Ep. 1 | Tax-Deferred vs Tax-Free
Download MP3Welcome to the Teaching Tax Flow podcast, where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.
Speaker 2:Welcome everybody to teaching tax flow, the podcast. This is our first episode, believe it or not. The time has come for us to record this and start just rolling out all the info and tax knowledge from Chris' mind to the world. Again, this is our first one we've done. Obviously, we've done the intro one where Chris gave us a little background on teaching tax flow or TTF as we refer to.
Speaker 2:But for this episode, we're gonna dive right in. So really, instead of delaying the inevitable in a very positive way, this episode, we're gonna look at tax free growth. So if that didn't get your attention, I'm not exactly sure what will. But without further ado, as I like to say, let's actually hop on the horn here with Chris Picuro. Again, CPA, MBA, and every other acronym.
Speaker 2:I can't really think of them
Speaker 3:since Well, most importantly, cohost of the TTF podcast with Johnny t.
Speaker 2:There we go. There we go. That is the the that is the most important one. Now we just need to think of an acronym for that one specifically. But before we get too creative with it, let's, let's talk about this.
Speaker 2:So tax free growth, very intriguing topic for this. I'm sure a lot of us have an idea maybe what it means, probably don't know everything. Actually, I'm gonna I'm gonna go even further than that. I guarantee that not everybody knows exactly what that means. So let's let's jump into it, Chris.
Speaker 2:Let's talk about the difference between tax deferred versus tax free. I I assume there's a big difference. Right?
Speaker 3:There is a huge difference. And first of all, thanks everyone for listening. We are big advocates here at TTF of of of creating tax free income and growth within your within within your personal financial picture. And a lot of us are are instill instilled in a lot of us rather is tax deferral tax deferral which means that you're taking some type of action and you're you're moving funds into some type of strategy or investment to get an immediate tax deduction, but that money grows tax deferred and at some point you have to take the money out. The most common example of this strategy is a four zero one k plan.
Speaker 3:An a traditional IRA. So with the four zero one
Speaker 2:k, Chris, let me let me stop for one second. So would that be would that be a good analogy to say you're basically kicking the can down the road?
Speaker 3:You are kicking the can down the road. And with the four zero one k plan, what's happening is you're putting money into an investment that and you're getting an immediate tax deduction. Now the value of that tax deduction really depends on your marginal tax rate. Your marginal tax rate, as far as teaching tax flow is concerned is the most important number in your planning. So your marginal tax rates that tax benefit, immediate tax benefit by putting the money into a tax deferred investment.
Speaker 3:What happens then is that money grows tax deferred like I said. So if you put in a hundred dollars into a four zero one k plan and that money grows to a thousand dollars 1 day, you would have saved and let's say you're in a 20% marginal tax rate, you would have saved $20 immediately. But that, let's say that hundred dollars turns into a thousand dollars, if you're in a 25% marginal tax rate in the future and you take the thousand dollars out, you're taxed on that entire thousand dollars at whatever the your marginal tax rate is in the future. And one of the things we're gonna talk about in a lot of podcasts, our crystal ball broke. So we don't know what tax rates are gonna be in the future.
Speaker 3:We believe they're gonna be higher.
Speaker 2:So basically making those assumptions. Right? Tech tax rates are are gonna be increased. The likelihood of an individual, say, from age, we'll say, 18 or 20, you're gonna be in a higher income bracket when it comes time to retire, likely.
Speaker 3:Exactly. And you're paying tax on all that tax deferred income. Now we're not saying that tax deferral is a bad strategy. Podcast listeners, you're gonna learn about our processes. The processes that we're gonna now bring to the public.
Speaker 3:And that process is diagnose, prescribe. So the first thing you need to do is diagnose your tax situation and then prescribe strategies. But today, we're talking about tax free growth which is very different than tax deferred. So with tax like I said, tax deferred for the right for the right tax situation if you're in an extremely high marginal tax rate. So you're in our system a red high red diagnosis, it might make sense, but diagnose and prescribe.
Speaker 3:The good thing about tax tax free income is no matter what your t t f, what your what we call your prescription is, what your situation is, what your marginal tax rate is, it makes a lot of sense. And with tax free income and growth what's happening is the money that you're putting into some type of tax strategy, in general, you're not going to receive an immediate tax deduction day one, but the the income would be, shielded from tax And if there's income, the growth and then the distribution of those assets in the future would be free from from tax. Mhmm. So tax free so so you're giving up you're sacrificing that initial tax benefit for a long term tax benefit.
Speaker 2:So we've been looking at that too. So so I know we had a couple examples of that. So where maybe is it better for people to look at, you know, four zero one k at at some point in their life and then then converting it out or starting with one or the other? Or where where is a good example of where it may be best for somebody to look at, say, a a four zero one? And not diving into too many details.
Speaker 2:Sure. We're just looking at it from a high level here.
