We all face the same dilemma of having to pay taxes and feeling like it is all for nothing. Getting our heads straight on this is tax attorney, certified financial planner, experienced wealth strategist, and best-selling author of Wealth Unbroken, Rebecca Walser. Rebecca shares her thoughts on why people continue to contribute money to 401(k) as she talks about the future of taxes. She also dives deep into the issues of how the 401(k) is the worst thing that has ever happened to the average American as well as the perfect storm brewing in America with the federal debt.
Listen to the podcast here:
The Future Of Taxes with Rebecca Walser
I have a fantastic guest for this episode. Her name is Ms. Rebecca Walser. Rebecca, welcome to the show.
I’m so glad to be here.
Let me tell our audience a little bit about you, Rebecca, who is driving in and out around the greater Baton Rouge. First of all, Rebecca has a book and it’s called Wealth Unbroken. I have read this book twice and I am infatuated with it. Rebecca, when I read books, I always get a pen. I’ve tried the Kindle and all that stuff. I’m old school and old fashioned. I have to have a pen for underlining things. What’s funny is I read your book and I’m just underlining stuff. Maybe there are twenty pages that didn’t have a mark on it. Then when I read it a month later for the second time and I even went back and underline more things. Rebecca is a tax attorney. She’s a certified financial planner and she is an experienced wealth strategist. She’s a best-selling author and she is uniquely qualified. She structures and implements the best income tax, best income, maximization, wealth maximization, tax mitigation and minimization and optimal legacy strategies for her clients. I love that because I’m all about wanting to maximize income retirement and minimize the taxes in retirement.
Rebecca’s book is called Wealth Unbroken: Growing Wealth Uninterrupted by Market Crashes, Taxes, and Even Death. She brings a wealth of understanding to the personal finance book space. Rebecca earned her degree from the University of Florida and her advanced law degree in taxation from New York University. Prior to the law, she worked for years in finance with PricewaterhouseCoopers, LLP, and the global networking division of IBM which was acquired by AT&T. She continues to practice law in the areas of federal taxation, wealth preservation, trust and legacy planning, business succession and estate planning and asset management and protection. She’s also serving her client’s financial needs as a certified financial planner.
I have listened to her on Fox Business one time. She spearheads a national practice with clients across the country. She enjoys working with high-income professionals, business owners, retirees, pre-retirees, high net worth families to implement advanced financial planning and wealth management strategies that maximize income and legacy distribution while minimizing taxes and managing risk. If I missed anything, I know you’ve been on the news and several different Wall Street Journal, Fox Business, Bloomberg Business, ABC and NBC. You are the most distinguished guest I’ve ever had on this show. I did have Harry Dent several times, but this is awesome. Tell our audience anything else that I missed that you want them to know.
You covered the whole thing. That’s going to be hard to do. I’m just glad to be here and glad to start off 2019 with you and your audience, Hollis. There’s a lot of opportunity for people if they’re paying attention, if they’re listening and if they’re looking for the outside the box solutions to all the problems that are headed our way. I know that’s what you do every week on your show and I’m glad to be a part of it.
When someone has accumulated wealth and climbed that mountain or if someone is still in their early to mid-thirties and they’re in the process of accumulation. Everything comes down to the belief on taxes and if a person believes taxes are going to be higher in the future, then it baffles me. Why they still are contributing money to 401(k)? I understand the company match all that but it still baffles me on that. What are your beliefs about taxes? I guess I’m asking you to pull out your crystal ball and rub them and what do you think is going to be in the future?
That’s easy to do because the past predicts the future. The book does a very good job I believe of walking through why we are going to see a seismic shift in less than ten years coming. What I can tell you is I believe that the 401(k) is the worst thing that has ever happened to the average American who is truly about preparation for retirement. We know that for a fact because it came about by accident. I went back into time into the late ‘70s. The Revenue Act of 1978 is where 401(k) was introduced and the early ‘80s is when it was brought into prominence through use for the first time in 1981. I looked to see if there were any white papers, any studies, any mathematical analyses, any tools or anything done by MIT, Harvard or maybe London School of Economics, but there was nothing.
