2021-09-15_Major_Tax_Changes_Coming...Just_Like_Always
00:00:00.000 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge,
00:00:03.600 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:00:08.200 | building a plan for financial freedom in 10 years or less.
00:00:11.360 | My name is Joshua Sheets.
00:00:12.360 | Today I want to continue a discussion on tax changes, tax law changes, with a brief overview
00:00:19.520 | of the text of the recent House Democrat proposal for tax changes that they would like to see
00:00:25.680 | passed in tax law.
00:00:28.320 | Now when I comment on current events, I'm walking a bit of a tightrope.
00:00:33.640 | If I comment on current events and current proposals, that is good for content.
00:00:40.240 | It's good for eyeballs because people are often interested in hearing and seeing what's
00:00:45.640 | actually happening.
00:00:47.340 | The problem is that when you comment at an early stage, it's hard to be certain of what
00:00:53.120 | will actually get through the political process.
00:00:56.320 | In the same way that in yesterday's show where I talked about recent proposals and bills
00:01:00.700 | that are submitted to Congress for your bank to automatically send all of your transaction
00:01:07.800 | information directly to the IRS, if I comment on tax changes here, it's current, it's newsworthy,
00:01:15.640 | it's attractive in terms of attention, but it's highly uncertain.
00:01:19.920 | I don't know what's actually likely to be passed into law, and I'm personally not close
00:01:27.000 | enough to the political process to even have a sense of what's actually feasible at this
00:01:32.700 | point in time in the political process in the United States.
00:01:36.720 | So it's dangerous for me to comment on current proposals at an early stage because it's very
00:01:44.520 | uncertain.
00:01:45.680 | However, if you wait too long, if I wait too long, then there's not really any planning
00:01:51.480 | opportunities available.
00:01:53.280 | And I'll point out in just a moment with some commentary on this current bill how obvious
00:01:56.820 | and important that is.
00:01:59.080 | If you wait for a law to become, or a bill to become law, if you wait for the president's
00:02:04.920 | signature, then often you're too late to actually put in place any kind of intelligent planning,
00:02:10.800 | and so I didn't serve you in that appropriate way.
00:02:14.700 | So what I want to do to try to tackle this problem is I want to use this current bill
00:02:23.320 | as a lesson, and I want to show you a few of the themes that I see in the bill, and
00:02:29.480 | then talk about how you can plan for the future without regard to any current particular piece
00:02:38.000 | of legislation.
00:02:40.640 | And this is fulfilling a theme that I've talked about for a long time.
00:02:45.920 | I've talked, for example, for many years about how I expect there to be changes coming up
00:02:52.120 | in things like retirement accounts, and I expect far more changes.
00:02:55.680 | I don't expect the rules that you and I are governed by today to be consistent with the
00:03:01.960 | rules that you and I are governed by 20 years from now, which is why long-range financial
00:03:06.740 | planning is in many cases quite difficult and dangerous.
00:03:11.660 | But I'll talk to you about some of the techniques and tools that I think do work in those scenarios.
00:03:18.080 | So let's begin with the text of the document.
00:03:21.960 | I will release a direct link to the text of the document in the show notes, so if you
00:03:27.360 | would like to read the text of the bill as it is coming out of the House Ways and Means
00:03:33.220 | Committee in the United States Congress, then you can feel free to take a look at that.
00:03:38.840 | It's 800 and something pages, about 200 and something pages of which are directly applicable
00:03:43.800 | to financial and tax rules.
00:03:47.500 | What I would suggest that you do instead of that is take a look at the quite excellent
00:03:53.560 | Jeff Levine, who is on Twitter @CPAPlanner.
00:03:58.040 | Jeff Levine works with and for Michael Kitsis and the Kitsis team.
00:04:02.760 | He is a real tax expert who does a phenomenal job of staying current on all of the proposals.
00:04:09.320 | So I took a look through his tweet storm where he was live tweeting and reading his way through
00:04:14.880 | the proposed legislation.
00:04:16.760 | He should have an article released a little bit later today on Kitsis.com covering some
00:04:23.000 | of the details.
00:04:24.000 | At the time of my recording, I have not yet seen his article.
00:04:27.280 | So feel free to take a look at that at Kitsis.com if you're interested in a very technical analysis
00:04:32.600 | of some of the proposed changes.
00:04:35.400 | A few highlights for you that I think are the most important things that you should
00:04:39.280 | know.
00:04:40.280 | First of all, it is proposed that tax rates are going to be increased.
00:04:44.960 | Now there are some areas of disagreement between the President's proposal and what the House
00:04:49.400 | Democrats are proposing here.
00:04:51.920 | In some cases, the House Democrats are significantly more aggressive than the President's proposal,
00:05:01.040 | which is in some ways I think to be expected.
00:05:04.320 | In short, the highest tax rate is proposed to be higher.
00:05:11.080 | In addition, the highest tax rate under the current proposal is proposed to be kicking
00:05:16.360 | in at something around $400,000 for an individual, $450,000 for a married couple filing jointly.
