Grinds Our Gears: The Financial Rules That Make No Sense

Episode 6 00:00:00 Ben Fuchs: Welcome to today’s episode of Fuchs Around and Cal them out. I’m your host, Ben Fuchs, with my co-host Alex Cal, and today I am really excited for this episode. Uh, because it is, um, things that piss me off, so grinds my gears, grinds my gears. Yeah. I don’t know if we have a license to steal from Peter Griffin on Family Guy. I don’t want to get in trouble. But if it was not family Guy, well, it was family Guy. 00:00:24 Alex Cal: But we are not. We shouldn’t reference them if we are going to take their content anyway. 00:00:29 Ben Fuchs: I can say whatever I want and then our producer will clean it up and make sure we don’t get sued. If we get sued, it’ll all be on him and that’ll be okay, right? 00:00:36 Alex Cal: I think as long as we make it funny, we’ll be okay. 00:00:39 Ben Fuchs: Please don’t watch Seth MacFarlane. All right. Did I even say his name? Right. All right, moving on. So things that are frustrating for me is the unnecessary anxiety that some of our clients feel, because it’s like they shouldn’t have to worry about this stuff, but they do. And what would you say is one of the, like, the number one things that our clients shouldn’t have to worry about But do. 00:01:02 Alex Cal: Yeah, I would say Social Security is number one. 00:01:04 Ben Fuchs: Yeah. I mean Social Security running out. It’s like, here’s this thing that you’ve paid into your entire life, your entire working career. And then they’re like, hey, you know, no big deal, but we might cut your payment by twenty four percent. Don’t worry about it. And you’re like, oh, that’s cool, I’m retired. Extensions are definitely going down because we don’t have inflation. And so that means let’s put it in real numbers. If I was getting two thousand a month, I’d be getting what is that, twenty five hundred a month somewhere in that ballpark, right? Twenty five. It doesn’t matter. I don’t mind losing five hundred dollars a month. I’m happy you don’t take that six thousand dollars a year that I was using. I don’t really need that. I don’t need to eat. Yeah. So, you know, I’m thinking about this, and I’m like, there’s so many ways to easily, quickly, immediately fix that problem. You could, um, instead of capping out what they tax on Social Security. So for those that don’t know, if you make one hundred and eighty thousand dollars a year, or if you make two million dollars a year, you pay the exact same dollar amount into Social Security from a tax base. So your income is capped at I think it’s like one hundred and seventy eight thousand somewhere in that ballpark, but you’re paying the exact same taxes. How can we fix it? Get rid of that break. I don’t think the people making five hundred thousand dollars need to pay less, or the same amount as somebody making one hundred and seventy, right? That is that a fair? 00:02:23 Alex Cal: That’s fair. 00:02:24 Ben Fuchs: Okay. But there’s more. You know, if we really want to dive into it, a lot of CEOs, they get paid by stock options. Right. 00:02:35 Alex Cal: Don’t even count in that figure. Right. 00:02:36 Ben Fuchs: Don’t even count. Great point. Thank you for bringing that up. It does not. They get paid millions and millions of dollars through stock options. And they pay zero Social Security tax. When they sell. They may have to pay other taxes. That might not be fifteen percent, might be twenty percent, it might be twenty three point eight. But none of that actually goes to Social Security. And you think, man, if they just put two percent, two percent tax on the capital gains that people make millions of dollars sell all the time. Man, that would like, totally fund Social Security and we’d never have to worry about it again. And then we could be so happy that our billionaires contributed to fixing the Social Security problem. And I’m sure that out of the kindness of their hearts, you know, when you have nine zeros after your bank account, I’m sure you don’t mind paying an extra two percent, right? It’s not a big deal. 00:03:27 Alex Cal: I don’t know, it depends on who you ask. I would say, oh. 00:03:31 Ben Fuchs: Man. See, I thought we had fixed the problem. 00:03:33 Alex Cal: I have no problem with it, but it depends on who you ask. 00:03:36 Ben Fuchs: Okay, so when Alex Cal, uh, runs for office, we know, not we. First of all, nobody do any Google searches on the guy. Skeletons galore in that closet. Uh, we already did. Uh, we will be doing. 00:03:49 Alex Cal: I passed background checks. Oh, that’s. 00:03:51 Ben Fuchs: That’s all we need. That’s all we. And we’re not going to go any further because, God forbid, we find something that would be horrifying. So the whole idea that people have to worry about Social Security running out, that we have to run different plans and analysis for people if it were to run out. That’s something that grinds my gears, that makes me crazy and also is completely and totally unnecessary. Fair? 00:04:12 Alex Cal: No, I would say that’s fair. 00:04:13 Ben Fuchs: Okay. You you have one about five twenty nine plans. 