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546: A Review of Retirement Account Strategies
At some point in a successful career, taxes quietly become your largest expense.
Not housing.
Not lifestyle.
Not investing losses.
Taxes.
And unlike most expenses, they grow automatically as your income rises — unless you deliberately structure around them.
You know that my favorite means of tax mitigation is through investing in real assets like real estate and operating businesses.
That approach has been the backbone of my own strategy for years — taking active income and redirecting it into assets that generate cash flow while providing meaningful tax advantages.
I’ve also recently explained how you can use Wealth Accelerator in conjunction with charitable pledges to potentially create a future stream of retirement income — essentially at no net cost — while also establishing a death benefit. It’s a powerful framework when structured properly.
That said, there are also more traditional tools in the tax code that are important to understand. They may not be flashy, but when layered together they can meaningfully reduce lifetime tax burden.
I wanted to put together a simple overview — not exhaustive — just a practical framework for thinking about what’s available.
Let’s start with the basics.
A Roth IRA remains one of the most elegant structures in the tax system. You contribute after-tax dollars, but the growth is tax-free, and withdrawals are tax-free.
That’s incredibly powerful compounding over decades. The challenge is that most high earners exceed the income limits for direct contributions. Fortunately, the tax code provides a workaround.
The Backdoor Roth is simply the process of contributing to a non-deductible traditional IRA and then converting those funds into Roth status. It’s not massive in annual dollar amount, but over a long horizon it’s meaningful — especially when tax-free growth is involved.
For those with access through certain employer retirement plans, the opportunity expands further through what’s commonly called the Mega Backdoor Roth.
Some plans allow substantial after-tax contributions followed by immediate conversion into Roth treatment. Instead of moving a few thousand dollars per year into tax-free territory, you may be able to move tens of thousands. It’s one of the most underutilized opportunities I see among high earners.
From there, we move into more aggressive tax mitigation territory with Defined Benefit or Cash Balance plans. These structures were designed for business owners and high-income professionals and allow very large deductible contributions — often well into six figures annually, depending on age and income profile.
They require actuarial design and administration, so they aren’t simple, but they can significantly reduce taxable income during peak earning years while accelerating retirement accumulation.
Many people assume pensions are relics of another era, but in reality, they’ve evolved. Structured properly, modern private plan approaches can create predictable future income streams while providing current tax advantages. For the right profile, this dimension of planning is often overlooked.
Finally, charitable strategies sit at the intersection of planning and purpose. Whether through donor-advised funds, charitable remainder trusts, gifting appreciated assets, or more advanced leveraged structures, thoughtful design can reduce current taxes, avoid capital gains, support meaningful causes, and improve estate outcomes.
In some cases, the real economic cost of giving is far lower than most people expect once tax effects are considered.
The big picture is this:
No single strategy solves the tax problem.
But when retirement positioning, Roth strategies, defined benefit structures, charitable planning, and real asset investing are layered together, they form a system — one that can materially change long-term wealth outcomes.
High earners don’t just earn more.
They structure more.
This week’s episode of Wealth Formula Podcast reviews these concepts in detail with an expert in the field.
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Transcript
Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].
Welcome everybody. This is Buck Joffrey with the Wealth Formula Podcast coming to you from Montecito, California. And before we begin today’s show, just wanna remind you that there is a, uh, website associated with this podcast wealthformula.com. That’s where you can sign up. If you are interested in, in seeing any of our deal flow, uh, in the accredited investor club, AKA investor club, all you have to do is sign up for that club.
There’s no cost to it, and it allows you to see, uh, deal flow, private deal flow that you’re not gonna see elsewhere. Uh, lots of opportunities still there. As you know, you know, 30%, 40% discounts on real estate these days. As a lot of the unwinding of, uh, bad debt continues and I, as I anticipate it will through this year.
Most of that’s gonna get washed out though at the end of this year. So give yourself a chance, uh, to get into the bargain, uh, bin there. So go to wealthformula.com, sign up for Investor Club.
Now, as far as
today’s show, we’re gonna go kind of back to the basics. Um, some of the basics we talk about. Here in terms of tax mitigation and that kind of thing, at some point in your career?