00:05:24.120 | That's kind of a lower number than it was previously proposed to be.
00:05:30.240 | So basically looking at something like a 40% tax rate plus the surcharges on anything in
00:05:35.320 | excess of $400,000 of income, which we'll see.
00:05:39.440 | Now there's also been proposed changes in the capital gains tax rate.
00:05:43.920 | President Biden had proposed making the top capital gains tax rate equal to the top ordinary
00:05:50.280 | income tax rate of 39.6%.
00:05:53.480 | The House Democrats' proposal seems to be more modest with a maximum capital gains tax
00:05:58.560 | rate of 25%.
00:06:00.720 | Who knows what will wind up happening.
00:06:02.600 | It does seem hard for me to believe that capital gains tax rates will increase to 40%, but
00:06:09.240 | I would not be surprised or shocked by really anything at this point in time.
00:06:16.760 | When other important components to the legislation would be changes to even corporate tax rates
00:06:24.120 | discussed as well.
00:06:25.800 | Now most interesting to me are some of the legislative changes that are being suggested
00:06:35.640 | relating to IRAs and Roth IRAs.
00:06:40.440 | Specifically, as was pretty easy to predict when the news came out about Peter Thiel's
00:06:46.080 | $5 billion Roth IRA.
00:06:48.840 | Specifically, Congress seems to be taking aim at large retirement accounts, adding a
00:06:55.560 | set of new rules governing large retirement accounts.
00:07:00.840 | Now this is not a surprise in any way.
00:07:03.440 | I think here we see the effect of the data leaks from the IRS to ProPublica, the journalists
00:07:12.920 | who have been writing the series of articles on the wealthy and their taxes in the United
00:07:18.800 | States.
00:07:20.120 | We see here the direct effect by way of reminder.
00:07:25.720 | There was evidently an IRS whistleblower who leaked, we don't know the extent of it, but
00:07:32.120 | who leaked at the very least years and years worth of confidential tax returns on at least
00:07:38.800 | hundreds of taxpayers in the United States directly to ProPublica.
00:07:44.820 | And ProPublica has been systematically going through that data and publishing various articles
00:07:51.440 | on it.
00:07:52.880 | They had several general interest articles, but perhaps the most newsworthy one was the
00:07:58.840 | article they released on Peter Thiel's $5 billion Roth IRA, where he turned, I think
00:08:05.240 | it was $1,300 of contributions into $5 billion over the course of a couple of decades.
00:08:11.280 | And because he did that in the context of a Roth IRA, then of course those monies under
00:08:17.600 | current tax law are considered to be tax-free.
00:08:20.640 | Now interestingly, if you have not seen it, I would encourage you to go and in fact I'll
00:08:25.200 | link it in the show notes today.
00:08:27.120 | I would encourage you to go and watch the YouTube video that I released for the Nomad
00:08:32.220 | Capitalist channel on Thiel's Roth IRA, because I actually, I argued in that particular video
00:08:44.660 | that with Thiel's $5 billion Roth IRA, he actually has a remarkable planning opportunity
00:08:50.980 | wherein he could, by expatriating from the United States and renouncing his US citizenship
00:08:56.500 | after the age of 59 and a half, he could take his $5 billion and take it offshore completely
00:09:03.820 | income tax-free, which would be a remarkable opportunity.
00:09:08.180 | Now will he do that?
00:09:09.300 | I doubt it, but in my understanding of the laws surrounding expatriation, Roth IRAs,
00:09:15.540 | etc., he does have a really interesting opportunity.
00:09:18.420 | So I'll link that in the show notes as well.
00:09:20.660 | I would encourage you to go and see how he could potentially use his massive Roth IRA
00:09:28.020 | combined with offshoring for a tremendous tax planning opportunity.
00:09:34.180 | Now under the current proposals, however, there will be a number of changes that are
00:09:40.660 | recommended.
00:09:41.660 | First of all, Roth conversions will be limited based upon income amount, and there will be
00:09:47.140 | some new required minimum distribution rules on large retirement accounts.
00:09:54.860 | So the wealthy will not be able to do Roth conversions.
00:09:58.180 | There'll be limitations on the so-called mega backdoor Roth IRAs, where you use a 401(k)
00:10:04.420 | and then convert some of the after-tax contributions into a Roth IRA.
00:10:09.260 | Also some additional restrictions are being proposed on the kind of investments that you
00:10:15.580 | can hold inside of an IRA or Roth IRA.
00:10:20.260 | There are already restrictions that you can't own businesses in which you have more than
00:10:23.740 | a 50% interest in, but they're tightening up even the private placement market as to
00:10:29.540 | what kinds of businesses you can hold in the accounts.
00:10:34.300 | So a lot of changes there, and all of them in a higher tax direction.
00:10:39.640 | So you need to be aware of what is coming, and hopefully you've taken advantage of opportunities
00:10:46.180 | in the past.
00:10:47.180 | That's the extent of which I wish to comment at the moment on the content of that proposal.
