RPF0511-Friday

00:00:00.000 | It's Friday here at Radical Personal Finance and that means Q&A.

00:00:21.240 | Good Friday to all of you, my radical friends.

00:00:22.960 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,

00:00:26.600 | skills, insight and encouragement you need to live a rich and meaningful life now while

00:00:31.400 | building a plan for financial freedom in 10 years or less.

00:00:34.000 | My name is Joshua Sheets and today on the show we do a live Q&A.

00:00:36.720 | I've got the phone lines open.

00:00:38.800 | I've got three callers on the line.

00:00:40.440 | It's going to be fun.

00:00:41.440 | Let's see if we can learn together.

00:00:53.480 | Whenever I possibly can due to my personal travel schedule, et cetera, and simple logistics,

00:00:58.840 | I always try to do on Friday a live Q&A show.

00:01:02.520 | Basically it works like talk radio.

00:01:03.680 | You get a phone number, you call in and I go live to the call.

00:01:06.960 | I try to make these calls very open.

00:01:08.960 | I don't screen them in advance.

00:01:10.360 | All I do is jump on real quick as we're getting ready to record and see who's calling.

00:01:14.200 | I get a quick idea of the questions but I don't screen them.

00:01:17.320 | This is the best way.

00:01:18.320 | If you want to ask me about anything in the world or talk about anything in the world,

00:01:21.280 | this is the best way to get through.

00:01:22.720 | I do screen out the callers based upon those who support the show on Patreon.

00:01:27.480 | These calls are open to those of you who voluntarily choose to support me and pay me money through

00:01:32.520 | the Patreon program.

00:01:33.940 | If you're interested in doing that, I would welcome you to do that and would be deeply

00:01:36.680 | appreciative of your doing so.

00:01:38.600 | You can do that at RadicalPersonalFinance.com/patron.

00:01:45.120 | Once you sign up there to support the show, at that point in time you have the opportunity

00:01:49.840 | to gain access to the time and the phone number to be able to join a call like this.

00:01:53.920 | Let's start with Erica in New Hampshire.

00:01:55.760 | Welcome to Radical Personal Finance.

00:01:57.040 | How can I serve you today?

00:01:58.040 | Erica Friedman Oh, thank you, Joshua.

00:02:00.040 | You've already served me so much.

00:02:04.160 | By following a lot of the things that you've spoken about on the podcast and some that

00:02:08.040 | we haven't followed, my husband actually lost his job of almost 13 years this past fall,

00:02:14.520 | 28 days shy of vesting for retirement because of a Facebook post.

00:02:19.800 | That actually left us in a bit of a surprise.

00:02:23.400 | Yes, ouch.

00:02:24.400 | It left us very surprised, but thanks to a lot of things we've reexamined over the last

00:02:29.680 | few years and becoming pretty diligent in YNAB, we just said, "Oh, okay.

00:02:35.200 | Then we're going to go on vacation."

00:02:36.200 | We packed up a car to go visit family in California and drive cross-country.

00:02:40.840 | We ended up actually getting a job before we'd even left New York State.

00:02:44.200 | We're already back on the bandwagon, but because of all of this, we have a pretty sizable 401(k)

00:02:51.200 | that we want to put to work.

00:02:53.240 | We are looking at doing a self-directed IRA.

00:02:56.000 | I actually was a market professional for over a decade.

00:03:00.520 | His best friend and the godfather of our children does real estate in San Diego.

00:03:05.680 | We've been looking at getting rental properties out there and having a nice sizable chunk

00:03:13.000 | of cash that could buy a duplex outright.

00:03:15.640 | It seems like it might be a really nice opportunity to put the self-directed IRA into a duplex

00:03:21.400 | and then take that income from the rent later on when we need to take the distribution.

00:03:28.080 | I don't know if there's any taxation issues that we might run into, though, when it comes

00:03:32.520 | time to pass to our kids.

00:03:34.440 | Let's talk about that in just a minute.

00:03:35.920 | But I just want to ask more about the story.

00:03:39.560 | Your husband was fired because he wrote a Facebook post that his employer considered

00:03:43.800 | to be offensive or against corporate policy, something like that?

00:03:46.960 | Yes.

00:03:48.360 | In a private group on Facebook, he wrote a post that "did not represent company value."

00:03:54.400 | Interesting.

00:03:55.400 | He was fired for that reason.

