Ep. 91 | Top 3 Tax Free Income Strategies

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Welcome to the Teaching Tax Flow podcast, where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.

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Welcome back to the podcast, everybody. Episode 91 today, we are gonna pick Chris’s brain once again for his top 3 tax free income strategies. So before we jump into it, let’s take a brief moment as always, and thank our episode sponsor.

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Alright, everybody. Welcome back to the show as always. Let’s dive off this thing like an Olympic swimmer, and let’s look at those top 3 tax free income strategies. That’s the closest you’re gonna hear me. Get to a rapper, hip hop artist, whatever you wanna call me, but I brought him back.

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Chris Pacuro, welcome back, sir.

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Thank you. Great to be back. Olympic trials kinda wrapping up and the Olympics pending. So I like your segue there, buddy. I like your segue.

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I’m excited about the Olympics this summer.

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Oh, yeah. Hey. You know what? I can appreciate anybody who has that much skill in something that I do not. So let’s talk taxes.

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Let’s talk let’s talk taxes. Let’s keep it sexy and interesting. Let’s keep it tax free. So let’s look at your top 3. And I know that you had a heck of a time trying to nail this down to 3 of them and not 33, by the way is my lucky number.

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So what are they? Walk us through these things 1 at a time and explain to us why in the world you love these things so much.

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1 of the things to consider, and I mentioned this in our last episode, I mentioned it all the time, taxes are on sale under the Tax Cuts and Jobs Act. So what we have to think about is not just tax deferral, because a lot of tax planning is focused on tax deferral immediately, punt kick the ball down the road. I think everyone should be considering tax free income and growth and have a bucket of their assets in tax advantaged opportunities, accounts. Because I’ll give you an example, John. Let’s say you put money into an IRA today, and you are in the 24% marginal tax bracket and you get a tax break.

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So you put $10, 000 in, you get $24100 extra in your pocket today. That 100 that $10, 000 grows and in 30 years, John, because you’re so young, you take it out. Right? Well, that 100 or that $10, 000 in 30 years could have very well grown to $70, 000. I’m just making numbers up.

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What do you what tax

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do you think you’re gonna pay on that 70 grand in 30 years? Well, at 0 would be ideal, but we you know, it’d be kinda high. I mean, let’s put it this way, even saving that much money having a daughter, you know, maybe it you know, be able to afford an American Girl doll or something because those things are much as I must.

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Well, John, let’s put it this way. I can’t tell you taxes are gonna be in 30 years because we don’t know. So how many how many times would you go order from a menu without a price being on it? Not often. That scares the crap out of you.

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Oh, yeah. That almost as much as going into the American Girl job store, John. John, I wanna make it personal for a minute here. And you know I

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love you.

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You know, when we were when we were working together earlier this year when you came down to gorgeous and historic Franklin, Tennessee, you had the fortitude to enter the American Girl Dolls American Girl Doll Store or American Girl Store in Franklin, Tennessee. John, I’ve lived here 8 years. I’ve never been in there. Luckily, for some emotional support, you brought my wife with you, and you successfully purchased some things for your daughter at a very reasonable rate considering, including, I believe you got a dog, didn’t you? I did.

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Did try.

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And you know what the craziest thing about that is? So, you know, and I’ll and I’ll connect this with, you know, not knowing what the future holds. So I knew they were a little stuff was a little pricey. K? But but, you know, if we’re talking tools here, price is never an option.

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Right? It’s because you could die. You know, if your blade comes off, you’re in trouble. But basically, what you were referring to is, you know, ordering something off a menu not knowing the price. That’s kinda how I felt walking in there, and I know your wife, Holly, was just laughing her butt off.

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So she walked in first, and it was very I would love to see the security cameras because I basically stopped, like, right at the door. And I’m sure she could tell you all about this. I, like, refused to put 1 foot in. I almost wanna do, like, window shopping and say, you know, grab this, grab that, see how it goes. So, yes, I made the mistake of walking in there.