00:10:53.060 | Again, go to Kitsis.com to read Jeff's article, which I'm sure will be published later today,
00:10:58.980 | if you're especially if you're a financial advisor and you need the information to share
00:11:02.020 | with your clients.
00:11:03.600 | What I want to point out, however, is how do you plan in the face of uncertainty?
00:11:10.420 | I would present this current proposal to you as evidence of the highly unstable nature
00:11:27.620 | of US-American tax law and political process.
00:11:33.820 | Right now, what you see in the United States is just a complete and total breakdown of
00:11:40.300 | the political process.
00:11:41.940 | There is no long-term vision that everyone has agreed upon.
00:11:46.700 | There is no overarching plan.
00:11:51.400 | We are in a place of schizophrenic gridlock, basically, where we have this ping-pong ball
00:12:02.220 | bouncing back and forth between the Democrats and the Republicans, and there's no overarching
00:12:09.360 | sense of leadership.
00:12:10.760 | There's no overarching sense of consistency of "here's where we're going as a people.
00:12:16.640 | This is what we believe in."
00:12:18.520 | Basically, you just have this bounce back, bounce back, bounce back and forth.
00:12:21.520 | You see this, "Okay, President Obama is going to raise taxes a little bit.
00:12:28.120 | President Trump is going to lower taxes a little bit.
00:12:31.200 | President Biden, we're going to raise taxes."
00:12:33.760 | Just this back and forth, back and forth.
00:12:37.480 | Now, although you have this schizophrenic gridlock, the actual marginal changes are
00:12:45.760 | actually not that big.
00:12:48.840 | For all of the news that I've just described to you, there's not all that much of a difference
00:12:53.600 | to you.
00:12:54.600 | It makes a little bit of a difference if you go from a 37% tax rate to highest marginal
00:12:59.160 | bracket to a 39.6% marginal tax bracket.
00:13:02.400 | At the end of the day, that's not that big of a difference.
00:13:05.360 | It makes a little bit of a difference if the top rate kicks in at $500,000 or $400,000,
00:13:11.680 | but at the end of the day, these are only marginal differences and things kind of march
00:13:16.400 | on business as usual.
00:13:18.840 | The IRAs and the Roth IRA proposals are interesting to note, but they're not that big of a deal.
00:13:26.880 | Meaning that, okay, some people do backdoor Roth IRAs and mega backdoor Roth IRAs, but
00:13:31.280 | they're not super popular.
00:13:33.200 | They're popular in the hardcore financial nerd space, but broadly speaking, they're not particularly
00:13:39.560 | popular.
00:13:41.360 | They're trying to tighten something up.
00:13:42.800 | Okay, some people are going to pass a new law with additional requirement of distribution
00:13:47.360 | rules if you have a really big account and a high income, but fine, that's kind of expected.
00:13:53.640 | There's this argument back and forth, but things do more or less kind of just march
00:13:58.760 | on.
00:14:00.960 | I find it difficult to know how to analyze this because on the one hand, I could create
00:14:05.640 | a show saying, "Look how schizophrenic this is and just the whole system is broken," but
00:14:10.360 | then on the other hand, I could create a show and say, "Look, things kind of continue as
00:14:13.640 | normal."
00:14:14.640 | I have argued that, hey, since 1950s, tax collection is locked right out at about 25%
00:14:22.800 | of GDP.
00:14:23.800 | So, while there's a little change on the margins, I think that from my perspective, it seems
00:14:29.360 | like the politicians in the United States have pretty well feel like they have figured
00:14:34.720 | out their Laffer curve, meaning that they've figured out the optimal level of taxation
00:14:39.520 | where people will pay as much as they can possibly pay without rebelling.
00:14:45.000 | You don't see much rebellion.
00:14:47.480 | Very few people, although some people are, very few people are leaving high income tax
00:14:53.800 | states.
00:14:54.800 | Some people are, but not really.
00:14:56.360 | There's millions and millions and millions of people who are quite happily living in
00:14:59.760 | California and New York.
00:15:01.520 | There are a few people who are fleeing for different places, but there are some businesses
00:15:07.640 | moving but not much.
00:15:10.200 | There are people fleeing the United States, a few people are, but all things considered,
00:15:15.480 | not many.
00:15:16.560 | And so, it seems like the politicians have pretty well dialed in their Laffer curve,
00:15:21.000 | which they've figured out the optimal amount of tax collection and things kind of continue
00:15:25.520 | as normal.
00:15:26.880 | And so, I don't know which of those arguments to make.
00:15:29.800 | I think that, although it's paradoxical, both of them are true.
00:15:33.640 | I think that the current schizophrenic arguments and bickering simply serve the politicians
00:15:41.080 | because they are able to go to their side and say, "Look, I'm fighting for us."
00:15:46.520 | While the changes aren't actually that significant, so people just kind of go along.
00:15:51.800 | And I know that sounds cynical.
00:15:54.000 | I try to guard against cynicism, but it's hard to observe the process and come away
00:15:59.140 | with anything but.
00:16:02.360 | As far as I can tell, Congress in the United States is broken.