Of course, there would be nothing because the 401(k) happened by accident. When things are not planned and they happen by accident, you get unintended consequences because you didn’t plan through this. We get enough intended consequences in our country to deal with the unintended consequences of accidents and it’s just so sad. You would think that the United States of America since the 1940s has been the world’s currency reserve, we would have planned out what the absolute best situation for our retirees is, but no. What we took was what was intended to be a corporate tax dodge for corporate executives. It’s very important to understand this because if we understand where and how the 401(k) came to be developed, we can see its deficiencies and it’s used beyond its purposes.There's a lot of opportunity for people if they pay attention and look outside the box. Click To Tweet
It was developed and intended as a corporate tax dodge for highly compensated executives in addition to their pension. In the ‘70s and late ‘70s, corporations were having a hard time luring top talent and they were trying to come up with a way to give them another thing to lure them. Everybody was offering pensions. Everybody was offering the golden watch and the retirement package after 30 years and all of this stuff. They said, “We can give you more money. We’ll pay you extra money every year but you don’t get it until you retire. On top of your pension with us, we’re going to set up this extra account for you. The great thing is you won’t pay taxes on it this year because you’re not going to get it this year. You’re not going to get it until you retire like your pension. It’s going to not be your pension. It’s going to be a market-based account that we’re going to pay for you but you don’t get taxed on it until later.” The corporate executives are like, “This is great. Another whole retirement account that I don’t have to pay taxes on.” It’s a way for them to increase their salary presently with no tax implications. They would just earmark these funds for retirement even though they were technically getting paid this benefit in the current year. That’s how it came about.
It worked and it made corporate executives go here, there, everywhere, whoever offered these benefits and it was written into the code in 1981. A benefits consultant at a company called Johnson company was reading through the tax code and found this obscure 401(k) provision. They read through it and understand that it was too highly compensated executives and said that this should be used for everybody. They didn’t sell it to a client but the company itself rolled it out to their actual employees and from there, it started snowballing and being rolled out everywhere. Because of the way it happened, we didn’t do any analysis as to whether it was going to work or not. Now, what we have is this system that is so entrenched. What happens is we are a lazy country. I’ve heard so many times and I’ve gone around and done this tour with the book nationally. I’ve heard so many people have said, “Rebecca, it’s all we have.” If you have nothing or you have something, something is better than nothing. If you have an employee and they would not set up a retirement brokerage account or they would not set up a retirement system on their own. That they would only do something that could be automatically drafted out of their paychecks through their payroll company, then that circumstance of 401(k) is better than nothing, but there are so many better options than the 401(k).
It’s sad that as a company and as a country, we’re so lazy because 60% of our employed workforce has access to the 401(k), we should focus on it, promote it and tell people to do it. The truth is Americans don’t save anywhere near enough so you’ve got half of the country saving absolutely nothing. You’ve got a small portion of the population that doesn’t have access to a 401(k) so the government believes the solution is to push the 401(k). The 401(k) of course is going to be a tax time bomb as we all know. We tell people to contribute to the max only because to walk away from free money still could be a bad thing, but it’s too hard to prove. We just have them contribute to the max, get the free money and beyond the free money, do not put a penny into the 401(k). It is a tax time bomb.
Do you know the old story of the seed versus the harvest? If I’m in the country and I go to the co-op, to the feed store and not have the option to pay the taxes on the seed that I’m fixing to walk out. Like I’m going to plant some okra or I can come back and pay the taxes on the harvest. It’s a no brainer. That goes to the roof. When the 401(k) was implemented, tax rates were extremely higher. If you look at the history of the tax code and you know it and you’ve forgotten more about it, then I know we’re on extremely low tax brackets right now compared to our history. Why do people keep wanting to fund this 401(k)? I think you’re right too. It’s probably an argument I won’t win but I could somewhat debate someone on the free money deal, on how it’s going to put them in a higher tax bracket down the road and talk to them on Social Security. That’s usually my advice too. Just fund the 401(k) to the minimum to get the match and then start another bucket three or something else with your money. How are you different from other advisors or CPAs?