Well, most of your career, I don’t even know if it’s at some point in your career, taxes, uh, become your largest expense unless you’re a real estate investor. Taxes, unlike most expenses, well they, they grow automatically as your income rises unless you deliberately structure around them. Now you know that, uh, from listening to me over the years that.
My favorite way of, you know, creating tax mitigation is through investing the right way. And that means investing in things like real assets, real estate, operating business, things where you can get big deductions. You know, it’s, it’s hard to be a seven figure income person and pay virtually no taxes unless you are involved with real estate, frankly.
And that, that approach has been, um, the backbone of my own strategy for years. I mean, taking active income. You know, from, from businesses redirecting it into, uh, assets that generate some cash flow while providing really meaningful tax advantages. Um, I should also point out, uh, if you guys have not watched it, I, we did a, a recent webinar.
On something called a wealth accelerator, which is a really interesting way where you basically take the upside of the market, skip out on the downside of the market, and leverage up the upside of the market. Well, it’s an in, it’s an insurance product, which means that at the end of the day, there’s also a death benefit.
And what people don’t know is there are ways to literally, uh, pledge parts of those death benefits in future years. To, uh, to mitigate taxes today. I mean, there’s, there’s some very interesting things to do, and if you’re interested, you’ve got to pay attention and dig into these things. Now, that said, there are more traditional tools that we don’t usually talk about, uh, on this show, but we should, because they may not be flashy.
But when you layer these things together, they can have, you know, meaningful, uh, reduction, lifetime tax burden. So. Uh, I wanna kind of review some of those, and this is gonna be somewhat redundant ’cause that’s what this interview is about today, but I feel like sometimes redundancy’s important and you may just write down one of these things that you’ve not heard of and dig down deep into it.
That’s kind of what I’ve done my entire life is, you know, even, even with the Wealth Accelerator product, the first time I ever heard about it was, uh, reading Tony Robbins books and I, Tony Robbins books on master, uh, money Master the Game and. He, uh, he brought this concept up of this, um, you know, ultimately what I’m calling the wealth accelerator.
And he didn’t really go into details, but I was intrigued by it and dug down to it. The next thing you know, boom. There it is. It’s, uh, one of my favorite things. So anyway, let’s, let’s go back to some of the basics. You have heard of the Roth IRA, and it’s a, it’s a great, uh, structure in the tax system.
Basically contribute after tax dollars, um, so that the growth. The growth in these, uh, these things is tax free and withdrawals are tax free and all that. It’s great now, it’s an incredibly powerful thing over the decades, but the challenge is that most, uh, high earners exceed the income limits for directing those contributions.
So now, fortunately, the Tax Good has provided some workarounds there. You’ve got the Backdoor Roth, which is simply the process of. Contributing to a non, uh, deductible traditional IRA and then boom, converting those funds into a Roth status. Maybe you have a low income year or something like that. Um, now that’s, again, not massive in in annual dollar amounts, but over long-term horizon, it’s, it’s really meaningful.
Some people have these, uh, employer retirement plans and 4 0 1 ks and stuff. That o opportunity expands further through what’s commonly called a mega backdoor Roth. Um, because what these plans, some of these plans allow is substantial after-tax contributions, uh, followed by immediate conversion into Roth treatment.
So instead of, uh, move moving a few thousand dollars per year into tax territory, you may be able to move tens of thousands, you know, maybe even over a hundred thousand dollars at a time. It’s, and it’s really one of the most underutilized opportunities I see among, um, high earners. So. If you haven’t thought about that and you do have these, uh, larger employee, employee type things, um, you gotta look into that.
Look up mega backdoor rock. Now, when you talk about being a business owner and that kind of thing, that’s where you can move into some more aggressive tax mitigation. You hear about things like defined benefit or cash balance plans, and these structures were designed for business owners. Uh, and, and to, to a certain extent, extent, high income professionals.
They allow very large deductible contributions, um, often well into six figures annually, depending on age and, uh, your income profile. Now, they do require actuarial design and administration. So they aren’t simple. They aren’t cheap, but they can significantly reduce taxable income during peak earning years.
Um, and allow for like, you know, big acceleration, uh, during, uh, retirement. Also, many people assume pensions, uh, are a relic of another era, but in reality, they’ve also evolved. If you structure them properly, uh, you can create predictable future income streams while providing, you know, current tax advantages.
