Welcome to Ditch the Suits podcast, where we share insights nobody in the financial services industry wants you to know about. We're here to help you get the most of your money in life, so buckle up and welcome to Ditch the Suits. Welcome back to Ditch the Suits. Steve Campbell here with Travis Moss continuing this series on how we can help you with your net earnings or the money that goes back into your pocket by giving you real financial planning ideas that can help you get hopefully 1% or more on your net savings. Get more money back. Today, though, we're going to be talking about understanding tax codes and the types of investment accounts that you have. We kind of got into this a little bit at the end of the last episode as we talked about the impact of asset location, maybe it's the first time you'd ever heard of that, but when you look at your statements, you have various type of accounts that have various different tax functions, it's really important for you to understand the tools that you have and how to use those. And why do we know this? You know, I service the Chief Brand Officer at Seed Planning Group, a fee-only financial planning firm. Travis is at the helm as our CEO between the two of us and a number of financial planners. We have spent hours working with clients just like you, building hundreds of financial plans, pouring into people's lives, understanding who and what's important to them. And a lot of times it's just a misunderstanding or a lack of knowledge about the types of accounts they have and how tax codes actually work. And what we have found is that sometimes people are afraid to speak up because they don't want to come off as being judged. So we're going to help you here because again, the whole idea is we want to help you increase your net earnings by understanding how you can utilize these financial planning tools to help you get the most of your money in life. But Travis, why don't you tee us up? When we say net earnings, in case we've got anybody new to this episode today, what do we mean by that and why is that important? Piled money you have after you pay everybody who gets their due. So if you have a pile of a million dollars, depending on how you have that million dollars, there could be income taxes due on it or there may not be income taxes due on it. There may be income taxes due on part of it. No matter what you've got going on it, there's fees or some associated fee with it, right? So you could say, well, you know, I buy a CD, there's no fees with a CD. The bank's making a spread on the interest rate they're giving you. So you may not be paying the fee directly, but it's coming out of your money. So we want to help people understand that fine print and what you're actually getting out of your money. What you're actually going to put in your pocket from that pool of money. And this is going to help you hold on to more of your money. So when we're thinking about financial freedom, we're thinking about, okay, I want to keep more of my money in my pocket, I want to give less to everybody else. I want more for me or more for my family or more for my charities, whatever's important to you, or I just don't want to be a waste. I don't want to be a bad steward of this stuff. And the most common way that people think about doing that is, well, I'll reduce fees. I'll just fire everybody who's trying to help me, right? Or I'll buy the cheapest investments. Well, cheap doesn't equal quality. I mean, we're at the point where I think it's pretty evident in most things in society that the cheaper things are typically, the more often we have to replace them or complain about the service. So cheap does not necessarily equal quality. And then the other place where people go to is risk, I need to, in order to make more money, I want to increase my risk, because that's kind of like the traditional way the financial advisor's kind of, oh, you're not happy with your returns, let's just increase the risk. Well, part of that, yes, it's true. If you don't take any risk, you're not going to keep up with inflation. I mean, that's just how it works. But let's say that you're, you know, a moderate aggressive investor, and you're averaging a half percent per year, and you want more return, I don't need to get you to make more than eight and a half percent per year. I need to work on those other things that are coming out of your share. So I might be able to do that in our first episode, we talked about charitable deduction or charitable donations and getting the deductions form and how all that works. So kind of, can I save money on taxes? And we talked about Ross and what kind of really IRA I might be using and how to understand how to better do that. This one, I think what we're going to get into is more on the issue of, you have, people think that they go and they buy an investment or, or, or put money in an account. And that's it. Right? I mean, in an IRA, a lot of times we're confusing tax codes with investment products or account types. So you have tax codes, and then you have this other column, which is everything else. And so what we wanted to do was talk about how we could probably help people get maybe another percent, keep another percent in your pocket. By understanding better how we're using the tax codes and how we're using the different products and account types that we can get out there. And so if you think back to, we've done, this will be our third episode on this topic. Our goal is to save you. We're on this pursuit to save you or to make you an extra percent net return, right? Which might be saving