EP. 128 More Knowledge, More Wealth: AM 590 Radio Show

Transcript:

Announcer:

This is More Knowledge, More Wealth, with your host, Gabriel Shahin. Gabriel is a certified financial planner and a registered investment advisor at Falcon Wealth Planning. This show is not intended to provide personalized investment advice through this broadcast and does not represent that the services or securities discussed, are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast, in the process of making a full informed investment decision. More Knowledge, More Wealth, on AM 590 The Answer. Now here's your host, Gabriel Shahin.

Gabriel Shahin:

Good afternoon. This is Gabriel Shahin, certified financial planner. Your host of More Knowledge, More Wealth, that's on every Saturday from 12:30 to one o'clock, going over all important topics of personal finance. Our goal is to give you the knowledge you need to increase your wealth.

Gabriel Shahin:

Now to the listener, you can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning. Our phone number is 855-963-2526. That's 855-96-FALCON like the bird. Or feel free to reach out on our website at falconwealthplanning.com. That's falconwp.com for short.

Gabriel Shahin:

Now I'm a principal of Falcon Wealth Planning, a registered investment advisory firm. We go over all important topics of personal finance, and we are a fee only financial planning firm, that also manages money as well. We go over, like I said, all the topics that could be, where you are today, how retirement looks like, goes over tax planning, investment estate planning, insurance folks, you name it. Anything that involves a dollar sign. If you want to help relate this show to your specific situation, give us a call. We can help do that for you. We'll give you one to two hours, one to two meetings of our time at no cost to you. We have offices all across Southern California, including our headquarters here in the Inland Empire. Our phone number is 855-963-2526. That's 855-96-FALCON, like the bird.

Gabriel Shahin:

Folks, today we are going to talk about tax efficiency when it comes to investing. A lot of people focus on investing, but nobody thinks about the tax efficiency behind it. So I want to talk about that. I want to talk about where to invest the money, whether it's in a retirement account versus a regular brokerage account or even a Roth. And then talking about the taxation of annuities, because I know a lot of people tout insurance products. These are very expensive, heavily commission-based products. Mostly people doesn't ask for an annuity, they are sold an annuity. And I'll talk about kind of the hidden, dirty little secrets about that, what people offer and you hear them on the radio, offering these things. And I'll tell you why you should avoid that and why it is not a good fit for a majority of individuals.

Gabriel Shahin:

But first I want to focus on tax efficient investing folks. This is extremely important. I'll talk about some of the basics. For example, a stock investing versus a bond investing. And let me tell you the difference between the two. So a bond invest, kicks out interest, whether you want to call it a coupon payment, whatever the case is. At the end of the day, it pays out. Whether it's monthly, twice a year, whatever it is, it kicks out interest.

Gabriel Shahin:

Now the thing with that interest that it kicks out, it is taxed at your ordinary income rates, which is the normal brackets we see today, which is 10%, 12, 22, 24, 32, 35, and the top bracket of 37%. Now that doesn't include the 3.8% insure tax on top of that, depending on your income levels. The reason that's extremely important is you may think that you're making 5% for example, but net if taxes, it might be as low as depending on your tax bracket, two and a half percent. So it's really key depending on what your federal income tax is, what state you live in and what your total income is, on what type of income that's coming in, and where it's coming from. So in a case like that, your interest could be taxed almost 50% of it. So if you make 5%, it could be two and a half.

Gabriel Shahin:

Let me explain the benefit of, for example, a municipal bond. If you're in the higher tax bracket, that's why some people invest in municipal bonds, because now if everything was the same, same risk, same duration, same everything, the interest rate won't be as high as that taxable bond, because the municipal bond already has the baked in tax benefits for being a municipal bond. So in that situation, if a taxable bond is 5%, that means a municipal bond will really only be 4%. But depending on your tax situation, it may make sense to do the municipal bond. Because like we said earlier, depending on your tax bracket, if you're in a high tax bracket, that 5% bond might only net you out two and a half. So I'd rather do the 4%, tax free. So it's, don't always just look at the interest. You have to look at what's called the tax equivalent yield.