I’m a certified financial planner, not a CPA but I’m a tax attorney so that’s what makes me different. The trajectory of my career and how I got to where I am and where it’s brought me here is, I was in pure finance for a decade before becoming a lawyer. That financial background served me well and gave me a capacity and a perspective of the law side that’s a straight-out lawyer would never have had. I was practicing tax law exclusively right after graduation for a while. What that bright shining light and moment was being in a conference room with a client at the head of his boardroom and his table with me on one side and his tax lawyer and his financial advisor on the other side. As his financial advisor starts to speak, my ears are starting to burn. It’s the most horrific financial advice I’ve ever heard. I’m sitting there realizing that both of these gentlemen don’t understand my entire background. They just know me as a tax lawyer and they don’t understand my financial background at all. I knew right then that wasn’t going to work. I was going to have to open my own practice and I was going to have to be much more holistic. The difference is that I have the perspective on building wealth in a capacity to have it within your control.
America needs to understand that any time they are building wealth with the partner as the Treasury Department of the United States of America, they have little to zero control over that money. They will not have that control for the rest of their life. Because of the tax reform that we had in December of 2017, everything is beautiful. We’re swimming in warm water. It’s a nice lukewarm temperature. We all feel safe and it feels comfortable and it feels right. What we don’t realize is it is about to be boiling within less than ten years. Half of America or more has put nothing towards retirement. They are going to be Social Security babies only, just whatever Social Security gives them because they have lived well beyond their means. They already have debt and the last thing they thought about is saving for retirement. Someone’s going to come behind them and take care of their lifestyle. They’re going to go from living off of this high-level of the lifestyle of the income that they’re making, spending beyond what they make and having a debt to basically living off of Social Security. There’s so much of our country that is going to be able to contribute nothing towards the people that are going to be on Social Security that we have to prepare. When I say we, I mean those who are building wealth. Those who do have and plan to have money in retirement. You cannot keep it in a tax government-controlled account because the government has to go where the money is held and that’s what we don’t want for our clients.
I have said for years that the 401(k), the government is your partner in retirement. People don’t think of it that way but it is. They’re going to tell you the tax rate at an unknown rate and unknown date in the future. Rebecca, we believed the same thing. In your book, you are talking about the nonnegotiable number in retirement. Explain to us what you mean by that.
The book is heavily tax-centric, the history of American and all of that. It builds up to where we’re headed. I also talked about the second biggest problem with being retired in America with the traditional conventional means and that is the market. The market is what I call the Technological Industrial Revolution of the ‘90s. The globalization of the world from the aspect of the internet that gave us an instantaneous capacity to communicate with people across the world on an instantaneous basis, video chatting, and all these things. That all came from the technology of the internet and then we combine that with cell phone technology. We just have a globalized world since the ‘90s, since the dot-com bust that we have not had prior to that. We have to look at the market in the perspective of the ‘90s and on. Everything pre-‘90s is so technologically outdated. It’s not that relevant.The past predicts the future. Click To Tweet
When you start to look at the market from the perspective of the 1990 run-up, the bull market in 1990 still is the best bull market at 417% up on the S&P 500. When you look at that followed by the three-year crash, the dot-com bust, we have only three years in a row of corrections twice before that was the great depression in the ‘30s and World War II in the ‘40s. It had been 50 years since we had three years in a row of the S&P 500 correction down. You see the dot-com bust, then you see that the housing recovery off of the housing, the securitization of junk bonds. The securitization of subprime mortgages as triple-A bonds on Wall Street which allowed us liquidity to flow for a good five to six years and just built up this bubble on the housing market. We obviously had the great recession which was the crash. That great recession peaked was a 57% S&P 500 correction. Since then with the likelihood of the market, as we started seeing, it has been going up and down up and in extreme volatility. Before that time, we have had nothing but a nine-year bull market cycle off the back of the Federal Reserve and quantitative easing. It wasn’t President Obama’s policies that got us a good economy.
