Tax Strategies

David Scranton: Truer words were never sung. The world does not just move to the beat of one drum and neither do financial advisors. “What you talking about David” well what I am talking about is the variety of strategies and approaches that financial advisors can specialize in on behalf of their clients and how you can determine which might suit you the best. Today we’re going to examine the pros and cons, ups and downs, do’s and don’ts of tax-based financial strategies and let’s face it with a major tax reform proposal on the table this is an extremely current topic today so you’re definitely going to want to stick around. It’s time to tune out the hype and focus on the facts, facts that matter to you the income generation. Let’s get started. Get ready to separate reality from myth.

David Scranton: How does it affect the market? How does it affect the economy? Thanks to efficiencies, and new technology and a staff of veteran analysts and portfolio managers. Sound income strategies strives to set a new standard and bring institutional style investing to your portfolio. Hello everyone and welcome to the income generation I’m David Scranton your host and on this show, we have focused often on financial advisors who lean heavily on stock market based financial strategies. Last week we actually explored a more volatile form of investing when we looked at Bitcoin and other cryptocurrencies. We’ve also talked of course a lot about my own specialty investing for income and today we’re going to examine the eye-opening world of tax strategies. Both in the accumulation phase of retirement planning as well as the income phase. I’ll talk about some of those strategies and get additional expertise from today’s guest Matz Zagula, author of the new book Smart Retirement the strategic movement around retirement taxation. In fact, Matt is another example of this shows commitment to welcoming a wide variety of expert who share our desire to help everyday Americans protect and manage their money. If we feel that they can help educate our viewers we’re glad to have them here and as always we’ll also get some fresh perspectives at our financial advisor’s roundtable but first let’s talk just a bit more about using these tax strategies while still in the accumulation phase of preparing for retirement. When you think about saving money or building wealth through taxes you probably think first about a business, and it’s true business owners have a number of tax strategies they can use to their advantage depending upon the structure of the company for example, they can decide to take income out and cash-flow out in different ways. They might choose to take it through salary, take it in the form of company stock, take it in the form of dividends, or have their income deferred into a pension plan especially designed to maximize that business owners benefits. But employees of a company however, have significantly fewer such option and of course the one most workers take advantage of and are familiar with is investing in 401Ks. Let’s face it in theory the very best investment, tax-wise would be one in which you can make pre-tax contributions then you wouldn’t have to pay any taxes at all on the interest or gains as your money grows and ultimately you’d be able to withdraw it all tax-free. Of course as you know the only problem with that investment is it’s too good to be true it simply does not exist. But the next best thing in the eyes of most workers is their 401K. The only trade-off between it in that non-existent investment is that a 401K lacks the last benefit. Yes you do get pre-tax contributions and yes you do not have to make taxes on the money as it grows but unfortunately yes, you are taxed when you withdraw the money. A good analogy here is, if you were a farmer and you were given a choice between paying taxes on the seed you plant or paying taxes on the harvest you sell, which would you choose? Well with the 401k you’re choosing to wait and pay taxes on the entire harvest and you’re getting your seeds tax-free. To put it in terms of actual numbers, let’s say that you’re in the 30% tax bracket and each year you put $10,000 into your 401k because it’s a pre-tax contribution it actually costs you $7,000 because the government is putting in the other 3,000 on your behalf.

Yes, you’re going to owe taxes on the whole thing in the future but meanwhile, all that money is sitting there compounding and accumulating interest and not being taxed. so it’s kind of, sort of like an interest-free loan from the government, so the question becomes, so what then would be the equivalent of paying taxes on the seed rather than the harvest? and might that be a better option for some? The answer to the first question is a Roth IRA, which in many ways this is a strategic opposite of a 401k. You don’t get to make a pre-tax contribution but your withdrawals will be tax-free. As for which might be preferable for you, that depends on several variable. The first is how much you or your adviser believe that tax rates are likely to increase in the future between now and the time you withdraw your money. If your tax rate between now and the time you withdraw your money only goes up from 30 to let’s say 35 percent for example, then deferring taxes for 30 years with a 401K could very well be the best option. On the other hand, if taxes go from 30 percent well all the way up to 50 percent, then you probably would be better off paying taxes on the seed, in other words using the Roth IRA instead of the 401K but not so fast, why? Because there’s another variable to consider here which is, how much time you have to let that three thousand dollars that the IRS is loaning you grow. It may be 30 years but it might only be 10 or 15 as a general rule the longer the time, the less the tax rates have to increase in order for the Roth IRA to make more sense. To put it simply, if you have either a lot of time for your money to grow tax-deferred or you think tax rates are going to go up a lot between now and retirement, you might very well be better off paying taxes on the seed rather than the harvest. In other words, maybe the Roth makes more sense strategically than the 401k but that decision has to be unique for every individual. But, not so fast again another reason most workers and advisors almost default to the 401k is that the Roth has more limitations as to who can use it and how much they can contribute for example, the limitation on the Roth IRA currently is $5,500 if you’re under the age of 50 and $6,500 if you’re over the age of 50, and if your income is over a certain threshold, approximately a hundred and thirty-three thousand dollars, then you’re ineligible to open a Roth IRA anyway. So with all these variables considered, what if you decide that paying taxes on the seed instead of the harvest is a better option for you but you can’t or don’t want to use a Roth IRA account? Are there other options? Well, the answer is yes. As we’ll explain a little bit later in our show with our special guest. So right now I’d like to welcome our special guest Matt Zagula to talk about tax strategies closer to in retirement. Matt is an extremely successful financial adviser, speaker, and best-selling author. His books include actually yes, Invasion of the Money Snatchers and his latest book, Smart Retirement the Strategic Movement around Retirement Taxation. Matt, thanks so much for joining us today.

