ABOUT THE GUESTS

Mary Beth Storjohann
ABOUT Mary

A financial planner for Gen Y and Gen X, Mary Beth Storjohann, CFP® is on a mission to make financial planning fun, educational and accessible for her generation. As Founder of Workable Wealth, Mary Beth applies a fun, albeit no-nonsense approach in working with individuals and couples in their 20s - 40s across the country. Storjohann [...]

ABOUT HOSTS

Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. As CEO he currently leads Pure Financial Advisors along with our executive team. As CFO he is responsible for the financial operations of the company. Alan joined the firm about one year after it was established. At that time the company had less than [...]

Published On
April 3, 2017

Show Notes


Transcription

Intro: How to work your wealth when you’re in your 20s and 30s. Why your 401(k) earnings may be taxed annually. How to spot a real IRS phone call from a fake one, and why is Joe selling knives? This is Your Money, Your Wealth.

Today on Your Money, Your Wealth, CERTIFIED FINANCIAL PLANNERTM and author of Work Your Wealth, Mary Beth Storjohann explains how she helps millennials wrap their heads around financial basics. Joe and Al discuss a proposal to cut the corporate tax rate by taxing 401(k) gains, 13 pieces of money advice you can’t afford to ignore and how to spot an IRS phone scam (hint, the IRS will always contact you by mail.) The fellas also answer questions on LLC income vs s-corp income, deductions for traditional IRAs, and taking a personal loan for the down payment on investment property. Also, Big Al lists 6 steps to get ‘super rich’ – none of which involve selling knives out of a trailer. Here are Joe Anderson, CFP and Big Al Clopine, CPA.

:53 – 401(k) gains taxed annually to fund corporate tax cut in new proposal

JA: We have a bunch of things to discuss today, Big Al just got back from Hawaii. How was your trip?

AC: Oh it was magical, Joe. It’s a place that Annie and I love to go to. And it was just great time, relationship enhancer, builder.

JA: Oh here we go. (laughs)

AC: We’re just so much in love. (laughs)

JA: Since you’ve been gone, I’m sure that you didn’t hear about this, but you might have because you got a pretty big brain. Did you know, President Trump, he’s trying to find a way to fund this corporate tax rate initiative. Where do you think he might go after? Where do you think he’s going to do this?

AC: Oh, to fund the corporate?

JA: Because we’re in the highest corporate tax rates, you’ve been a CPA for a long time, and so he wants to bring it down about 15% on the corporate level.

AC: Well yeah. There have been all kinds of things. Maybe 20%, maybe 25%, but right now it’s 35%. How does he want to fund it? I think he wants to bring more dollars back into the U.S. And so he wants to make it easier for companies to do business in the U.S., so they’re not sending their sales and operations off overseas. I think that’s how he’s going to try to fund it.

JA: So this just came out this week. This is by one of his advisors: “We are actively working on a variety of different tax alternatives. We are exploring all opportunities.” So here, the proposal to lower the corporate tax rate to 15% was advanced by the nonpartisan Tax Policy Center, a joint program led by the Urban Institute of… some Institute. The extensive plan includes a 15% tax rate on all gains in 401(k) plans and other tax-preferred retirement accounts.

AC: Really. That would be interesting.

JA: The proposal’s two authors, including one of the conservative-leaning American Enterprise Institute, say it would raise $48 billion in new revenues in 2018 and $60 billion in 2025. So taxing the deferrals in your 401(k) plan. What do you think about that?

AC: I don’t think that’s a good idea. I mean, that’s that’s against the original promise of tax-deferred growth.

JA: So under existing law, capital gains and dividends, earnings on investments and retirement plans are not taxed until the savings are withdrawn, when they are taxed at regular income rates. So that lets the gains in retirement accounts go untaxed as the accounts grow. Along with the tax brackets on plan participants, income deferrals excluding annual earnings from taxes accounted to nearly $159 billion in lost tax revenue in 2015 they said. So the pretax contributions that you put your 401(k) plan, IRAs, 403(b)s, whatever, that caused $159 billion dollars in lost tax revenue, and more than $1 trillion is estimated foregone revenue between 2015 and 2019.

AC: Well we’d get all that tax money later when people withdraw it, so I don’t understand that.

JA: So how do you even calculate? So let’s say I got a 401(k) plan, you have a 401(k) plan. And then, they’re saying they’re going to tax 15% tax on annual gains in 401(k)s.

AC: So growth, income, whatever.

JA: Whatever it grows to. So let’s say if you have a 10% gain you’re going to be taxed 15% on that.

AC: Actually I have never heard anyone propose anything like that so I will predict that this will be dead on arrival. But it’s an interesting idea.

JA: So this one gentleman is saying “I can’t believe why we wouldn’t want to go after retirement accounts.” Well, because their retirement accounts!

AC: Yeah, let’s make it tougher for people to retire.

JA: Right! If you take a look at the average balance of these retirement accounts, it’s abysmal. And then all of a sudden now you’re going to tax the growth inside of a retirement account?

AC: On top of it?

JA: And then are you double taxed on the way out? Or you would have to figure out the basis? How would you do that?

AC: And then does that keep happening after you retire? Do you have to keep paying the 15% gain? But it provides basis when you pull money out? What happens if you pull it out before the basis is calculated for that year? That’s just strange. Very strange.

JA: I think it would cost $150 billion just to figure it out. (laughs) So you might save some money in tax, but it’d piss a lot of people off.

AC: It’d be good for the CPA profession I suppose.

JA: I suppose. Because there’s $24 trillion sitting in retirement accounts. So there’s a ton of money there, but I don’t understand. These politicians do not have retirement accounts. They can’t. They have big pensions, right? So you probably haven’t saved any money into a 401(k) plan, you have a pension that’s going to pay you 90% of your salary for the rest of your life.

AC: So maybe we should tax all the pension plans, defined benefit plans.

JA: Yeah, as they grow as they grow. You have zero control over it, but the defined benefit plan, as it’s growing, we’re going to tax those too?

AC: Wow. OK. So yeah I’ve got to say, that’s very unlikely that that would happen, in my opinion. But wow, if you just think about the way taxes work. Everyone wants to lower the tax rate. And so then there are two choices, there’s either other ways to make up the revenue, or you’ve got to cut spending.

JA: But here’s what he’s saying, is that if we cut the tax rate, well that’s going to substantially increase returns in your 401(k) plan. So if this tax rate cut goes through, the market already is kind of anticipating some sort of tax cut, some tax reform. So when you look at that, it’s like, I’m going to tax you because I’m creating more income for you. So in your 401(k) plan, that everyone is contributing to, even a dollar, now your dollar grows to two, we’re going to take 15% of that growth, versus these other individuals that have big fat defined benefit plans… Al you and I’ve been doing this a long time. And what I have found in my career, is that people that do have very large pension plans, do they have large balances in 401(k) plans?

AC: Yeah, in general, no. Because they don’t have to.

