Ep. 11 | Gold Diagnosis (tax-free income and/or growth)
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, back to teaching tax flow, the podcast. There we go. That was that was my pathetic version of a vocal drum roll. Episode 11, again, back at it. We are on the fourth and final color coded I would say definition, but diagnosis, prescribe, prescribe diagnosis.
Speaker 2:There there's obviously a way of doing this. So looking at this, we're gonna put Chris back on the spot, and he's gonna tell us what he likes about the gold. Right? So, again, I'm John Chryposki, cohost of this with my counterpart, my buddy, my mentor, my my bold friend, who's a lot smarter and elder than I am. We're not we're not gonna go into the whole you're way elder thing.
Speaker 2:We're gonna leave that alone. Chris, why don't you sing us a song? Sing us a song. It's the end of the year. It's '22.
Speaker 2:We're going into '23. You gotta be tired, man. You gotta be tired being a being a a CPA. Right?
Speaker 3:Year old. I feel good, John. Even though I'm of a mature age to you, as you like to mention I don't want to hurt you. Special shout out to my wife, Holly. We just celebrated our fifteenth wedding anniversary yesterday, so that was awesome.
Speaker 2:I should have saved my drum roll for that.
Speaker 3:That's alright, John. You were probably in diapers when I got Oh. According to your math. Persically, I had some fuzzy math. But, yep, part four here, teaching TaxFlow's favorite year end goal diagnosis tax strategy prescription.
Speaker 3:And I'm going to preface this by saying a couple of things. One, the goal diagnosis is my favorite color coded diagnosis in our ecosystem. The goal diagnosis is the least utilized or most underutilized strategy in general. And we're gonna talk about my favorite year end gold strategy. Does not mean it's my favorite gold strategy, by the way.
Speaker 3:I prefaced that before. But as you know in our system, some tax strategies can straddle years, meaning it could be what we call a p attribute, p attribute prescription, p as in Paul, meaning that you can do this prescription in '23 and still count it for '22. So the reason I picked the strategy that we have today in the prescription is that we are almost at the end of the year. I needed something that had to fit into this year. I needed to be gold strategy, and I needed it to be something that's basic and that could easily be executed in the next couple days.
Speaker 2:Since we have some old friends on this list, and we have some new friends. Right? But all takes some time to implement. It's just not you flip a switch, and you're good to go. So let let's jump into your favorite based on that criteria.
Speaker 2:Right? So looking at gold, we're looking at a taxpayer who can currently benefit from, little different than the other ones, the red, green, purple, now we're gold, tax free income and or asset growth. So so this is somebody ideally with an MTR, so that marginal tax rate with value of diagnosis directly correlated with expected future MTR. So, again, look back and listen in so you can hear all about MTR compared to tax bracket if you're cur curious on that. But, Chris, jump in jump into this a little bit for us.
Speaker 3:What's the base? Marginal tax rate, the most important number, in my opinion, that you're going to deal with when you're looking at your tax planning and strategy. If you expect your marginal tax rate to be higher in the future than it is right now, then the goal diagnosis makes more and more sense for you because that means that you're you're going to enjoy tax free income and growth. And we talked about in episode seven where we think tax rates are going to go. So keep that in mind.
Speaker 3:So gold strategy, tax free income and growth, the higher your marginal tax rate that you expect in the future, the the better benefit gold is.
Speaker 2:And likely, taxes are going to increase over time. Would that be a good assumption? Not saying one year or five, but likely over time. Well, John, you're gonna have
Speaker 3:to go listen to our previous episode. I'm not gonna tell you what we talked about. So it's some
Speaker 2:I think I was there.
Speaker 3:I know.
Speaker 2:In fact, that was a great, great interview we had with Andrew as well too.
Speaker 3:So so episode seven, episode seven, we know that the sentiment is sentiment is that tax rates are gonna increase. So my favorite gold year end gold diagnosis is a section five twenty nine plan contribution. That section five twenty nine plan contribution, named after section five twenty nine of the tax code, and you guys are always gonna I'm always gonna remind the listeners that one of our three laws of teaching tax flow is that tax agencies are your involuntary business partner. So because the federal government would like us as a society to save more money for our children and younger folks to attend college and university or a trade school, there's a tax incentive for a section five twenty nine plan contribution. And these are are really what's generally considered, right, an education savings plan.