Matt Zagula: Thank you for having me.

David Scranton: So tell me, what motivated you to write your last book?

Matt Zagula: You know I work with a lot of different law firms around the country and we have a focus on the preservation and protection of the assets, however, I felt that there were many reasons why taxes would actually go up over the long haul but, potentially go down in the short

term opening up an arbitrage opportunity, so I started to share these ideas with them and I put them down on paper and then ultimately it ended up with publisher and Forbes published the book.

David Scranton: That’s awesome, so give us an example of one of the tax strategies that you talk about in the book that you think you know our average income generation viewer can actually benefit from.

Matt Zagula: I think there’s a process that makes the most sense to go through and that process is simply to save money today based on what the end game is going to be, for instance, a lot of folks say well Matt, you’re against the deferral of money and that’s not true. For a lot of people who may not be getting pensions in the future using a tax-deferred vehicle like an IRA or 401k may very well may be their very best way to go because when they take that distribution plus their Social Security you know they’re likely not to pay any tax or much tax at all, however, if they’re a higher earner now we’re looking at Roth and other alternative strategies that are more tax-advantaged, so it’s really a process more than a product .

David Scranton: Well you know it’s funny that you say that, because the reality of it is for a lot of people you know they’re going to retire on the 15 percent bracket. A lot of people don’t realize that today you have to be making, if you’re married, filing jointly just about $100,000 before you get out of the 15 percent tax bracket and for people that are under the threshold there’s some that actually don’t have to pay any taxes on their Social Security.

Matt Zagula: Yes.

David Scranton: So you say you’re working you’re deferring taxes that you could have paid at 25 or 28 percent and you might very well be getting them out of the 15 percent bracket.

Matt Zagula:  Exactly, and it’s just really about an end in mind approach, building towards something and understanding what you’re building towards. What you said is exactly right, imagine you have a cylinder here and it’s filled with liquid up to about here and there’s this much more space and it says 15% on it, you know if you do believe long-term taxes are going to go up then, doesn’t it make more sense to fill that bracket, move those dollars to a more tax-advantaged product or you know, strategy and then ultimately, have access to that at a low tax bracket rather than paying more later or letting somebody inherit that who’s gonna be paying a lot more taxes  later?

David Scranton: Sure, now you know, what if I’m 45 or 50 years old and I want;  I know that some point in my 60s when I retire I want to buy a second home, I want to buy a cottage or something like that, I want to save for any tax-preferred method then I’m certainly not going to use a 401K because you’re going to be pulling out a lump sum, it’ll probably be getting pulled out in a higher bracket than what I’m contributing. So in that case, will the Roth be better in that case in your opinion?

Matt Zagula: It could be; it could be a variety of strategies, income strategies that I know that you are a proponent of and utilizing you know, tax-exempt and tax-free growth in different types of assets certain insurance based products might make sense but you’re right, if we’re trying to buy something in our 50s and we’re using qualified funds we not only have the potential for a future higher tax, we also have penalties, you know, so if you think about it the liquidity factor makes that the not a very advantageous place to put the money.

David Scranton: So it sounds like if you think that taxes are going to go down  which, you know Donald Trump gets his way taxes are going down but then you think they’re going to come up which; which I have to agree with because the reality is with our national debt and deficit and all the social programs an aging population like myself and all of our viewers, you know the government has to pay for this somehow so that makes sense but that sounds like it’s a great chance for arbitrage maybe doing a Roth conversion with when taxes are lower and then you don’t take it out tax-free and a higher bracket.

Matt Zagula: Smart really is about understanding how to strategically move around retirement taxation. That is my trademark process that we use in our firm. What we teach to other advisors and the lawyers is, how are we going to look at this person and say, how are we going to get the most bang for the buck on a net after-tax basis because income planning sometimes is limited towards a number. Well, that number has a cost to it and the biggest cost that you have to face is actually taxation. Now, what if I could share the reason I think taxes are going up so much is really an age demographic issue. I believe there are three dates that have permanently changed the face and future for the American retirement system for forever and the first of which happened in 2008 and everybody goes “Oh it’s going to be about the stock market crashing”. Well, it’s not about that at all. That is when the very first verified baby boomer turned age 62.

David Scranton: Okay, good point.