JA: Yes. They know that “I’m going to receive a $100,000 pension when I retire.”

AC: Why do I need to save into a 403(b)?

JA: Yeah, exactly. That is my retirement, I’m already putting money into this plan.

AC: Yeah, the company is doing it, why should I?

JA:  Right, so I’m putting 7% of my income in it, they’re matching 7%, but they’re putting into Social Security, it’s just going into that and they get this pension. So they think that 7% is a savings. But guess what? Everyone else that doesn’t have that pension is putting 7% into Social Security. Well it’s not that much, but it’s about 6.25%. So it’s like well how much are you saving. I’m saving 6.25% of my income every year. Well where is it? Social Security. No, we don’t think that way. But I think a lot of individuals that have these bigger pension plans kind of think that way, and I don’t blame him. God bless you. If you have a large pension, that’s fantastic. But most of us don’t necessarily have these pensions. That’s why we do this show, to help people create the retirement income, that don’t necessarily have a pension or to supplement their pensions. And also, I don’t want to just paint this broad brush of saying everyone that as a pension doesn’t have savings, because that’s not true at all.

AC: Yeah, we’ve seen lots of cases where they have giant pensions and giant 401(k) or 403(b) plans. And then when they have a tax problem because they got all this income coming from the pension, and they have to take the required minimum distribution. Some of these people have worked for, let’s say, companies, and they have Social Security to boot.

JA: Right. So then you have the pension, Social Security and now these large 401(k) or retirement accounts. And then that’s where we come in, try to figure out a strategy to mitigate the taxes.

AC: Because then you don’t have an income problem, you got a tax problem.

JA: And I think a lot of our listeners have that particular problem. It’s like I’ve saved some money, now how do I mitigate the tax, mitigate the fees, trying to maximize my return and everything else in between. Because, I forget, what, last year? I read through that other plan, and I was like, “this person probably has never contributed to a retirement account.” Just the logic going through. And just the mechanics of saying, now you’re going to tax 15% of any gain that I have in my 401(k) plan? How do you work that? I just don’t understand the math. And then so now I’m going to have basis in there. So is it going to be pro-rata coming out because I already paid 15% when I start taking distributions? Or is it going to be taxed at ordinary income?

AC: It gets very complicated, because right now, if you put money into an IRA and do not get a tax deduction, then when that money out, and it’s pro-rata, based upon the total IRA balance, but some of the money coming out is tax-free because you never got a tax benefit. So that’s the idea here, if there’s some way that they’re going to pay taxes on this balance, then that should give you basis. And then it gets more complicated when you’re taking the money out.

JA: Right now if you take a look at individuals that have after-tax contributions inside a retirement account. So they put money into an IRA, they were not able to take the deduction because they made too much income, so they have basis in the IRA or 401(k) plans or defined contribution plans. Some companies allow employees to continue to contribute over the maximum allowable of $18,000 or $24,000 if you’re over 50. But then those contributions are then after-tax. They still grow tax-deferred, you pay ordinary income tax on any of the growth, but that basis comes out tax-free. But a lot of times, people have no idea what the basis is, and they forget about the basis. So it’s in a 401(k) plan, maybe it’s worth $500,000 and they have $150,000 worth of after-tax basis in there? What do they do most of the time? They roll it into an IRA. They forget about the basis, and now it’s mumbled in this IRA, and then everything is going to come out taxable at ordinary income rates, so now they’re getting double taxed on those dollars.

AC: Well that’s very common, Joe.

JA: I don’t know. There are just a lot of ideas kind of floating out there. Stay tuned. Wait and see.

11:30 – Interview with Mary Beth Storjohann, CFP®, author of Work Your Wealth

mary beth storjohann

JA: Got a little special guest today.

AC: That we do.

JA: Are you excited?

AC: As always.

JA: This is the best part of the show.

AC: That’s what all of our listeners tell us. The rest is, like, nonsense.

JA: Just blah blah blah blah. We have a local CERTIFIED FINANCIAL PLANNERTM joining us today. Mary Beth Storjohann. And she’s a fee-only advisor right here in our neck of the woods, San Diego. And I’ve been watching, following her a little bit, not stalking her. She’s a happily married man.

AC: Happily married woman? (laughs)

JA: Woman. Yes. I’m sure he’s a very happily married man. (laughs) But she’s doing a heck of a great job of really educating a lot of individuals on the true principles of finance, so I want to welcome Mary Beth to the show. Mary Beth, thanks for joining us.

MBS: Thank you for having me. Great job on the pronunciation of my last name.

JA: You like that? I’ve been practicing all week.

AC: An entire week. Probably has about 40 hours in.

JA: Storjohann. I would imagine some people kind of butcher it?

MBS: Most people butcher it. I butchered it when I first got married. I couldn’t spell it at first, took me a couple of tries. (laughs)

AC: Yeah my wife butchered my name too. It’s Clopine. Everyone wants to call it Clapine, or Clopeen or whatever.

JA: It’s not Storjohann though, Clopine, right? (laughs) Mary Beth you got a new book that’s out, Workable Wealth. Tell us a little bit about yourself and what made you write this book.

MBS: So the book is called Work Your Wealth.

JA: Work Your Wealth, your firm is Workable Wealth.

MBS: Yeah the firm is Workable Wealth, the book is called Work Your Wealth. I launched my practice in August 2013 and I worked with 20, 30, 40 somethings all around the country, and we won’t go into whether or not my business model was supposed to be “successful” according to our industry. But what I found was, yes, some people can afford to pay me, and some people couldn’t, but I wanted to give people a place where they could start. In terms of building their own financial plan. And so I wrote Work Your Wealth, Nine Steps To Making Smarter Choices With Your Money, basically, to help my audience. My audience has been growing in terms of readership, listeners, people who would find the podcast and such. So this book came about as an idea of giving people the tools that they need to start making smart choices with their money, and really breaking it down, bringing it back to the basics. We tend in our industry, to get so over-complicated and to throw so many fancy terms, but a lot of people just need to know, like, what’s a stock or what’s a bond? How do I actually set a goal that I can achieve, and how do I achieve that goal? We tend to overcomplicate it so much. In this book, it just brings it back to the basics and empowers people.

JA: Yeah I like how say if you want complicated terms, this book’s not for you. If you want to know all sorts of crazy Social Security strategies, don’t buy this thing. If you want to have fun and kind of figure out exactly what you need to do, keep reading. I’ve tried over the past couple of years to do a lot more education to people in their 20s, 30s, and 40s. It is so difficult for me to get even two people in the room. So how do you encourage our younger generation? Big al is a boomer, I’m a generation X. But how do you encourage people to get motivated about this because when you’re in your 20s and 30s it’s like, retirement, it’s like 400 years from now, I don’t even care about it.