I almost feel sorry for President Trump because his policies are very simulative and very pro-growth and good on unemployment numbers and great GDP. All that is going in the right direction. The trade issue with China causes instability. The bottom line is we’re in this new era since the ‘90s of extreme highs followed by extreme lows. You can withstand doing that in your 20s or 30s and your 40s, but when you’re ten years out from retirement, it is a no-win proposition. It took four and a half years after the great recession just to get you back to where you are. If you have ten years left before retirement and you go through a correction like that, you lose 40.5% of your time to grow your wealth just to recapture it. You have lost almost half of your time and then we have five years left. Who’s to say if you’re invested in the market, we won’t have another correction or we won’t have another problem? This is the problem. Extreme high highs followed by extreme low lows is not something that we can deal with in retirement.
The other problem is what they advise you and tell you to buy and hold and the market is cyclical, the market goes up, the market goes down but it comes back up. What they don’t tell you is what happens when the market goes down. If you retire and you have a standard 60/40 stock bond portfolio and that’s where all of your money is and the market crashes like it did in 2008. It takes four and a half years for us to just get back to what we had before the correction. If you’re in retirement, you have to understand you cannot touch your portfolio for four and a half years. You can’t touch it otherwise you will never completely regrow it back to what it was. If you were in retirement and already living on Social Security and you need to take money from your portfolio to maintain your lifestyle, you can’t afford to go to that volatility because that means you can’t touch your portfolio for almost five years. Who can live like that in retirement? Also, the volatility of the market is a wealth building killer and a wealth sustaining killer once you’re in retirement.
It’s absolutely devastating whenever someone takes money out of the market on a down year. I have your book and I opened at page 76, Rebecca. The first sentence is, “Market volatility is the first obvious reason the 401(k) is failing.” We’ve had some volatility this last quarter of 2018. I go down a little bit further. You have a nice little graph here and I love this next sentence, “High volatility doesn’t only mean intense market increases but devastating market lows as well.” If someone is in a distribution phase of their life and they’re pulling money out of the market and they pull it out on a down year, it compounds the losses and how quick the money is going to run out. We talked about the issues and the problems, we’re going to dive into the solution into the second segment. You talked about the perfect storm brewing. Tell us what you mean by the perfect storm brewing in America?
If we had planned this to happen, we could not have ever arranged it and engineered it but without trying, we have it. When I started to talk to a retiree or a pre-retiree ten years or less from retirement, I say, “I want you to imagine the blue sky of your retirement and I’m going to give you two clouds. I want you to understand that these two clouds are going to collide and form the perfect storm that could ruin everything that you’ve ever planned for if you do not prepare accordingly.” The first is the federal debt. Federal debt is now in excess of $22 trillion and we cannot ignore that fact any longer. We especially cannot ignore that fact and we’ve been able to kick the can successfully down the road hypothetically all this time since the ‘80s and since Ronald Reagan’s tax reform of 1986. It has given us the last 30 years of the lowest tax policies since FDR in the 1930s. With our tax reform in December of 2017, we do have the lowest individual tax rates that we’ve had at FDR 1930.
We’re having a great, fantastic and terrific show. We talked about the 401(k). She does an amazing job talking about the 401(k) and how it was founded, how it started in the late ‘70s and ‘80s. I want to talk a little bit about your personal story because you’re right in the book. I’m 42 years old and things that the way that I am now is because of the things that happened in my childhood. If you don’t mind me asking you your thoughts about money and your specific example.
My parents, I love them to death and they’re the most wonderful people in the world. They both came from money. The curse of coming from a family of money. My father came from a wealthy family. He had a lot of KFC franchises and he was a single child. My mother, her mom was the head nurse back in when nursing was prominent for a female. It’s the most prominent profession you could have. She was in charge of the hospital nursing staff and my grandfather was an engineer with the Bells phone company. That’s when you had pensions. They were very upper middle class and never concerned about money and they had no sense when they were growing up about money. My dad enlisted in the Navy straight from high school and went to avoid the college route which was normal. A lot of people did that back in that timeframe.