Matt Zagula: He or she had the opportunity to say yes to Social Security or no, but then 10,000 every day after that came on. Of course by deductive you know mathematics we know that in 2011 we have them eligible for Medicaid and so now we have all of these social costs that are piling on and creating these debts that you mentioned and really there’s no money to pay for them, their promises, the question are they going to be lived up to or not and somebody has to pay for that.

David Scranton: Of course, of course. So one last quick question we have

about 20 seconds left before we go and take a break but your thoughts about taking away the Roth IRA. Do you think Congress will ever come out and say “oh all that money we said was tax-free isn’t really going to be tax-free anymore”? Do you think they’d ever do that? Do you think we do politically unpopular?

Matt Zagula: You know I, I have a hard time believing that they’re going to renege on the promise.I, I think that they make change and modify but I don’t believe that it’s; I don’t believe it’s politically prudent to do it. I don’t buy that.

David Scranton: It might stop it for new contributions but it’s highly unlikely they’re going to renege on the promise. I actually agree. Matt stay with us for just another moment please we need to take a commercial break.

David Scranton: If you’re near or in retirement head over to the Income Generation dot-com and download your special report written specifically for the needs of the income generation, again those born before 1966. I’m David Scranton and you’ve been watching the Income Generation.

David Scranton: Welcome back to the Income Generation I’m David Scranton your host. Let’s talk just a bit more now about Roth IRAs. So let’s say you and your advisor have determined based upon your goals and your situation is that you just heard Matt Zagula say that paying taxes on your seed, in your case is a better strategy than paying taxes on the harvest. In other words, you feel investing in a Roth IRA is more beneficial in the long run than investing in a 401k. But unfortunately, you’ve risen to a level in your company where your income makes that impossible. You’ve exceeded the hundred and thirty-three thousand dollar income limitation for Roth IRA eligibility. What do you do? Well believe it or not there is one possible option that’s available to you and that is life insurance. Yes, you heard me right, but not ordinary life insurance. This is a life insurance strategy that many affluent people have ended up using in recent years specifically because of the income restrictions on Roth IRAs. In fact, it’s often been touted as the rich person’s Roth IRA. What most people don’t realize about life insurance is this. You can take a whole life policy or possibly universal life policy and contribute extra money to it over and above the basic premium. That extra money goes almost 100% into the cash value and grows. This can be done up to a certain limit without any adverse taxation. Those contribution limits were established by TAMRA which was the tax act that we had back in 1988 and any extra money that you put in the policy within those limits become taxed as life insurance when you take withdrawals. Only if you exceed those limits will you be taxed adversely but as long as you stay within the limits the benefits are as follows. Although yes you are contributing after-tax dollars into the plan, you get tax deferral i.e you don’t have to pay any tax on the interest on gains as it accumulates or on certain withdrawals. But then in addition, on any strategically structured policy loans. No tax on those withdrawals or the strategically structured loans. If these loans are structured properly you should never have to pay them back during your lifetime, in essence, you’re taking tax-free cash flows for life. How does it get repaid? Well, you see we all die at some point and it’s only after your death that the loan is repaid through a tax-free death benefit. So ultimately what your advisor has done is helped you strategically engineer a Roth IRA through a life insurance policy. Are there other life insurance based stock strategies that could benefit retirees and near-retirees depending upon their strategy? Well to answer that question let’s welcome back our special guest today Matt Zagula. So, Matt, I happen to know we talked about it during the break you know maybe a thing or two about life insurance taxation. So, tell us, what are your thoughts about these types of strategies and for whom might these strategies actually make sense?

Matt Zagula: Well I think you nailed it. I think for higher earning folks that can’t utilize Roth this becomes a logical extension to that. It’s interesting you know you look at big financial companies who are more geared towards turnkey asset management in a multitude of assets. They really are negative on the use of high cash value low death benefit, high cash value low death benefit life insurance and, but their executives are using them at the company level.

David Scranton: Sure.

Matt Zagula: So these are not uncommon structures for very wealthy people to shelter taxation and also then whatever is left moves on to the family for their family on a tax-free basis. So it’s an amazing way to live tax-free or get a tax-free source of money to take from in retirement as well as pass both on to the family without paying any taxation.

David Scranton: So this could make financial sense even if one doesn’t really need life insurance. They can make financial sense just as an investment is what I’m hearing you say?

Matt Zagula: It can, you know? I do think there’s a hierarchy. You have to look at the tax deferral side first and you have to look at the Roth and then this is an after. So it’s a process to get there but for some folks, it’s a very potent way to achieve tax diversification and it’s interesting because if you look at how Warren Buffett utilizes his own assets his own insurance assets he uses the future liability, that float to buy companies. Here you said it so well, the future death benefit pays the loan. So, in essence, you’re floating your own future death benefit for current income without paying taxation.

David Scranton: Right (unclear 18:23) it’s good of a strategy as it could be if you don’t need a life insurance you can only imagine if he actually needed the life insurance. A death benefit, you had a family that wasn’t fully grown yet so on and so forth. So that makes sense. Now, why do you think the financial world your average financial adviser is against this? What’s your thought on that?