00:03:56.920 | Was this industry-related or was this related to personal, political, religious, or ideological

00:04:02.440 | opinions?

00:04:03.440 | Second Amendment opinion.

00:04:04.440 | Interesting.

00:04:05.440 | He's made very sure not to comment publicly about anything that is within his field that

00:04:14.720 | would come back negatively towards his company or any other company.

00:04:19.120 | This is...

00:04:20.120 | No criticism of FDA.

00:04:21.120 | Right, right, right.

00:04:22.800 | Interesting just because this is such a...

00:04:25.960 | I see this happening, but I see very little reporting on the subject.

00:04:30.240 | And so whenever I have an opportunity to talk to somebody about it, then it was just good

00:04:36.960 | to hear some of the personal anecdotes.

00:04:38.680 | I've watched this for a number of years and just in terms of seeing either the public

00:04:43.160 | censorship or the specific outright firing of people for expressing opinions.

00:04:49.680 | And do you think was the company...

00:04:52.920 | How do you think the company was tipped off if it was in a private Facebook group?

00:04:56.080 | Is there any...

00:04:57.080 | Do you have any opinion or thoughts on how that may have happened?

00:05:00.360 | I don't know.

00:05:01.360 | It's possible that it could be a former friend that didn't like that he didn't apologize

00:05:05.520 | appropriately for something he had said.

00:05:08.480 | But I think it's more likely that being...

00:05:11.640 | The retirement policies changed at his company since the time when he was hired.

00:05:16.520 | And no, it's not the same years of service plus age anymore.

00:05:19.760 | And so he was one of the few young people, younger people who was close to retirement.

00:05:24.200 | And I think it's because the fact that he was fired 28 days before he was fully back.

00:05:28.800 | So we left almost $100,000 on the table because he was fired.

00:05:34.360 | Is there a legal case there?

00:05:38.160 | We're looking at age discrimination because the company is based in California and age

00:05:41.640 | discrimination is an issue there for anyone over 40.

00:05:45.480 | But it's a challenge.

00:05:46.480 | It is one that we're going to pursue, but it's challenging.

00:05:49.560 | It's going to take a lot of time.

00:05:51.360 | And it's always a balance of is it worth pursuing in terms of the emotional turmoil, the financial

00:05:57.280 | cost for the actual financial outcome?

00:06:00.920 | Well, interesting.

00:06:01.920 | My advice, and I say this very advisedly, what I recommend to people is in today's world,

00:06:09.040 | don't ever put anything in writing in any form that you are not content to see published

00:06:14.280 | on the front page of a newspaper.

00:06:16.320 | And I mean in any form.

00:06:18.660 | Whether that's on Facebook, whether that is on your personal wall – actually, don't

00:06:24.600 | call it a wall anymore – on your personal timeline, on your personal page, on your personal

00:06:29.800 | website.

00:06:30.800 | Don't put it in a private group.

00:06:32.400 | Don't put it in a Facebook message.

00:06:34.360 | Don't communicate with somebody in writing in a text message.

00:06:39.320 | Anything you put in writing very quickly is screenshotted and captured.

00:06:44.800 | And it's a significant, significant risk.

00:06:48.040 | I'm frequently disturbed at the risk that people expose themselves to based upon their

00:06:54.680 | written communication.

00:06:56.120 | And I think that we should all pay careful attention.

00:06:58.520 | And I want to encourage people to speak their mind.

00:07:01.400 | Unfortunately, however, you've got to do so advisedly given that many companies demand

00:07:08.520 | ideological conformity or – and there are certain standards that if you don't follow

00:07:13.680 | them, then it's going to happen.

00:07:16.440 | So I support the right of employers to discriminate on any basis that they choose to.

00:07:21.520 | That's not the law.

00:07:23.040 | But I support the right of employers to be able to hire and fire as they think is appropriate.

00:07:28.560 | But I think it's important that we consider carefully the impact of our words.

00:07:32.320 | But I'm glad that you are able to, number one, use it as an opportunity to travel a

00:07:38.800 | little bit.

00:07:39.800 | I think that's one of the best strategies to use is when – if you're – hopefully

00:07:42.920 | – many people in the wake of a firing, it's such an emotional bit of turmoil that they

00:07:48.600 | can't easily relax.

00:07:50.320 | But whenever you leave a job or whenever you're laid off from a job, use that as a nice chance

00:07:54.520 | to move on – to take a little mini sabbatical, a mini break, a vacation, take some travel.