00:04:17 Alex Cal: Yeah, but more about the whole Medicaid spend down. 00:04:20 Ben Fuchs: Tell me more. 00:04:21 Alex Cal: Especially with, you know, I understand the state doesn’t want to pay for all your care. I get it, and especially with the nursing home, it is fourteen, fifteen grand a month. So understandable. But my thing is, why are we including college planning funds in that number? The whole purpose is so that the kids have less debt, to be less of a burden, to then spend more money on other things for the economy. 00:04:48 Ben Fuchs: Yeah, but if they run into problems and they’ve got like, you know, if they have to go bankrupt because of student debt like that comes off, right? No. Oh, really? 00:04:56 Alex Cal: No. Why would it do that? 00:04:57 Ben Fuchs: Yeah. That’s crazy. 00:04:58 Alex Cal: Especially through the government. They’re not going to let you do that. 00:05:00 Ben Fuchs: They don’t want indentured servants anyway. Sorry. Go ahead. Tell me more. 00:05:03 Alex Cal: So especially if. Yeah, I understand the parents can access the money. Yeah, they’ll pay a penalty, of course, but I don’t see how if. What if being for them, the whole idea was, hey, I’m going to set this up for my kids. So my kids are in a better position. They’re not old enough to own the account, so I have to put it in my name and then. Well, yeah. If you need long term care event, thank you for using those funds to help fund that instead. 00:05:30 Ben Fuchs: So you have to drain the five twenty nine account to pay for your long term care. Yeah. 00:05:34 Alex Cal: At least in Connecticut. 00:05:35 Ben Fuchs: At least in Connecticut. 00:05:36 Alex Cal: Other states may be different story, but Connecticut is a five twenty nine is a spendable asset. 00:05:42 Ben Fuchs: That is incredibly frustrating. 00:05:45 Alex Cal: Yeah, can’t get it out of your name because then you’ll run into a penalty on top. 00:05:49 Ben Fuchs: Yeah, I would say that that would make the list of things that I would rather have not happen. Um. 00:05:55 Alex Cal: I can understand your money. Yeah, right. Or your account? Your own accounts? 00:05:59 Ben Fuchs: Yeah. No, I get that. And I think, listen, I think that it’s fair to a point. Right. And I think there’s a certain amount of like, what is the system? Right? Is the system like, you know, you need to take responsibility for your own care. You need to pay for it. I think there is something to that. And I think there is something to say, like we shouldn’t be attaching a burden onto the state. At the same time, if you are in a position where you need care, I do think it’s fair for like the state to take care of you. I don’t think you have to be kicked out on your own because you have dementia or other scenarios where you can’t do two or three out of the six activities of daily living, right? That we judge those by. And so I, I mean, it’s always it’s a tough scenario, but if I’m a financial advisor and I’m planning for my client’s best interest and not for the state’s best interest, I’m going to make sure that they’re giving as little as possible to the state. And understanding that five twenty nine is one of those things that can be taken. We may have to make some different recommendations with those. 00:06:58 Alex Cal: Yeah, that’s all it is, is just the sooner we can be in front of it. I mean, great, the state will get less. 00:07:04 Ben Fuchs: Absolutely. All right. So I have another thing that I think really, really frustrates me. And I’m going to lay out my case and you’re going to tell me why I’m wrong. Because that’s I’m okay with that. You’re allowed to tell me I’m wrong. I’m a firm believer in that. 00:07:18 Alex Cal: What if you what if what you say is right? 00:07:20 Ben Fuchs: That’s never happened before. But you know, I’m happy for a one off. So. The majority of people that we meet save their assets, their net worth into their retirement funds. IRAs four hundred one, four hundred fifty seven for government workers, four hundred three B’s for teachers and some hospital workers. Thrift Savings plan. If you work for the federal government, you get the idea. And when most people pass along their wealth, it is through that asset that they have the most money in. So let’s say that I have a single child and I don’t. I have three, but it makes more. 00:07:58 Alex Cal: You just want to leave to one. 00:07:59 Ben Fuchs: Yeah, let’s say that the other two really piss me off and I’m going to leave that one Theoretically, you got two million dollars in my retirement account. I passed away. It goes all to that child. After ten years, that’s how it has to take out all of their. All of that money. Okay. So what most people do is they take out ten percent a year, two hundred thousand dollars a year, and then they are taxed on that two hundred thousand dollars as if they made that money. Also, when people inherit money, typically they’re at their highest earning potential. So they’re making the most money they’ve ever made in their lives. They’re also paying the most money they’ve ever made. And then they get to inherit this money, and then they’re paying tax on all of it as well. And one side of the argument is, woe is me, you just inherited two million dollars. Stop crying. Which, to be fair, is the side that I’m on half the time. But the other side is. Well, wait a minute. I didn’t want all this money to go to the federal. The state government. I don’t want to be pushing my children to the thirty seven percent tax bracket and seven percent state bracket. I don’t want forty three percent of that money that I worked so hard for fifty years to save, to now be going to the federal government? 