Gabriel Shahin:

Now let's say it's reverse. Let's say you're in a super low tax bracket. It's tax free, municipal, sound attractive, no better word for it, but sexy. Who wouldn't want a tax free investment? Now, if you're in a low tax bracket, let's say very low tax bracket, between federal and state, it's 10%. The reason that's important is because let's say you have a 5% taxable bond. Well, you may net out after taxes, assuming between federal and state is 10%, you may net out 4.5% of the five tax free, or from an after tax basis. So even if you pay tax on 5%, you still keep four and a half percent of what you made. So I would rather do the taxable bond, versus the 4% tax free bond. Yet again, you have to understand your tax situation. And unfortunately I see people making these recommendations to you without even, looked at your tax situation.

Gabriel Shahin:

It's absolutely madness when I see this. I see it all the time. What do they say? "Please consult with your tax advisor." And it's very important that you understand where that plays a piece, in your overall situation as well. So yes, there are tax efficiencies on the balance bond side. There's also tax efficiency on the stock side. There are differences of qualified versus non-qualified or we'll call it ordinary dividends. By the way, folks, if you're just joining us, you're listening to myself, Gabriel Shahin certified financial planner, your host of More Knowledge, More Wealth here on every weekend, talking about all important topics of personal finance. And today is talking about the simplicity of tax efficient investing. And when you take a look on the bond side, the two different types between taxable and non-taxable interest, and on the stock side of qualified versus ordinary dividends, it is very important on what you choose to invest in and how you invest in it, because a qualified dividend has a better tax treatment than an ordinary.

Gabriel Shahin:

Now what's ordinary? Ordinary dividend is taxed just like interest, whether it's in your bank account, your CD or the bonds that we talked earlier on the taxable bonds. So an ordinary dividend is taxed the same way, as that bond, at the 10%, 12, 22, 24, 32 35 and the 37% bracket. Now a qualified dividend could be tax free, 15% or 20%. Those are the taxes. Now on both sides, I both ignored the 3.8% surtax because it's a constant between the two. But on a qualified dividend, will always be lower than your ordinary income bracket. Always. For example, if you're in the 10 or 12% bracket, your qualified dividends are tax free. Let's say you're higher than that. It would be at 15. If you're at 22 or 24, it could be at 15. If you're at the highest bracket at 37, you'll be at 20% in the qualified rate.

Gabriel Shahin:

So it's always lower. So this is where it's extremely important, because I see people mess this up every single time. And I'll ask you this question. If you had a million dollars and 500,000 was in the taxable account, your brokerage will call it non-retirement account. And 500,000 was in your retirement account, your IRA will call it. Would you invest stocks? Assuming you wanted to invest half in stocks, half in bonds. So 500,000 in stocks and 500 bonds. Where would you want to invest the stock? Would you want to invest it in the retirement accounts, the tax deferred or the brokerage accounts? The after tax, not retirement money? What would you choose? Not an opinion, the factual right answer, there's 11 plus reasons why this is the factual right answer, is you will always want stocks in the non-retirement, the brokerage, the after tax account. Always.

Gabriel Shahin:

Why? Well, because let's just do simplicity here. Let's say you had a million dollars. Okay, and you had a million dollars in the IRA versus a brokerage account. Where would you rather have it? Someone might say retirement account. Really? You've never paid taxes on that IRA tax-deferred retirement account! So when you take out a million, you're going to owe half a million dollars in taxes, versus if you have it in a brokerage account. You have a million dollars there, you take it out, you only pay taxes on the growth. Heck, the best account of everything. I would rather have 900,000 in a Roth.

Gabriel Shahin:

A Roth you could take out 900,000 and pay no taxes on the federal and state level. It makes all the sense in the world to have your money up there in the Roth, tax free. So because we would rather have more money in the brokerage account because it's after tax money and oh, by the way, the growth is tax preferred tax treatment, if you held onto it for over a year. It's subject to long term capital gains, which oh, by the way, is the same taxation as qualified dividends, which remember is always a lower rate than your retirement account.