Speaker 3:Is that correct? Absolutely. It's an education savings plan. It's a tax advantage plan designed to help pay for education. As time has gone on, the definition of what, quote, unquote, eligible education expenses are has expanded.
Speaker 3:So the the value of the five twenty nine plan has expanded in recent years. And the nice thing about the section five twenty nine plan, I'm gonna sprinkle a little sugar on some of our high tax states. We call it a gold diagnosis because you're not getting a tax federal tax deduction for the money that goes into the five twenty nine plan today. But that that income is growing tax free as long as it's used for qualified education expenses. States that do have a state income tax, many of them give you a tax deduction on the state return for that that contribution.
Speaker 3:So there's a sliver. Maybe we'll call
Speaker 2:it pink
Speaker 3:diagnosis, not red diagnosis. Right.
Speaker 2:And also don't forget too. I mean, this the importance of us talking about this today at the end of the month, at the end of the year is this is probably the easiest and most rapid, we should say, implementation of any of the strategies or or diagnosis and prescription or diagnose and prescribe strategies that are out there. Correct?
Speaker 3:That is correct. The nice part about the strategy is that since many of the gold strategies are income dependent, meaning if your income is of a certain amount, you might not be eligible to contribute to a Roth IRA. There is no income restriction on on this five twenty nine plan contribution. Now there are some estate tax considerations. We're not gonna dive into that today.
Speaker 3:If if a large lump sum is contributed to a five twenty nine plan, there's some special gift tax elections where you could spread that contribution out over a five year period. But the things to consider would be that it's allowing not just parents, but anyone the opportunity to put put funds into a special account that receives tax free treatment for for the benefit of of a youngster. Something to remember, though, these five twenty nine plans or state qualified tuition programs, they're kinda interchangeable terms. An adult, usually a parent of a child, will be the account owner. The child is the beneficiary.
Speaker 3:So the children can the beneficiary can change within a family. There are other ways to to save assets for children using, what we call, UTMA and UGMA accounts, Uniform Gift to Minors Act. But the challenges are is once that child becomes the age of majority of 18, that there aren't restrictions on that child. That child now is the owner of those assets and can do whatever it wants with it. Here, the parents are still the owner and are in control of the account.
Speaker 3:The child's the beneficiary. So they're buy so they're buying a little island instead. We're not gonna go buy a Camaro or something.
Speaker 2:Right. And then so, again, kinda the the ease of implementation of these five twenty nine plans is very attractive. I mean, that's one thing. I mean, obviously, it's something that, you know, you could basically I wouldn't say basically, but you can slam the brakes right now, pull into a gas station, and and basically, you're implemented at that point. So
Speaker 3:And this is a bay what we call a basic, so a b attribute, tax prescription, or strategy. Meaning that, typically, you can put you could easily log online log in online tomorrow and create a five twenty nine plan, for a child and contribute money within one to two days. Now I would highly recommend that we always talk about building out your board of directors, and you talk to a financial adviser to make sure that those investments are allocated properly. And there are some other 30,000 foot view rules about five twenty nine plans that that need to be considered.
Speaker 2:Absolutely. And then, yeah, again, there's, you know, our old friends and new friends that we kinda classify or kind of lump into this gold. But, again, it's it's all about strategy. It's all about planning. So even though you may have waited too long this year, this may be may be an option for you.
Speaker 2:But, But, obviously, looking forward to next year, there's plenty more. Right?
Speaker 3:Absolutely. And I wanna touch on a few considerations when we talk about five twenty nine plans. So remember, we talk that that, like I say all the time that, taxing agencies are your involuntary business partner. So five twenty nine plans are encouraged. They are tax advantage accounts, and they can be used for educational expenses as I discussed.