00:16:07.920 | There's no major legislation happening.
00:16:11.120 | They've abdicated much of their responsibility for legislation to the courts on important
00:16:16.120 | issues and it seems pretty well broken.
00:16:19.240 | So, time will tell.
00:16:21.040 | We'll see.
00:16:22.040 | So, what can you do?
00:16:23.560 | The first lesson I would say is you should always do your planning earlier rather than
00:16:29.720 | later.
00:16:30.900 | One of the things that I think was the most interesting about this particular proposal
00:16:36.280 | is the dates that were assigned from it.
00:16:39.960 | When President Biden was elected, there were a lot of people who were saying, "Okay,
00:16:44.840 | I need to sell something because I don't want to pay a higher capital gains tax right down
00:16:51.320 | the road."
00:16:52.320 | But, none of us knew what the date was.
00:16:55.160 | Some people argued that the tax changes would be imposed retroactively.
00:17:02.660 | California did that a number of years ago.
00:17:04.260 | They passed a tax law and then they made it retroactive.
00:17:07.660 | So, the law was passed, for example, on September 1st, but they made it apply all the way back
00:17:13.060 | through January 1st.
00:17:14.780 | I don't remember the exact dates.
00:17:16.500 | That's what a retroactive tax law is.
00:17:18.620 | So, California voters went along with it.
00:17:20.780 | They weren't bothered by it.
00:17:22.340 | That's pretty wrong and evil in my opinion, but they did that.
00:17:26.540 | Some people argued, "Well, it would be a future date."
00:17:28.660 | But this particular proposal puts the dates down and it was the date that the proposal
00:17:33.380 | was released publicly, which was September 13th.
00:17:36.300 | And so, here I am recording this on September 15th of 2021 and it's too late, right?
00:17:43.460 | Unless you had a binding contract in place as of September 13th and nothing materially
00:17:48.760 | changes with that, any kind of sales that you do now are exposed to the higher rate.
00:17:54.620 | And so, the lesson here is if you think that you see the future, right?
00:17:58.860 | If you think that taxes are going to go up, you have to follow through with your convictions
00:18:03.940 | and your analysis, even if there's not evidence that you can point to.
00:18:08.460 | Because when they release that date, it's too late, right?
00:18:12.340 | When they make that happen, it's done.
00:18:15.380 | And so, if you saw that, "Hey, we have a new president, we have a democratic house,
00:18:20.300 | democratic senate, taxes are going to go up," you needed the conviction to actually follow
00:18:25.340 | through and make your sales to the extent that you were going to sell things in the
00:18:30.980 | previous cycle.
00:18:32.940 | Because once it was released, we now see September 13th was the date.
00:18:37.460 | That was the date.
00:18:38.460 | So, the first thing is follow your convictions.
00:18:41.200 | If you believe that taxes are going up and you should do Roth conversions, follow your
00:18:46.180 | convictions.
00:18:47.180 | If you believe taxes are going up and you should sell assets while they're at a lower
00:18:50.360 | amount, follow your convictions.
00:18:53.320 | Because at this point in time, the prognostication business is quite difficult, so you have to
00:18:58.700 | look at the general trend.
00:19:00.740 | The second lesson that I draw from this is we can clearly see there is a legislative
00:19:07.600 | implementation of the general trend, meaning it was not hard to predict that taxes are
00:19:14.160 | going to go up, and here we see the teeth coming out for that actual proposal.
00:19:20.140 | What will happen politically?
00:19:21.480 | I don't know.
00:19:23.180 | I don't know what happens in a reconciliation process, but we see here the evidence that
00:19:29.400 | elections have consequences, and if you are living and working in the United States, taxes
00:19:34.960 | will go up.
00:19:36.280 | And so, pay attention to the trends.
00:19:38.560 | Pay attention to what is happening.
00:19:41.600 | The third thing that I observe is that the government changes the rules, and I want you
00:19:51.320 | to pay attention to the fact that they are significantly changing here the rules on IRAs,
00:19:58.040 | Roth IRAs, and things like conversions.
00:20:03.840 | I thought when I was a young man, I thought that, "Hey, law is a law, and it should continue."
00:20:11.600 | And that's because I equated moral laws with current laws.
00:20:18.760 | And so I thought, "Well, laws shouldn't change.
00:20:21.160 | If it's illegal to kill somebody or to murder somebody, it should be illegal to murder somebody
00:20:25.580 | no matter who's president.
00:20:26.580 | It should be illegal to murder someone no matter what political party is in power."
00:20:30.320 | And so I thought there was a lot of stability, and I used to listen to people when I was
00:20:33.600 | younger who would say, "Oh, the laws will change.
00:20:36.360 | Don't trust Roth IRAs, or don't trust IRAs because the laws will change on them."
00:20:40.600 | And I thought, "No, they can't change.
00:20:42.560 | It's a law.
00:20:43.560 | They said it."
00:20:44.560 | Well, I have learned over the years that it wasn't wacky to say that things would change.
00:20:52.800 | You have to look and read the direction, say what's happening.