Speaker 3:Well, a four zero one k, one of the one of our laws that of teaching tax bill, one of our three laws is that, taxing agencies are are your involuntary business partners. So the tax laws are written written to encourage and discourage certain financial and social behavior. One of the one of the advantages of the tax code is the four zero one k plan. It's just think about the four zero one four zero one k as a tool. Just how that tool is used depends and and you wanna make sure that that tool is used properly.
Speaker 3:So I know you you're a guy that walks around and says, what what's that one shirt that everyone comments on that, you like romantic walks in the
Speaker 2:Yes. Yeah. The the I I I enjoy romantic walks in the hardware store.
Speaker 3:Correct. So I'm not a handy guy. John is. But so bear with my analogy, but you're not going to take a sledgehammer to to put in a nail. And I see a lot of people using a tax deferred four zero one k plan as just an example of something that's not very appropriate.
Speaker 3:So when we're talking about tax tax free income, in our opinion, as and when I say our TTFs and and, especially in mine, everyone could benefit from tax free income and growth. Now in our ecosystem, that's considered a gold diagnosis. Gold is is the best diagnosis. That's why we we colored it gold and, with it so one of the strategies in tax free growth would be a Roth contribution and that it could be a Roth IRA, it could be a Roth four zero one k. Now unfortunately, there are restrictions on being able to contribute to a Roth IRA if your income meet goes over a threshold.
Speaker 3:And that's where if if you own a business it might make sense or actually if anyone even if you're if you're a w two person somewhere, there are no income restrictions when it comes to contributing to the Roth component of your four zero one k. So that's really where I'm glad you brought that up. We really teach on blended strategies. So that red diagnosis and that and that gold. So your employer has to if you're using the four zero one k, if there's an employer match, that has to go in pre tax where your portion go in post tax.
Speaker 3:So what I see a lot is I love that people, especially younger people are putting money into retirement. But if you're in a 12% marginal tax bracket on the federal side, you're really not getting a big advantage by putting money in tax deferred. So that's why where the gold strategy tax free income and growth works best. And but actually the higher your marginal tax rate, the better the gold strategies work. So Roth four zero one ks or Roth IRA contribution, those are just two examples of gold strategies, tax rate income and growth.
Speaker 3:Because if you're in a high marginal tax rate now, you're probably going to be in a high marginal tax rate in the future. And what people don't understand is that, you know, social security, when you start pulling that, excuse me, that's going to be most likely taxable and and for most people that have retirement income tax at 885% of social security benefits taxable. Your medicare premiums will will be higher if you have more income. So there's a lot of need based things in retirement that that create a high marginal tax rate than you would think. So having that having that money going growing tax deferred or rather tax free, is very powerful.
Speaker 3:And for younger people in a low marginal tax bracket, it's it's huge. When we run the numbers on someone that's gonna have their money going growing tax free for forty, fifty years, it's it's mind blowing how much that that can become. But again, really, Roth Roth I Roth four zero one k's, Roth IRAs, those are just examples of a gold strategy. There are several different gold strategies that work based on someone's situation. Absolutely.
Speaker 2:And I and I know the strategies and and blended strategies and the diagnosis. So that's a lot of the stuff I know we have on the books. We won't we won't give away too many hints or or who's gonna be on the show with us to run through them. But one line that that I know you mentioned all the time and it really gets people thinking, I wouldn't say not too deep. They they think pretty deep on it.
Speaker 2:You know, as as you mentioned, you know, the IRS is your involuntary business partner whether you like it or not. And and, honestly, that agree or that that saying there really applies to businesses and individuals in a sense too. So it's tell us tell us a little bit more about that. I know I know you you dove into it a little bit, but there there's a lot of depth to that.
Speaker 3:Right? Yeah. Absolutely. That means that, like I said, tax law, they could be on the federal level, state level, or local level is written to encourage or discourage certain behavior. So that's part of teaching tax flow is really diving into what the laws are in legally and ethically reducing the tax you pay in your lifetime.
Speaker 3:So for instance, you as an employee, let's talk about employees, we're we're gonna talk a lot about business owners and and rental property owners, but employees, they're encouraged to put money away pre tax for health insurance and for and encouraged by four zero one k plans to put money into retirement or simple IRAs or other other type of plans. It's just unfortunately they're trained to put money in the four zero one k not potentially a Roth four zero one k. So those are some of the things for instance, it's encouraged for us to be homeowners because we get to deduct expenses that are personal in nature. Mortgage interest and property taxes. So, those are really personal expenses.
Speaker 3:Now, depending on if you itemize your deductions or take the standard deduction, but but by those being really tax deductible expenses, that is saying we encourage you to own a home.
Speaker 2:Right. Right. And that and too with individuals, I mean, we've all seen it. Pretty much all of us have seen those ads and those, you know, the the diagrams that show, you know, compounding interest. If you put $25 a week from age, you know, x very young, and it grows up.