So again, for the right profile, this dimension of planning, uh, is often overlooked. Again, that is, uh, something you want to hear about, look, look about. Again, if you wanna look that up, that is called a defined benefit plant. Now finally, there’s also some more advanced stuff. Um, and you know, we’ve kind of alluded to some of these things in the show, charitable strategies, right?
Um, and again, I mentioned the Wealth Accelerator idea of pledging future. Uh, income from your death benefit for tax mitigation today. That’s a charitable strategy. There’s also donor-advised funds, charitable remainder trusts, gifted appreciation assets. There’s, uh, more advanced leverage structures. Now, these, again, um, they can reduce current taxes, they can avoid capital gains support, meaningful causes, of course.
You would be surprised because there’s ways to essentially make these things profitable. A lot of times it involves, um, you know, doing things like, you know, you’ve got a charitable remainder trust, but then you, so you’ve given away things, uh, you’ve given away assets, taken fixed income, but then you’re replaced what you gave with a, a.
Life insurance plan. So lots of interesting things there that if you’re interested, you can certainly reach out to me. But the big picture is this, no single strategy solves the tax problem entirely. Um, well, I should say that I think if you have enough real estate in your real estate professional and you have that designation, you may not be paying any taxes at all.
So that can solve it. But again, look at all these things. And, uh, think about them, think about how they might, uh, benefit you. The interview we are gonna have today is with the guy who deals with this, um, uh, professionally and, and works with high paid professionals. Every day you’re gonna hear about a lot of the same things that I just mentioned and get his take on them.
So if you’ve got an issue with taxes and paying too much. This is something you’re gonna wanna listen to. We’ll have that interview right after these messages.
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Welcome back to the show everyone. Today. My guest in Wealth Formula podcast is Gary Pattengale. He’s a veteran tax strategist. Senior Vice President Mero Wealth Management with over 30 years advising high net worth clients on tax efficient retirement and estate planning.
Uh, he specializes in optimizing wealth through tools like Roth conversions, HSAs Charitable Trust, and he’s good at translating complex code into clear strategies, uh, for, for people like us. So, Gary, welcome to the show.
Thank you. I’m very happy to be here. Thank you.
So let’s just start out with, um, you know, just some basics when you’re working with, uh.
High income or high network clients, how do you define advanced retirement planning beyond just maximizing contributions?
Yeah, I think it’s really looking at the whole spectrum, right? So, um, understanding what, uh, client’s looking for and high net worth is, is different than, uh, you know, a lot of, uh. You know, typical individuals you gotta look at, taxes are really important, right?
I, I haven’t found a client yet that wants to pay tax. So, um, I think it’s also trying to make sure that the taxes are not the primary focus. So things like, um. You know, uh, making sure that we take advantage of vehicles that have appropriate costs, the appropriate investment selection, that sort of thing, right?
Um, and then I think beyond that, it’s really understanding when do you need the money, right? Is this, you know, do you really have the, the, the runway for retirement? Are there immediate needs, intermediate needs, that sort of thing. Um, and then looking at legacy too. So that’s a much different, you know, time horizon, but clients hate paying estate taxes too.
So you gotta look at all of that. I think.
What structural mistakes do you often see sophisticated investors making with retirement accounts despite having advisors?
That’s a really good question. So I think a lot of times it’s not fully taking advantage of what’s out there, so, um. You know, I think people tend to understand 4 0 1 ks and, and take advantage of that, but it’s really knowing what’s available to you.
Uh, if you’re a business owner, you may think that all there is is, you know, maybe a, a sep IRA contribution, which is great. It’s simple. You can add. Uh, you know, fair amounts to that, or even a solo 401k, but for extreme high earners, maybe those that are over 50, there’s other available plans where you can sock away a lot more than that.
So I th I think really not knowing what available, uh, options are is one thing, and then two is just, um. Maybe not having the time or, or the discipline to really, uh, you know, contribute. Um, you know, a lot of times you see like stock based compensation and things get missed, where, you know, the, the options aren’t exercised, that sort of thing.
So I think it’s really just being organized and staying on top of what’s available to you and really executing it as well. That’s really what’s important I think.