My mom went to Wake Forest and she got a degree, but they got married and ended up having four kids four years in a row. You can imagine on an enlisted person income with a stay-at-home mom and four young children, what that looked like from a financial perspective. I remember being four years old going into the bathroom and turn on the lights and the lights not coming on and going to find my mom saying, “Mom, the lights aren’t working.” She and my dad sat me down and explained to me something about, “There are things called bills and you have to have money to pay the bills. If you don’t have enough money to pay the bills, your life can go out.” I remember thinking, “I’ve got to figure out how this never happens to me when I grow up.” That mentality stayed with me. I wasn’t determined to be rich. I was just determined to be financially settled and never have the instability of your lights potentially coming off. That has molded my whole life.
We’re going to get into the tax diversification part of the episode. My parents are very middle class. My mom was a registered nurse and my dad owned a tire business. Whenever Walmart and Sam’s started selling tires, my dad’s business started tanking. My parents were very middle class and my mother died at 54-years-old of ovarian cancer. I’m going into this because the way the government forces us to put into Medicare and Social Security, it’s a scam. I don’t like it. I don’t like anyone telling me what I have to do with my money especially when these elite, pompous, career politicians in Washington, DC make the rules for us as citizens and then they exempt themselves from the same thing. My mother died at 54-years-old of ovarian cancer and she never got a penny of the money that she put into Medicare and Social Security. She died four months shy of being eligible for Social Security disability. My dad died very unexpectedly on Thanksgiving Day of ‘07 of a pulmonary embolism. My dad was 64 years old. My dad was nine years older than my mom. I had taken my dad to the Social Security Office in Baton Rouge and signed him up for Social Security. He wants to start receiving Social Security the month he turns 65. My dad received a $255 check when my mother passed away to help with the burial expenses.When things are not planned and they happen by accident, you get unintended consequences. Click To Tweet
The government loves people like my parents. They put into the system their whole lives because they’re forced to. The government is giving us the middle finger whenever they say, “Hollis and June Day, give us your money because we’re better at managing your own money than you are.” My stories whenever I can show someone, very few people even know that they’re going to pay taxes and Social Security. Very few people even know that and it’s mainly because of where their money resides. If there’s a way to get around that retirement taxation and tax diversification, I can’t believe that the IRS does a terrible job of educating us about taxes and Social Security. I cannot believe this past that we weren’t overturning cars as far as citizens that they’re going to tax us on our Social Security again. This is after-tax dollars. Because of our combined income of $44,000 or more, 85% of your Social Security is going to be taxed. Let’s talk a little about tax diversity because it’s not just about asset diversification, it’s also about tax diversification. What are your thoughts on that?
I just want to quickly finish the last segment thought that I had on the perfect storm so that people can follow because it goes right into what we’re talking about tax diversification specifically. We talked about the perfect storm of the federal debt $22 trillion colliding with now the retirement and mass of the Baby Boomers. The Federal government has given us reports every year, the Office of Trustee and the Office of Social Security. They have told us and given us a forecast of when we would get to two payers into Social Security and Medicare for every one person receiving benefits. We’ve been told for no less than ten years that we would not get to a two-to-one payer to payee relationship payer and to a recipient on the system until 2030. It’s is a very specific year because that’s the year the last Baby Boomer retires.
The government has been telling us forever that we would not get to two-to-one until the last Boomer retires. On December 27th of 2017, I was at my home office because it was a quiet week, two days after Christmas. I got this news flash with a whistle which means it’s big news. I thought, “What could be happening?” I walk over to the desk halfway lean over and halfway sitting down and I see record number 61 million Americans on Social Security for the first time. I fell out onto the floor because in December of 2017, we had 126 FTE. It stands for Full-time Equivalent. We had 126 million full-time people and 61 million people on Social Security record for the first time. That is essentially two-to-one in December of 2017, some thirteen years ahead of schedule.
They’re not telling us that. They’re not broadcasting their mistake on that forecast.