Gabriel Shahin:

So it's not only more tax beneficial, because qualified dividends are a lower rate. And in the retirement account, who cares because you only pay taxes in the retirement account guys, when you take the money out, and it's at a higher rate. So that is another reason why you want your stocks in the brokerage account. You want to know something else? Well, let's ask you a question. What historically makes more money, stocks or bonds? Folks that is not a trick question. Stocks historically make more money than bonds. Should be like that for the foreseeable future. Even if the stock market drops and bond goes up, the average over 10 plus years is stocks do better than bonds, let alone when you stretch it out for 20, 30 years. Granted, past performance has no guarantee on future results. Anything on the contrary is disallowed from this industry, but because we know stocks over time make more than bonds for the most part, wouldn't you rather have more money, as we said earlier, in the brokerage account?

Gabriel Shahin:

So wouldn't you rather stocks in the brokerage account versus bonds in the retirement account, or versus stocks in the retirement account? You'd rather have bonds in the retirement account. Also, another reason. There's more reasons which I'll go over it a little bit later. The stocks that grow more versus the bonds, remember there's two types of bonds. There is taxable and non-taxable municipals. Remember taxable will always make more interest assuming the same risk, duration, rating, will always make more, the taxable bod than the tax-free bond, because the tax-free rate is baked in to that lower amount. So wouldn't you rather have the tax, the higher taxable account in that retirement account? Because remember you pay taxes, that ordinary income with everything in that account, including bonds, because remember you only pay taxes when you take it out.

Gabriel Shahin:

Folks, there are so many more things to discuss with you, but we have to take a short little break. And if you need help with this, this is what we do. This is what we can help you with. Our phone number is 855-963-2526. That's 855-96-FALCON, like the bird. We're going to go on a little break here and we'll be right back after a few words.

Gabriel Shahin:

This is Gabriel Shahin certified financial planner. Your host of More Knowledge, More Wealth that's on every weekend covering all important topics of personal finance. We're going over retirement planning, making sure you're prepared for retirement, social security and strategies, real estate, taxes, avoiding them now and in the future investments, reducing fees, commissions, and so on, insurance and estate planning. Folks, we are offering a free financial assessment that you could take advantage of. We have offices all across Southern California, including the Inlet Empire. Give us a call to take advantage. It's a $500 offer. Our phone number is 855-963-2526. That's 855-96-FALCON, like the bird, or visit our website, falconwealthplanning.com. That's falconwp.com for short. Enjoy the show we look forward to serving you. Am 590, the Answer.

Gabriel Shahin:

Welcome back folks. This is Gabriel Shahin, certified financial planning, your host of More Knowledge, More Wealth, here on every weekend talking about all important topics of personal finance. And today we are talking about the tax strategic way of managing your assets. And it's not as simple as just stocks and bonds, but it's also where you put those investments. So we talked earlier about the tax efficiencies of the difference between stocks and bonds. And now we're talking about where you should put the accounts. And we talk about how bonds pays historical performance less than the stock market. In addition to that, the interest on bonds, are taxable at the highest of tax rates, which is your ordinary income bracket. Well, some people get municipal bonds, but that's apple to apple, a lower rate, because it has the baked in tax benefit.

Gabriel Shahin:

So corporate bond versus a municipal bond, if one's paying five, the municipal may pay 4%, for example. We talked about investing in bonds in the tax deferred account, because of the under performance and of the historical asset versus stock, plus the tax inefficiencies of interest. And so a municipal bond actually makes no sense in a tax deferred retirement account. I can argue make no sense at all. Why? Well, for the simple reason is, who cares of the tax free benefit? Because you only pay taxes when you take it out. So why would you care to have taxable tax free bonds in a retirement account? Because you don't pay any taxes until you take it out. The only time a municipal bond ever makes sense is in the taxable brokerage account. But remember, my point that I'm saying is why would you have bonds in a brokerage account versus a IRA account?