So let’s, let’s kind of go through some of the strategies, right? Um, you know, I don’t know that we necessarily need to talk about. Traditional IRAs, but you know, with Roths for example, maybe we can just start with, people obviously can see the advantage in a Roth, but direct contributions are often really unavailable to high earners.
Um, can you explain the planning implications of those limits and maybe some of the strategies like backdoor strategies to fit.
For sure. So the Roth, uh, you know, the advantage of that is, uh, the tax free growth and the tax-free withdrawal. So everybody, you know, wants to be able to participate in that.
Right? But there’s income limits with a traditional or, uh, a bigger, pardon, Roth IRA, you have to make under 150,000 if you’re single, 250,000, roughly if you’re married. So that limits a lot of people. There’s Roth 4 0 1 Ks. A lot of plans offer of that now, where it doesn’t matter how much you make, you can actually still participate if you’re, uh, you have a company sponsored plan that allows that, whether or not you should is another story.
If you’re in a top tax bracket, it may not make sense if you’re gonna be in a lower tax bracket later on. So I think careful planning really, uh, is warranted there to figure out where, where should that money be going. Um. You mentioned the backdoor Roth, that’s, uh, available to certain, uh, individuals. If they don’t have any outside IRAs, you can make a non-deductible contribution to a traditional IRA and basically immediately convert it to a Roth and, and avoid having tax.
Can you talk about that in a little bit more detail? Because they think there’s also an element there that helps people put more money into it than you might usually be able to.
Uh, yeah, sure. So, you know, one of the things that you hear about sometimes is a mega backdoor Roth. So if there’s a, if you have a 401k plan that allows it, it’s really plan specific.
But you can put in after-tax 401k contribution. So that means you’re not getting a deduction on that. Uh, if the plan allows, uh, in plan conversions or, uh. Uh, the ability to convert to a Roth within the plan. You can put in more money on an after-tax basis and convert it to a Roth, uh, and, and put a lot more in than you normally would.
So it’s really highly plan dependent though. And, uh, it often de uh, benefits highly compensated employees. So you don’t see it that often, but if the plan offers it and allows it, it’s something worth taking advantage of. The reason I think you don’t see it a lot is ’cause it’s expensive to administer and it’s pretty complex.
So there there’s reasons you may not.
Got it. Got it. Okay. Well, um, let’s talk a little bit more about business owners then. Um, you know, I guess, you know, with some of the more sophisticated stuff, um, you mentioned SEPs, solo 4 0 1 Ks. Why don’t you go through some of the basic ones and then talk, and then we can kind of move on to some of the things that you mentioned for, um, you know, for people who are, uh, I don’t know how you defined extreme high earners, but.
But you know, we certainly have a lot of high, uh, high paid professionals and, uh, high earners here. So it’d be good for us to talk about some of those things.
Yeah, absolutely. So, uh, for business owners, there’s things that you can do, uh, you know, while you’re running the business, and then there’s things you can do to prepare your, your company for sale.
Uh. So it, it’s important to kind of, I think about both of those things, but starting on the basics, we have a lot of business owners that have solo 4 0 1 Ks. If, if, uh, they’re the, they don’t have any employees, so that allows you to set up a 401k and make the employee contributions and the employer contributions you can add up to.
Uh, basically $72,000. Uh, and then if you’re over 50, you can add another 8,000 to that. If you’re over, uh, 60 to age of 63, there’s this super catch up contribution now. So that’s 11,000 instead of the 8,000 additional. So, uh, you know, that can really start to make a difference over time. There might be Roth, uh, options that you can have on that as well.
Um, as long as you have earned income, that’s a, a great way to get going. Um. Many business owners, if you know, they just want simplicity, low cost, no administration, that sort of thing, they’ll, they’ll maybe do a SEP IRA where that’s 25% of your compensation is the most you can put in, and that’s up to $72,000 or $80,000 if you’re over 50, but there’s no Roth option.
So simplicity can be at the expense of, uh, you know, being able to add more to that and take advantage of the features. Um. And then, you know, if we go into the more complex things, if you’re a solo entrepreneur or you, you, you have an S corp and, uh, uh, you know, it really depends on your makeup. There’s a defined, uh, personal defined benefit plan.