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The only, you know, blessing in disguise, they were closing in, like, 3 minutes, so I had to make a decision quick. But that stupid dog you’re talking about, yes, it was a little stuffed basset hound about half the size of my hand. That little stuffed animal was actually, like, 15% of what we actually bought our real basset hound for, which is crazy. So, anyways, clearly, I’m getting all heated up. It’s it’s almost like if I ask you, you know, all these questions about, you know, a a was it a a contract employee or something?

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What was it? No. A 10.99 employee. That’s how I feel. Anyways, back to your regularly scheduled program.

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Oh, lord.

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Well, what hey. You know what, though, John? And you know I love Cooper. Neither dog could see either at this point. Right.

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Right. They’re both blind. They both have nonfunctional equipment. But my gosh. Yes.

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Anyways.

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I’ve heard that might run-in the family, John, but that’s another story. Hey. Alright. Let’s move on. He gets it from

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his human mother. Let’s put it that way. That’s why she married me.

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Because no 1 listens to me. Alright. And our family. But in all seriousness, so tax free it is so important to implement some tax free income and growth strategies, and I would argue, even for people in a high marginal tax rate, to have something tax free is more valuable. So if your tax rate’s 40% between let’s know California under the bus.

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We’ll chuck you in there. Right?

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And And if you’re up as slow as we need to.

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I know. I know. If if California if your tax rate’s 40% and you earn 5% interest from the bank, you’re really only earning $3 of interest from the bank because 40 percent is going to your business partners. So if you can earn, you’re better off earning 4% tax free than 5% taxable. So, let’s talk about my top 3 strategies.

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We’ve talked about all these strategies at some point on this podcast. We are now in the 90s. We are in the 90, 210, Beverly Hills.

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Oh, okay.

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Oh, yeah. I know. We era of the of this podcast. And we’re gonna talk through it. So number 1, in no particular order, we don’t wanna make any of these strategies jealous, our 529 plans.

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We’ve had, again, a whole episode on 529 plans, but ultimately a 529 plan is an educational savings plan where you people make contributions, the money grows tax deferred, and is distributed tax free if it’s used for qualified educational expenses. In the in recent years, there’s been much more flexibility as to what that money could be used for tax free. It could be now used for k to 12, not just college. So this isn’t a college savings plan anymore. It’s an educational savings plan.

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So k to 12 tuition, it can be used for trade schools, and now it could actually if you have money in the 5 29 plan that’s been there for 15 years or more, you can now roll it, there are limitations, into a Roth IRA. So 529 plan is is a really 1 of my top 3 tax free income and growth strategies. Remember, the parent is typically the account owner, could be a grandparent, could be a rich uncle. If I have a rich uncle out there that’s listening and it and I don’t know about you, please contact my people immediately. And the and the child is the beneficiary.

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You can always change a beneficiary without triggering a taxable situation. So 529 plans is number is 1 of the 3.

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And that too, Chrissy, you mentioned some of that too. I just wanna highlight. Right? So this a 529 plan is being set up by the parent. Typically, yes.

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It’s owned by the parent, and the beneficiary is, hypothetically speaking, the child who plans to attend higher ed certifications, anything like that. So but they can also move that. Right? So say you, you know, we’ll just use a situation. Say you will use a wild 1 because people know we like to do that.

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Say you have 1 kid. You set them up as the dependent. Obviously, you have 1 child. Naturally, that’s who that’d be. This child decides that they want nothing to do with you when they turn 16, which I am terrified that my daughter will become that way.

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And she moves out with her boyfriend and you never talk to them again. And then you decide that it’s a great idea in your fifties to adopt a child So you can always switch them back.

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John, I have a feeling your daughter will still like Stacy, though. Maybe not you.

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Yeah. As long as there’s 1 of us she likes, I think it’ll be fine. So I’m definitely being the cool 1. Stacy’s the enforcer. So anytime she does something dumb, I just kinda, like, squeak out of the room and then wait for wait for my wife to come in.

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It’s it’s a strategy. Right? Like, we talk about planning and strategy. It took me 3 years to figure out 1 that works Yeah. With the, with the child.

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So it’s, it’s going good.