Gabriel Shahin:

I would probably depending on your situation and going back to my original example, if you had 500,000 in a brokerage, taxable, non retirement account, and 500,000 in a retirement account, tax deferred IRA, for example, and you wanted to invest 500,000 in stocks, have 500,000 bonds. In that specific situation, I would always recommend end to put 500,000 in stock in the taxable brokerage versus the 500,000, that would be necessary in that example, to put it into the IRA account. Folks, if you need help with that, if you are understanding it but want to see if you are a good candidate to make sure you could do tax location investing, we can help folks. This is what we specialize in. This is what we do on a daily basis. It's extremely important to do these types of asset location. Vanguard came out with a study called Advisor Alpha that shows this can enhance your portfolio by almost half a percent by putting the right assets in the right tools for tax efficiency reasons.

Gabriel Shahin:

Most advisors don't do it. It's too complicated to do it. And member, most advisors have never even looked at your tax return. So it's extremely important to understand the benefits of investing properly and looking at your overall tax situation, because depending on how much you have, this could save you thousands, tens of thousands, if not more than that, depending on how much you have in tax savings. Because people are doing it wrong. They put the money in the wrong pools. They're putting stocks in the IRA and bonds in the brokerage account. On top of that, it's municipal bonds, which municipal bonds, pays lower interest than corporate bonds. Makes no sense. I'd rather get the higher interest rate, put it into the retirement account, because that pays a higher interest and you don't pay taxes on it anyway, unlike the brokerage, because you pay taxes and IRA, remember, when you take it out.

Gabriel Shahin:

So if you get an average rate of return of 4% on the retirement accounts and a return of 10% on the stocks and the brokerage account, you are getting that average 7% rate of return between the two, but you are strategically getting the 10% growth in the more tax efficient account, because of the qualified dividends that stocks pay out. Plus the long term capital gains on stock are always a lower tax rate than IRAs. Folks, that's a lot of information to go over with you. Another benefit is step up in cost basis. If God forbid you or your spouse passes away, the remaining spouse or the beneficiaries get a step up in cost basis. And what typically goes higher over time, stocks or bonds? Bonds kicks out interest. They don't really go appreciate that much or depreciate that much. Of course, we understand price sensitivity and interest rates, but relatively speaking, they're not as volatile as stocks.

Gabriel Shahin:

So, and it goes up more, the stocks over bonds. So it's even for estate planning, a more efficient reason to keep stocks in that brokerage account. Also, it could be a great gifting strategy because we know it appreciates. You can use that for gifting as well, appreciated stocks, where you still get the write-off for it. So this could also, you get the write-off for the full amount you gift. If you bought an investment for a thousand, it grew to 5,000, you still get the write-off of $5,000, but you avoided the capital gain on the 4,000 because the charities don't pay that. So folks, there are multiple reasons it makes sense to do this. We heavily recommend that you consult with the tax advisor and your financial advisor. But wait, financial advisors are not allowed to be tax advisors. Well here at Falcon Wealth Planning, we are.

Gabriel Shahin:

Give us a call, we'll be happy to help. Our phone number is 855-963-2526. That's 855-96-FALCON, like the bird. Or visit our website at falconwealthplanning.com. That's falconwp.com for short. We'll be happy to put together per personal financial assessment for you to help relate this show to your specific situation. By the way, folks, if you're just joining us, you're listening to Gabriel Shahin, certified financial planner, your host of More Knowledge, More Wealth. We're here on every weekend talking about all important topics of personal finance, folks. And our goal was to help from a strategic point of view, save money, because the more knowledge you have, the more wealth you'll truly attain. And looking at that where advisors are trying to help you build wealth, sadly, majority, a lot of our industry, their self-serving advisors. What does that mean? They think about themselves and their paychecks before they think about you.

Gabriel Shahin:

And that makes sense because if they're working for a broker dealer, they're working for the broker dealer. They are not independent registered investment advisors like here at Falcon Wealth Planning. We are fee only registered investment advisor and we focus client first. We are not allowed to get paid from any third party except from our clients directly. That's it, versus other are places if they're selling you a mutual fund, they can get paid from the mutual fund company and their broker dealer off commissions. And sometimes they have spiffs. "Hey, you put 10 million in this fund. We'll give you an extra trip or extra money." So they have to also fit certain categories for certain things. "Hey, you have to sell this much in stock commissions. This one in bond commissions, this one mutual funds, this one in insurance products, this one's in annuities." And then each company will also say, "Hey, if you sell my annuity, I'll give you even more money."