AC: It’s because she has a better podcast than we do. (laughs)

JA: Of course she does. (laughs)

MBS: Well yeah. There you go right there. No. (laughs) So that’s the problem. We’re taught to start with retirement, like start with the end point in mind, never mind that this generation is having babies or changing jobs or buying homes or moving across country, they’re starting businesses. So no, they’re not thinking about retirement for the most part. My goal is like, let’s start with what you’re going through. Are you are you planning a wedding? Great we should probably talk about a realistic budget and you not blowing all of your money. Or are you trying to buy a house? Let’s get you a mortgage that you’re also factoring in that you’re going to have kids in daycare probably the next couple of years as well. So let’s not spend all your money on the house. That’s where the decisions need to start, and the industry isn’t used to going there. As planners working with boomers, we don’t typically start there. We start with, yes, retirement planning but where I start with clients is like what changes are you going to do right now? Because you’re probably going through like 5 to 10, because that’s what that’s what happens at this age range.

JA: What do you think one of the biggest challenges are for people in their 20s and 30s at this point? I mean college debt and student loan debt is unbelievable, you got credit card debt and trying to buy a house. I mean juggling all that is daunting.

MBS: You just named all of the issues. Those are all of the things. Student loans I think are a huge issue. And one of the biggest things I talk to now, if I talk to anybody earlier, I talk to people who are planning college for their kids. My call is, let’s talk to your kids about that, or plan for the amount of loans they’re taking out and what their salaries are going to be on the other side, first of all. They’re taking on $200,000 of student loans to become a teacher. What’s the breakeven there? So understanding that when you’re going to school, but student loans are a huge hinderance. Also, some people just kind of have some unrealistic expectations. Credit card debt, a lot of people just aren’t used to managing those things. And probably exactly what you two have seen as wel. I work with a lot of women, a lot of female clients. And I’m sure you’ve seen a lot of women who have the emotional barriers, the money blocks, money scripts, and I see that a lot with this age group as well. A lot of women are just terrified of money. My big thing for them is, what are your goals? What’s really important to you? What are your values? And you’ll see in the book, That’s what I start with. Let’s put your money where your heart. Let’s talk about what’s actually important, and then yes, there’s those barriers, but how can we set some realistic goals and help you to achieve those. So there are barriers and those are the hard things, but I think the big thing is most people are not clear on what they’re trying to accomplish.

JA: I think that goes with all age groups.

MBS: Exactly. It is. And it doesn’t matter how much money you make, you don’t know where your money is going. We see it no matter if you make $50,000 or $500,000, a lot of people still don’t know the cash flow issues.

JA: You know it’s funny, Al and I kind of joke about this, but we’ll sit down with a couple that make, let’s call it $700,000 a year. They have very little cash savings, very little retirement accounts. They got credit card debt, and then they have a big mortgage. And it’s like, well how much do you think you spend on a monthly basis? And then they’ll look at each other and they’ll say, well the cell phone bill is about $150. (laughs) My power bill, I don’t know what you think honey, $200 for SDG&E? Alright, so, I don’t know, maybe $5000, $6000 a month?

AC: Yeah, that’s what we always get is that figure.

JA: It’s like, OK that’s what $72,000 a year, you make $700,000! I mean, do you get robbed? Daily? (laughs) What are you doing here?!

AC: Where’s the rest?!

JA: Oh, we don’t live high on the hog. No, we’re not lavish.

AC: We hear we’re not lavish all the time. Mary Beth, how do you prioritize retirement savings, and saving for a home. and paying off credit card debt, and student loan debt, and saving to care for kids and daycare, and how do you go about all that?

MBS: Go all in. Just do it all. (laughs) So basically it starts with comprehensive financial planning, and so it comes down to, your credit card debt, yeah if you’re sitting on $30,000 of credit card debt, you might not get that wiped out in one year. And it’s probably going to impact your ability to get a mortgage. So let’s be realistic. Can you pay off $5000, $10,000 in the next year to the next three years, and then move bigger chunks towards retirement, or toward home downpayment, retirement savings. So I usually say student loans, depending on the balances, they can hinder you and your ability to qualify for a mortgage. It depends on where you live and the state and all of that stuff as well. For credit card payments, my goal is typically knock out your consumer debt, your credit cards if possible. Emergency fund, we didn’t even mention that but an emergency fund, I usually say you have to get that up before you even think about a down payment. So people come to me like, I have $15,000 in the bank. I’m like, great, that’s your emergency fund. Let’s start now for your home downpayment. With retirement savings I like to factor in, if my clients are 33 years old let’s say and they’ve got 30 years towards retirement, I’m going to tell them what they should be saving, like here’s what you’re saving, here’s where it’s going to get you. But, we’re going to start here. We’re going to start here because you’ve got multiple goals, multiple things going on, and we’re going to adjust along the way. So once you get that house, that’s going to free up cash flow here from your savings, we’re going to move that towards retirement. So it’s really the cash flow game, and it depends on the client. We can do one thing at a time. Sometimes, I’m a big believer in multiple savings accounts. That’s the big thing that I talk about in the book as well. There are travel savings accounts. Everybody no matter how old they are needs that, because people with so much money on travel, it’s a thing that we like. Home downpayment savings account, emergency fund savings account, separate retirement savings. I basically go through cash flow with my clients and tell them, here’s what we’re going to save into each account on a monthly basis and make your cash flow work with the extra that you have available in terms of like discretionary stuff.

JA: Just kind of taking it in bite size pieces. You know, how’d do you eat an elephant? Is that what that stupid saying is?

AC: One bite at a time.

MBS:  A lot of people which I’m sure you guys see too, people just don’t have the clarity, like how much do they need. They come to me, they have no idea how much they even need for a down payment, realistically, like what a mortgage would look like. They put 10% down, what do houses even cost, and what does mortgage payment look like. So I’m usually crunching numbers that say you can’t afford a $3000 mortgage in your cashflow. You need to save more. So those are conversations to have, that but with retirement it’s always contribute at least enough to get the match. And yes, you need to keep saving more, we need to bump this up over time, but I’m not going to paint – I talked about this a lot with my study group of financial planners – I’m not going to paint this dreary picture of “it’s all going to blow up in the end anyways because life happens.” I don’t enable, I educate and I say you’re making a conscious decision right now, are you OK with this? And I cheerlead my clients along the way. Most clients are so insecure. Most people are insecure around their finances. So my thinking is like, “Hey you knocked out $5000 in debt. That’s amazing.” “Hey you got this new home.” I’ll send them a personalized address thing with their new address on it and the last name as a client gift. I want them to feel excited that they’re hitting these milestones.

AC: Yeah, I think that’s good because I think we naturally when the picture seems too dreary we just stop doing anything. What’s the point?

JA: Hopelessness. You get drunk. (laughs)

MBS: Oh yeah. Exactly and there’s enough like I said, a lot of people carry the baggage they have from their childhood or past experiences with finances anyway. And you’re telling them you’re going to retire till you’re 70 and they’re 30 and they’re kinda like, “why bother?”