So that’s a little bit different. Where it’s a hybrid plan, it allows very large contributions, and essentially what you do is you tar target a retirement income at a set age, um, and then you fund it accordingly in the actuarial, uh, calculations. Determine how much you’re gonna fund. The way it works, the way the math works, it’s usually better for those that are over age 50.
You can add up to 290,000 in 2026. So if you compare that to 80,000 for 401k, that’s pretty big. Right? Um, what’s the trade off? You know, there’s costs, uh, and you gotta have the cash flow to fund it. So once you set this up, you typically, you’re gonna have to put those contributions in every year. And how much should it be?
Probably 90 to a hundred thousand at least. Otherwise, the tax savings probably aren’t gonna offset a lot of the costs, but for those that are high earners making a ton of cash, it could really make sense that you can really, uh, uh, jumpstart your retirement savings from a big perspective.
Why are these so expensive?
Because you, uh, you know, I’m, I’m curious when you say you wanna at least have a hundred grand and otherwise the cost, so why are, why are these things so expensively?
Yeah, well, you know, you got the plan costs, you got the setup costs, which usually are one time, but, uh, you’ve got form 5,500 filings, so there’s a tax aspect of it.
There’s the actual aerial work, that sort of thing. Um, and if you have employees, you gotta fund the employee’s contributions too, so that’s where it can get really expensive. So, you know, there’s a difference if you’re a solar entrepreneur, but if you have employees then it can be very costly, but might still make sense, you know, depending on how your makeup is.
Let’s talk about an example of one of these things. One of these, uh, um, defined benefit plans, because that might be of interest to somebody who’s 50 years old, um, you know, they’re making a million dollars a year or more. And, um, so what is, so how, what, what is the, what are some of the components you break in, break down in there to figure out, you know, say, say they wanna retire with, I don’t know.
$300,000 a year or something like that. And then, then what do you do?
Yeah. So, you know, that’s gonna be part of the setup of it. So figuring out what’s the, the income, you know, it’s based on income when, when you pick a retirement age, but, um, that’s gonna determine how much you funded it and what your retirement age is, what your income is, is gonna help, uh, you know, determine what that ends up being.
So, uh. But you kind of, you know, the numbers are, are calculated and then that’s what you’re gonna, uh, compute. Uh,
how many years do you usually do that for like. In a defined be benefit plan.
Yeah. It’s gotta be usually at least five years for it to make sense. So, um, but I, I’ve had several business owners who started at age 50.
They’re gonna retire at 65, um, and then they have a set benefit at 65. Um, it really depends. But then once you hit that age, you know, the question is, well, what if I don’t want an income stream that’s gonna be taxable? Right? Uh, you have the option of actually taking that lump sum and rolling it to an IRA, so then.
It works like a supercharged 401k where you take that balance and then you continue to defer it. Once you hit age 73 or 75, depending on what your age is, then you’re gonna be forced to start taking money out for required distributions. But that’s one of the features of it as well.
Cash balance,
pensions,
is that different?
How
does that work? Uh, I think, I think it works very similar to what you’re talking about. So the cash balance is, uh, uh, works in a, a similar fashion as what, what we’re describing here, but it’s really, you know, creating a, a set benefit at a set age and then you’re funding it accordingly with, uh, employer contributions.
Now we have a lot of people in our group who like to invest in alternatives. Do any of these larger options allow them to? You know, invest in, um, private investments through their retirement accounts.
Not that I’m aware of, at least the ones that, that we typically work with. So that’s one of the downsides to this.
So, you know, generally what you’re gonna have to do, if you want to have alternatives in a retirement account is setting up a self-directed IRA. So, uh, that’s just, you know, specialized, uh, you know, retirement plan that allows you to invest in alternatives. Uh, there are a few custodians out there that will allow this, but, uh.
You know, uh, you can invest in real estate, you can invest in private investments, pub, you know, private equity, private debt. You can do, you know, things beyond stocks and bonds. Essentially you can do crypto. Um, so that’s a way to get access. There’s, there’s pros and cons to that too, right? There’s no free lunch on anything.