Speaker 3:But now those educational expenses could be anywhere from kindergarten all the way to graduate school. And it can doesn't have to be college. It can be a trade school. It can be, a building trade, a a any type of trade, a license, you know, or license, that's eligible. There's two different types of five twenty nine plans.
Speaker 3:There's the educational savings plan and a prepaid tuition plan, where the prepaid tuition plan is typically some where you would pay for credits in advance through a state. And that way you're locking into the prices today. Five twenty nine plans are sponsored and run by by states and the District Of Columbia. So the five twenty nine plans, what we talked about, the the, the educational savings plans are sponsored and run by states. You do not have to live in the state where you purchase a plan.
Speaker 3:For instance, my wife and I, we have five twenty nine plans for our children, and they're based in West Virginia.
Speaker 2:I didn't know you ever lived in West Virginia.
Speaker 3:I don't have to. That's There
Speaker 2:you go.
Speaker 3:That's that's that's the so why did we pick West Virginia? Well, we worked with a certified financial planner that advised us to do so, number one. Number two, the state we'd like the mutual funds that were in that state of West Virginia plan, which brings me to another consideration that before you invest in the five twenty nine plan, look at the rules and fees because they differ from state to state. Mhmm. And we talked about that board of directors.
Speaker 3:Understand that those five twenty nine plans, they could you can purchase or or fund a five twenty nine plan either directly from a state or using a financial adviser or a broker.
Speaker 2:Excellent. So so there there are even though a five twenty nine plan is is quick and easy to implement, obviously, there there's a lot of variables in that. A lot of options, a lot of opportunity with that. And that being said, I mean, without going into a lot of other detail on some of the other, you know, gold items that that we've commonly seen, is there anything else you might wanna add on this? And if not, what would be your best recommendation or suggestion to any listener?
Speaker 2:Because because maybe this is gonna be the last podcast they're gonna listen to in in 2022. It's kinda crazy
Speaker 3:to think about it. Yeah. Or closing it out. Binge it out. Right.
Speaker 3:My advice would be, you know, every family is different, how they feel about about funding education. With the expansion of the five twenty nine plan rules where where there are some limitations, but you can use those assets in k to 12. If you have a child in a private school, you might wanna deeply consider using this type of strategy. And depending on how your family feels about education and where they wanna allocate their assets, and if you think that you're going to be in a high marginal tax rate in the future or if you think you're in a situation where your assets or income are gonna make you ineligible for many grants or financial aid, deeply consider the five twenty nine plan. Review a few different state plans.
Speaker 3:Connect with a financial adviser that you trust and determine and and if you've been thinking about it and you've already know you wanna do it, it's something that you could do on your own within one to
Speaker 2:two business days. Absolutely. Absolutely. It's great. Thank you for the great advice.
Speaker 2:And thank you everybody for joining in and teaching TADXFlow, the podcast, as we close out. I would say it was a pretty good year. You know, 2022 was was pretty good for everybody. Obviously, there are some in the past that were not as exciting, I should say, most likely, but we really look forward to next year. So, really, a heartfelt thank you from our entire team at Teaching Tax Flow.
Speaker 2:Chris, thank you as always for for dealing with me and and everybody else as far as for this. But but this year, we did a lot. Right? So even though it took you twenty years to develop some of these concepts, you know, and put the pen to paper, you know, years ago on it, we really did bring this bring this to the world. I know that makes it sound huge.
Speaker 2:Right? Well, we it's a lot a lot of material, a lot of good concepts that are now out there.
Speaker 3:Absolutely. And we appreciate everyone's open mind and time. We're passionate about empowering taxpayers to understand the the concepts of tax planning and strategy to legally and ethically reduce the tax you pay in your lifetime. We hope you have a safe New Year surrounded by family and loved ones, friends. And speaking of friends, be friendly.
Speaker 3:Make it your resolution to give us a five star review. Follow rate in that five star review would be much appreciated. Thank you so much.
Speaker 2:We're gonna see you in 2023. Alrighty. Normally, I close this out with see you next week, but let's change it up because we can only do this once a year. Thank you, everybody, again. We will see you next
Speaker 3:year.