JA: I think you can’t blow people up. You also, I think you do a really good job of holding them accountable though, too. It’s not like here’s the picture. It’s not as great as what you might have thought, but I think you can accomplish it if you do those things, if you continue to do the right things ongoing. I love how you’re saying, “if you got some credit card debt, you’re not going to be able to qualify for this home that you want. So let’s just kind of take things as we see them to help you accomplish all of your goals, it’s just going to take a little bit more time” versus just jumping into a big purchase that might blow you up, gets you more backwards than you already are.

MBS: Exactly. And I usually say to a lot of clients, they come to me and they’re doing the right things, they might be maxing out their retirement savings and sitting on some cash in certain areas, they might be doing some stuff and I’m saying yes they are making forward progress, but they’re not, because they’re getting so many right things in different directions, there’s not actual clarity around the plan. So a lot of the times, it’s like, let’s bring it together, what are we trying to accomplish and let’s just put a plan around that that is realistic in terms of, you want to take that $5000 trip with your family every year, OK you got that money on hand. Or like, hey, you bought that house or that car or whatever it is. A lot of people are doing good things too, which I’m sure you guys have seen, it’s just there’s no clarity around what they’re doing. They just throw things in different areas and doing what they think they should, as opposed to saying, here’s how I can be impactful and use my money to make me happy.

JA: We’re working our wealth right now, Mary Beth, telling you that. Hey, we’re talking Mary Beth Storjohann, she’s a CERTIFIED FINANCIAL PLANNERTM, founder and CEO of Workable Wealth. Where can we find your book, anywhere that good books are sold?

MBS: It’s on Amazon.

JA: Work Your Wealth by Mary Beth Storjohann. Amazon. Everyone buy it please. Hey, Mary Beth we got to run. Thanks so much for joining us.

MBS: Thanks for having me. I appreciate it.

24:10 – 13 Pieces of Money Advice You Can’t Afford to Ignore

JA: We just talked to Mary Beth, what’d you think?

AC: I liked what she had to say, and a lot of times on our show we talke to retirees, or those that are near retiring. But if you’re in your 20s, 30s and 40s you’ve got to be thinking about a lot of stuff, and there’s a lot of things you’re juggling, between paying off debt and saving for a home and saving for retirement, and how do you buy a car, and all this stuff – a lot of conflicting goals. And it was really nice to kind of get her perspective. And as she said, in some cases, you attack one thing at a time, other cases you do several things at a time, to make sure you get on track. and Joe, kind of along side that, I’ve got an article in Business Insider that I that I saw – 13 Pieces of Money Advice You Can’t Afford to Ignore. And I don’t think we’ll get through all 13. We’ll go through as many as we can and then I’ll rapid fire the last ones at the end. The first one –

JA: You already said it, didn’t you – you said 13, now you’re stuck. You’re committed.

AC:  I said I would get it. Rapid fire. Number one: pay yourself first.

JA: Done.

AC: (laughs) That just simply means have money go in your 401(k) directly. Or your IRA directly, or your savings account directly, right from your paycheck, so you don’t even see it. It’s out of sight, out of mind, before you pay your bills. Number 2, beware of lifestyle creep. Joe, it’s so often when people’s income increase as their lifestyle increases and they never say it anymore.

JA: It’s crazy. I mean the more money that people make, the more money they spend. It’s like, wow, now I can actually afford this thing.

AC: Yeah, I’ve been wanting to get out of this old beat up car.

JA: The beat up car was working fine wasn’t it.

AC: I want the new BMW. Number 3 take advantage of employer-sponsored 401(k).

JA: It’s crazy how many people don’t do that. How many of billions of dollars are left on the table because of company match?

AC: I don’t know the number but it’s a lot. It’s a whole lot of money, and a match just simply means you put in a dollar and you receive a dollar from your employer, at least contribute up to the match. That’s an absolute no-brainer.

JA: 100% guaranteed rate of return.

AC: Yeah in other words like let’s say you put in $2000 in your 401(k), your employer puts in $2000. You put in $2000, now you got $4000. That’s 100% rate return. Invest in the stock market, just don’t try to time it. Trying to time the market is, Joe, I’m not going to say it’s impossible. There’s people that have been successful at that, but the odds are kind of against you, especially with the way our emotions kind of take charge and we tend to want to invest when the market is at all time highs, because everyone is excited, and we tend not to want to invest when the market is all time lows, because we’re afraid. And actually almost, if you’re gonna time, which we don’t recommend, you almost want to do the opposite.

JA: And it’s funny I guess if you take a look at what average, what most people do when it comes to timing, it’s all based on their emotion. There’s no written kind of game plan of how they’re going to get in and out of the markets. They’re looking at, “ooh, I hear this in the news. I’m going to get out.” They’re just going on gut. That’s why so many people fail, because they’re going off of gut, not necessarily doing some sort of number crunching, even though that doesn’t work.

AC: Case in point I mean you figure people in the Great Recession, they got out of the market, they patted themselves on the back because they didn’t lose as much as everyone else. But they never got back in. And now we’re, what, 9 years later? It’s like when are you gonna get in? It’s very difficult.

JA: How many people got out before the election?

AC: Right. A lot. And now the markets are up. So build an emergency fund. Boy, this is huge. And a lot of people don’t do it.

JA: I just read something like – our crack research, the elevator. (laughs) That’s where I get all my research. It was some crazy amount of number 50, 60% of the population couldn’t afford a $500 medical bill if it came to them.

AC: Right. Yes. Exactly. I’ve seen those kind of stats too.

JA: So that means there’s there’s not $500 in your checking account.

AC: Right. Crazy. And emergency savings, I mean, if you got nothing, try to get $1000, $2000, $3000 right off the bat. And then ultimately you’d like to save three to six months of your living expenses. That’s the goal. Here’s another one, pay off your credit card balance in full every month. The interest charges on credit cards are crazy, and you get sort of lulled into this thing that “I can afford something that I can’t really afford because I can afford the credit card payments” and then they just keep piling up on each other until it’s out of control.

JA: Yeah, I go American Express. Even though I pay you know, a couple of hundred bucks for that stupid fee. But you know what I do get, Al?

AC: Itemization?

JA: Yeah that, that I never looked at. I get Skyway lounge access since I travel so often. (laughs)

AC: Well there you go. For all your trips. (laughs) Number 7, Joe, don’t sit too much on too much savings, because, I mean if you put your money in a checking account it earns what, .01?

JA: Right, you’re losing money safely. You’re going broke slowly.

AC: Yeah, it’s not keeping up with inflation. Here’s one, have more than one credit card. That sounds kind of, why would you want to do that? Actually, the reason is that, if you have like a couple, maybe two or three credit cards, I’m not saying to use them all, it actually improves your credit score. Now if you have 10 credit cards, it’s going to reduce your FICO score. But if you have a couple credit cards, or maybe a credit card and a Home Depot card, I don’t know what whatever, wherever you like to shop. That actually can improve your FICO score.

JA: Do you have a Home Depot card?