00:08:00.400 | Financially, if you can – you just check your numbers and make sure you're financially

00:08:03.400 | secure and then use it to bounce on to the next opportunity.

00:08:06.480 | So that is – that sounds really good.

00:08:09.080 | I'm really thankful that you're in such a good position.

00:08:12.640 | Didn't that change – were you and he earlier in your lives – were you ever fired from

00:08:16.600 | a job or laid off from a job when you felt much less secure?

00:08:19.360 | Was it a different experience when that happened?

00:08:21.360 | This is his first job after getting his doctorate.

00:08:26.600 | I worked in the financial industry.

00:08:28.440 | So the idea of being laid off was not a surprise for me.

00:08:32.520 | It happened to me several times.

00:08:35.160 | I just remember.

00:08:36.160 | As the normal course of business.

00:08:37.720 | It did come to a shock to him especially because his dad served his whole career at one company

00:08:42.880 | as well.

00:08:43.880 | So he was still in the mindset of company loyalty which unfortunately seems to have

00:08:49.000 | gone extinct.

00:08:50.000 | I remember the time that I was laid off from a job and I – when it happened, I was – it

00:09:01.440 | was – I had always – I realized in the wake of it, I had adopted this idea which

00:09:06.600 | I think many of us share that the only reason that you're going to be laid off from a

00:09:10.200 | job is because you've done something wrong.

00:09:12.520 | And even though I probably would have disavowed that idea if asked about it, I would have

00:09:16.360 | said, "No, you could be laid off from a job if not doing something wrong."

00:09:18.880 | I probably would have been a little bit more arrogant in my private thoughts and think,

00:09:23.400 | "Well, I'm better than that.

00:09:25.560 | I'm better than the other person."

00:09:27.560 | When I got laid off from the job I was doing a decade ago, it was just out of the blue.

00:09:33.000 | I had no inkling it was coming.

00:09:34.480 | I had no expectation it was coming.

00:09:37.160 | And I remember just being so shocked and surprised in the sense of, "Wait a second.

00:09:44.120 | This is happening to me?

00:09:45.600 | I'm a star employee.

00:09:47.600 | I'm Mr. Hard Worker.

00:09:50.520 | How is this happening to me?"

00:09:52.160 | That I just remember laughing and the little anecdote that I usually share in the story,

00:09:58.240 | a number of years previously I had studied Dave Ramsey's courses and one of the things

00:10:03.240 | that he did in his iteration of his Financial Peace University at that time is he talked

00:10:07.800 | about how if you're out of debt and you have a fully funded emergency fund, you can laugh

00:10:12.840 | in the face of the person who's laying you off and you can say, "How big is the severance?"

00:10:17.880 | In the sense of take this bad thing and turn it into a good thing.

00:10:21.560 | When I finally realized what was happening as I was sitting there in the meeting, then

00:10:27.000 | I literally did that.

00:10:28.440 | I laughed and I snorted and I said, "How big is the severance?"

00:10:31.200 | Because I was so nervous and I remember to this day, both the president and the CEO who

00:10:39.080 | were in the meeting were taking it back and saying, "Well, it's three months but why

00:10:45.400 | do you ask?"

00:10:46.400 | Then I explained, "Well, I'm sorry.

00:10:47.400 | I've worked really hard to be in a position where financially I'm prepared for this event

00:10:51.440 | and I didn't mean to be rude."

00:10:54.160 | But it was definitely a sobering experience and a very humbling experience.

00:10:58.360 | I think it's challenging for many people to keep a positive self-esteem out of that.

00:11:04.760 | I'm glad he's found another opportunity and I'm glad that it has worked out.

00:11:08.480 | Back to the self-directed IRA, is there any reason why you think this is not a good path

00:11:13.440 | for you to pursue based upon your personal experience, your comfort level with the approach

00:11:19.440 | and the potential partners that you may involve in the process?

00:11:26.760 | I think it seems like an amazing opportunity to me.

00:11:31.440 | My husband's best friend, our friend's godfather, does a huge amount of property.

00:11:37.720 | His brother is a real estate attorney and his dad has a huge amount of properties as

00:11:41.720 | well.

00:11:42.720 | We're pretty much in the family queue for whenever there's a good property and they're

00:11:46.440 | not ready to buy because they stack up the cash first, then we'd be put in line.