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It works. So let’s let’s talk another. Number 2, 3. Number 2 or 3. Yes.

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Roth accounts. So Roth accounts, I’m using a vague term because a Roth could be 401 k, could be an IRA, could be a 4 403b, but it is a typically gonna be your IRA or 401k. A Roth is a retirement account, but unlike traditional IRAs or or traditional 401ks, you do not receive a tax deduction when the when you make contributions to a Roth account. That being said, the money grows tax tax deferred and is distributed tax free if you make a qualified distribution. So remember that example, John, I said you put in $10, 000 into your retirement plan and you got a 20 $400, 22100 tax benefit.

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Mhmm. But then you were able to take that money grew to $70, 000. Right? Well, what if you’d put that money into a Roth account of some type? Well, if you put that money into some type of Roth account, you would forego the 22100 to $24100 of the benefit today, but when you take the $70, 000 out down the road, that’s all tax free.

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So that $60, 000 of growth is tax free. Now there are obviously limitations to Roth contributions, and there are multiple ways you can get money into a Roth account. 1 is over contribution through either a Roth IRA or an employer sponsored plan, or you can convert money into a Roth. But that being said, there are some limitations as far as income on Roth IRA contributions. Before you listen to this podcast, give us a 5 star rating, share on social media, and sing from the rooftops as this is the best podcast you’ve ever heard.

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Thank goodness your financial future is secure. And then the next thing you do is go online and create fund a Roth account, make sure you talk to your financial advisor and your tax professional to make to ensure that you are making contributions that are allowed based on your marital status, employment status, and income. Great advice. And question with that too, Chris. So is 1 of

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the limitations with the Roth Roth account, is it if there is a, we’ll call it a contribution limitation, like, a a monetary cap, if you will. Is there any ways around that? Like, is that per account, or is that basically per individual? So, like, if you had a cap with 1, could you open another 1? Can you do etcetera?

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It is right. It’s typically there there are both. There’s gonna be a contribution limit per individual, and it depends if it’s a if it’s a Roth IRA or if it’s an employer sponsored Roth. Unfortunately, the Roth IRA accounts are also limited based on your income, if you are married, your spouse’s income, if you have an employer sponsored plan that covers you, or and or if your spouse does. For some reason, if you work for an employer that offers a 4 01K plan with a Roth component, which most of them do, you can make contributions to the Roth regardless of your income.

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The employer match has to come in as a tax deferred contribution. Are there workarounds? Absolutely. I’ll give you a great example and then we can hit number 3. John, let’s say let’s say your wife is a very successful dog groomer.

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Oh, okay. You know, she’s an animal lover. Rest her out. It’s a free subject. She she she’s self employed.

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She has no employees. And you sit in the in your you sit in your basement and play video games. Fortunately, she married down. You don’t do anything, and you basically are a lazy bum. So you have you have no income.

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So she’s making all this money, and you take care of your pet fish. She makes $700, 000 a year. She is an awesome dog groomer. Sure. Her income might be too high for her to really make Roth IRA contributions, or it might be limited based on her income to only $7, 000 each you for you and her.

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But if since she’s self employed, she could always create a solo 401 k plan with a Roth component and then contribute 3 to 4 times that amount without being concerned about the income limitation. So the point is there are workarounds. I don’t necessarily like to call them work arounds. There are planning opportunities. That’s why it’s important to understand your employment status, marital status, and income.

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That’s gonna drive what we want what we want is people to come to us and say, as tax professionals, as teaching tax law community, I wanna start growing my Roth dollars. I here’s my situation. Here’s the amount of money per year that that our household’s willing to commit to the strategy. Tell us the best way to do it. Because there are also things called backdoor Roth contributions where you’re putting money, tax, non deductible contributions into an IRA and converting it to a Roth.

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If you’re listening to this, be aware of the power of a Roth account and make sure you build what we call your board of directors so you have the people in place to help. If you’re listening to this and you think you feel like you’re in an island, you don’t know where to go to get this advice, take a breath, Just join our Defeating Taxes private Facebook group. No shameless plug, defeatingtaxes.com. We will help and guide you. Doesn’t cost you a dime.