That’s not even the reason that it was so shocking to me. What was shocking about it is that I happen to know that 70% of our Boomers haven’t even begun to retire yet. Beginning in 2022, in just three short years and in five to six years recession, 70% of the entire Boomer generation will retire one year after the other year for the five to six-year period from 2022, 2027 to 2028. We’re at two-to-one when we haven’t even had 70% of our generation began to retire yet. The CBO wrote a report in 2008 and it’s in the book that did an analysis and their conclusion was very simple. Two things will happen when the Boomers retire. The benefits will be cut extensively and taxes will go up dramatically and that’s it. That’s the simple math of it. Everyone says to me, “No one will elect politicians that will raise our taxes.” They’re missing the boat. When Titanic hit the iceberg, the engineer looked at the blueprints and the engineer said, “Bulkhead has been breached.” The moment that fit bulkhead is breached she will think, it is a mathematical certainty.
We are at the point now with the Federal debt at $22 trillion and the looming mass exodus retirement, the largest demographic shift from worker to the recipient in the history of the world. We are at the point that it is not blue or red, Republican, Democrat, Conservative or Liberal. It is masked black and white. The can is about to fall off the cliff and everyone should be prepared. Within the next eight years or nine years, we will have a massive Tax Law change and our benefits will start to be means-tested. They are already means-tested. If you are getting $25,000 on our benefit and you have enough other income, the tax benefit 85% so that you pay $4,000 back to them. They are saying, “You make too much money to get $25,000 from us, so we’re only going to give you $21,000 because you make too much.” They are already means-tested in Social Security. They’re calling it taxes instead of calling it what it is which means testing. That’s only going to become more prevalent and more pervasive. Now is the time, in this lull that we have before the storm, the calm before the storm, this low of taxes on the sale is the time to reposition these dollars out of the pretax buckets that they’re in and into an alternative that will work for them for the rest of their life.
I’m a big number. I love data. I love numbers, that’s why all that we’re doing makes sense to me because the numbers don’t lie. I had a friend of mine in Houston Texas that kept telling me I needed to look at what he was doing with life insurance. I was a Dave Ramsey guy and just out of pure ignorance, that what it was, I read a book and I got done reading the book and I called my buddy in Houston. I said, “Somebody is lying. Either you and this author are lying or Dave Ramsey is lying talking about the permanent life insurance.” I’ve heard so many bad things about it. He goes, “Hollis, I’ve been telling you.” That led me on a journey of reading so many books and I couldn’t believe it. It’s really part of the equation what we’re talking about. It’s part of the solution.
As a tax lawyer, I didn’t come to the route you came to the investment world that way and going through the Dave Ramsey channel by the term invest and different standard advice. I, as a tax lawyer, had to look at the tax code and help my tax clients only. The legal tax avoidance of tax is called tax mitigation so you’re minimizing tax legally. From the position of doing that as a tax attorney, you look through the tax code and you find the most tax-favored asset class under the code. There is no doubt that the most favored asset code since our code has been written, is cash value permanent life insurance. It just is and it always has been. There are a lot of reasons the government has to make it. We don’t have to go into that, but the truth is that’s the most tax advantage asset class. If you will establish wealth domestically, onshore legally with the most tax-favored advantage you possibly can, there is no doing that without leveraging cash value permanent life insurance.
You go over that in your book and you do a fantastic job explaining it and telling people what to do. How do you bring on new clients yourself?
Our practice is national. We’re on national news a lot. We are on a lot of different media that way so we get a lot of people that find us through that. They contact our practice and we set up a call and then we go to virtual meetings because I have clients all over. If we’re going to have a client, I have to see them. They have to see me and we have to be communicating. We have the technology that we can be on a webinar call and they can see my screen and I can see their screen. We can write back and forth documents to each other. It’s all interactive. It’s as if they’re almost here but they’re not. Eventually, we want to meet all of our clients at least once in person. That’s how we established clients all over the country that are not here in Florida. We are based in Florida, but we have clients everywhere and I travel quite extensively all throughout the year to meet with clients all over.
What’s the one takeaway from your top-selling book Wealth Unbroken that has stood out to your readers?
