why it is called tax planning.
We do have a few questions here. One of them is, “If you are required to take an RMD from your qualified plans, can you move money into one of the insurance products to decrease the amount of exposure?”
Shey: I can take this question, Kami.
First of all, great question. And the answer is yes. There are not a lot, but there is a fair amount of people out there who have large amounts of large balances, if you will, inside of IRAs, 401(k) plans, those types of environments. When you’re talking about the required minimum distribution, if you’re bumping up to that age, if you will, it’s a good idea. You need to ask yourself some questions first, though. Here’s the first question. Are you going to need your RMD? And if the answer is no, you don’t need that for income, then is there a way for us to use it as a strategy inside of mainly the asset-based long-term care strategy? Can we use that qualified money to fund that and reduce the tax exposure? The answer is yes. So long answer to a short question: yes. Get with us, and we can look at your individual circumstance and show you how to do that.
Elhert: There’s another question asking, “How is the tax forecast used in tax planning with a Roth conversion and life insurance?”
Gibson: With the Roth conversion, what I’m normally looking for is, as a result of our other strategies, if we can get the effective tax rate anywhere from 20% up to about 23%, 24% percent, it makes all the sense in the world. And the younger you are, the more sense it makes. I had a client the other day tell me, “Well, I think I’m going to be in the 24% tax bracket when I retire.” And my response to them was, “If the brackets are exactly the same, are you telling me you really want to live on $340,000 a year?” And that’s the most uncontrollable thing. You don’t know what tax bracket you’re going to be in when you retire. We think the brackets are probably going to be higher than they are now. But again, if we’re doing that conversion, I’ve seen them as low this year as 18%, 19%, and you’re getting that money in a place where, as we said earlier, it’s going to continue to grow tax-free. The difference is, it’s all going to come out tax-free in retirement if you need it. And if you don’t need it, the tax has already been paid if you need to pass that along to whomever you want to give it to.
The 10-year rule is a huge thing. That was Secure Act 1.0. That threw a huge kink into some estate planning strategies that have been around for decade. And I think Brian would agree with this. For your heirs, one of the worst possible places you can have money when you die is in a pre-tax retirement plan because they’ve got to pull it out in 10 years. Doesn’t mean they have to take a 10th of it every year. Same thing with Roth. If a Roth passes to a child, they have to get it out in 10 years. Ten years at a 7% interest rate, that money could double in 10 years. And like I said, the tax issues have been dealt with at that point.
Elhert: So you’re not really setting up for that tax timebomb.
Gibson: You’re not setting them up to pay, in a lot of cases, 32%, 35%, 37% on that which it took you a lifetime to accumulate that they’re going to turn around and give to the government because we didn’t do effective planning with you.
Shey: Tom, to piggyback on that, let me take the latter part. This is something we’ve talked about for a period of time. But everyone is busy, and we’re all working on the different strategies. I’m going to repeat the question that Kami just put out there, which was, “How is the tax forecast used in tax planning with the Roth conversion and the life insurance?” Here’s a thought for the people out there as you’re getting with Tom and Taylor and doing your tax forecast. I’m just going to use easy numbers and just do a hypothetical. If you’re converting $100,000 from a normal IRA over to Roth and your effective tax rate is 20%, then, obviously, you’ve got to write a check for $20,000 to the government of the United States. However, if you’ve moved $100,000 from a taxable environment over to a tax-free environment, and you work with us, we can assist you in investing that and growing that $100,000 and compound it over a period of time. That one’s easy. Now, let’s look at the other end. When you look at the tax forecast that Tom and Taylor will show you, at the bottom of it, it’s going to show you net effective savings.
So we’re going to save you, and the net savings to you is $50,000. So you’ve converted $100,000 over to Roth, but now you also had a net savings of $50,000. Instead of taking the $50,000 out and going and buying something or spending it or whatever it may be, we want to try to help you create multi-generational wealth. So think about taking 50% of that, $25,000, and leveraging that into three-quarters of $1 million worth of life insurance. Now you’ve double-dipped. You’ve converted money over to a Roth, and now you’re growing it tax-free. And you’ve also taken your tax savings. Instead of spending it or blowing it, you’ve leveraged it into a tax-free death benefit through the door of a life insurance policy that will transfer all tax-free to the next generation. And then you’ve taken the Secure Act 1.0 of your children having to distribute that Roth account within a 10-year period off the table. They can do that, and they can do it even faster because you’ve created generational wealth through the door of a tax-free death benefit. So there’s two plays there. It’s a win-win, Kami.
Elhert: It is a win-win-win. That’s right.
Tom and Brian, I want to thank you both very much for joining us today and for the great webinar. We covered a lot of really important information, a lot of great tidbits, and strategies that we here at TSP Family Office offer. I encourage everybody, to reach out to us at (772) 257-7888 to learn more about how you can use a tax forecast to help protect yourself in a recessionary environment.
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