AC: No. I don’t.

JA: Do you have any other?

AC: I don’t. Actually, Anne’s got a Macy’s card. She loves to get all these 20% off. You know every weekend, it’s a one time sale. It’s always 20%, maybe more. Pay off high interest debt first if you’ve got credit cards. Number 10 is always be insured. Make sure you’ve got health insurance. Number 11, track your spending – right now you can do that through Quicken or Mint.com, or other sites. Sometimes people like American Express we’re just talking about that, they’ll send you an itemization of your expenses. 12. Pay your taxes and be smart about it. There’s lots of deductions. Make sure you’re taking advantage of deductions. And this last one, Joe, is super important. Be patient. This is what we’ve learned from from Warren Buffett. You know, you invest a month at a time and compound interest. That’s how you build real wealth.

JA: Yeah it doesn’t happen overnight.

AC: No it doesn’t. And if you if you listen to some late night show that says you can get rich overnight, I would advise to turn the channel, because, again, I’m not going to say it’s impossible. It’s just not very likely.

JA: Did I tell you I bought a bunch of knives recently? 10,000 of them. Did you see that infomercial? Gets me every time! Look at this samurai sword! We’ll throw that in there too!

AC: You’ve gotta get that!

JA: 10,000 knives! All you gotta do is get a trailer. (laughs) Put these knives on your trailer. Get a flag. And then now you’re a business! It’s like, “oh, I gotta get that samurai sword. If they’re throwin’ that.” So I’m gonna start a little side hustle. If you see me out there, you know, stop by. I’ll sell ya a knife.

AC: OK I’ll buy one.

31:30 – Big Al’s List: 6 Steps To Get Super Rich

AC: This is from a man who went from broke to millions, and the individual is Grant Cardone.

JA: Oh, I thought his name was Big Al. (laughs)

AC: (laughs) Coulda been Big Al, huh? So he writes this, it’s called The Millionaire Booklet: How To Get Super Rich. And so I’m going to go through the 6 steps, because maybe you’ve been thinking about, you know what, I’d like to try that. You know, I’ve heard that money doesn’t necessarily buy happiness, but I’d sure like to try and see if that’s true or not. Because one thing the money does do, it gives you freedom, and gives you the ability to do the types of things that you would like to do. So in that sense, it can help with your happiness. But here’s step one, Joe, and this one is kind of obvious in a way, but it’s mentally commit. Getting rich starts with your mindset, with a belief that you really can accumulate it. Instead of thinking it’s impossible, you think it is possible and that’s whether you want to be a millionaire, or multimillionaire, or even a billionaire, whatever it is for you. You just have to get to the mindset that “I can do this,” and you have to keep reinforcing this, and that’s hard when you don’t have a lot of money. It’s very hard. And we have seen some of these, what do you call them, gurus out there that try to tell you “just get in the right mindset and everything will happen.”

JA: Oh god, that so doesn’t work.

AC: That doesn’t work. There are six steps. That’s an important one, but that’s step number one.

JA: What was the one, it was like, if you want to get married, you just clean out half your closet. You buy some, you know, just because your significant other needs out half of the closet, clean out a couple drawers. Do that and guess what, your spouse is just going to be coming, knocking on your door.

AC: Or you want to you want to live in a mansion. You just set up a little vision board of really nice homes, put that in your office

JA: You’re startin’ a fire now! I think there’s some truth to it. I don’t know if you want to go to that extent. But I mean if you tell yourself, “this is something that I want to do,” you’ve just got to be committed to what your goals are. But then it gets overdone. Do you have a vision board, Al? What’s on your vision board?

AC: I actually did have one once.

JA: See, he’s making fun of it, he’s got it. (laughs)

AC: I used to. You know it was on my vision board? I wanted to get a vacation home in Hawaii.

JA: I knew that was coming.

AC: And it worked.

JA: Yes, see? There we go. Why are you knocking the vision board?

AC: I’m not. I’m saying that’s only step one. I think it’s great, it actually worked for me. (laughs) But you’ve got to do the other five steps. That’s the point. Because remember when The Secret came out? Everyone had their vision board and they thought it would magically happen? That’s step one. There are five more steps.

JA: So all right. Number one just you gotta keep the end in mind? Is that a better way to say that? Just to say, what do I really want to accomplish here, set some goals and then be committed to the goal.

AC: That’s right and actually believe you can do it. And here’s number two is kinda along what you’re saying is do the math. Crunch the numbers, figure out a plan. How is this going to happen? So if you want to make a million dollars and your you’re selling something. If it’s a $200 product and five thousand people buy it, you got a million bucks. And of course there’s costs, and I mean, this is over simplification, but you get the idea. You can’t just have the vision board and hope that that happens. That’s important. But you have to then do the math and figure out all right. I want to have $10 million dollars or $10  billion dollars whatever it is. How do you go about doing that? What’s what’s the path here.

JA: I met an individual. Real good guy. He’s in his late 50s. He’s got $50,000. And freaking out about retirement. Joe, you know, I need some help here. You know, what do I need to do? And what’s that number that I need to get to? And so we just kind of went through a simple exercise. Well, you got 50. How much are you spending. Now he’s spending about $40,000 a year, maybe a little bit more. And so I ran the numbers, I was like, in the next, you know, if you want to retire at 70 you know you need about $900,000. *Gasp!* Okay, Alright. So let’s do the math. Let’s see how you get there. How much do you think you could save? And then he’s like, well, I could probably save a lot more but I’m doing this activity, I only work really two days a week. First of all, work five days a week and save the difference. That three days a week but you could then take that income in save. He’s not very committed.

AC: Got it. Well that’s right. And step three is increase your income, and there’s a lot of ways to increase your income. It could be at your current job, and I just had this chat with my son about success and succeeding in whatever you go into, and it’s like, doing way more that’s requested, and doing self-study at home, and asking questions, and taking that extra mile. I don’t care what profession you’re in, from working at a non-profit to working at a Fortune 500 company, it doesn’t matter. Whatever position you have, be committed to that position, and you’ll be amazed how your income can increase. And then also, look at other ways to make income. Maybe you can set up an internet business at home, or do some kind of consulting on the side, or I don’t know, you can walk dogs if you like. Whatever it is for you, figure out some ways to get additional sources of income. Maximize your job. But think of other sources of income, because if you have a lifestyle and keep the lifestyle the same, this extra income all goes to savings. And that’s where it really starts to make a big difference. Number four is find out who has the money and spend time with them.

JA: Well, I think, if you surround yourself with successful people, you will be successful. You have a better probability of being successful.