00:11:52.280 | Also, in the asset, in lieu of having a life insurance to provide care for our kids, he

00:11:58.640 | said that having properties there, the income it will generate is more than enough for their

00:12:02.800 | care and for everything else as well, should the worst happen to both of us.

00:12:07.280 | My biggest concern is just, I have a friend who's relatively new to the financial industry

00:12:12.200 | and he said that there's huge taxation issues with inheriting IRAs.

00:12:17.920 | I've just been so busy I haven't had a chance to look into that myself and that's my one

00:12:22.840 | stumbling block at this point.

00:12:26.080 | So specifically, based upon the scenario you're describing, it sounds to me like an ideal

00:12:32.600 | use of a self-directed IRA.

00:12:34.240 | You've got the money, it gives you a large amount of investment dollars available, you

00:12:38.920 | have experience and competence in the realm of investing, you can do your due diligence,

00:12:43.680 | you have the personal connection that is trustworthy.

00:12:46.240 | I mean that checks all the boxes.

00:12:48.560 | From my perspective, that checks all the boxes as far as the use of a self-directed IRA.

00:12:52.520 | I think that's an ideal solution and especially with the inside connection on real estate

00:12:59.080 | and the fact that you and he are more sophisticated in your knowledge.

00:13:02.960 | He's got a PhD, you have advanced education, you have experience in the financial industry.

00:13:06.520 | I think these are all important things that would lend a measure of sophistication to

00:13:11.400 | your personal approach.

00:13:13.560 | As far as taxation, I don't know what that person would be referring to.

00:13:17.560 | IRA taxation is extremely standardized and it's the same – you're going to face

00:13:22.760 | the same – to my knowledge, you're going to face the same taxation whether you're

00:13:28.440 | dealing with real estate in a self-directed IRA or whether you are dealing with stocks

00:13:34.520 | in a mutual fund portfolio.

00:13:38.320 | In essence, the taxation is this.

00:13:41.240 | As the money grows, of course that tax will be directed to the future.

00:13:45.680 | Starting at the age of 70 and a half, the IRA will need to start to make required minimum

00:13:51.400 | distributions.

00:13:53.080 | You would want to make sure that the account given the real estate could actually disperse

00:13:58.480 | the cash for those required minimum distributions.

00:14:02.440 | Of course you can take however much you need out of it for retirement or you can keep it

00:14:07.280 | as an asset for the benefit of your children.

00:14:12.080 | The downside to a traditional IRA, which is what this would be, given that he's going

00:14:16.360 | from a 401(k) to an IRA, the downside of course is those required minimum distributions.

00:14:21.660 | If you don't need that money, it can be annoying to have to take those out and that

00:14:25.280 | could be a challenge in the world of real estate, especially if you had a property-intensive

00:14:30.880 | portfolio but you didn't have the actual cash coming out of it.

00:14:35.260 | With regard to taxation when he dies, of course generally you would be the beneficiary if

00:14:40.840 | he were to pre-decease you.

00:14:42.160 | But let's assume that both of you die.

00:14:44.320 | If you leave the account as an asset for your children, then they would receive it under

00:14:51.480 | the standard rules and those rules would be either they could take the money out very

00:14:55.520 | quickly – they could of course have access to the full amount at any time – and they

00:15:00.120 | would – or they could turn it into a stretch IRA where they could take the assets out over

00:15:06.920 | the course of their lifetime, which is a great way to do it.

00:15:12.640 | Now I guess perhaps the only consideration that he may be referring to would be that

00:15:19.320 | the taxation would be at income rates rather than dividends or profit from the ownership

00:15:27.560 | of real estate.

00:15:29.000 | Perhaps that's the difference that he's referring to.

00:15:33.080 | And frankly, having never done a transaction like that, I would need to research that.

00:15:37.320 | I don't know if that would be what the fear is.

00:15:41.800 | The fear would be of course that if you have a normal property and you leave it behind

00:15:47.520 | as – in fact, here I've talked to myself.

00:15:51.120 | This must be what he's talking about.

00:15:52.680 | In general, if you and your husband buy a house and you pay $200,000 for this investment

00:15:57.560 | property, it grows over the course of your lifetime and then when you die, it sells – your

00:16:04.200 | heir is inherited at $600,000 of value.

