059 FOMO No No

(Complete Show Notes Below)

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In the 59th episode of the Financial Procast:

Do You Have Financial FOMO?

Unfortunately it seems that financial “advisors” have spent too many years trying to gain credibility with their clients by pitching them on creative ways to defer, delay or dodge taxes.  Now, we realize that this notion has some appeal…especially when it's done legally and well within in the confines of the IRC.

However, we run into people on a fairly regular basis who've bought into using some tactic to get around a “tax problem” that exists in the present only to find out they've created a substantial problem down the road.  We've seen some schemes that people thought up all on their own and we've seen some that were recommended at great expense by an advisor of some sort.

Many times the tax “problem” people perceive isn't really a problem at all.  Paying more taxes because you have a higher income, doesn't mean that you have a problem.  In fact, we'd suggest that you should just pay the tax and get on with your life.

Now, before we get hate mail from your CPA…we're not suggesting you should pay more than you have to.  However, we see people spend so much time, money and energy trying to work around paying taxes only to create a major headache for themselves later in life.

Let's talk more specifically about some of the silly things we've seen:

–  A 162 Bonus plan pitched and put in place for a business owner on his/her own life.  More often than not, it's a lot of hassle to gain a very small advantage in terms of tax savings.

–  Heavily relying upon qualified accounts to ‘avoid' taxes.  You will pay at some point in the future.  The IRS has effectively created a very nice annuity for themselves by allowing you to defer taxes until you retire.  Hey look at the bright side, the taxes you pay on your qualified accounts will help pay your own social security benefits.

–  “Proprietary” crazy schemes used to avoid paying taxes or at least pitched as a tax deduction strategy.  Of course, there's the cost of setting up the plan (which isn't chump change…think $5000-$15,000) and the fact that you will pay the taxes at some point anyway.  Also, most of these plans use artificially high effective tax rates in their sales presentation.

Why? Because it makes the numbers much more appealing.  Many times, we see effective tax rates used as high as 50%.  Now, we're not saying that that doesn't exist but based on our experience and after working with some very high income earners in our practice, we've never/rarely seen people with effective tax rates that high.

–  The idea of using a pension to buy “free” or significantly discounted life insurance.  At one time, this idea worked fairly well but for the most part, those days are behind us.  The IRS is all over this strategy and in most cases it's just more trouble than it's worth.  Honestly, we've run the numbers comparing the use of life insurance in this way, and we've rarely seen any significant advantage gained by doing this in the long run.  It's best to pay your current income tax and buy the policy outside of your pension.

You will have much more flexibility and you'll be done with the IRS forever as now you have no further tax obligation surrounding the policy as long as you manage it properly.

Why is Complexity So Sexy?

We're not entirely sure of the answer to this question but I'll hazard a guess…

Complexity is engineered because it appeals to the ego of the status-driven investor.  It gives people something to talk about with their friends on the golf course and at cocktail parties.

What is the result of most status driven purchases?

Well typically it's a really great deal for the person who's doing the selling.  As Brandon has often said, “It's gonna to put someone's kid through college…probably not yours but more likely the guy who sold it to you!”

We encourage you to keep it simple.

Taxes are unavoidable when you earn a higher income but keep in mind that there are a few standbys when it comes to the tax advantaged income of certain assets:

– Municipal bonds–are always federal income tax free and can be state income tax free as well if you live in the state where the bonds are issued

–  Capital gains on certain real estate sales

–  Cash value life insurance–can generate a tax favored income if managed correctly through policy loans

–  Leveraged assets–typically works well for those who have high concentration of net worth tied up in business and/or stock ownership who can collateralize their assets.(think Mark Zuckerberg , Bill Gates, Steve Jobs)

We're not saying that all advanced planning strategies are worthless but we're tired of seeing those strategies used as a thinly veiled disguise to sell financial products when most of the time…it's not necessary.

Learn to accept income taxes now and spend your time and energy on strategies to minimize their impact down the road on your much larger pool of assets.


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