00:20:56.840 | And people are using things, they will change.
00:20:58.760 | And so I've come to be convinced at the current moment, I've come to be persuaded that many
00:21:05.760 | of these laws will change.
00:21:08.120 | And all of the laws on things like IRAs, 401ks, Roth IRAs, et cetera, will change.
00:21:15.000 | Congress keeps a list of what is called tax expenditures, and on that list is 401k tax
00:21:20.800 | exemptions, Roth IRA tax exemptions.
00:21:24.240 | And as is so often the case, when Congress passes a law, they call it an incentive, and
00:21:31.120 | then when you follow the law that they pass, they call it a loophole.
00:21:34.160 | And so you're dealing here with people who will change the laws.
00:21:37.200 | And as the financial situation in the United States becomes more and more dire over the
00:21:43.520 | coming years and decades, you will see many of these laws change.
00:21:49.040 | And I think that the way that you will see them change is the way that you see them changing
00:21:52.920 | right now.
00:21:54.200 | Nobody today is going to cry over the prospect of Peter Thiel or Mitt Romney or some other
00:22:04.440 | rich fat cat who's got $500 million in his IRA.
00:22:09.120 | Nobody is going to cry over that guy paying higher taxes or him being subjected to additional
00:22:14.800 | required minimum distributions, which forces money out in taxes.
00:22:18.840 | No one's going to cry over it.
00:22:20.500 | But what that does is that psychologically primes the population to accept that their
00:22:26.260 | taxes will change as well, and that their IRAs will be taxed, and their Roth IRAs will
00:22:30.940 | be taxed, etc.
00:22:32.960 | And so I think that you should assume that everything is going to change.
00:22:37.960 | I do not assume that my Roth IRA will remain tax-free.
00:22:43.840 | I look at it and I say, at the moment they're saying that my distributions from my Roth
00:22:48.080 | IRA will be tax-free, but that'll change.
00:22:53.560 | At the moment they're saying that I can maintain the tax deferral on my 401(k) subject to the
00:22:58.360 | current rules at age 70 and a half when I get required minimum distributions, but that
00:23:02.200 | will change.
00:23:03.200 | What will change?
00:23:04.200 | Well, I don't know.
00:23:05.200 | They can change the RMD formula.
00:23:06.840 | They can make the money come out at an earlier amount.
00:23:08.960 | But these things are not set in stone.
00:23:10.760 | They're just the current round.
00:23:12.520 | And they can pass if there's a political consensus, and they can just simply pass a new set of
00:23:17.640 | rules.
00:23:18.640 | Congress gave us the Roth IRA.
00:23:20.920 | Congress can take away the Roth IRA.
00:23:22.800 | Congress has power and authority to do whatever they want with these rules, and we're subject
00:23:26.720 | to them.
00:23:28.440 | So the first lesson that I use this as evidence is, don't place any kind of long-term trust
00:23:34.240 | or confidence into the promises of these government agents.
00:23:39.000 | Don't trust them.
00:23:40.560 | Recognize that they will change the law when it is politically expedient for them to change
00:23:45.320 | the law.
00:23:46.800 | And they will use whatever tools and means necessary, including leaking personal data
00:23:53.680 | from the IRS to a journalist article to change the perception of people so that everyone's
00:23:59.080 | looking down and saying, "Peter Thiel has a $5 billion Roth IRA.
00:24:02.440 | That's not appropriate, and so we should change the law."
00:24:04.840 | And then you and I might very well be swept up in that law change.
00:24:09.440 | It's political warfare.
00:24:10.860 | It's propaganda warfare.
00:24:12.640 | And so expect it to happen.
00:24:14.280 | Do I have any evidence or proof that the leak was manipulated, the leak was intentional
00:24:20.720 | by political actors?
00:24:23.600 | I have no evidence or proof whatsoever.
00:24:26.200 | But if you think back, right, for the last few months, leak all the data, all of the
00:24:32.480 | confidential tax records of the wealthiest people in the United States, leak it all after
00:24:41.000 | the election of a Democratic president, after the election of a Democratic Congress, leak
00:24:45.280 | it to a journalistic outfit.
00:24:48.160 | Journalistic outfit starts publishing the stories.
00:24:49.760 | The stories make their way into the news cycle.
00:24:51.980 | And here at perfect timing, here is the change.
00:24:55.120 | Now are the politicians responding to what the muckraking journalists discovered?
00:25:00.080 | Or is there something more, is there greater collusion?
00:25:03.080 | I don't know, but the end effect is the same.
00:25:06.080 | And I have not yet heard of anybody being prosecuted or any major investigations into
00:25:11.280 | who leaked that confidential tax information.
00:25:14.960 | The end result is the same.
00:25:16.440 | The end result is now we have legislation proposed, which changes new rules, and we're
00:25:20.880 | going to have widespread support for taxing the rich.
00:25:26.240 | So the means don't matter.
00:25:29.080 | What matters is the end result.
00:25:31.200 | Now the next lesson that I would draw from this though is while rules can change, you're
00:25:38.280 | kind of stuck with using the rules as they are for yourself.