Gabriel Shahin:

Folks, if that's not a conflict of interest, I don't know what is. And unfortunately, a lot of the industry is like that, especially in the broker dealer world sadly. How do you know if they're like that? Ask your advisor. Do you hold a series seven? That license alone allows you to receive commissions. Here at Falcon Wealth Planning, we all have CFPs. We are all certified financial planners, our advisors. We are not allowed to make commissions at all, which leads me to the annuity conversation. A lot of advisors are pitching these annuities to clients. We see them all the time. They normally come too late. I ask people with annuities, "Would you do it again?" I don't think I've ever had somebody say yes. Most of the time, they said, "Absolutely not. I don't like these things. I don't know how they work." Why? Because they are sold to you.

Gabriel Shahin:

And the worst thing about this industry is you have some advisors out there that are saying, "Oh no, you don't pay me anything", because that's the elephant in the room how do you pay these individuals? "Oh, you don't pay me. The insurance company pays me." Are you kidding me? Give me a break. How is that legal? That is so wrong. They are getting paid a commission from the product they are selling you, that goes to the brokerage house that owe to them. Are you kidding me? So you believe there's no cost to it? How about they're just transparent and tell you they're making a five, seven, 10 up to 20% commission, depending on what they're selling you? How about they just be honest with you? You want to know what the commission is? Look what the surrender fee is the second you put your money in there.

Gabriel Shahin:

If you put in $100,000 and then if you want to take your money out, you only get 80,000, now you know it's a 20% commission. That's crazy. And you see a lot of this at free dinner seminars, folks. That's why we always recommend to get a second opinion. There's no reason not to, literally. Because the person you're getting a biased opinion of somebody that only gets paid if you buy it. Think about that. You don't want advice for someone that only gets incentivized when you buy it. Get advice from other people. We heavily recommend it.

Gabriel Shahin:

Folks, if you need help with that, if you're looking for that second opinion, we are charging nothing for one to two hours of our time to help point you in the right direction, whether you're good fit for us or not. We want to cast a strong net out there of being one of the good guys in this industry, and a trusted resource you can go to. Our phone number is 855-963-2526. That's 855-96-FALCON, like the bird. Would be happy to put this together for you and point you in the right direction.

Gabriel Shahin:

Annuities, by the way, going back to that, because I promise I'll talk about the tax inefficiency is number one, their tax at ordinary income rates. If you have money in a brokerage account, it makes no sense to have money and annuity there, because you are being taxed at the highest of rates. Plus upon passing, there's no step up in cost basis. And some people are selling you certain aspects of guaranteed income, but you lose that guaranteed income, if you don't annuitize it afterwards. And then they go and move you from one annuity to another. Hello? The whole reason you did that guaranteed income writer was so you could then annuitize it at the end, which still doesn't make sense. Heck, the IRS has calculated because you're going to lose money with an annuity, because we know you're going to lose money.

Gabriel Shahin:

The IRS has already calculated that you're going to lose. And how have they done that? They've done that with charitable gift annuities, because we know when you buy an annuity, the only winner is the insurance company that does it for you. So if you're going to do one, go do it with a charity of your choice, that has a strong endowment. You get a tax benefit that payouts more and you're helping a charity of your choice. Yet again for an unbiased non-commissioned advisor, those are the type of things we look at for people wanting that guaranteed income.

Gabriel Shahin:

Folks, that's a lot to talk about jam in here, in a 30-minute show. I want to thank you guys for tuning in with me. Please reach out to any one of our colleagues. You can reach out to myself at 855-963-2526. That's 855-96-FALCON, like the bird. Call us for a personal confidential conversation to help relate this show to your specific situation. Tune in every weekend, every Saturday from 12:30 to one o'clock where we go over all important topics of personal finance. We want to thank you for listening. Enjoy your afternoon. Have a great week, and God bless.