The biggest is that the 401(k) is not a good financial tool. People have been so ingrained in conventional wisdom. It’s shouted from the government. It’s shouted from your employer. It’s shouted by all of the big banks because they want you to invest dollars on their platforms. I’m not trying to say that all is bad. They’re all trying to help you and they believe that this tool is a great tool, but what you don’t have happening is anybody talking about what’s coming. There was nobody talking about it. It’s like it’s going to get here and everyone is going to be shocked except for the people that have been exposed to a message like yours and a message like mine. There is nothing to be shocked about. We know what’s coming. We can see what’s coming based on the numbers. We are in a preparation period. I want to relate it to Noah’s Ark. He started building his ark and everyone was laughing at him saying, “It’s not raining. In fact, there’s drought. We haven’t had any rain in 40 years or whatever.” He’s building his boat because he knows the rain’s coming. At the end of the day, we know who run that story. All the people that are making fun of them are dead and he and his family and all the animals are surviving because the rain did come. We’re building the boat now and people think that we’re crazy.
You and I believe in the same thing and the same strategy. I know you’re not a CPA, but you are a tax attorney. ExxonMobil refinery is three miles from the Mississippi River where I am. I have several ExxonMobil retirees and they retire after 30 years working there with $1.2 million to $2.4 million. What do you tell that person that is approaching that and has the majority of their wealth in the 401(k)?
Even though they worked for that company and I know they’re very concentrated in the Exxon space, I would always tell them to diversify somewhat because you never know what’s going to happen. The United States is now the largest oil producer in the world. That alone can keep oil prices down for quite a bit of time and depress Exxon. The first thing I would do is just give them some advice to diversify outside of Exxon. They have two tax strategy options. The first option is a simple Roth conversion which they can keep their Exxon holdings and convert to a Roth and pay the tax outside or inside. They can keep Exxon doing it that way. The problem with the Roth as compared to their second option, which is a cash value permanent life insurance, is the Roth has no champions. Let’s say that ExxonMobil has their 401(k) on Fidelity. The ExxonMobil doesn’t care whether they have paid the tax or they haven’t. They could care less. They own Exxon stock inside pretax or outside pretax. It doesn’t matter if they still own the stock. Fidelity doesn’t care if it’s the pretax account, a traditional IRA or a Roth IRA. Fidelity has no bird in that game. They don’t care.
The only person that cares if it is a Roth account or not are two parties. The United States Treasury Department cares and the taxpayer cares and that’s it. Anytime a taxpayer is the sole person that cares against the government, the taxpayer is in the losing hand because the government is way too powerful. The Roth has no champions. No one’s going to come and stand up for the Roth holder to maintain the Roth. Why we care about the Roth is that there’s a calculation called provisional income. The provisional income is what determines whether or not your Social Security is taxable and the level of your Medicare Part B and Part D premiums. Provisional income has already been proven to us to be suspect by the government. If you own tax-free municipal bonds, even though it’s tax-free, that interest income is included in the provisional income calculation to determine whether or not your Social Security is taxable. I can tell you with absolute confidence that the government will modify the provisional income calculation to include Roth distributions. Even though they’re tax-free, they are cashflow and the government is already taxing your Social Security based on your tax-free municipal bond income. Provisional income in the future will include Roth distributions and the Roth is reported every year. Your basis, your balance, and your distributions are reported every year on 1099 to the Federal government under your Social Security number.The way that we are is because of the things that happened in our childhood. Click To Tweet
The government used to not care. It’s been recently when they started tracking who had Roths and there’s a reason for that. Your book is the best book I’ve ever read talking about taxes, the future of taxes, the history of taxes and the beliefs and where we’re going with the tax code and not only that but also what you can do about it. I want to read it to our audience, page 173 chapter 10. You have a title, “The Golden Child of the US Tax Code.” It’s important because permanent life insurance gets a bad name but here I am with you, a tax attorney and a very well-educated lady. I’m sure you’re doing exactly what you tell your clients as I am doing with my own money exactly what I tell them. Tell us why you believe this is the golden child of the US Tax Code?