00:09:05 Alex Cal: Hold on. Before you said we should pay a little bit more into, like, the Social Security benefit side. 00:09:12 Ben Fuchs: Sure. This isn’t going to Social Security? 00:09:13 Alex Cal: Well, I mean, going to the government. 00:09:15 Ben Fuchs: Well, again, I don’t have a problem paying taxes. I like clean water. I like, you know, like I’ve been in states where you can’t drink the tap water. I’m, you know, we live in Connecticut. I’m okay with certain things. And, you know, my kids go to public schools. Again, things that I’m okay with. But I also want to pay as little in taxes as I possibly can. Uh, just because I don’t mind taxing the rich doesn’t mean that I want to pay those taxes. Those are totally different. I mean, I think we can understand we. 00:09:41 Alex Cal: Want to fund the. 00:09:41 Ben Fuchs: Government. No no no no no no no no, I didn’t say that. We don’t want to fund the government. I just said I don’t want to fund the government. 00:09:46 Alex Cal: I don’t either. 00:09:46 Ben Fuchs: Not in my backyard. Right. I think there should be a prison. I just don’t think it should be behind my house. Right. Not in my backyard. So I don’t want to pay for those taxes, but it. And I wouldn’t necessarily have a problem with the way this is set up, except that if I had one hundred thousand dollars dollar house. And let’s say that it was worth two million dollars, and I had passed away. And that went to my one heir. They could then sell that two million dollar house and pay zero taxes. Step up in basis and not one dime, not one penny. They get the whole thing tax free. So here we are. When I leave two million dollars and I’m effectively paying forty three percent over time to the government. So that means eight hundred and sixty thousand dollars of that two million is now gone to federal and state government. Whereas the real estate, all two million dollars goes to the next generation. Okay. And if we think about who has real estate and who has a lot of real estate, typically it’s your not necessarily middle class, right. It’s people with more. And now when they move the federal estate tax limit up to what, twenty six million dollars for a married couple filing jointly? 00:10:54 Alex Cal: Correct? Yep. 00:10:55 Ben Fuchs: Right. And I think it will be thirty million. Is it fourteen point nine nine. 00:11:00 Alex Cal: thirteen point nine nine right now. And it’ll go to fourteen. Oh. 00:11:03 Ben Fuchs: Okay. So it’s almost twenty eight million. Yeah, I think he does the numbers. I have to google the stuff when I look at it. But you know, he’s got a better. 00:11:10 Alex Cal: Man for the show. 00:11:11 Ben Fuchs: I appreciate that. Um, makes one of us. I’m glad somebody. 00:11:14 Alex Cal: Can read your mind sometimes. 00:11:16 Ben Fuchs: It’s horrifying. Uh, so can my wife. 00:11:18 Alex Cal: And some of them are weird. 00:11:22 Ben Fuchs: Good thing I was thinking about you at the time. All right, stay out. But if we can pass on twenty eight million dollars completely and totally tax free. But we have to give away forty three percent of our four hundred one KS. That would be something that I would say grinds my gears. And it didn’t used to be like that, by the way. It used to be that if you inherited money from your four one K or IRA from a parent, you could stretch that out over your lifetime. You could take twenty or thirty thousand dollars a year. You could pay a lot less overall in taxes, and it could be generational. It could last for your entire lifetime. Now, not so much. And so you’re forcing people to take it out, which means they’re more likely to spend it and more likely to pay more to the government. How does that make you feel? 00:12:02 Alex Cal: No, I would agree. I mean, it just hurts our clients or just hurts everyone in general, especially if the one tool that they push right now is great. Save in retirement accounts. All these catch up contributions and deductions that you get when. Okay. Yeah. Great. You saved all this money. You don’t need it. It’s just going to go to the government anyway. 