00:16:07.560 | At that time, if you own the property in the standard way, that property, because it's

00:16:12.520 | long-term capital gain property, would receive a step-up in tax basis and your children would

00:16:18.000 | be able to inherit it with a $600,000 basis, which they could then turn, sell for $600,000

00:16:25.040 | and they would incur no income tax on the property.

00:16:28.280 | Whereas if you put it into – if you purchase the property in the context of your IRA, then

00:16:33.320 | at that point in time, they would be receiving it as ordinary income property.

00:16:36.720 | And since we're getting money that's never been taxed and they're inheriting the money

00:16:42.840 | that's never been taxed, they're going to have to pay ordinary income tax rates on

00:16:47.000 | the money.

00:16:48.000 | So if you bought the $200,000 property today, it grows in the IRA.

00:16:52.760 | You die, they receive $600,000 and it comes with the income tax bill on a $600,000 worth

00:16:59.280 | of income for them when they take the money out.

00:17:02.240 | So my guess would be that that's the problem that your friend is referring to.

00:17:06.520 | My answer to that would be, of course, I want to have that long-term capital gains property,

00:17:11.600 | but that wouldn't necessarily be enough of a reason for me to walk away from pursuing

00:17:18.340 | a self-directed IRA because the capital being available is valuable.

00:17:27.520 | You would just need to make sure the deal is going to get you returns that are in excess

00:17:31.960 | of other investment opportunities that you have.

00:17:34.880 | So that would be my best analysis of what he's saying and why he's saying it.

00:17:39.160 | Okay.

00:17:40.160 | And then with that, if it was one where they spread the distributions over their life,

00:17:45.320 | then it would get taxed at each distribution instead of in one chunk at our death?

00:17:50.320 | Yeah.

00:17:51.320 | And this is really powerful.

00:17:52.320 | This is one of the big benefits of IRAs.

00:17:55.440 | Roth IRAs are superior here, but it's one of the big benefits of IRAs.

00:17:59.680 | If you leave an account balance behind to a descendant, to your children, your grandchildren,

00:18:05.040 | keep it simple, then they have to take the money out, but they have a couple of different

00:18:11.120 | choices on how quickly they can take it out.

00:18:14.200 | They have required minimum distributions as well.

00:18:17.080 | And so this is loosely called a stretch IRA in the vernacular of financial planning, although

00:18:22.800 | it's not actually – that's not actually a technical term.

00:18:26.200 | What it means is you take it out over the longest period possible.

00:18:29.500 | So if I, as a 30-year-old son, inherit a $100,000 or a million-dollar IRA from my dad or my

00:18:39.280 | mom, then I can just take the required minimum distributions from that over the course of

00:18:45.120 | my entire lifetime.

00:18:46.560 | And so there's an IRS table that calculates based upon life expectancy.

00:18:51.280 | So I don't remember the number, but let's say that the life expectancy for me as a 30-year-old

00:18:55.920 | would be an additional 60 years of life.

00:18:58.480 | Well, if I take a million-dollar portfolio, I just need to take out one-sixtieth of that

00:19:04.080 | account as at the age of 30.

00:19:06.720 | And then the rest of the money continues to accrue with no taxation.

00:19:11.800 | It continues to maintain the character of the IRA account, which means that the taxation

00:19:15.840 | is deferred.

00:19:16.960 | And so it continues to build and to build and to build.

00:19:19.560 | And then if it's a traditional IRA, I just go ahead and take the money and I pay income

00:19:25.180 | taxes on whatever my distribution is in that year.

00:19:27.940 | Now this is more powerful with a Roth IRA and this is one of the reasons why Roth IRAs

00:19:33.360 | can be such a valuable estate planning tool for people who have them, because Roth IRAs

00:19:38.800 | don't have required minimum distributions for a retiree.

00:19:43.040 | So if somebody is wealthy and they don't need the money, then the money can continue to

00:19:46.720 | grow tax-deferred from say age 70 to age 90 at a natural death.

00:19:52.000 | And then the child can continue to maintain it and they receive the money over that same

00:19:58.640 | distribution schedule, but they still receive the money income tax-free.

00:20:02.760 | And so it's more powerful in a Roth IRA because Roth IRAs can be left alone for longer because

00:20:08.120 | they don't have required minimum distributions.

00:20:10.240 | But it's still powerful for anybody who inherits an IRA from their parents or grandparents

00:20:15.400 | and they don't need the money.