AC: Yeah, a lot of the self-help books that talk about this, and sometimes this seems a little bit crass, but there’s probably some truth in it, is if your friends are broke, maybe you need new friends. Different mindsets. Not that you couldn’t be still friends, but in other words, who are you hanging in with, what’s their mindset, and it is true that we are social beings and the people that we hang out with their attributes rub off on us. So I think that’s an important one. Step five is, stay broke. And this is an interesting one, which basically is paying yourself first. In other words, with all this extra income that you’re making, save it. In other words, what the rest of us do, what most of us do, is as our income increases, our lifestyle increases, and we don’t end up saving that much more. How about pretend like you’re broke, and save all that extra money that you’re making. And that leads to step number six, which is save to invest. That’s how you make money is investing, because you can only make so much money from your own labor and efforts and time, because there’s only so many hours in the day. But you talk to people like Warren Buffett. It’s just one month at a time, saving, investing, saving, investing, saving, investing and compound interest and growth does phenomenal things to your overall net worth.

JA: Right. I think money’s not everything either. You can have a millionaire mindset and have a couple of hundred thousand dollars. I mean whatever your goals are. Because Al and I know people that have millions, and they will go broke. I mean because of their spending. And then we have other individuals that we know, that have very modest assets, but they’re the happiest people that you’ll ever meet, extremely successful in their own right, and they’re living the dream. So, I think it just basically brings down to that first step of figuring out what it is that you’re trying to accomplish? What does that goal look like? Or what does that life look like? Start crunching the numbers to say, hey, can we actually do this? And you’d be surprised that most of you probably can. Then once you get that plan down on paper, you’re going to be a lot more committed to the process. I like that, act broke, even though you’re not. Most successful people just say spend less than what you earn.

AC: Yeah, it’s not that complicated, and that’s the reason why, in a lot of cases, some of our clients and individuals that we meet that have the lowest income, have the highest savings. Because they learn that from a very early age. You see that mentality with a lot of teachers, which is they didn’t make a ton, they do all right, but they don’t make a ton of money, but they have a pension, and then they saved a bunch, and their retirement is like, wow. It’s like they can do anything they want.

40:51 – Tax Day, The Fake IRS and the Real IRS

JA: Tax time is right around the corner, Al.

AC: It is right around the corner, and this year, Joe, April 18 is the Tax Day. And it’s kind of strange, it’s when April 15 falls over the weekend that it’s usually the following Monday, except when the 15th is on Emancipation day. I think it’s on Friday, it’s on Saturday or Sunday, I forget which of the two, I think it’s… Saturday and then Emancipation Day is on Monday, which is a holiday in Washington D.C. only.

JA: What is Emancipation Day?

AC: I don’t know. We never celebrate it because it’s Washington D.C. It’s not California. So I have no idea. But at any rate, then the Tax Day is the day after, which is April 18. And so that’s what it is this year. And Joe, one of the things that’s going on right now, and happens this time of year, is IRS phone scams. In other words, people calling others and saying that you owe a tax bill, from the IRS, and they’re rather convincing and pretty unnerving, because they use fake names, they use bogus IRS identification numbers. In some cases they know a lot about the targets because through this data mining they’ve learned different things about people and they’ll say you owe money, you’ve got to pay it right away, we need a credit card, we’re going to notify the sheriff, and come over and put you in jail. Don’t fall for this. The IRS doesn’t doesn’t do this.

JA: That would freak you out though. You get a phone call, it’s like, this is Frank Smith IRS agent number 74391. I’m calling in regards to case number 678493. Is this Mr. Clopine? Uh… no? (laughs)

AC: So here’s what the IRS says. Here’s what they do not do. They will never call and demand immediate payment using a specific payment method such as a debit card or credit card. They’re not authorized to do that, they’re not allowed to do that.

JA: They won’t even send you an email.

AC: No because you have to go through the process of, here we think you owe this, and you get to respond, and that sort of thing. They will never threaten to immediately bring in local police or law enforcement. They’re not authorized to do that. That’s not something they can do. They will not demand that taxes should be paid without giving the taxpayer an opportunity to question or appeal the amount, and they don’t ask for credit card or debit card numbers over the phone. They’re not authorized to do that. So, I know it sounds convincing. And particularly for a lot of senior citizens, they’re at home and they just freak out. They don’t know.

JA: Most people are way above board and they want to do the right thing always. And so when you get a call like that, it’s like wait a minute. OK what do you need? Oh my gosh.

AC: Right. Because you assume it’s real, so the IRS says if you don’t think you owe taxes, then just hang up. It’s OK. Just hang up. Don’t give out any information. If you want to you can report it to the Federal Trade Commission, or you could call the Treasury Inspector General. There’s different things you can report. If you think you do owe taxes, still hang up, and then call the IRS directly. And the number is 800-829-1040, like the form 1040. 800-829-1040, and talk to a real IRS agent, and get on a plan to fix whatever needs to be fixed.

JA: Yeah you’ll get certified mail if you have an issue. You’ll know you know via mail. Snail mail.

AC: Yes. They’re very good about that, and they will send you, generally, several letters. And if you don’t respond they’ll eventually send you one or two certified letters, and the certified letter usually says Notice of Intent to Levy, which means that they can actually levy your bank account. And you think, well how do they know that. Well the banks are required to report your interest to the governmental agencies. If you owe taxes and you’re not responding, they have the authority to do that. And in really egregious cases, they can actually seize assets. But boy, that’s very rare. That would be a large tax liability of someone that just is not responding, not doing anything, and by the way…

JA: Wesley Snipes.

AC: Yeah, right? But, by the way, so if you owe taxes and you cannot afford it, the IRS has a payment plan. You just get set up on a payment plan and in some cases, your payments are higher than you would like. But they’ll at least leave you enough money to be able to eat and have shelter and utilities.

JA: Right, they’ll walk you through. OK, let’s just see what you have. What’s your income, what’s your expenses, what’s going on, what are you doing? You know, we need to get paid here. And so they’re reasonable. In most cases that I know, and I’m sure there are some nightmare stories out there that I don’t know anything about.

AC: Oh sure, and there’s been a lot of nightmare stories, and the IRS has tried to clean up their act a bit, but you have to also realize from their standpoint, their tasked to collect money, and if they’re super nice all the time no one’s going to respond, so they have to have a little edge. So I kind of get that. But the other thing, Joe, is if you just can’t pay a liability, and there’s no way you can ever pay the liability, like let’s say there was some big transaction that caused a big gain and in some cases, the IRS has the ability to force a sale of an asset and take the proceeds and then you’ve got no money to pay the tax. And let’s say that happens to you, and you do have no money to pay the tax. You’re getting older, or you’re sick, your terminal disease, or whatever. You can do what’s called an “Offer in Compromise” where they’ll take your liability and it’s a formal process.

JA: You’ll probably have to hire an attorney for that right.

AC: It’s advisable.

JA: You know, you hear some of these ads on the radio, like, if you will more than $10,000 in tax, call me now and I can get pennies on the dollar. Is that legit stuff?

AC: In some cases. I mean it sounds sensational on the radio, so of course you’re gonna call. Now if you’re working, with a good job, forget about it. This is someone that lost their job, they have terminal cancer, they’ve got a year and a half to live. There’s no way they can pay this $500,000 liability, yeah. That’s going to be settled for pennies on the dollar.