But, um, I had, I had declined. I had a self-directed IRA who had farmland in there. There’s some really tricky rules and you gotta really be careful to not run, uh, follow that. Uh, and it’s the self-dealing rules. So like for example, you know, if, if you wanna buy a vacation home and you wanna have that in the self-directed IRA, you decide to go use it for a couple weeks.
You’ve just violated the self-dealing rules. You can’t have it for personal uh, reasons. So you gotta be careful with that. There’s just a lot of things that. You have to watch out for it. I mean, if you think there’s a set and forget investment, it’s really not because a custodian takes no responsibility.
You’re, you’re the one that has to do the due diligence and the research for that. But, you know, if you’re, you’re, you’re well versed in that you’re willing to take the risks and it’s, you know, it can make sense and certain situations, then, you know, you can really benefit from that. Um, there’s also potential tax issues that could go wrong.
So you really have to work with a CPA that knows what they’re doing. I mean, if you, you, you have, uh, unrelated business, taxable income, you know, if, or, or debt income if you use, uh, you know, debt with your, your real estate acquisition. So there’s just a lot of things you gotta watch out for.
Well, let’s, let’s talk a little bit about, um, some of the other advanced strategies.
Let’s talk a little bit about like, so you know, charitable, uh, you know, you hear about things like donor advised funds or charitable trust. Can you talk about those?
Yeah, for sure. Yeah. So I have a lot of clients that, you know, if they’re charitably inclined or sometimes if they’re not charitably inclined, they just don’t want to pay taxes or give it to the government.
Uh, you see that a lot. So, donor advised Fund, it’s a fund that, uh, really is a, a charity. So you can give, you know, cash and gift, depreciated stock. You can actually make your IRA, the, you know, you can make the donor advised fund the beneficiary of your IRA. Um. And the donor-advised fund receives the assets.
You get the charitable deduction. Uh, but typically the, uh, the fund is gonna work with you to determine, you know, directing the assets to the actual charity. So you see it a lot for front-ended gifting. So let’s say, for example, I can benefit by making five years worth of gifts, but I want my charity to get funds over five years and not get it all in one year.
And then five years from now, I tell ’em, Hey, remember I gave you money five years ago. You’re not getting any more now. Um. They tend to follow your direction on that, and it, it can be a tax benefit, but then also, uh, you know, meets your charitable, uh, gifting needs as well. Um, another thing is charitable remainder trust.
That’s something that some high net worth clients can, uh, you know, pursue. And really it’s setting up an irrevocable trust. Uh, and there, there’s really two beneficiaries. There’s, uh, you know, use the income beneficiary and then the charity gets the remainder at death. So you can get an income stream over, you know, you could pick a turn, you could pick 20 years as a maximum, or you could, you know, it could be over a lifetime.
And it’s a great way to still get income off the investments. It’s a great way to, you know, lease some assets for charity and avoid estate tax
in charitable trust. The idea again, so you donate and then you take the deduction immediately, right? Mm-hmm.
Yep.
And, and then, um, and then on top of that, then what you’re doing is you’re still allowing yourself to have an income stream until you die.
And then you die, and then whatever asset that is. In the trust then goes to the charity. Is that
Yep.
Is that right?
Right, right.
Yeah.
So depending on how you structure it, whatever’s more important to you, if, if getting the deduction is more important, then you wanna structure the income stream accordingly, right?
Because if you’re getting a huge income stream, there’s probably gonna be less of a deduction or vice versa. So those are the things you, you can work with. Um. So, you know, it can be a great way to, to, to satisfy all, all, all your needs. The, you know, the trade off is if you want that money, that money’s not gonna go to your kids, if that’s one of your right.
Uh, you know, goals.
Can you, uh, concurrently set up life insurance policies with those.
Can you set up life insurance policies? Yeah. Well, you know, what we see with life insurance is often to replace the, uh, money that’s not going to the family.
That, that’s what I was getting at, like in the charitable trust side.
Right. So like if you’re, if you’re basically could you, you can use basically some of those savings that you have from the taxes to, to essentially by life insurance. Mm-hmm. Uh, that would basically give, you know, your, your kids those assets at the end.
As well. Exactly. Yeah. And then those assets pass, uh, tax free.