00:12:21 Ben Fuchs: Yeah. The other thing that they did was they pushed back the required distribution age. Right. So when you’re forced to take money out, you know, seventy three right now it’s about three point seven percent, give or take. You divide the total amount of money that you had at the end of the year by twenty six point five. I don’t make these ridiculous rules, but that’s what they tell you to do. Safe to take three, four or five percent a year while you’re alive, but then your kids inherit it and they have to take ten, and they push back when you’re forced to take RMDs. So in twenty thirty three, it’ll be seventy five years old that you’re forced to take out this money. They don’t care if the people that own that money take it out. They’d rather they didn’t, because the heirs are going to have to pay a lot more in taxes to do it. 00:13:01 Alex Cal: Right. 00:13:01 Ben Fuchs: Yeah. And so it’s a weird scenario. And so as we see baby boomers passing away, it’s almost like this gift to the tax system where when we talk about Roth conversions, there’s reasons why it makes more sense for the people that own that money to pay the taxes instead of the next generation, because the next generation, they still have to take all that money out over ten years. But you don’t pay. They don’t pay any taxes on that money when they take it out. So if we can control the taxes, if that’s important to you, great. Now listen, I love my kids. They’re wonderful. Um, they can get whatever they get. I’m not going to pay the taxes for them. That’s just my position. But, you know, I have a lot of clients that do care about that. And it’s important for us to make sure that they’re getting what they need out of the system. Right now. You have somebody and we can cut this out if you want to. But that we talked about earlier today where he’s getting a pension and he’s not paying taxes on it because of his service to the country. But if his wife. 00:14:00 Alex Cal: Paid. 00:14:00 Ben Fuchs: Him. 00:14:01 Alex Cal: Huh. Thank you. Damn. 00:14:02 Ben Fuchs: Yeah. Thank you to him. Absolutely. Um, but if he passes away, his wife may have to. Well, still get the pension, but will then have to pay taxes on it. Right. 00:14:12 Alex Cal: Yeah. So that same benefit would not apply to her. And at the same thing for them, they want to leave as much money behind as possible. Right now they pay nothing in taxes federal or state. We might as well use the extra room that they have. Still pay nothing. Right. But let’s just slowly siphon off some away. 00:14:33 Ben Fuchs: Or even we take more and we pay more taxes. And we even pay more money than you would really want to, because the other number that we looked at, right, is when they’re married, filing jointly, they’re both alive. Their taxes are here. Let’s say the pension is one hundred and twenty dollars a year and they don’t pay taxes on it, give or take. Right? All of a sudden she’s paying taxes on one hundred and forty thousand dollars pension. And then she has to take required minimum distributions. 00:15:01 Alex Cal: And she’s in a single bracket. 00:15:03 Ben Fuchs: Yeah. And she has to take Social Security in a single bracket. So her tax bracket goes from zero to like twenty four or thirty two percent. So if they can max out the twenty two percent bracket while they’re alive, while they’re both alive, right. They’re gonna be paying a lot less taxes than if you were to pass away. And she would take this money on her own and then have to pay all the taxes herself. Yeah. 00:15:26 Alex Cal: And we want to leave money behind, so it works out even better. 00:15:29 Ben Fuchs: Right. I found that most of the time when we’re doing Roth conversions, it’s either because it’s going to save one of the two people in the relationship taxes, or because they want to leave money to the next generation. That’s usually the catalyst. The other thing for me is when you’re going to be forced to take out more from RMDs than you’re ever going to spend, you know? So, like, I’ve got people that are spending twenty five thousand dollars a year from the IRA, but they’re going to be forced to take out sixty. Well, if you’re going to have to take it out anyway and pay the taxes anyway, well, let’s get ahead of it and make it so that you don’t have to pay the taxes ever again on that money, and do that before you’re forced to take the RMD because you can’t convert RMD money to a Roth IRA. And that’s something that, you know, people have gotten confused on in the past, but it is what it is. Um, sir, is there anything else that grinds your gears, anything that you want to bring up that we haven’t talked about. 00:16:21 Alex Cal: Other than, you know, kind of going back to real estate, it’s deferrals, the best game. It’s really what it all comes back to. Um, a lot of the time people will say, hey, you know, do these little things or these quick fixes. And honestly, they all kind of come back to defer, you know, whether it be these ten thirty one exchanges, which just means we go from one real estate to another property without any paying any taxes. Right. 00:16:45 Ben Fuchs: So I got a question on that. And you to be fair, Alex knows more about real estate and taxes than I do. And if you don’t know this, we can just edit it out. 00:16:52 Alex Cal: But I should hopefully. 