JA: Can you file BK and avoid it?

AC: In some cases, yes. And there’s different time periods, and I forget, an attorney could tell us, but something like two or three years after the tax is assessed, you can file bankruptcy and then get the taxes removed, depending upon the kind of tax. Like if it’s regular income tax, individual income tax, that’s true. If it’s payroll taxes that’s not true, because payroll taxes are a payroll withholding, that doesn’t necessarily go away.

JA: Well that’s like, also, self-employment tax then as well.

AC: Well, can be. I’m not actually sure on the laws on that one. But I guess the point is, never ignore the IRS. There are ways that they’ll work with you.

JA: Well yeah. Ignore the fake IRS, but the real IRS you don’t.

48:09 – Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com 

 

JA: Here we go. Here’s the title of this email for you, Al: “Can my wife and I deduct the full amounts from our traditional IRAs?” Both my wife and I have 401(k)s and traditional IRAs. Can we deduct the whole $5000 for each of our traditional IRAs? We file jointly and have a combined income of about $140,000.

AC: $140,000. So the answer to that is no. And I will tell you how that works. First of all, in an IRA, you can put $5500. Let’s just start there.

JA: Good catch. Or if you’re over 50 it’s $6500 catch up.

AC: That’s right. Now if you or your spouse have earned income, and let’s say neither one of you is in a pension plan, you can put in an IRA $5500 regardless of your income. You could make a million dollars and you could put in an IRA and take a deduction. What happens is, let’s say your spouse has a 401(k) for example. Then there’s limits. In this case, they both had retirement plans. So when you both have retirement plans, once you make over $119,000, you cannot put any money into an IRA and deduct it. You can still put money to an IRA, you just can’t take a deduction. And there’s a phase out, Joe. The phase out is $99,000 to $119,000. Meaning that if your joint income is below $99,000, you can both put in $5500 and deduct it. If it’s above $119,000 you can’t put any. And then there’s that phase out – like if you’re halfway through that phase out, you could put in half of $5500 as a deductible IRA. But I would say maybe even more importantly is because they can’t do a deductible IRA, why not do a Roth contribution? Because their income is low enough for that. And this goes back to that $196,000 number, maybe it didn’t say that, but $196,000 number is the ability to do a Roth IRA contribution. Now you never get a tax deduction for those, but it grows tax free. That’s a lot better than tax deferred. Tax deferred means that you will pay tax on those dollars later. Tax free means you’ll never pay any kind of tax on the principal or growth or income. For a married couple, there’s a phase out there of $186,000 to $196,000, to where you can do a Roth IRA. If you’re single the phase out is from $118,000 to $133,000 adjusted gross income.

JA: I guess the nuts and bolts of this is that, if you have a 401(k) plan you could still contribute to an IRA. Unless you’re over 70 and a half, but let’s just talk about that. Because I think there’s confusion. I have a 401(k), that means I can’t put money into an IRA. Or I’m working, my wife isn’t working, so I am the only one that can put money into a retirement account, she can’t. Or my wife’s working, I’m not working, I can’t. No. There’s spousal contributions that you can make, if you’re putting into an employer plan at your work, you can still contribute to an IRA. If you got a 401(k) that you’re going pretax, it might make sense to do a Roth IRA after tax, just to have a little bit more balance, and diversity, and choice, long term. So yeah there you go.

AC: Good question, I like that one.

JA: We should have kept Mary Beth a little bit longer.

AC: Oh, got a question for her now?

JA: No, but there’s a lot here. It’s complicated. My wife and I continue to plan for our financial future. We are trying to determine what our best options are with surplus monies. Here’s our options: Should we pay off our mortgage at 4% interest, pay more off our truck loan at 1.99% interest, or invest the money with our financial advisor? We have investments in low risk stocks and bonds, but are still exploring a bit more in the stock market with medium high risk stocks. I recently opened a Scottrade account and joined Investopedia to expand my knowledge in the subject. What do you think?

AC: Doesn’t say how much, but they have some surplus.

JA: So pay off the loan or invest it? He’s on Scott’s trade, reading this stuff.

AC: Well, as usual, we don’t have enough information but let’s just maybe take a step back and say here’s kind of an order that you might want to save. I’ll start even before we normally start with, which is credit card debt – you probably want to pay that off first, get get that handled. And sometimes you want to overlap some of these things. And then with any savings that you have, you want to put enough money to your 401(k) to get the full company match. Company matches 3% of your salary, if you put in 3% of your salary? Make sure you do that, because that’s that’s free money. Then maybe, if you still have more you can save, maybe you want to switch over to your own Roth IRA. Get some money into a tax free account, particularly if you’re younger, boy that tax free growth for years and years and years. But this can be really effective if you’re 70 as well. Then go back to your 401(k) and then max that out, that’s $18,000 that you can put into that, unless you’re over 50, then it’s $24,000. Then after that. you might want to save into a non-retirement type of account, so I don’t know how much they’re doing but let’s just say they’re already doing all of that, and they still have some extra money. I’m not a huge fan of car and truck loans, even though that’s a low interest rate. I might get that thing paid off. The mortgage at 4%, that doesn’t bother me too much, because that’s a low interest rate and it’s fully tax deductible.

JA: Are you a big fan of big mortgages, or be debt free at retirement?

AC: Given the choice, I’d rather be debt free. However, I would rather have a mortgage and plenty of retirement savings, then no retirement savings and be debt free.

JA: Well, you went to a 15 year versus a 30. So you want to accelerate your debt.

AC: I do. If you can afford it.

JA: Look at the big wallet on Big Al. Boom! There it is! (laughs)

AC: (laughs) You set me up on that one. If you’re fully funding your retirement plans, and can do a 15-year mortgage – and by the way, if you have a 30 year mortgage, you can make extra principal payments. And I have no problem with that. I’d basically rather have you do everything else first, I guess, is what I’m saying. So this is like, you already paid off all your other debt, your car loans, your truck loans, your credit card loans, you’re already maxing out your retirement plans, you probably already saving outside of retirement. You still got some extra money, based upon your plan, then yeah, then throw some extra to the mortgage, why not.

JA: But there’s the other side of that coin, Al. If I’m paying extra to the mortgage, then that means more is going down to a personal use asset versus those dollars accumulating, and other assets that are more liquid that I could potentially use for income or whatever. So are you doing it more for peace of mind?

AC: Yes I suppose.

JA: Because I think I would be a lot more comfortable without that debt over my head.

AC: But I’ll tell you in reality, just figuring out people’s emotions, myself included, which is, if you force yourself to pay off the mortgage more quickly, then you don’t have that money to spend. If you do the analysis, you always do better saving rather than paying down the mortgage, because the stock market has earned, over the last 100 years, around 10%, a little bit less than 10%, bonds 4 or 5%. You mix those together, maybe you get a 6, 7% rate of return, something like that. That’s what you might expect over the long term. Year in and year out, it’s all over the place. But over the long term, maybe something like that. Your mortgage is 4%, plus you get a tax deduction. You’ll always do better – I shouldn’t say always – but you’ll generally do better mathematically speaking, given those numbers. And that’s why financial planners will tell you not to pay off your mortgage early. Now I’m going to take that one step further and say, that presumes you actually save the money. And what we find is most people take that extra savings or what could be extra savings and they spend it.