It can be a great way to, uh, for wealth replacement. Yeah. Um, right. Yeah. It requires some planning, but yeah, it, it, it can be a great thing. You can get a better result doing it that way than just leaving things alone and hoping for the best.
Yeah. Yeah. Um, let’s talk about HSAs. Uh, sure. But before we talk about HSCs, any other sort of advanced stuff that around charity or anything other thing that, you know, the seven figure.
Earner might find interesting, useful that they don’t, might not know about.
Well, yeah. You know, I think, um, I mentioned legacy planning a, a while earlier, so, you know, the thing that it, it gets talked about a lot, but Roth conversions, right? So, you know, should you do it, the Roth is a great, uh, asset to leave for.
You know, for your kids or for future generations. The thing is, when, when, when you die, if you have an IRA, um, it’s gonna have to be all pulled out after 10 years, and that money’s gonna be taxed. And what tends to happen is, uh, you know, the, the, the beneficiaries are in their primary earning year, so they’re paying a really high tax rate to pull that money out.
Um, so Roth conversion, doing it during a lifetime can be a great way to create a, a. Just a more favorable legacy for, for, for your kids. Even if it doesn’t benefit you during your lifetime. You gotta run the math to see if it makes sense or not. But, uh, that’s a tax-free asset for your kids. They pull it out tax free and that money can grow for decades and, you know, be a very sizable asset later on.
So that’s one thing to, to maybe think of a little bit about. Um. You know, for business owners too, one of the things that got changed with the recent tax law change, it’s called Qualified Small Business Stock. So, um, uh, you know, that gives, uh, uh, certain businesses the ability to sell their, their stock, uh, their companies tax free.
Um, if the stock is direct issuance, certain, you know, businesses don’t qualify, but with careful planning upfront, maybe five years before the sale, you can. Potentially, uh, exclude some, if not all of your capital gains when you go to sell. So that’s something to really look at too. And
then, well, what does that, what, what, what does that entail?
I mean, how, how, explain that to, ’cause you convert it to stock and then just because you converted it to stock, you don’t pay tax. Can you explain?
So, yeah, so qualified small business stock, that’s section 1202 of the tax code. So it’s been around for quite a while. So any stock that’s been, it’s for stock that’s been issued after, uh, 2010.
Um, and they changed the rules just recently for stock that were issued after July 4th. But it allows you to exclude up to $10 million or 10 times your basis. Certain businesses qualify. You gotta be a small company. There’s certain, um, you know, size requirements. Uh, certain industries are excluded. Like if you’re an accounting firm or you are the business, you, you’re probably not gonna qualify.
But if you create a, a good, or you know, produce a good for sale, you’re probably gonna qualify. It’s, you have to be a C corporation. So a lot of small businesses aren’t C corporations, but if you are close to selling and you’ve got more than enough liquid assets and you structure your business in such a way where maybe you’re not distributing quite as much so you don’t get hit with a double taxation quite as badly, you, you can figure out a way to really make this, uh, uh, favorable.
So that’s, that’s something that’s out there that I think a lot of people aren’t, aren’t aware of.
Do you have to sell to a specific. Person or a type of, uh, buyer in that situation?
No, the, the, the buyer doesn’t matter quite as much. It’s the, you know, the stock has to be directly issued. Um, you have to be a C corporation.
There’s the size requirements, uh, you know, the business requirement being in certain industries are not being in certain industries. But no, that, that really, I wouldn’t think would impact things.
Okay. Interesting.
Alright, let’s talk about HSAs. Uh, sometimes they’re, uh, some people describe ’em as the most efficient account availables.
What, what people tell, tell people about HSAs and, and basically, you know. Creative ways to use them, um, by affluent clients.
Sure. Yeah. I think the HSA is, uh, it’s probably the, the most, uh, tax beneficial vehicle we’ve got out there. ’cause it’s triple tax advantage. You get a tax deduction when you put money in.
It grows tax deferred and it comes out tax free for qualified, uh, uh, health expenses. Uh, if you have a high deductible health plan, you can contribute to it. Um. You can add, uh, I believe it’s about, uh, 4,500, roughly if you’re single, 8,500 per year if, if you’re married. Um. And, and, and, you know, the, the triple tax advantage is tremendous.