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And then, oh, Chris, just don’t go to TikTok

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and start hiring people off of that. And on that point too, I mean, I’ve seen a handful of the people that have got a hold, of you directly. Right? And that’s through through your personal website, really. And people get a hold of you.

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Right? I mean, maybe before we jump into that third 1 and kinda close out with that too, I wouldn’t say use a scenario necessarily. Right? But it’s there’s no hard and this is, you know, not not just for you. I think for everybody in general.

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Right? It’s planning is so important and understanding it, not only what the situation is now, but what it is, projected to be the best we can in the near future. Again, more long term. Right? So like we were talking about certain caps.

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So if you gave that great example of kind of a loophole, if we will, legal and ethical way of doing things. Lots of opportunity for those that are self employed. Lots like an unimaginable amount of tax opportunities with that. But it really takes kind of the the bird’s eye view of everything that you have, what your current situation is. I mean, down to, you know, I’m sure you’ve talked to people and you say, well, you know, if you plan on starting a family in the next x number of years, you may not wanna do something right now Correct.

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Which could, you know, drastically change the way things happen, you know, in 2 or 5 or 10 years. So maybe, you know, I know these are 3 great examples for you know, that you use a lot. Absolutely. Is there 1 in but is there 1 that people just completely do and I’m pulling this 1 out of thin air, so you’re probably gonna wanna punch me for this 1 because you know you love when I do this. But is there maybe a a strategy that people just totally misinterpret, misunderstand that sometimes you have to tell them, like, you know, it it is what it sounds like, but there’s a lot more to it.

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And it may actually be the 1 that we’re about to talk about in number 3 where people just don’t understand it, but it’s it’s something that holds immense power.

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This is gonna sound like a cop out answer. Almost every strategy is situationally dependent, a term we like to use. It strategies and ideas are cheap. Implementation is where the value is. So this I’ll give you examples.

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I just spoke with a client this this week is going to have a $400, 000 capital gain based on the sale of their primary residence. They listed it. They got a all cash offer. And now they’re it hit them, oh my gosh. This is taxable.

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Guess what? They’ve only lived there a year 10 months. If they sell their house, it’s gonna cost them about $100, 000 of state and federal tax. If they hold on to the house for 2 more months and live there for 2 years, then they pay no tax. There’s no so the section 121 exclusion is a great great example.

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Now there are some exceptions. So all of these things are powerful. But as guys, John, you know, we guys in general, we we get something, we rip the box open. Remember, again, a video game when you’re a kid, you rip that box open, you’d grab your Nintendo controller or whatever that PlayStation. You never read the directions.

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I’ll I’ll figure out what a, b, and c do. So a lot of times we do that, and it’s important to actually read the directions and make sure that you’re making decisions with the understanding of the tax ramifications. We say teaching tax flow. Tax, every decision has a tax burden or benefit. Tax flow and cash flow are different concepts.

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So a lot of times in the teaching tax flow community, we have people that just aren’t experienced with tax planning, they’ll say, I’m gonna sell this rental property, my profit’s $80, 000. Okay. Is that what you’re getting at closing? Yes. That’s not your profit, that’s actually just the cash you get at closing.

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Your profit’s probably less because of, we have to look at what your cost basis is, your depreciation, your passive activity losses. There’s a lot of other factors in in that. So, yes, that’s a and, honestly, I

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don’t think that’s a cop out answer at all. Oh, good. It’s a I mean, to be honest there, buddy, I that’s actually a better answer than I expected from you besides the punch in your throat for pulling out, which, again, is anybody that listens to this, we absolutely do not script these at all. The only thing that we come up with as an organization are, hey. What topics do we wanna put on the schedule?

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And, hey. We have a great guest. Let’s bring them on. So, like, these are the most authentic conversations that I think we could have. The only difference is is me and Chris could be at the bar talking about these.