00:25:43.400 | I'm not opposed to making contributions to 401ks, Roth IRAs, etc.
00:25:48.680 | I see that as it's really the only tool that a US citizen has, or a US employee, somebody,
00:25:55.960 | a US person who is an employee has to lower his tax rates.
00:25:59.820 | And they work well, and there are many good reasons to use them even if the laws change.
00:26:04.880 | I'm a major proponent of 401k accounts, especially due to their asset protection benefits.
00:26:11.120 | And so you can know simultaneously that the rules will change, but still look and make
00:26:19.240 | a good solid decision saying I'm going to use this account because it serves my interests
00:26:24.240 | right now.
00:26:25.720 | And that's the way that I think you should look at things, is not look at things and
00:26:28.520 | be swept up in this fury of "hey, they're going to change the laws and so I can't trust
00:26:35.080 | them."
00:26:36.080 | But just simply look at it and say as things exist right now, what serves my interests?
00:26:40.240 | I've made contributions to retirement accounts.
00:26:42.680 | I've taken early withdrawals from retirement accounts that I've talked about on Radical
00:26:45.920 | Personal Finance.
00:26:47.200 | If you have periods in which your income is going to go down, then it's better for you
00:26:53.160 | to make contributions to tax-deferred accounts when your income is high, even if a year later
00:26:59.280 | when your income is low, you take the money out and pay a penalty.
00:27:02.740 | And so these accounts are not sacrosanct.
00:27:05.360 | You just look at them and say, "What can I do now?
00:27:07.720 | What's the best solution for me right now?"
00:27:10.520 | And so I encourage the use of the accounts if they fit your situation.
00:27:14.880 | I encourage people to use Roth IRAs as a place to put their emergency funds.
00:27:20.440 | It's not worrying and banking on the tax laws of 40 years from now.
00:27:24.080 | I'm encouraging you to focus on today, on the benefits today, and then we'll see what
00:27:28.360 | the tax laws are 40 years from now.
00:27:31.120 | Good financial planning should allow a lot of flexibility.
00:27:34.760 | Don't do something if the only reason for doing it is what you're going to get 40 years
00:27:39.040 | from now, because that's too uncertain.
00:27:42.640 | There's no way for you or me to predict what things will be like 40 years from now.
00:27:46.640 | I believe the system will be completely transformed.
00:27:50.080 | But do something based upon what serves your interests now, and then be prepared to respond
00:27:57.480 | and to adapt as the legislation changes over time.
00:28:03.040 | So go based upon your personal situation, observe what's right in your situation at
00:28:12.560 | the moment, and then make whatever changes are necessary along the way to adapt as the
00:28:18.480 | laws change.
00:28:20.240 | You don't have to be an extremist on the issue.
00:28:22.620 | You don't have to say, "Nobody should participate in a Roth IRA because they're going to change
00:28:26.600 | the laws."
00:28:27.600 | Neither do you have to say that everyone should put in a Roth IRA and you're a wacky conspiracy
00:28:31.640 | theorist if you think that the laws will change.
00:28:34.080 | To me, neither of those extremist positions seem to be the appropriate way to handle reality.
00:28:41.520 | My opinion, as what seems to me to be the most appropriate way to handle this reality,
00:28:46.640 | is look at the rules, understand what they are now, take the measure of the wind as far
00:28:52.840 | as the winds of political change, the winds of what's going to happen in the future in
00:28:57.560 | terms of tax collection, tax rates, etc., and then do what seems best at the moment,
00:29:05.800 | but keep your plans flexible, knowing that you may have to change them and adjust them.
00:29:11.920 | Here are my personal predictions, my current finger in the wind as I dope the wind and
00:29:17.020 | try to tell you here's what I think is going to happen.
00:29:20.080 | Number one, over the significant arch, the US government has a major fiscal imbalance.
00:29:30.240 | Expenses are much higher than revenues, and so the US government needs revenues.
00:29:35.640 | There are four sources of revenue that the US government has.
00:29:41.880 | Or, any government has.
00:29:43.920 | Number one is tax collection, number two is borrowing, number three is user fees, and
00:29:48.760 | number four is inflation.
00:29:50.840 | So taxes have to be increased in order for some combination of those four has to happen.
00:29:57.760 | So let's talk about it.
00:29:59.160 | What's likely?
00:30:00.160 | I think what's likely is all the major three will all be used, maybe user fees as well.
00:30:06.240 | User fees is just insignificant, so I'm going to leave it off for now.
00:30:09.400 | Number one, taxes will go up, but I think that there is a cultural restraint against
00:30:16.120 | massive tax increases.
00:30:18.280 | I don't think that the US highest marginal tax bracket is going to go from 39.6% to a
00:30:26.720 | Swedish 65%.
00:30:29.400 | It's not going to happen.
00:30:31.560 | It's not culturally the same.
00:30:33.720 | The US Americans won't accept that.