you fees, saving you taxes, those types of things. So any one of these ideas, maybe it does it for you. Maybe you get a 1% benefit from that. Maybe just one of these is a home run. Well now we've got three different, this is the third episode. These are three different complete topics. If each one saved you a third of a percent, all of a sudden you're up to a full percent difference. You know, if you have a million dollars, that's $10,000 a year. If you have $5 million, that's $50,000 a year. That starts to add up. If you got more benefit from what we've been talking about than a percent, maybe you've gotten 2% by now. I have a $500 or a $5 million account that'll, that'll net you, what, $100,000 a year. That's pretty significant. Let's take a quick break to hear a word from your sponsor. This episode is brought to you by Seed Planning Group. If you're looking for a life-giving experience working with a financial planner, then Seed is here for you. Seed is a fee-only financial planning firm with a fiduciary obligation to put your best interests first. If your goal is financial freedom and independence without sales, products, or really glorified salespeople, then check out Seed Planning Group today. You can visit www.seedpg.com. That's www.seedpg.com. In the best part, you can schedule a free consultation to find out if their fee-only planners and their process are right for you. Yeah. Well, hey, folks, no shame if some of the things we're going to talk about today, you just didn't really understand this is how this works. When we speak with individuals and folks just like you, it's our job to educate you on some of these things, just so that you can make the best decision for you and your family. So you've got my interest to have this as a listener. You're talking about saving me 1% net of earnings, which is the money that is in my pocket after I've paid everybody else. I'm intrigued. You're not saying I got to go buy a hot stock or buy some stupid product? Yep. We're not talking about that at all. We're not talking about that at all. We made through financial planning. How can we do this? So one of the ways that we've talked about is maximizing returns by understanding how different account types works and the tax code's involved. So kind of paint a picture, help us understand what do we mean and what are we talking about when we say that? Just let's group accounts into three categories, three broad categories, but I think it'll help people get more of a grasp on this. There are retirement tax-advantaged accounts. So these are accounts that the IRS gives you special advantages on. You have traditional individual retirement accounts. Those are what most people call RIA or, yeah, IRAs. IRAs. Sorry, I was giving my lexicon mixed up there. All right, registered investment advisor and individual retirement accounts, sorry. So you have traditional individual retirement accounts, IRAs. That's where we just did a full episode on that. You put money and you get a tax deduction. You pay taxes when you take it out. Now that is a tax code. You can buy just about whatever you want in an IRA. You can buy annuities in there. You can buy real estate in there. You can buy stocks. You can buy mutual funds. Anything you can think of, you can probably buy in an IRA. So IRA is a tax code that then you buy stuff under basically, and it says how the IRS will tax the stuff that you own in there. A Roth individual retirement arrangement is what we were talking about, a Roth IRA. So the key term there I guess is arrangement, and I might have said it wrong with the traditional individual retirement accounts. It's an actual arrangement in the actual tax code called arrangement. So it's not an account, it's arrangement. So when you open a Roth, let's say you go and you go to Fidelity and you open a Roth there, you open an account at Fidelity, and you ask Fidelity to assign it the Roth tax code. And then you have 401(k)s, 401(k) is the name of the subsection of the US Internal Revenue Service Code. It's actually not an account type, it is a tax code that has become synonymous with account types. However, you can have a Roth 401(k), you can have a traditional 401(k). You can have a 401(k) that actually was non-deductible, and therefore we have the basis tax-free and the gains taxable when it comes out. It's the same for the 403(b)s and 457(s) if you're in deferred comp, and whatever other kind of three number accounts that you can come up with, keyo, all that kind of stuff, they're all just the references to tax codes. And what that does is that tells whoever's got your money, whatever the investment company that's got your money, what the tax treatment of the money is, which creates the rules around IRS reporting. Yeah, the lack of understanding around this area across the board is what makes us all human beings. Again, me being the first point of contact from many of you that have called in over the years or just prospective clients that have found seed planning group, when I speak with individuals on the phone for five, ten minutes is that initial call. You know, I'll ask them about their retirement accounts and they're like, yeah, you know, I think I got a 401, a 403. People aren't sure because they're not understand how it works. So if you're in that boat, maybe here's a great exercise for you. Pause this episode, stop listening right now, go print out your statements or open up your computer because maybe as we talk about some of these things, when you look at your financial statements or your retirement accounts, you're going to see next to your