It’s just simply not taxable. It has an internal buildup that is never taxable that can be accessed through certain specific ways that we access it. We used to do it through loan distributions but we access it during live tax-free and it’s not taxable nor is it reportable. Unlike the Roth, it gets reported to the government every year how much of a distribution we got. Life insurance is not taxable and not reportable so the government has no knowledge of the policy after we meet the tax test of the policy going on upon creation. Once we meet the tax test at the creation, there’s no more reporting between the United States government and any life insurance company. The reason life insurance besides the tax code itself is the superior vehicle to the Roth is the fact that there’s every champion in the world on the side of life insurance. The top 50 banks in America have so much money invested in cash value life insurance on their tier one balance sheet. For example, Bank of America has an excess of $30 billion cash value life insurance asset on this tier one balance sheet. The top 50 banks have so much in life insurance cash value that they would be reclassified as insurance companies if necessary. You’ve got all of the banks on your side of not taxing life insurance.
We also have all the corporations. Walmart has a case all the way before the Supreme Court because of how they put permanent life insurance on one of their employees. It got worked out in Walmart’s favor and now we have some new consent requirements on employees. There are such a huge multitrillion-dollar industry insurance and banking incorporations that they have their own name. It’s called BOLI, Bank-Owned Life Insurance, and COLI, Corporate-Owned Life Insurance. On the life insurance side, you have two huge multibillion-dollar businesses that would stand in the way of the government saying, “There’s no way you can tax it because you’d collapse the financial institutions of America if you did.” Those are the people that are going to stand up against the changing of the tax code on cash value life insurance. It has been the most favorable since the beginning of the code. It remains to be. If it ever was to change, it would cripple our entire economy. It’s very suspect to ever change that at this point in time that’s why it’s much safer to be on that as your tax-free vehicle than as the Roth where nobody cares because no one is going to be affected except for the taxpayer.
I get asked that question, “Hollis, you said that this company has been paying dividends for over 100 years. Can they quit?” I was like, “They can.” If this company quits paying dividends, life won’t matter. It won’t matter because we will be answering in our doors and scores in for food. You’ve never turned on the TV and have heard of some widow having to sue some big life insurance company because they didn’t pay. This is what they do. They’re more financially stronger than the government by all means.
Their reserve requirements are strict. They have a lot of reserves for every policy they issue. That’s true.
It’s just not much of a risk that they’re not going to pay death benefits. Rebecca, if you want to tell our audience anything else in the greater Baton Rouge area.
I want to stress that the taxes are on sale in 2019. This is the lowest they’ve been since the ‘30s and I promise you, I don’t believe I will ever see taxes this low again in our lifetime. They’re going to run their course until we run into the wall of finance that we can’t defeat mathematically and that is when taxes will go up. I don’t believe that I will see them ever lower again for the rest of my lifetime. I’m young still so I’ve got a good 50-plus years left on this Earth, I hope God willing. Taxes are on sale and now is the time to look at your portfolio. Take a hard look at what could happen, if we are right and taxes go up extensively, where would that leave you? That is not a place you want to be. A place of uncertainty is no place to be.
Call me 202-SAGE. That’s 202-7243 and go to the website SageMoneyRadio.com. We had an absolutely fantastic show with Rebecca Walser the author of the book, Wealth Unbroken. Miss Walser, thank you for being a guest on the show. You were phenomenal.
God bless you and God bless the USA.
About Rebecca Walser
Ms. Walser is a licensed tax attorney, who earned her advanced law degree in Federal Taxation from the highest rated tax law program in the US at NYU. She is a certified financial planner, CFP®, with two decades of financial and legal experience combined. She earned her undergraduate degree, summa cum laude, in Finance, her Juris Doctor degree, cum laude, from the University of Florida, her Masters of Law degree in Taxation from New York University, worked in international finance with PricewaterhouseCoopers LLP, and continues to practice law in the areas of federal taxation, wealth preservation, trusts, and legacy planning, business succession and estate planning, and asset management and protection.