00:30:35.480 | So there will be some changes at the margin, it may go from 39.6% to 41% or 41% to 43%,
00:30:41.660 | but we're not going back to 90% marginal tax brackets like the United States had several
00:30:47.240 | decades ago.
00:30:48.240 | That's not going to happen, in my opinion.
00:30:50.640 | And so tax collection will increase, taxes will increase, but a little bit.
00:30:56.360 | Rates will go up a little bit, brackets will adjust, the tax collection will go up.
00:30:59.840 | I think the major tools that the US government is going to depend upon are borrowing and
00:31:05.440 | inflation.
00:31:06.440 | Those are the two major tools for increasing revenue.
00:31:09.240 | And so I think we'll see lots more borrowing and lots more inflation until or unless borrowing
00:31:13.320 | doesn't work anymore and/or inflation doesn't work anymore.
00:31:17.360 | And then I think we'll see significant levels of default.
00:31:21.260 | That's my opinion.
00:31:22.600 | But that's over a course of several decades.
00:31:25.760 | And so there's not going to be any kind of major change right now.
00:31:30.000 | That's going to be a course of several decades.
00:31:32.680 | The next lesson that I think you should take from this is you should focus on doing what's
00:31:38.440 | right for you without regard... and focus on the things that you can control.
00:31:46.920 | For example, the people who win or who have won are not the people who've just piled up
00:31:53.600 | more money in their IRAs, but rather the people who've taken control of their businesses,
00:31:58.040 | taken control of their incomes, etc.
00:32:00.520 | And so I spend much more time focusing on income and business because that makes a bigger
00:32:05.500 | difference than what the tax rate is in your IRA, your Roth IRA.
00:32:10.040 | Not everyone is right for entrepreneurship.
00:32:12.520 | Totally concede that first up.
00:32:15.560 | But if you're right for entrepreneurship or if you're right for improving your career
00:32:19.960 | scale, that's going to make a bigger difference for you from a financial planning perspective
00:32:24.240 | than worrying about tax rates.
00:32:27.000 | Always focused.
00:32:28.000 | Keep the main thing the main thing.
00:32:29.340 | Always focused on those things that have the bigger impact.
00:32:32.360 | Do your 2080 analysis relentlessly.
00:32:35.780 | Practice that analysis relentlessly and don't worry too much about short-term tax rates.
00:32:40.480 | Focus more on the things that are going to make the biggest difference.
00:32:44.280 | The next lesson I would point out to you is those who can afford to wait always have the
00:32:51.640 | most options.
00:32:53.320 | The key to good long-term planning is as much as possible have the ability to sit and wait.
00:33:01.280 | Think multi-decades.
00:33:03.280 | Think multi-generationally.
00:33:05.480 | Not just short-term.
00:33:06.480 | A difference between 37 and 39% is not that big of a deal.
00:33:13.440 | What you need to do is you need to have enough assets that you're sitting on that you're
00:33:17.020 | not going to sell for many many years.
00:33:18.940 | One thing that was nice is that to my knowledge, I believe I got this right, is that in the
00:33:24.020 | current Democratic House tax proposal they didn't mess around with imposing problems
00:33:34.400 | on the step-up basis for the transfer of capital gains assets at death.
00:33:39.100 | And so this is a disparity between what the president's proposal was and what the current
00:33:46.960 | Democratic proposal is.
00:33:48.660 | And so the key is have assets that you can borrow against when you need to.
00:33:53.220 | Have assets that you can just sit and wait and take a very long-term time perspective.
00:33:58.440 | Don't think in terms of three years.
00:34:00.360 | Think in terms of 30 years whenever you have the opportunity.
00:34:02.640 | I guess the final lesson I would say is I do believe that competition is going to become
00:34:10.440 | more relevant in the coming years.
00:34:12.400 | I have worked very hard over the last three years to put in place a comprehensive internationalization
00:34:19.060 | plan for myself and for my children.
00:34:23.360 | And three years ago I had nothing.
00:34:25.800 | I had no internationalization plan.
00:34:27.740 | Today I have a very robust and resilient and diverse internationalization plan.
00:34:37.340 | And it took me three years of work to do but it feels worth it.
00:34:43.260 | And one of my major compelling reasons, I had several major compelling reasons, but
00:34:48.480 | one of them was looking at this schizophrenia in the political space and just thinking like
00:34:57.420 | "wouldn't it be nice to be out of this?
00:35:00.000 | Why should I have my life and my children's lives governed by this?"
00:35:05.060 | And I determined, I said "I'm not going to have a significant portion of my life governed
00:35:11.620 | by this schizophrenia.
00:35:12.620 | I'm not going to do it."
00:35:16.700 | And so I said "I don't want my children's futures to be tied to the future of the United
00:35:21.540 | States."
00:35:22.540 | And while I'm not as dark in terms of my outlook as a lot of people are, I'm a bit more relaxed
00:35:31.340 | in terms of I don't predict worst-case scenarios.
00:35:34.500 | I decided that it was too big of a risk for me to leave alone and so I started doing what
00:35:38.060 | I've done over the last three years.