name, Roth IRA or traditional IRA or 401k, just be aware of what we're talking about as we go through it so you can start to identify and go, aha, I know what Stephen Travis are talking about. And I think that's where maybe we've also last over the years is just the misunderstanding that these are actually just accounts, right? Because we've talked about in previous episodes and years before, people say, yeah, my IRA made 10% and it's like, well, no, it didn't. The investments inside that IRA made all the IRA did was say you didn't have to pay taxes this year on the 10%. Yep. So just people understanding that if that's you zero judgment, trek with us, we're going to help you. So we've established the retirement tax advantage accounts like you had said. What are some other areas that we need to understand? So then we've got annuities and because people, you know, you're going to be offered to buy an annuity by some insurance salesman and yes, it's an insurance salesman because they're insurance products or possibly through your pension, you can annuitize. So annuity has two different terms here or two different meanings here. The first meaning is they fixed some of money, paid to someone over a specific period of time. So when you take your pension or even you take Social Security, you're technically taking an annuity. Right? It's like, here's the terms of a payout over a certain amount of time. But what most people are doing when they're buying an annuity is they're buying a product or a form of insurance and titling the investors, some sort of future benefits. So annuities are products. Now, the annuities do as a product create certain tax situations, but that's based on more so the type of tax code assigned to it. For instance, if I buy an annuity that is also an IRA, all the money coming out will be taxable. If I buy an annuity that's also Roth, all the money that comes out will also be tax-free. If I buy an annuity that is neither, let's say I got $100,000 for selling my house and I put it into an annuity, then what will happen is all the earnings when they come out will be taxed. And then when I take out my last $100,000, that'll be the basis, that'll be tax-free. Depending on how I take the income out, there are a number of different ways that you can do or there's other ways you can do the taxes, but that's essentially what's happening there. That's because of the way that the IRS assigns the tax methods to these accounts. And then you have just, we're going to qualify them as regular investment accounts. And so that's any place you buy an account where you can buy and sell investments. And you can buy and sell investments with an IRA, you can buy and sell investments labeled as a Roth. You can actually buy and sell investments within an annuity, although it's a little bit of a different kind of nature. But in general, when you want to buy investments, you go open an account with a brokerage company. You're going to say, "I'm going to go to Charles Schwab, I'm going to go to Fidelity, I'm going to Vanguard, and I'm going to buy investments." And for our purposes, what we're talking about is really just the platform that you're buying the investment from, just the account before there's a tax code assigned to it. So think about an investment accounts just someplace where you can buy or sell whatever investments you want. That may or may not actually have a tax code assigned to it. Hey, guys. Steve Campbell with Ditch The Suits want to take one quick moment to make a big ask. If you haven't already, Travis and I would love for you to subscribe to this podcast. But if you haven't, also, we would love for you to leave a five-star rating and review. You're rating and review will let other podcasters note the show is worth their time. So let's go right back to the episode and thanks for listening to Ditch The Suits podcast. So I love Ditch The Suits partner because if you are new to our show, Travis is your unfiltered professional, it's going to give you cold, hard truth. I am sometimes your voice of reason, the more the emotional appeal of the show. Folks, I'm going to tell you right now, now that you understand annuities and how they work, please stop buying products from individuals that are pushing things on you without actual real financial projections. There are so many people out there that when I speak with them the first time, say, "I didn't really understand what I was getting into, but it sounded good." The financial services industry is all a pageantry and anything can be coerced or pushed in front of you in a way that sounds like it's advantageous. But if you go back to the second episode that we did in the series, without understanding actual financial projections, so many people are making decisions that are fear-based based on storytelling rather than understanding how some of these things work. So it's really important, if that's been you, it stinks, I understand it. But if you are out there and you've got somebody right now that is pushing a product on you that you don't understand, just make sure you ask a lot of questions because, again, it's trying to get to financial independence. Yeah, and for those that don't believe that, who say, "I've got this financial advisor, they're great," and I bought by lots of annuities from them, the Department of Labor is trying to expand about its fiduciary rules for any IRAs or Roths or any other kind of covered account under the ERISA, which is the Employee Retirement and Income Security Act. So they're trying to broaden the rules as far as when you buy an investment from