Matt Zagula: What’s interesting life insurance really comes in a few different varieties. The types that are most profitable for them to sell are the least advantage for the consumer. When you look at a properly structured contract that is really geared towards the creation of future retirement income and future death benefit for the family achieving both. It really is a function of the adviser being willing to take the least amount of compensation legally available on those contracts to achieve that outcome. So that they’re not; you have to go through underwriting, there are hurdles, they’re not fun to get through but they’re extremely beneficial to a client if the situation’s correct.

David Scranton: So if said financial advisor then wants to do the best job for the client, he has to be willing to take the least amount of compensation for himself?

Matt Zagula: That’s what works best.

David Scranton: Yes, yes. So that’s fine for life insurance based advisors who typically don’t utilize this strategy may be to the greatest benefit of their clients. But how about stock market-based advisors? How about the people at the big wirehouses you know. Why don’t they talk

about this more? They’re used to getting commissions (unclear 19:47). Why would they want to do this?

Matt Zagula: It’s a good question. We’re seeing a big push with lawyers who are multidisciplinary, who are suggesting this to their clients for future

retirement taxation and tax diversification. We’re seeing independent

AUM advisors (assets under management). Advisors doing it but the wirehouse is, they are very opposed to the use of life insurance and a plan and I think it’s to the detriment of their client.

David Scranton: I think part of it is because they’re going in the direction now of non-commission. Everybody’s going the direction of more fees of course this new Department of Labor thing that President Obama started is pushing that along even more. So, if you’re you know if your philosophy is to

do fee-based planning then they may not like the fact that they put somebody in a financial tool. They get paid once and they have to service that for the next 50 years that that client lives.

Matt Zagula: Yes.

David Scranton: I think for some of the big wirehouses the direction they’re going and I think that might be, it might be kind of a selfishly motivated thing why they don’t want to do that.

Matt Zagula: Yes it’s interesting you know the wirehouses sometimes they don’t like annuities, they don’t like life insurance, but yet what they sell is really based on an annuity, for them, of fees for a lifetime. You know so I do think that there may be some of that in there.

David Scranton: Now we; twenty weeks we talked at one point you and I about you know the concept, even the death benefit sometimes can be a tool that can benefit the particular client while they’re living. Especially business owners who are willing to think a little bit outside the box.

Matt Zagula: Yes.

David Scranton: You know the concept of making the death benefit come alive for example.

Matt Zagula: Yes.

David Scranton: You give our Income Generation members a kind of an idea as to how they might actually be able to get use of the death benefit while they’re alive with I mean without faking their own death if you know what I mean.

Matt Zagula: Yes. No fraud!

David Scranton: That’s right.

Matt Zagula: No, what we’re talking about is really utilizing those loans that you’re talking about. You know and if it’s a business owner they may be coming on to, if these tax rates changed it could be an unbelievable opportunity for them to buy insurances and unique structures like split-dollar or other types of arrangements where they’ll be able to arbitrage the tax rates legally, and I think that that’s really fascinating but you’re absolutely right. If you utilize loans on a tax-free basis, how does it get paid back? Well, it gets paid back by the death benefit.

David Scranton: And we all die someday, right. But how about what we’re talking about with the death benefit part I mean you know you had talked to me about, okay because there’s his death benefit well maybe now one could do a charitable trust. Because there’s a death benefit may be one could buy a certain type of annuity–

Matt Zagula: Yes.

David Scranton:– which where gives you more income but then you know.

Matt Zagula: You could definitely increase your overall personal yield by

having death benefit because it’s replacing assets. For instance, if you

have a charity that you care about and of course, you love your kids right. Well, so what you can do is the leverage of death benefit, it’s directed to your children tax-free. The qualified money that you have that is kind of tax toxic or there’s a bill to pay with it could be left to the charity and then it’s tax-free to them so you can pick and choose who gets what in an estate plan by putting a life insurance into your plan and I think it’s a powerful tool that some are using and it’s becoming more popular. We’re seeing a lot more higher net worth folks using it that aren’t necessarily Fortune 500 executives.

David Scranton: So and I think you said it right. I mean what people don’t realize is there’s the corporately owned life insurance, Bank owned life insurance we call COLI and BOLI you know.

Matt Zaluga: Huge.

David Scranton: If people are doing it, the wealthy are doing it but in fact, the wealthy are doing charitable remainder trust.

Matt Zagula: Oh yes.

David Scranton: And a lot of people who I wouldn’t say they’re affluent but more we call the mass affluent that you know have a couple million dollars. They don’t want to take minimum distributions from their IRA.

Matt Zagula: No.

David Scranton: So it sounds like having the life insurance is almost like a permission slip from your children if you will. So that you know, now you can take that whole IRA and say you know what I’m going to give that to charity. I’m going to avoid the RMDs. That’s a pretty cool strategy.

Matt Zagula: Very. You could spend their inheritance and then get it all back tax-free.

David Scranton: It’s a cool strategy for the average Joe. Matt so much for; thank you so much for being with us today. I really appreciate it and–

Matt Zagula: It’s been a privilege.