JA: So what you’re doing is very smart, you’re just practicing what you preach of paying yourself first. You’re using a 15 year mortgage just to kind of force savings for you. Versus saying hey you know what I’m going to do a 30 year, but I’m going to pay the 15 year payment to give me more flexibility. We see that. But who does it?

AC: Yeah. Very few people. But the way that you can do it is, you can set up an automatic payment with your lender and just have extra principal each and every month, so you never think about it. It just comes right out of your checking account. You time it with your direct deposit from your employer paycheck. And that’s part of that concept, pay yourself first. It can be debt payments, it can be savings, either one.

JA: Yeah we did that little formula a couple of weeks ago that I found interesting.

AC: Yeah. That’s right I’ll have to pull that out again. But there was a formula to figure out whether you’re really on track for retirement.

JA: Or just financially independent. Well no, I mean are you financially savvy, or what’s your financial sophistication number.

AC: Exactly yeah. So at any rate, I want you to make sure you’re doing all your savings first, before you’re paying extra on the mortgage. That’s very important in my view.

JA: Alright.This individual is writing us, or writing Investopedia: “I’m interested in purchasing a single family home as an investment property. I currently do not have the 20% for a down payment but I have excellent credit and I’m interested in using a personal loan for the down payment. I understand that you cannot use borrowed money for a downpayment on an investment property. But what if you took out the loan for a vacation or something else, let it sit for six months or so, and use it for the 20% down payment? I understand this will affect my debt to income ratio but as long as the numbers work will I be OK? Or does the mortgage underwriter go back and see that some of my down payment came from that personal loan?” Alan, what say you?

AC: I’m not a mortgage broker or I’m not a mortgage underwriter, so I can’t say with complete authority, but I do have a thought.

JA: You have some investment property.

AC: I do. And my thought is that if it’s seasoned long enough, they generally won’t necessarily go back and try to trace that money. I don’t think so. So I think that would probably work.

JA: So I cannot get a personal loan for a down payment?

AC: Well here’s what happens, I guess, in reality, a lot of times when people buy their first home maybe they have 10% but not 20. So they borrow 10% from their parents and their parents just have to write a letter saying it’s a gift not a loan. Even though, after the fact, the kids pay it off. I mean that’s reality. I’m not telling you to commit fraud. (laughs) That’s what happens all the time. Because they want you to actually have the money for the down payment. Now realize that you don’t necessarily need a 20% down payment, although if you have it, usually your terms and conditions are better on your loan. But there’s FHA loans where you can get a 3% down payment, or some VA loans, it’s no money down.

JA: But not on an investment property.

AC: Investment property, it’s generally going to be at least 20% down. In some cases 25%. And when you get into apartments and things like that it could be even more than that.

JA: “How about I take out a loan for a vacation or something.” Really dude?

AC: I think it works, but I’m not a mortgage broker. That’s actually a question for your mortgage broker. And actually, maybe ask a friend who’s in the business. Then you go to another one when you actually do the loan. He doesn’t know where that money came from. I don’t know. I have no idea.

JA: Save money. Get a 20% down payment. Do that. Do not take a loan for downpayment. I was listening to this podcast radio show slash whatever. Yeah. This caller calls in. So he’s like, “hey I’ve got a question for you.” And before I ask the question that he asked the host, this individual had a single member LLC. So he’s a sole proprietor. And he said he’s making several hundred thousand dollars but he’s paying himself $60,000. So he’s asking the question of like, “well, I’m already kind of maxed out on my SEP plan because I’m only paying myself $60,000. But I’m making $200,000. Should I pay myself a little bit more, so I can save into my retirement account?” But if I’m a single member LLC, I’m the one that’s doing all the work, shouldn’t everything be wages?

AC: Yes, the question is flawed. Let me go back and just say, if you have a single member LLC, everything that you make is earned income – 100%.  In fact you’re not supposed to pay yourself a salary because it’s already considered like salary. It’s earned income.

JA: So like some people will say I’m going to pay myself $20,000 salary, I make $200,000, I’m going to pay $180,000 as a flow-through so I can save if self-employment tax. That’s fraud, right?

AC: Yes. Now, if you’re an S-corporation that would be a relevant question.

JA: OK, how about if I’m a single member LLC that file Subchapter S in my taxes and I’m still the only one working in the business?

AC: OK. Now you’re taxed as a corporation, as an S-Corp, so that would be a relevant question. Very few single member LLCs have have applied for S status. But you can. In fact a lot of people don’t realize, an LLC can be taxed as an S corporation. But yeah, in that case then the $60,000 would be earned income, and the $200,000 whatever, that would be just investment income. And if you want to have a higher retirement plan, you have to pay yourself a higher salary.

JA: But looking at them, in 10 seconds or less, but if I’m the only one in the business, so what separates that? If the IRS comes in…

AC: Yes, I get your question. The question is, what’s reasonable compensation for your service, and if you’re the only one in the business, and it’s a service business, it’s hard to justify it’s investment income from the company – it’s basically all from your own efforts. And so you could have a problem if the IRS comes in and evaluates you.

JA: Got it.

AC: Ten seconds or less.

JA: Yeah. And he’s like well you know my wife’s not working so I put her on the payroll. I’m paying her. She’s like “oh that’s great.” I’m like, “well you know, she needs to work!”

AC: Yeah she should. She’s saying that on the radio?

JA: “She stays at home, takes care of the kids so I’m paying her like $24,000 so we could get her a retirement plan.” She’s like, “yeah that’s good. You should pay her a little bit more so she can get a little bit more Social Security.” And I was like, she’s got to work in the business!

AC: She does, and has to be able to prove that she’s working in the business, if questioned.

JA: There ya go. Look at the big brain on Big Al. That’s it for us today hopefully enjoy the show. We’ll check in next week. Show’s called Your Money Your Wealth.

____

 

So, to recap today’s show: That proposal to tax 401(k)s to fund the slashing of the corporate tax rate is probably dead in the water. Whew! If the IRS claims to be calling, it’s safe to hang up. And the biggest key to getting super rich is to save. Special thanks to Mary Beth Storjohann, CFP, author of Work Your Wealth, Nine Steps To Making Smarter Choices With Your Money, be sure to check it out on amazon.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, this show is about you! If there’s something you’d like to hear on Your Money Your Wealth, just email info@purefinancial.com. Listen next week for more Your Money Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

Your Money Your Wealth Opening song, Motown Gold by Karl James Pestka, is licensed under a  Creative Commons Attribution 3.0 Unported License.