somebody, what are their legal responsibilities to you? So what are their fiduciary responsibilities? And one of the groups that is fighting any kind of legal responsibility are the insurance companies. And they're saying, "Well, annuities, people buy a contract and we're really not responsible for what happens after they buy it," and it's really a transaction. So they're coming to us to sell them this product, and it's kind of like buying a car, so buyer beware. How many people feel like when they've bought an annuity, though, that was the experience that they went through? And I'm not saying that all annuities are bad. Every single financial product that has been created was created for a purpose, but they can be extremely abused or misused, especially the more money somebody has. Oftentimes, less, they need an insurance company to insure their money. And so it just becomes one of those things where this kind of gets into our next point is there's a going in scenario. You have money, most financial firms or most anybody will take your money off your hands for you. They will gladly take your money. And depending on where you put your money, you might get better benefits than other places that you might put your money. And depending on where you put your money, you might have to pay more fees than some places that you put your money. So obviously, and I think we talked last episode in depth, it's a very important to understand the tax code that you're putting your money into, but what happens when you put your money into something for certain benefits? And now there's some different restrictions that are going to come into play. So for instance, I'm buying a product through an investment account or I'm buying an annuity or something. And it could be in an IRA, a Roth IRA, or neither, I'm just buying stuff. I could put myself, my money in an account that says you can't have the back for eight years, period. It doesn't matter if you want it back, it doesn't matter even if you're willing to pay an extra fee, you can't have it back. Or if you get it back, it's going to be marked to a certain rate of the market. And so you're going to take this massive haircut off of it, or I can put money in it. And if I want it back, I have to pay a very large exit fee. So I put my money in, it doesn't cost me anything to buy it. I pay this one and a half percent a year fee to have the product, but if I want my money back within the first eight years, I have to fork over three, four, five percent of my money. And I've seen those fees as high as 20 some odd percent. So I have to pay, you know, a huge piece of part of my money to get it back. There's types of accounts out there where you can have some guarantees. I'm going to put my money in it, and I'm going to, the company's going to guarantee me that I get X, right, but what is X compared to what you're giving up, right? And how was that kind of sold to you? For instance, you mentioned fear. If I terrify you that the market's going to crash, you should buy this thing. And no matter what you get, you get, you know, if the market goes up, you make money. It's market goes down. You don't lose anything. But what if I put a cap on it? If the market goes up, you can get it as much as five percent this year. And if the market goes down, you don't lose anything. Or even eight percent. So market goes up. You get eight percent. The market goes down. You don't lose anything. What was the last time the market only went up eight percent or down, right? And so you start doing the math and you're like, okay, we're leading by fear. We're buying these things that are protecting us from going down, but they're inebriating us. We cannot go up. We're severely kept on the way up. So, sir, why don't you pay us three and a half percent of fees? And because you pay us three and a half percent of fees, you don't ever have to worry about running out of money. We're going to give you four and a half percent of your money back per year for the rest of your life. Fixed four and a half percent, not going to increase. How is that a good deal? You're paying three and a half for a four and a half percent guarantee. And now you can't access your money. And if you access your money, you lose the four and a half percent guarantee. Yeah. So we do these things. We make these decisions. We put our money in these things and we don't necessarily redefine print. And what the fine print does is it takes away all of our upside a lot of times or it could increase our downside. What if I buy something and they don't really tell me what they're doing and I get completely wiped out, right? So when we put our money into an investment, we really, number one, we need to have a plan before we buy an investment. The financial plan ought to drive the investment selection. People are driving the financial plan by picking the investments first and the investments work out so they can do financial, fund financial stuff and the investments don't work out. And now they're like, I got to go back to work or the markets are rigged or whatever. The financial plan should drive the investment decision making, not vice versa. So that gets us to the taking out scenario. So anybody will take your money and put it in something and they'll gladly make money off of you. Yeah. Can I speak to something real quick about that, just so that people have an understanding a little bit of the industry. If you're out there and you know you want to meet with somebody, go to Google, you type in, who should I meet with? Let me just give you an understanding of how seed works. When people