Speaker 2:But very little do they ever talk about when it comes time to to pull from that. Right? So it's a couple dollars a couple dollars a month or a couple dollars a day or week when you're very young, you know, it's millions and millions at the end. But, you know, again, they they kinda hit it very, very high level and it seems like that's more directed towards four
Speaker 3:o ones. Exactly. And so another example of a gold strategy would be $5.29 plan contributions, which is the education savings plans. A lot of states have those. There there is different variations but from a federal level, there's no tax deduction for those contributions.
Speaker 3:But by it could be parents, grandparents, you know, or the rich uncle, but unfortunately, we're still waiting on the call. Right? But so we're so that's an example of putting money in. There's no deduction on the federal level. Now, although, some states do give you a deduction.
Speaker 3:And then the money grows tax free as long as it's used for a child's education. Why is that? Because the the federal government wants us to take more responsibility in paying for our children's college. That's why five the five twenty nine is a section of the tax code. That's why it's called the five twenty nine plan.
Speaker 3:There's and and now even with five twenty nine plans, you could take distributions from them, to pay for private private high school and and elementary school and that sort of stuff where that wasn't around before. But if we look at the 30,000 foot view was, okay, social security is going to run out, so the government wants to incentivize us as tax payers to put money into retirement. You know, the the government wants us to send our children to college, be more educated, they wanna create financial incentive by creating the five twenty nine plans. So it all comes down to these, these these things that the government wants us to either encourage or discourage, like I said. So for yeah.
Speaker 3:So for the gold strategy gold strategy, tax free income and growth, you know, using your Roth accounts in one way shape or form. Excuse me. Using a health savings account is another great example. Some Just things that everyone can do even if you're, you know, if you're an employee, the five twenty nine plan, those are really some basic tax strategies. Mhmm.
Speaker 3:Building a rental portfolio is a great great one. A lot one that's been used over the last few years is a section one twenty one exclusion. Another section of the tax code that you can exclude up to $500,000 of of of capital gain, if you have a qualifying primary residence. That's if you're married, filing, join, if you're single that's up to $250,000. These things are out there that people need to be aware of and we we always say, you know, don't you're gonna get sick of hearing this on the podcast, don't let the tax tail wag the dog, but those are great examples of tax free income.
Speaker 3:So I'd encourage the listeners, take a look at what you're doing, figure out what your marginal tax rate is, and determine if you could benefit more from tax free income or tax deferred income. In what bucket should you put more of your resources and your decisions in?
Speaker 2:That's a great way to to kinda wrap up this this episode as well too. And it's it's funny how this topic came to be. Right? It's something that we I know we've talked a lot about and we've heard a lot about it, especially at the event that we just wrapped up actually yesterday, looking at the calendar over in Orlando. It was a it was an REI, so a real estate investor conference over there.
Speaker 2:It was Flip Hack Live. Excellent event. And it it was interesting to see how some of those tax questions went from real estate specific down to really personal, you know, personal questions, individuals, family, entrepreneurship. So I know teaching Tax Flow has those courses and mini lessons and community forms that are built for all this, you know, all these individuals, but but that's definitely not siloed. Right?
Speaker 2:So it's something that, you know, may be specific for real estate investors or entrepreneurs or individuals. A lot of it really kinda crosses those boundaries, which is good, and that's in the community forums. So, I mean, this again is a great example of a question that came up the other day somebody had asked, So we figured we'd do a podcast on it. So I I appreciate the the insight as always. And I hope hopefully, everybody else does as well.
Speaker 2:Takes a
Speaker 3:little nugget from it. My pleasure. And and we are so excited about deep diving into a lot of these strategies that we discussed. So, yeah. That's that's great episode one, a great way to just change that mentality.
Speaker 3:What we're asking for from the listeners is an open mind and a little bit of time and I think you're gonna get a lot of benefit from what we're we're providing.
Speaker 2:Absolutely. And looking at our our calendar or agenda in front of us here for these other episodes, it's, you know, not to sound like a total sales pitch. However, there is some great stuff on here. It's and it's the little topics that add up. It's the sum of many.
Speaker 2:Well, it literally change people's lives. So as as we've always mentioned too, you know, teaching tax flow specifically is not meant to make you more money. It's meant to save the money or save you money that you've already worked so hard for. So we look forward to to the platform itself and growing it and keep adding content to it. And if anybody has any specific questions or or anything that, you know, they may wanna hear us talk a little bit more about, feel free to shoot it over to us.
Speaker 2:We love the ideas. We love the conversations, and we love we love really talking to anybody about these specifics. Right, Chris?
Speaker 3:Absolutely. Check us out on social media. Please rate, review, and subscribe, and we will keep bringing that content
Speaker 2:to you. Excellent. Thank you as always, Chris, and we will see everybody here very soon.