David Scranton: –shed some light on a very complex topic and our Income Generation viewers stay with us we’ll be back with our financial advisor roundtable to explore this concept further. Stay with us.

David Scranton: This is fun. This is great. Three, two, one; but I’d like to take a few seconds and tell you why I decided to write the book entitled Return on Principle. Basically, it all boils down to this. Let’s face it you deserve to live a happy retirement it’s as simple as that but for many, the subject of money, finance, and math is complicated. Here’s a fun fact many Americans claim that they’d much rather clean a toilet than calculate a tip in a restaurant. Thank you I guess, but it doesn’t have to be that complicated. Using the seven core values I outlined in my book you too will be able to build a life based upon the right core principles.

Male Voice: Cut!

David Scranton: Return on Principle isn’t just a book about financial investing. It’s about investing in your life. I know for a fact that you’re going to love it. Okay, now it’s just getting a weird here.

David Scranton: Yes, it’s that time again. It’s time for our financial advisor’s roundtable. Joining us today are two repeat guests the first is Dee Carter president of Carter Financial Group in Midland Texas. Dee has a whopping more than 45 years of experience in helping retirees and pre-retirees bring stability and peace of mind into retirement. Dee welcome back to the show.

Dee Carter: And it’s good to be back with you David.

David Scranton: Jeff Small is president of Arbor Financial Services in Melbourne, Florida. Jeff has 32 years of experience in financial services and specializes in the unique needs of today’s Income Generation members. Jeff a big welcome back to you too.

Jeff Small: Thank you very much, David it’s great to be here.

David Scranton: Do you find Jeff that most of your clients or your prospective clients, when they first come in do they come in already aware of how important tax strategies can be in retirement planning or do you find that it’s something that you have to kind of school people and educate people on because they don’t think about it as much?

Jeff Small: Well, they’re not really thinking about that. You really have to educate them and of course, you know, show them what their options are to mitigate their taxes.

David Scranton: Dee, how do you best help people when it comes to tax savings you know when people come in and you know of course you’re there in Midland Texas and of course as the economy goes in Midland I should say as the price of oil goes so goes the economy. So you know you have people there that come in that are pretty affluent. You know the traditional

Millionaire Next Door. The guy who comes in and you know old rusted-out Ford F-150 but yet has a few million dollars you know. What do you do with that person to help them save taxes? What are some strategies that you found useful for them?

Dee Carter: You know that scenario you just gave is very well accurate as a matter of fact I had one of those just yesterday. What we try to do, we try to see where they are obviously, what they’re doing, what their background has been and who’s been working with them because we want to work with their tax people. If they have a CPA who they’re working with we want to go through them and work with them as much as possible. But we find that a larger percentage now are a lot more aware of what their tax situations are than there were just a few years ago. But they still didn’t need a great deal of education from our standpoint.

David Scranton: You heard our special guest Matt Zagula talking and he was talking a lot about people who were preparing for retirement, who were years away, who were accumulating. We tend to get people when they’re either retired or just on the brink of retirement putting pre-tax

money away is not as beneficial if you’re going to put it in pre-tax and end up taking withdrawals in a couple of years in many cases. You know we tend to find more people coming across the table I think at least in my practice for example, who think tax-free municipal bonds or the saving grace. They’re the solution. Yo Jeff, what are your thoughts on tax-free municipal bonds? You’ve come across those much in Florida? I know there’s no state income tax down there and if so what do you tell people?

Jeff Small: Well you know basically tax-free municipal bonds really are not giving us an equivalent rate of return that we would need, that we can get actually and better-rated bonds that are corporate bonds, they’re paying more interest and we don’t have the tax savings there really, so if somebody wants media bonds it’s not because of the math it’s just because of the preference.

David Scranton: It’s because they like the sound of being tax-free but when they really do the math it often times doesn’t make sense. Now Dee, school me on Texas. You guys do have a state income tax in Texas correct?

Dee Carter: We do not have a state income tax in Texas.  We’re one of those lucky States that does not have it and I agree totally with Jeff. We have the people come in if they want tax-free meetings it’s because they like the word tax-free but we take a look at where they stand and what their tax write-offs are on the other side of the coin and a lot of them have

great tax write-offs in their businesses. It’s better to go out with the corporate high-yield bonds than is with the tax-free Municipals.

David Scranton:  And it’s a very good point. I was on a  call this morning with someone but one of our advisors are part of sound income strategies and he had a case where it said on the statement, and it’s on the big investment banks whose name you recognize, it’s said right on the statement that most  of the yields are about 4% but because the bonds are currently traded at a premium we did the math on it an you know if they held these bonds to maturity they’re really only earning about two and a half percent and when they’re paying a fee of 0.8 percent they were down to 1.7 and I think most people don’t realize that when they have been too slow bonds they look at the statement they see the four percent they think oh I’m getting four percent isn’t that great, but when you factor in the actual economics of fact that they’re: they’re holding them at a premium and they have to pay a management fee when all is said and done it’s not much better than the bank right Jeff? Do you find the same thing to be true?