00:20:17.120 | They can stretch those distributions out and wind up getting much more money out of it

00:20:22.040 | because the account stays invested and invested tax efficiently.

00:20:26.240 | Okay.

00:20:27.240 | And can I ask one more twist on that as well?

00:20:30.480 | Go ahead.

00:20:31.480 | So we've used pretty much the whole amount in the self-directed IRA for a property.

00:20:38.160 | And then because we'd probably have to pay cash because that self-directed IRA can't

00:20:42.160 | take out a loan in years, because now that my husband is in the startup world, in years

00:20:48.240 | where he doesn't have an income, can we take those proceeds within the self-directed IRA

00:20:53.480 | and roll some of that into a Roth IRA?

00:20:56.120 | Or am I just going completely off the charts here?

00:20:58.840 | I wish I – there are a number of businesses that peak my radical proclivities and this

00:21:05.000 | is one of them.

00:21:07.020 | The world of custodianship for self-directed investment accounts, it lights my fires because

00:21:15.520 | it's so interesting to me the things that could be done.

00:21:18.680 | I don't see any reason why – in my knowledge, I don't see any reason why it's not possible

00:21:26.600 | conceptually.

00:21:28.040 | For example, I don't know why you couldn't establish an LLC and then have the IRA own

00:21:38.080 | the units of that LLC and then just simply transfer those from an IRA to a Roth IRA when

00:21:46.580 | you needed to.

00:21:47.580 | I don't know any reason why legally it wouldn't be possible.

00:21:50.080 | My guess would be that just practically is it worthwhile.

00:21:55.320 | But if you – because conceptually that's exactly – and the reason is conceptually

00:22:00.840 | that's exactly what would happen if you were to say purchase shares of an existing

00:22:06.040 | publicly traded REIT, a real estate investment trust.

00:22:09.760 | That's what somebody else is doing.

00:22:11.400 | They have established a REIT.

00:22:12.960 | They're issuing shares of that REIT.

00:22:15.440 | You purchase those shares within a traditional IRA and then when you convert from a traditional

00:22:20.160 | IRA to a Roth IRA, you're basically just transitioning those shares from a traditional

00:22:25.200 | IRA to a Roth IRA.

00:22:27.040 | So I don't know why it wouldn't be possible conceptually to do that with your own private

00:22:32.240 | holdings.

00:22:33.240 | Many of these companies that will work and serve as custodians for your self-directed

00:22:36.880 | accounts will allow you to mingle various self-directed funds.

00:22:42.680 | So you could – in these accounts, you could have a self-directed educational savings account.

00:22:47.920 | You can have a self-directed health savings account and you can have a self-directed 401(k)

00:22:54.400 | or self-directed IRA.

00:22:56.320 | And essentially, they market this under what they call the checkbook LLC and you can just

00:23:01.880 | simply have one checkbook and then the shares of your ownership of that entity are owned

00:23:08.040 | by these different accounts that you have.

00:23:10.980 | So my answer is I don't know why it couldn't be done conceptually.

00:23:15.840 | But practically speaking, I don't know if the custodians will service that.

00:23:20.480 | If any listeners have done this or have additional advice, come on by RadicalPersonalFinance.com

00:23:24.800 | and comment on today's show and you can help educate Erica and educate me on the actual

00:23:30.160 | details of it.

00:23:31.160 | It's one of those areas where I'd love to do more and I've been remiss in not doing

00:23:34.040 | more discussion of self-directed investing on the show.

00:23:37.800 | Anything else, Erica?

00:23:38.800 | That's it.

00:23:39.800 | After I get big into it, maybe we can get into it together for an episode.

00:23:44.480 | Absolutely.

00:23:45.480 | I would love that.

00:23:46.480 | Let me know.

00:23:47.480 | Absolutely.

00:23:48.480 | Erica, real quick, since I know we've corresponded outside of this call, tell me briefly – I

00:23:54.320 | was going to do a full interview with you on the show about building your own house.

00:23:58.920 | You've educated yourself a lot in this area as one of the strategies of financial planning

00:24:03.080 | and I've been planning to do a standalone show on that but I haven't gotten it done

00:24:05.960 | yet.

00:24:06.960 | Tell me quickly what you learned in pursuing the idea of building your own house, especially

00:24:11.240 | as it relates to the financial feasibility and how it's impacted your own plan.

00:24:15.680 | Well, I'm actually getting a tractor for Christmas with a backhoe because we are laying

00:24:21.200 | the foundation for it.