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We could be on a plane together, or we could have a mic in front of us. Yeah. I mean, there might be a couple 4 letter words that we have to come

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out of

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my mouth if we recorded in public. But all things considered, it’s the same conversation. And really, I mean, to toot your horn a little bit. And, again, I do the editing on these, so I can say whatever I want or I can edit it after the fact. But it really like, you mentioned that, you know, the I I forgot exactly verbatim out of your mouth the way it came, but, you know, the the strategies are cheap.

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That’s not it. However, the the pudding or the whatever is in the implementation, which it’s the same thing. Right? Right. Think about blueprints for a house.

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You know, my mind obviously always goes to construction. Hiring an architect is way cheaper than it is to build the actual house. But, you know, that being said, that’s a given. When you’re looking at a piece of paper as a plan, everything looks great. It looks fantastic.

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You’re excited. You start to envision it. But then once you start

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Mhmm.

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Framing, paint, decor, all this stuff, things change, time passes. You can make a lot of mistakes with that that your house could fall down. Like, if you completely forgot about, hey. You know what? I’m building this on the side of a cliff.

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Yeah. Maybe I should think about this. Your house is gonna look great. While it’s being put together, you’re excited. And then 4 years down the road and, you know, you’re 300 feet down in a canyon with no house.

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Again, crazy crazy example.

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No. You’re you’re kinda remind me, yeah, that house. Remember in Panama City Beach when the tornado hit this January? We saw a house. We should we might have to find that picture.

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It was it’s literally 3 blocks from the we’re teaching Ted. This podcast was born and with the pizza box and that that story we’re told, but a house fell into another house. It’s still there because I was down there a few weeks ago for a baseball tournament, and it’s an insurance disaster because your house, the house literally fell sideways into another house. Crazy.

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But it’s totally true. I mean and you get you know, this is where the tooting your horn comes into place. Just the way that you and your team look at things. Right? And let’s be clear.

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I’m not I’m not tooting my own horn here because I’m not part of the the tax people team in the private practice world. And, god help me, you don’t want me on that team. No. I’m I’m the marketing guy. But the way you guys look at things is very unique in a sense, and it’s very comforting.

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And I wish more people could actually see that because, you know, I think you and this now will poke fun at the marketing guys in the in the world. And, you know, of course, they’re gonna hate me for this is, you know, we’re very good at putting a spin on things to make it seem easy.

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Yes, sir.

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But easy is not always the best. Right? So there’s no cookie cutter. And I’ve seen you work on tax returns and planning. They’re you’re just not key stroking away putting numbers in and and hoping for the best.

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Right? Like, we talk about AI and taxes. And is that gonna replace it it can look at things at a certain point of view, but it cannot even if it asked you all the qualifying questions in the world, it still could not give you the output of somebody that’s been doing this for 20 something years like yourself and y’all’s team? And just the way that you guys package things together and plan for things Right. And, again, kinda, you know, putting different strategies together.

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So we won’t talk about compounding them or anything like that yet. But the next 1 I know we’re gonna get into, your your number 3 here, there is a lot of buzz around this, so there has been especially in the real estate investing world, I’ve seen it a ton. So I’m excited for you to walk us through this 1, and I will not steal your thunder and tell people.

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No. That’s alright. Now I wanna as we wrap up with the third 1, I wanna point out, you made a great point. Strategies should be used in tandem. It’s not a yeah.

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Or. It’s a with. So there are a lot of different tax strategies that complement each other. And the 3 we’re talking about today are just my 3 favorite. The goal diagnosis, tax free income and growth is my favorite color coded diagnosis out of the 4 in teaching tax flow.

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So the 3rd 1, 3rd favorite is it has a it’s it it has a couple different names. I call it advanced whole life insurance planning. I use it myself. Some people call it infinite banking. There there again, there’s a lot of different terms for this.

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But, ultimately, it’s utilizing a whole life insurance policy that has a cash value to utilize some of your premiums that you’re paying to build that cash value. That cash value can grow tax deferred over time, and it could be distributed tax free and allow you to have a lot of liquidity. That distribution could be a return of premium. It could be a loan. Yeah.