I think one of the things that really is worth considering is investing that money rather than taking it out, funding it and taking it out to pay expenses. Now using other money to pay expenses, invest it like a Roth IRA and let it grow. Take advantage of the tax free compounding. Um. And use that for later in life.
Uh, you can invest it very aggressively. That money can turn into a sizable sum later on. And, uh, you can use it to pay for things that maybe Medicare doesn’t cover, like, you know, hearing aids or dental work and that sort of thing. Um. Uh, you know, take advantage of, uh, the tax free features. Um, but it’s, it’s a tremendous vehicle.
What happens? Uh, can you use that money for non-medical things, but you just won’t get the third, you won’t, that won’t be tax, uh, exempt. Is that the deal or how’s that work?
Yeah, so you would, you would get taxed, um, and, and potentially penalized if it’s for non-qualified, uh, expenses. Um, so, but after a, a certain age, I, I believe it’s 60, you can, you just get taxed on the earnings and no longer get penalized.
So that’s, you know, not all is not lost if that happens.
Right. So when you see, you get tax on the earnings here, you’re, you still got the deferment, um, and you let, you had tax free growth. It’s just that. Now you’re 60, you don’t have as many health problems as you might have thought, but you had decent money in there.
Then you’re gonna use it almost as if it’s just IRA money or 401k money. Right,
right. Yeah. And you get the tax deduction upfront, so,
right.
That’s, that’s the additional benefit too.
Let me just ask you one more question then, Gary. Sure. So, if you’ve got a $400,000 or to $1 million earner listing today, you wanted to upgrade their planning sophistication.
Can you think of like three areas they should evaluate? First,
we spend a lot of time on tax planning, and I think that often gets overlooked. So, uh, having somebody look at your tax situation, take advantage of what opportunities there are out there, what deductions, uh, you know, we just had, uh, the new tax law get passed in a law in July.
There’s a lot of changes out there, right? So, um, the state and local income tax deduction has been increased, but it’s under certain, uh, income thresholds. So, you know, see if you take advantage, what can you do to possibly take advantage of things like that? What new deductions are available, that sort of thing.
Um, I think really just having a plan, uh, you know, high earners, uh, high net worth, a lot of times they just don’t have the time. It’s really hard to, to, to get to your own stuff. You know, you’re running a business or you’re running a company, or you’re an executive. You’re a high, you know, highly compensated key employee.
You’re just on the go. You don’t have the time to do this stuff. So, um, it’s worth investing just to have somebody, uh, you know, helping you, uh. Stay on top of things and organize, have a financial plan. And, you know, some, some people, uh, have the false, uh, interpretation that, you know, Hey, I’m too young for that.
I don’t really need this until I’m like, ready to retire. But Right. Having a plan early on, uh, generally it’s gonna pay for itself if, if you do all the right things early enough. Right. Um. And then third I think is, uh, you know, don’t wait too, too long to think about legacy planning too. Um, estate taxes are, are important, but what do you want your legacy to be?
What’s important to you? What do you want your life to be? Um, those sort of things, especially for business owners too, you know, it’s like, what do you want life to be after the sale? So I think thinking about those things, uh, early on. Can, can really help you, you thrive and, and, and grow. And nothing has to be set in stone.
Um, estate planning is the one thing that I so often see just get kicked down the road. It’s like, I’ll do that later, I’ll do that later. Right. And, and then life can throw you a curve. So it’s just, I think it’s really important just to focus on that and be on top of it.
Fantastic. Gary Pattengale, uh, strategist with Senior, senior Vice President, me, Israel, uh, wealth Management.
Thanks so much for being on the show today.
Great. Thank you for having me. I really appreciate it.
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Welcome back to the show Run. Hope you enjoyed it. Uh, again, uh, lots of different opportunities there. I do encourage you guys, uh, you know, take a look at the Wealth Accelerator webinar, uh, replay that was sent out because again, if, uh, if that was of interest to you.
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It’s a very clean structure. And, um, something that you ought, you gotta look into. Anyway, that’s it for me. This week on Wealth Formula Podcast. This is Buck Joffrey, if you wanna learn more, you can now get free access to our in-depth personal finance course featuring industry leaders like Tom Wheel Wright and Ken m.