Jeff Small: Oh there’s no doubt about that Dave, the math just doesn’t compute if you want to take a haircut than by a Muni bond because the tax savings isn’t justified at all.

David Scranton: You know it’s funny Dee you know. Do you find that people get confused sometimes when you say you know, people say I want tax-free, I want tax-free that they; they lose sight of the fact sometimes, some people do that the job the goal shouldn’t be to pay the least amount to the government. The real goal should be for that investor to keep the most after he or she pays the government.  Did you find that some of those people get confused and look at it from the wrong side?

Dee Carter: No question about it and you made a great statement there. What we’re trying to do is get the most into their pocket when they get to ready to reach “oh I just saved this much from  the taxman”, so we have to educate them as to which side they need to go and show them the difference between the two and sometimes between two three or four but we really want to show them the best opportunity for them to have the most they can get into their pocket at that magic day.

David Scranton: Now Jeff, I’m gonna paint a picture for you because you know you’re in the east coast of Florida so you and I can relate to this you know, you get a client who retires lives in New Jersey let’s say, you know a state that’s known for maybe not being in the best financial condition right now, they retire they’ve got all these New Jersey municipal bonds for example, and they turn around and they; they move to Florida and you see them and they’ve got all these state-specific bonds and it seems almost like the advisor is more worried about getting them tax-free interest than he is putting them in states that have good credit that have solvency so on and so forth, you know, Do you see that a lot?  And if so how do you handle that? What do you tell people when you come across that?

Jeff Small: Well you know, it’s been for quite some time we know we have to be very careful about what state bonds we buy because so many states are in the red in this country. Recently you know Illinois has gotten a lot of press. I think they’re 15 billion they haven’t been able to balance the budget in a few years here because nobody can agree on anything, so you know I guess we have to have a state failure first for folks to really come to four and fix things politically speaking but as far as what folks are holding you know, we always scrutinize those things and like you said David, a lot  of bonds even some of the bad states are selling at a premium now and so we can dump a lot of these things and get them out and that’s the most important thing so they don’t have exposure to a state that might have weak economies.

David Scranton: Yeah I mentioned New Jersey as an example but the reality of evidence you brought up a better example in the state of Illinois they can’t even they can’t even decide on a budget so forget about balance they can’t even decide on a budget and that’s; that’s unfortunate and  I think the one thing good about you know our current president, is he’s been pretty vocal in coming out and saying this isn’t our money, this is your money its taxpayer money and I just wish all the states would look at that the same way.  Gentlemen, I need you to stick around for a minute if you can we take commercial break we’ll be right back with more words of wisdom on tax saving strategies for income generation members specifically for you so stay with us we’ll be right back.

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David Scranton: If you’re not using someone who’s well trained in fixed income and you’re born before 1966, it may just be time for you to break up with that advisor and move on. I would suggest someone who will care for you through these important years of your life. If you need help finding someone, call or write us. I’d also like to remind you of the special report entitled, The Income Generation. This is available free to you, our loyal viewers online. If you haven’t downloaded your report pick it up after the show.

 David Scranton: If you’re near or in retirement head over to and download your special report written specifically for the needs of the income generation. Again those born before 1966. I’m David Scranton and you’ve been watching The Income Generation.

 David Scranton: Welcome back to income generation I’m David

Scranton your host.  Now let’s bring back our financial advisor Roundtable, we have Jeff small in Melbourne Florida and Dee Carter in, as I like to say, the great state of Midland Texas. Thanks for sticking around gentlemen you see you see Dee if Texas is its own country, then Midland must be a state. Am I correct or what?

Dee Carter: Midland County is a state within itself.  It’s a state of mind if nothing else.

David Scranton:  So yeah, municipal bonds, I mean I always feel like I’d rather diversify people’s municipal bonds across state you know, even when I have clients in my own state in Connecticut where taxes are six or seven percent, still I don’t want to rely on just one state’s bonds for me I’d like to go the extra step and I really like to focus on diversifying people across state borders. I think that’s important there’s one of the things I’ve talked about gentleman, is recently as I’ve come out pretty vocally and made a prediction and I’ve said that you know, I think the next financial crisis could very well be municipal failures you know, we always

thought right, in the fixed-income world that if you get an a-rated municipal bond versus an a-rated corporate bond in theory the a-rated municipal bond is safer. Well I think now with all the off-balance sheet liabilities the municipalities and states and so on that I feel more comfortable with the a-rated corporate bond over the a-rated municipal bond. your thoughts Jeff?

Jeff Small: Oh I could not agree with you more Dave you know, as we have continued political gridlock and all these various municipalities states cities counties whatever you know, they’ve got to get their act together and I think you’re right I see a bailout down the road for the folks that can’t get it together. Similar to what happened to Orange County several years ago in California.