00:16:54 Ben Fuchs: If we’re doing a ten thirty one exchange. Right, I bought a rental house for two hundred thousand, and then I turn it into a duplex for four hundred thousand, and then a small apartment building for a million. And, you know, I’ve deferred all the games. Every time I move it from one to the next, I sell it and I move to the other one. I never pay the taxes. And let’s say that I die. Do my kids still get a step up in basis on that ten thirty one exchange? Yeah. So we’ve deferred the taxes our entire lives. And then when the children inherit it, they don’t pay any taxes at all. 00:17:22 Alex Cal: Yeah. And the nice thing is, along the way, while you were still living, you got benefits from depreciation. 00:17:27 Ben Fuchs: Got to depreciate the whole thing over time. 00:17:29 Alex Cal: Yeah. So say you bought that one hundred grand property. You started with a two family, right? Depreciated it for the twenty seven and a half years. You said, hey, I want an apartment. Now your basis that adjusted like, hey, we took all that depreciation. It’s like fifty grand. You moved to this apartment building? Still fifty grand, but now the apartment’s worth two million dollars to pass away the next day. Your whole two million dollars is included in your gross estate. So why are we step up? 00:18:00 Ben Fuchs: Why are we managing stocks and bonds and mutual funds and ETFs? Why aren’t we managing real estate? What’s wrong with us? Where have you been playing this game? You know, if you’re on a column out real estate edition. Coming up next. Yeah. 00:18:10 Alex Cal: Well, real estate’s a little bit more. You have that hassle factor, right? Especially if you have, you know, two, three, four family. Before you get into the commercial space, you have to deal with tenants. Are you even landlord material. Do you understand what could happen? I mean, I’ve had situations, I’ve had clients have rental where your tenant gets cancer, they can’t pay you. They don’t have money to pay you. 00:18:36 Ben Fuchs: You can’t kick them out. No. What kind of a jerk would kick out a tenant with cancer? 00:18:40 Alex Cal: Yeah. So you have to eat that. 00:18:42 Ben Fuchs: And you have to still pay the mortgage if you have one. 00:18:44 Alex Cal: Or any other expenses that come up. Right. So it’s all on you. So if you have no free time, no connections or help around you, and you’re barely making things meet, it’s not going to work. 00:18:59 Ben Fuchs: I think that in a lot of cases, the people that are successful with real estate here are the ones that are either able to do the work themselves or have family that can help them do it. And if they can’t, and they have to go to somebody else. For all the makeovers, all the redos, it takes either a very, very long time to break even or you never do. And there are often times when we’re looking at people and I’m looking at the, the, the actual rate of return, like they have a, they have a rental property. And we’re looking at, you know, what they spend, what the taxes are, what the insurance is and what they actually net after taxes, like what they bring home after paying for all that. And, you know, if they sold the property, they would clear four hundred thousand dollars and they’re only making like two percent a year for all of that hassle, which and there are other times when it’s the opposite, right where they’re getting like thirteen percent a year and keep it. And that’s wonderful and great. But there are a lot of times I’m like, man, this is a lot of work and you are getting nothing from it. 00:19:47 Alex Cal: And unfortunately, that’s more common that I see. Um, even more scarier sometimes there’s no insurance or there’s no lease agreement. And so there are or even an umbrella policy. All the real estate is in your name. So if someone slips and falls and, you know, everyone’s litigious now, um, well, it could be gone. 00:20:08 Ben Fuchs: As soon as Alex buys a property, I’m going to retire after I fall on his property. Anyway. 00:20:14 Alex Cal: Uh, that’s why I have a camera just for you. 00:20:16 Ben Fuchs: Great. I’ll, uh. I’ll. I’ll wear my green suit. No one will see me. Uh, thank you for hanging around this edition of Futurama and hope you enjoyed, uh, the things that, uh, bother me a little bit. Uh, somewhat. It may be government related. Maybe not, but. Hope you’re having a great day. And, uh, see you next time. Investment advisory services are offered through Foundations Investment Advisors, LLC, foundations and SEC Registered Investment Advisor. The content provided is intended for informational educational purposes only. The views and opinions expressed herein are those of the individual speakers and not necessarily those of foundations and its affiliates. 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Always consult with a professional. All rights reserved. A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce your future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax and estate planning strategies with your tax advisor. To be sure a Roth IRA conversion fits into your planning strategies. Please note that this transcript was automatically generated and may include errors.