call in, it normally takes us from an intake to the time they actually meet with our team six to eight weeks before they can get in. The reason that we do that is not because we want to push them off or we don't like people. It's if you've been tracking with us for the last few years and we've told you about the hours it takes to build a financial plan, there is no way to fit people in at the cost of other people that we work with. If you call a financial professional and they're willing to meet with you the next day or take your money and push products, you should be raising your hand because that is something that like you just said, any professional will take you money. In the countless kind of horror scenes, we've seen of individuals that have done something quickly, not because they didn't understand it from a so-called professional. So just make sure you're doing your due diligence and your research and asking questions because they don't want us to underscore the fact that I think listeners are trying to do the right things but they don't know what questions to ask and they don't know when to raise their hand. So you talked about the money going in. Now talk to us about taking out scenarios in the different kind of areas that we need to be aware of. Yeah, I just want to expand on that a little minute. If you forget talking to us, you talk to whoever you want to talk to, if you can get in next week and it's not in the life or death situation, most really good, I mean, I can never be available like that, you know what I mean? You talk to somebody who's really, really good at what they do because that's who you want to hire, right? You want world class, you're running a money business, you want to hire somebody who really knows what they're doing and they're available to take your phone call at any time. Every now and then clients are getting frustrated. I called and nobody called me back until later that night or the following day or I send an email and I didn't get a response back right away. You're working with people who are not a dime a dozen, right? And so when you're looking for expertise, sometimes that expertise is going to call you 24 hours or 48 hours later, unless it's like a life or death situation, in which case you tried to move, heaven and earth for the person, but you don't, if you want really good people, they're going to be busy. You go and hire a contractor, if the contractor's really good, what you say, book you in six months, right? They don't go, yeah, you know, I've been sitting at my couch all week, I'm so glad you called, yeah, let's talk tomorrow. You know, if you can even get them on the phone, you know, half the time you can't even get them on the phone. There's a little piece on there just to get in the back of your mind, but they're taking out scenarios. This is, I think, where it becomes so important with the type of accounts that you're selecting or the products that you're selecting within the accounts. And I've got a couple of different scenarios. So age, age is important because if you put money in an annuity, and not an IRA or Roth, just a regular annuity with your money that you got from your house, you can't take the money out before 59 and a half. If you take the money out early, you pay an IRS penalty. And an IRA is the same way, right? An IRA, you have limitations as to when you could take the money out. So if you were going to put money away that you were going to use to retire early at age 50, the type of product you buy is going to be very, very important, right? Would you actually buy within those accounts before you even get to the tax wrapper of it, right? So risk, you know, when you buy a product, what is the risk of the actual product itself? Like for instance, if you put money in a hedge fund, what's the nature of a hedge fund versus a mutual fund? You know, one can lock you up and not give you your money back and they don't have to tell you what they're doing. The other one has to give you access and tell you what you're doing, right? There's a dramatic difference in them. Do you understand the risk, people buy non-traded real estate investment trusts all the time because they heard this thing on TV and they were promising the fact that you'll make 10% income, blah, blah, blah. Well, they come to find out the 10% income isn't really income. It's 5% return of their own principal and 5% income. And that only happens as long as the market's good. And when the real estate market crashes or when their pet project dies, all of a sudden their money gets locked up and they can't even sell their principal. They can't even sell the underlying shares. Well, that's in the fine print. And so it's a very risky investment that also has a liquidity problem. Liquidity is, can you sell the darn thing for what it says it's worth on your statement? Just because they give you a value on your statement, that doesn't mean what you can actually sell something for. That's the going price, but you're still going to go out and find the buyer. And there are types of investments where you are contractually limited as to when you can sell the investment and that could end up in an after-tax account, it could end up in an IRA, it could end up in a Roth, it has nothing to do with the tax code of it. Just has to do with what somebody sold you or what you bought because it looked good. Then of course, you have tax codes and we've talked enough about that, but then you have product limitations. You know, does the product itself limit, you used to be a thing called A shares, B shares and C shares. These were