00:35:40.060 | Well having completed phase one of my kind of long-term internationalization plans, putting
00:35:46.860 | myself in a situation where my life and my children's life is no longer attached to the
00:35:53.460 | future of the United States, where I can divorce myself from that country, I can divorce my
00:35:58.420 | children from that country, they have to wait until they're 18 to do it themselves.
00:36:03.260 | But I've put in place all the infrastructure that they need.
00:36:06.620 | Then it does make me feel a lot more peaceful.
00:36:09.660 | And so it just feels like a really good insurance policy to where I look at it and I say "Okay,
00:36:14.500 | if I'm wrong and taxes do change dramatically, I don't have to stick around.
00:36:17.580 | I don't have to stay forever."
00:36:20.380 | And I would encourage you to do that as well.
00:36:23.180 | Is recognize that if this stuff bothers you and annoys you, you don't have to stick it
00:36:28.620 | out, right?
00:36:29.620 | You don't have to stay and be abused by it.
00:36:31.460 | I think there's a good reason why most people will stay.
00:36:34.500 | I'm traveling back to the United States this next week.
00:36:37.620 | I might stay for a time.
00:36:39.420 | I really love so many things about the United States.
00:36:44.380 | But you'll feel better if you just put yourself in a situation where you're not stuck with
00:36:48.460 | it, and that may give you more peace.
00:36:50.580 | And so I'd encourage you to do that.
00:36:52.440 | You have to do it long in advance, right?
00:36:55.020 | You have to do it before you need it.
00:36:57.580 | Don't wait for the last minute.
00:36:58.700 | The internationalization stuff takes a long time.
00:37:01.540 | It's always longer than you wish, but you can do it.
00:37:05.340 | So put the pieces in place today that you would need in the future if you didn't want
00:37:10.580 | to actually be governed by these guys, if you didn't want to actually deal with their
00:37:15.900 | long-term schizophrenia.
00:37:18.420 | Put in place the pieces that you would need to be able to have more options, and I think
00:37:22.180 | you'll feel better as well.
00:37:25.500 | I have really appreciated that.
00:37:26.980 | I try to be thoughtful and share with you that it's not for everyone.
00:37:29.540 | I've tried very hard to share with you the difficulties.
00:37:32.700 | I'm very aware of the difficulties.
00:37:34.060 | I appreciate so many things that are easier and better in the United States.
00:37:39.140 | But I'll tell you, watching the political process, watching this tax stuff change, watching
00:37:45.780 | the arguments and the fights and the debates makes me much, much—I'm much more even-keeled
00:37:54.140 | and relaxed and less stressed out about it now that I know that I'm no longer a slave.
00:38:00.780 | I know that I'm no longer beholden to them.
00:38:05.580 | And so that makes me feel better.
00:38:07.140 | And I want you to have that feeling as well if that's of interest to you.
00:38:10.700 | Hopefully these are some useful lessons for you.
00:38:13.340 | Don't put too much stock in this current proposal.
00:38:15.900 | Recognize that taxes may go up, and hey, this might be a time where you just simply grow
00:38:19.660 | your wealth rather than your income.
00:38:22.220 | And then when taxes go down in the next round of political things, then that's a time that
00:38:26.660 | you take more income.
00:38:29.000 | If you will build your reserves, you'll always have that option.
00:38:32.180 | So focus on building reserves.
00:38:34.360 | Build income streams that don't force you to take income.
00:38:36.940 | To do that, you'll need to be in an ownership position of a company and/or negotiate better
00:38:41.500 | deferred compensation arrangements.
00:38:43.660 | So remember that there are only three basic tax strategies—going back to what, episode
00:38:47.460 | four or something of Radical Personal Finance, right?
00:38:50.220 | There are only income shifting strategies, income timing strategies, and income conversion
00:38:54.900 | strategies.
00:38:55.900 | And all three of these still apply.
00:38:57.980 | But get control of the timing of your income so that you can stretch it out and defer it
00:39:02.960 | to times when taxes are lower.
00:39:05.280 | Get control of the ways that your income—so you can convert highly taxed income into less
00:39:11.640 | taxed income.
00:39:13.600 | And then work on shifting strategies.
00:39:15.520 | How can you shift income from high taxpayers to low taxpayers?
00:39:21.840 | If you will get into a place of control, then you don't need to worry too much about the
00:39:27.380 | current proposals.
00:39:28.380 | That's it for today's show.
00:39:29.900 | Thank you so much for listening.
00:39:30.900 | I would remind you that I have started taking private consulting clients.
00:39:34.440 | So if you'd like to consult with me on tax planning or internationalization planning,
00:39:38.860 | if you'd like a balanced expert eye to tell you—kind of cut through a lot of the noise
00:39:45.220 | and point you in a direction to some things that work quickly, been there, done that can
00:39:49.400 | consult with you on either of those topics.
00:39:51.520 | Go to RadicalPersonalFinance.com/consult, RadicalPersonalFinance.com/consult, and book
00:39:57.020 | a consulting call with me today.
00:39:58.660 | Thank you.