David Scranton: And you know it’s funny and we hope there’s a bailout but if we start to get states to fail in mass like I don’t think that that is really feasible for the federal government, so it’ll be interesting to see what happens you know, think about it if a corporation wants to increase their revenue they come up with a fancy new product, they market it and hopefully they can increase the revenue if they’re smart but, if you’re a state what do you do to increase your revenue if you raise property taxes, as a town or you raise state income taxes. The state people are gonna move out right? We’ve already seen that happen in a lot of states up north like not for your states but, we saw that happen in Connecticut, that’s happening in New Jersey and so on and the same is true with the defensive side of it, if you want to lower expenses corporations could lay off employees, can cut back left and right but you know what our state’s municipalities going to do? they can’t start cutting into the bone and laying off all the teachers and laying off the police officers and all the firemen right, that wouldn’t work, would it?

Dee Carter: They’ve talked about it a couple of times in Texas recently.

David Scranton: Well Dee, it’s a little different; it’s a little different in Texas you probably could get rid of all the police officers because all you are packing heat over there anyway, so you don’t really need them right? You could take care of your own business from what I understand.

Dee Carter: Well, it’s not quite that bad but it’s getting close to it we do have some cities in Texas right now that are undergoing some difficulties and it’s because of the way they’ve been governed over the last twenty years and now they’re reaching out to the rest of the state saying we need some help. So, as a result, we’re not looking at too many municipal (37:59 )czars or the corporate of that situation at all right now.

David Scranton: So Dee, another tool that I find that a lot of people have there; members The Income Generation, a lot of people look to get tax benefits through annuities, now annuities aren’t tax-free. They’ll pay tax- free interests, they’re tax-deferred. You know, do you come across annuities much in Texas? People come in holding annuities and where do you think annuities fit in versus where they don’t fit in for your average retiree?

Dee Carter: We see a lot more of it now that we did for a while and seems like people are becoming more conscious of the ability to put money into situations tax-deferred and so we do see a lot a lot more than we did for a lot of the last 15 years. I’ve had the luxury of being in the business down for 46 years so I’m seeing this thing move both ways and right now we’re seeing more and more people wanting to put things in to get guaranteed type products that perhaps may even have some fees and tax but the fees are so small, that way of the safety outweighs the fees so we’re seeing a lot more annuity awareness now you might say David here in Texas.

David Scranton: Now Jeff, you know as well as I do that, annuities are kind of like the good, the bad, and the ugly.  Some people love them, some people hate them, and they’re one of the most misunderstood financial tools but in 30 seconds or so we have left in a segment tell me, you know, where do you think annuities do fit in for what type of person as a possible tool?

Jeff Small: Well there’s good annuities Dave, and there’s bad annuities and you know, what folks really have to do is make sure they have an advisor that helps filter out the bad ones and some of the bad ones are variable annuities with high fees of course and lots of risks so, people that do come in asking for annuities, they are finding that annuities are synonymous with safety and I need somebody to educate them on what the various options are and how to leverage them based on their own situation.

David Scranton: Alright so, new people want to know these are people who want guaranteed income, they want safety, they don’t want to take risk. Whereas there those are willing to take a little bit of risk you know, might shy away from annuities for example is what it sounds like. So, gentlemen we need to take one more commercial break, stay with us please, we appreciate you being here.

David Scranton: If you’re not using someone who’s well-trained in fixed income and you’re born before 1966 it may just be time for you to break up with that advisor and move on. I would suggest someone who will care for you through these important years of your life. If you need help finding someone, call or write us. I’d also like to remind you of the special report entitled The Income Generation. This is available free to you our loyal viewers online.

David Scranton: Welcome back to The Income Generation. I’m David Scranton your host. Now let’s bring back our financial advisor roundtable Jeff small from Melbourne Florida and Dee Carter in Midland Texas thanks for sticking around gentlemen. You know people in Texas here’s a really safe investment right, you can go ahead if you live in Texas, you could do some exploratory drilling. So you can invest in drilling programs to try to drill wells that haven’t been drilled before, you get all these upfront tax write-offs exploratory drilling cost, intangible right offs, and so on and that’s a pretty safe investment for people is it not?

Dee Carter: Absolutely not. You’re absolutely wrong about that. The thing about it is, it’s still exploration that’s the word and the fact is that we still don’t find oil every time they put something in the ground down here.

David Scranton:  Well not to mention that but you’ve been around long enough you, remember as I do, you know what happened in 1986 Tax Reform Act of 86 where all those real estate limited partnerships offered accelerated depreciation great tax benefits so people let the tax tail wag the investment dog they invested in those things just so that they get the tax break you know and the tax law changed in 86 the value of these things plummeted and a lot of them went bankrupt. You probably had some of those right in Midland, did you not Dee?

Dee Carter: Midland was the heart in the middle of it, as a matter of fact, we had more of that Midland and probably any other place for the size of our community than in the entire United States

David Scranton: Yeah.

Dee Carter: We still have people believe it or not David thirty years, later that recall that and they are absolutely avoiding anything that has to do with all investment to this date because of what happened in 1986 -1989.