pre-cursed with all the different share classes you have now, but those were for mutual funds. Mutual funds are investments that you buy, you see them in your 401(k) or if you go by Vanguard, you're buying a mutual fund. Now they used to be sold as an A, B or C share and what they were was A, you paid up front, B, you paid if you took your money out early, but you paid a higher ongoing fee, C, you paid a really high ongoing fee, but after the first year, you could take your money out whenever you want without a penalty. So B, if you put your money in, you didn't pay anything up front, you pay higher ongoing fee, but if you cash your money out, you might pay like 5% or 6% for taking it out early. So you got to look at these products also and say, "Okay, if I put my money into one of these things and I want my money back, what happens?" Or if I put my money into one of these things like we talked about before, what are the limiting factors? Are they going to take away my growth opportunity? Index annuities are a great example. I think the historical average return on an index annuity is under 3%. They're sold as a market alternative. You can invest in the market, still make market-like returns, but have no downside risk. That doesn't sound like market returns. You might as well have bought a 30-year bond back in the day when you bought that index annuity. You know, and that's the vast majority of them, the performance, at least the experience that I've seen. I haven't never had somebody come in with an index annuity that they bought, which by the way, paid commissions north of probably 10%, and if they sold it, I literally have seen one if they sold it within 20 years, they'd pay like a 20-plus percent fee, right? They're not all like that. Some of them are a lot better than that as far as the terms, but I've never had somebody come in and say, "Look, I made 8.5% per year in this index annuity." It doesn't happen. It's not a market alternative. In fact, you don't even get the dividends in those things. You get the market returns net of dividends, which a large part of market returns, historical market returns, a material part of the returns are the dividends. There's limitations on all these things that we buy, whether it's mutual funds, whether it's stocks or options or annuities or UITs. Those of you who own UITs, you know what I'm talking about, ETFs, whatever you're buying. There's limitations on them contractually the way that they're designed, and when you buy them, you're buying all the fine print that comes with them, just like when you sign up for a tax code, when you sign your money up and say, "This is IRA money," you've made a deal. You ask government, "This is how you're going to treat my account." If it's a Roth, you made a deal. This is how you're going to treat my account. These are the rules I'm going to play by. Same thing that happens though, at the account level and at the product level. You're making a deal every single step of the way, and if you can get it right versus getting it wrong, I think you can make a lot more money out of it because you won't have the mistakes or mess ups. If you mistake, you have a mistake early on and it costs you 50 grand. We just talked about $100,000 over 30 years is a million dollars at 8 percent a year, right? Yep. 50 grand costs you half a million at least. That's a big oopsie by picking the wrong account type or the wrong product or getting stuck in something you didn't understand what it was. I guess I would just leave it like this because I know we got to wrap up. Tax codes are complicated. Products are complicated. This is why you need a complete plan. You should be going in with almost like a prescription for your investments based on your financial plan. How do your projections work? What do you actually need? How do you live your life and how do you utilize your money and how might that change over time? That should dictate what the heck you're buying and what tax goods you're putting on it. Yeah. I think Travis, if you and I, because there's not an actual exchange of currency, most people don't understand what they're paying for these products that they have. If you just showed up and showed somebody, "Hey, do you just know your largest expense is $50, $60,000," they would say, "Where? Where's that coming from?" If you look at the investment products and what you're paying advisors, sometimes people just don't understand for the friends that they're paying or individuals, "Hey, if they're worth it, pay them." But most people don't understand these tools. So we hope that in this series, as we continue on talking about net earnings, that if you stack these ideas upon each other and just understand how these account works and the tax code, you can really not only supercharge your giving and your charitable donations, but just the quality of life, the legacy you're building, who and what is this for. These are all important things that you need to understand. So if you have questions, again, we'd love for you to leave comments in the video before or write a review online. Let us know what you think about this series so far. But if you've got real questions, head over to DitchTheSoots.com, that's DitchTheSoots.com and that contact us buttons up in the corner. Let us know who you are or questions you have. I'd love to talk with you here a few minutes, point you in the right direction. We are here to help you get the most real money in life. So as always, thanks for stopping by DitchTheSoots. Thanks for being our guest and until next time, see you soon. [MUSIC] [BLANK_AUDIO]