00:24:22.920 | Fortunately, things didn't line up to tear down the house this winter because otherwise

00:24:27.160 | we would have been in the tear-down phase right when my husband lost his job.

00:24:31.000 | So I'm really lucky that everything got pushed out.

00:24:33.720 | We're looking at the question.

00:24:35.160 | We were going to partially finance the build but now we're not sure if we're just – we're

00:24:39.560 | probably just going to stock all the cash.

00:24:41.720 | I'm just trying to go through everything we have and get rid of all the excess belongings

00:24:45.960 | so we don't have clutter and we're a lot more streamlined.

00:24:48.560 | And then once I do that I'm going to try and finalize the plans to build the house

00:24:51.640 | both as economically as comfortable and as basically as multifunctional as possible.

00:24:59.400 | I'm looking at doing the – basically doing buildings in sizes that optimize materials

00:25:06.760 | for strength and for open space.

00:25:08.840 | I'm looking at things like putting in a – because it's cold and also taking passive solar design.

00:25:16.400 | So I'm looking to take a whole bunch of these different pieces but it's kind of hard when

00:25:20.360 | you're a perfectionist and you want to try and make it perfect.

00:25:24.960 | But I've charged myself as soon as I – as soon as I purge everything I can from the

00:25:28.840 | house I am making these plans and I need to start pricing it out because do that or do

00:25:35.000 | some remodels on the house.

00:25:36.360 | I don't want to pour money into something I'm looking to tear down.

00:25:39.480 | And you went through the Shelter Institute course up in the Northeast, right?

00:25:44.520 | I did.

00:25:45.520 | It was up in Maine and it was the most amazing class that I've taken.

00:25:49.400 | I was there.

00:25:50.400 | I had a pretty extensive background because I was an architecture minor and I've built

00:25:54.640 | a few things around CR, a big chicken coop and a few other things.

00:25:59.160 | And there were people who had no idea at all.

00:26:02.480 | So for me I was able to look into it and get a PhD level look when I asked clarifying and

00:26:08.360 | furthering questions.

00:26:09.360 | And then there were other people that just became acquainted through it.

00:26:13.080 | It was great.

00:26:14.080 | We got to go through all different aspects of the build, septic systems, electrical systems,

00:26:20.720 | all sorts of things.

00:26:22.480 | And also got to have a field day when we got to play with some backhoes and bulldozers

00:26:26.320 | on the farm that the founder has.

00:26:30.160 | It's actually a family company.

00:26:32.960 | And so there was a father running a good part of the lectures and daughters and sons all

00:26:38.800 | there as part of the team and just helping with a really holistic look at it.

00:26:43.520 | And also the understanding that sometimes you're still going to specialize even if you're

00:26:48.000 | going to do everything you can.

00:26:49.920 | And the mindset of doing everything, just basically the mindset of just trying to do

00:26:55.280 | everything that you can do on your own and then asking for help when you need it was

00:26:59.160 | fantastic.

00:27:00.160 | He had a welding class on the Saturday in between the classes for anyone to learn how

00:27:04.240 | to weld.

00:27:05.240 | That's awesome.

00:27:07.000 | So for those who aren't familiar, the organization that Erica attended is called the Shelter

00:27:12.560 | Institute.

00:27:13.560 | It's the shelterinstitute.com.

00:27:16.000 | And they offer various courses at different amounts.

00:27:18.880 | But they bring in people who, as Erica just said, a variety of experience and walk them

00:27:25.240 | through the process of here's how you build a house.

00:27:28.640 | And for those who have the interest and the patience, building your own house can be something

00:27:33.640 | – or at least doing much of the work to build your own house could be a really good

00:27:39.600 | financial move.

00:27:41.040 | The biggest challenge is education and then confidence.

00:27:45.320 | But you can do a lot of things yourselves in the home building process.

00:27:49.800 | And also depending on the stage of your family, this can be very valuable.

00:27:54.520 | It's something that when I was about 10 years old, my father went through the process

00:27:59.160 | of building our house.

00:28:01.520 | And he didn't do all of it because he was – he didn't do all of it.

00:28:06.360 | He was maintaining a full-time 40-hour-a-week job at the time.

00:28:10.000 | But he did a lot of it and it was a very formative process for me and helpful for me, for my

00:28:18.080 | siblings.