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This isn’t something that you just go off and do on your own, go on 1 of those websites and get your own whole life insurance policy. This is something that you work with a financial professional that’s on your team to discuss. There are rules as far as there are limitations that you have to consider. So you avoid a MAC, which is a modified endowment contract. But in this is something the younger you are, the better before you implement this.

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Unfortunately, quite to be real transparent, I waited till my mid forties to start implementing this. And luckily, I was healthy and I was able to get insured and everything’s great, But it it’s something that you wanna work with, and and this is especially important in your younger years because you don’t have the amount of assets you’re gonna have when you’re older. Hopefully hopefully, you’re you grow your assets, but you want that that life insurance protection, that disability insurance protection, but also have something that’s building a war chest for you. So Advanced Whole Life Insurance Planning or infinite banking is my 3rd. And, again, if you’re looking for help, please let us know.

00:27:24.305 –> 00:27:49.150
I’m gonna John, you know, I spend a lot of time personally vetting professionals in making sure that the people in our teaching tax law community and our private CPA practice are with in great hands. Absolutely. And then, Chris, again, too, just to, you know, to add to the fact of that, why this is a very unique conversation that I’m seeing as. Right?

00:27:49.370 –> 00:28:14.305
It’s although this is a tax related conversation, you do bring a very unique perspective to this because you personally are a certified financial planner. So like that being said, it’s not just, oh, this is only tax. Because some people look at it as, oh, well, my accountant, my CPA, all they do is look back. They never plan forward where you’re kind of in the middle. It’s it’s you’re basically an owl.

00:28:14.445 –> 00:28:21.670
Right? I’m I’m gonna start calling you the owl, the tax owl. There we go. You know, because your head spins around so quick. You know, forward to back.

00:28:21.670 –> 00:28:25.510
Well, it’s not like you’re playing pickleball though too, which by the way, I didn’t mention pickleball.

00:28:25.510 –> 00:28:27.590
Oh, we haven’t talked pickleball in a

00:28:27.590 –> 00:28:34.775
few episodes. We didn’t mention it last episode either, I believe. So there you go. I’d I’d take the trophy. I’ll put it back on my shelf.

00:28:34.915 –> 00:29:04.990
But I again, I think the perspective of this, you know, we talk about blending strategies or compounding strategies, you know, over time. This is blending them from the financial planning side also bringing in the tax side. So a lot of these, I mean, we talk about, you know, 1 of them is not the answer to all your world’s problems. Multiple make life a whole heck of a lot better and secure. So that being said, again, as Chris, you had mentioned too, and, you know, legally, I think we have to put the disclaimers in here, but we do it anyways just because we look out for people.

00:29:05.075 –> 00:29:25.995
But definitely contact, you know, those in your life that you work with or if you’re looking for somebody because I know you mentioned too. Just get a hold of us. We’re happy to make connections, you know, to who may be the best fit for you. So it’s, you know, it’s the ball is in your court. As the taxpayer, as the individual, you really can’t rely on somebody else to take the first step for you.

00:29:25.995 –> 00:29:52.820
You’re you really gotta do it yourself, but just building your personal board of directors is now more important than ever because as we mentioned in last episode, just tax only. You know, a 100 plus years ago, I think the the tax book then was 400 pages, and now the tax pub, you know, publication is 70, 000. So unless you have a lot of free time and you really enjoy, you’re never gonna know all that. Heck, most CPAs don’t know all that. They just know where to look to give the answers.

00:29:52.820 –> 00:30:03.275
So that being said, we’re gonna shut up. Ball’s in your court. Game on. We will see you back here next week on the Teaching Tax Flow podcast.

00:30:09.740 –> 00:30:27.310
The content provided is for educational purposes only. We encourage you to seek personalized investment advice from your financial professional. For all tax and legal advice, please consult your CPA or attorney. Investment advisory services are offered through Cabin Advisors, a registered investment adviser. Securities are offered through Cabin Securities, a registered broker dealer.

00:30:28.605 –> 00:30:38.763
The content of this podcast does not constitute an offer of securities. Offerings can only be made through an offering memorandum, and you should carefully examine the risk factors and other information contained in the memorandum.