David Scranton: Jeff,  you know it’s funny, there’s  the Trump tax plan they’re talking about getting away with the deduction for state income taxes that are paid and everything else but, the question; and that’s going to give an advantage to people like yourself in the state of Florida and Florida’s revenue generation and so on but, the one thing they’re not doing away with there there’s no threat of is the mortgage deduction the ability to deduct your interest so you know, do you have a fear that more financial advisers might say hey, you retire you need tax deductions so go ahead and take equity out of your house and invest the money, I mean you see that as a possibility on the horizon that people might be doing that?

Jeff Small:  Geez Dave, the financial advisor told you to do that I’d probably fire him and run to the front door of his office as fast as I could.

David Scranton: Yeah yeah but, I mean you see what I’m saying this? I agree with you I mean people want to be debt-free you know, they want their mortgages paid off I mean heck, our co-hosts there Dee carter his mortgage has been paid off now for 47 years so I mean, he  knows what it feels like not to have to worry about that but, you know the question is do you have a fear that financial advisors might start jumping on that bandwagon since it’s like the only tax benefit they can get retirees at this point?

Jeff Small: You know, I think the tax savings from deducting your mortgage interest is; it’s very marginal at best. It’s not a, you know, it’s not; the mortgage is not gonna just; getting a mortgage or using a deduction, it’s not gonna justify getting a mortgage and the masters doesn’t work

there you know it’s not gonna work out like that.

David Scranton: People who understand if your mortgage is 4 percent you know, you still if you want to invest the proceeds, great the 4 percent seductive all but you stuff to earn more than 4 percent when you invest those proceeds and we’re not talking about crossing your fingers and toes hoping a stock goes up at 4 percent we’re talking about interest or dividends so, gentlemen we need to take one more commercial break if you stay with us for one more segment I’d appreciate it and for you too, our income generation members we’re gonna get the best of the best tax advice from both of our financial roundtable guests as soon as you come back stay with us.


David Scranton: Welcome back to The Income Generation. I’m David Scranton and more importantly, welcome back to our financial adviser roundtable and as promised in this final segment we’re going to get the best words of wisdom on tax savings ideas from members of the income generation from both Jeff Small and Dee Carter. Dee, what’s your best idea for tax savings for members of the income generation?

Dee Carter: I would like my clients to at least take a look at non-tax things and taxable things first. We want to get their money out as early as possible with things they’ve already paid taxes on, that way they don’t have to worry about taxes coming up. They really want to have the pre-tax things already taken care of.  Roth IRAs is a great example of that and we do a lot of that for our younger clientele on the other side of the coin if through your IRAs as much as possible here.

David Scranton: You’re talking about the old buckets of money strategy looking at which buckets you can pull income from tax-free, which are taxable and coordinating that strategy based on your personal financial situation. Good advice Dee, Jeff, what’s your words of wisdom to our income generation viewers?

Jeff Small: Well since 90 percent of the income generation Dave, will have a 401K or large IRA the largest deduction and the tax code is to pass that IRA on to their family without paying tax by way of a multi-generational or a stretch IRA a scenario. You know IRAs were designed to be a supplement to your income they were never designed to be a source for massive amounts of liquidity which of course then we have tax and that’s one thing we don’t want to do is take a big pile of money out of an IRA or 401k because then we’re taxed.

David Scranton: Gosh Jeff, I wish we had more time I’d love to talk even more about all the reasons why people should retire and not keep their money in the 401k, why typically rolling it over to an IRA is better in most cases but, unfortunately, we don’t have that time. Good advice Jeff, I appreciate that and so do our Income generation viewers and I’d like to take this opportunity now to thank all my guests for joining us today for another episode of the Income Generation. I’d also like to thank you to our new and returning viewers. You know, whether it’s tax strategies, bonds, or bitcoin, or stocks there’s a reason I’m committed on this show to sharing a wide variety of perspectives and insights from a wide variety of experts and their reason gets the heart of my approach to working with clients in my own financial advisory practice simply put. I believe that when it comes to saving investing for your retirement one size definitely does not fit all brokers and advisors who rely on cookie cutter strategies and give advice based upon computer-generated algorithms are doing their clients a huge disservice and investors who put their faith in that kind of impersonal guidance should know that you deserve better. It all starts with identifying your specific retirement goals and finding an advisor willing to work with you, not for you to help you achieve your goals, thanks for watching. If you’re close to retirement and you really want to know how to help protect and maximize your money or if you are retired and want the same it’s absolutely essential that you stay informed and up-to-date and right here is where you can do it here on The Income Generation. I’m David Scranton and thanks again we’ll see you next week.


David Scranton: If you’re not using someone who’s well-trained in fixed income and you’re born before 1966, it may just be time for you to break up with that advisor and move on. I would suggest someone who will care for you through these important years of your life. If you need help finding someone call or write us. I’d also like to remind you of the special report entitled The Income Generation. This is available free to you, our loyal viewers online. If you haven’t downloaded your report pick it up after the show.

David Scranton: If you’re near or in retirement head over to and download your special report written specifically for the needs of The Income Generation. Again, those born before 1966. I’m David Scranton and you’ve been watching the income generation we’ll see you all next Sunday.




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