00:28:19.080 | We did a lot of the work ourselves, which was extremely valuable for me to have the

00:28:22.840 | experience.

00:28:23.840 | I was the youngest one so I did the least.

00:28:24.920 | But for me to have the experience of going through and actually seeing a house built

00:28:28.640 | and building it from the ground up, it provided a tremendous amount of interaction between

00:28:33.640 | my parents and me and my many siblings.

00:28:38.520 | It was really, really valuable in our family.

00:28:43.120 | And then it also allowed my parents to build a much bigger house than they would have been

00:28:48.480 | able to afford and it solved their housing needs at the time in about the only way that

00:28:53.160 | was financially viable.

00:28:54.680 | They couldn't afford with where we live and the size of our family.

00:28:58.240 | They couldn't afford to buy the types of houses that would fit us and they couldn't

00:29:02.720 | afford to bring our whole family together, which was the goal at the time.

00:29:09.360 | The goal at the time was to – for my parents to be able to build a place where within the

00:29:14.440 | nature of the house, they could have a house that could accommodate six children and my

00:29:20.680 | grandparents living with us.

00:29:22.480 | And so custom designing and then custom building was the only way that they worked out that

00:29:28.200 | they could actually build something that would give our family an ideal living space.

00:29:34.000 | My father is very competent.

00:29:35.000 | He's an engineer.

00:29:36.000 | He was very competent with his own background and experience to do many of the things.

00:29:41.120 | But to this day, I value those experiences.

00:29:43.200 | I value the fact of we put on the roof.

00:29:47.140 | We did the wiring.

00:29:49.760 | We didn't do the plumbing but we did all the flooring.

00:29:52.380 | And so those experiences for children were very, very valuable and it solved a major

00:29:57.320 | financial need of our family at the time and was valuable.

00:30:01.040 | So I think it's something that we've often neglected as a strategy.

00:30:05.080 | But for – whether for young people, for people with children, you can learn it.

00:30:10.600 | I remember seeing a story about a very inspiring lady who – she had young children.

00:30:16.760 | She was a divorced single mom.

00:30:18.840 | She had young children and I think she lived in an urban environment.

00:30:22.220 | But basically she built her own house with nothing more than the help of YouTube, trying

00:30:28.080 | to study things on YouTube and then working on things.

00:30:30.880 | I've read story after story of people who don't have a lot of money who build slowly.

00:30:36.880 | They used reclaimed materials, salvaged materials and they just simply force themselves to learn

00:30:42.080 | the skills that other people have and they're able to build a really beautiful and functional

00:30:48.760 | housing for themselves and their families by doing the work themselves.

00:30:52.600 | I would love to see that expand because it seems like it should be that fundamental human

00:30:59.000 | ability to build your own house, to craft with your hands, the shelter for yourself

00:31:04.320 | and your family should be a standard human skill that we teach all of our children.

00:31:08.280 | But unfortunately, we have lost it.

00:31:10.280 | So Erica, keep me in the loop as you work through your project.

00:31:12.960 | I'd love to hear and then bring you on the show for a full discussion when you guys work

00:31:18.740 | out what actually ends up happening.

00:31:21.080 | We'd love to hear your experiences.

00:31:22.080 | That would be fantastic.

00:31:23.080 | Thanks so much, Joshua.

00:31:24.080 | Absolutely.

00:31:25.080 | All right, going on to Nick in Indiana.

00:31:26.080 | Nick, welcome to Radical Personal Finance.

00:31:27.080 | How can I serve you today, sir?

00:31:28.080 | Hi there, Joshua.

00:31:29.080 | It feels weird to hear your voice not at 2X speed because that's how I always listen to

00:31:30.080 | your podcasts.

00:31:31.080 | I hear that constant so much from listeners.

00:31:32.080 | And when I teach a class on a webinar, people say, "Oh, it's weird to hear Joshua's voice

00:31:48.160 | at 1X speed."

00:31:49.160 | And it makes me all nervous.

00:31:50.160 | Am I going too slow?

00:31:51.160 | Go ahead.

00:31:52.160 | No, no, no.

00:31:53.160 | It's not like that.

00:31:54.160 | But anyway, my first question relates to your experience when you were working with planning

00:32:02.680 | clients.

00:32:03.680 | Are there any particular questions that you wish more clients would have asked or information

00:32:08.480 | that clients should have brought to your attention to kind of get the most out of your services?

00:32:12.200 | I know in my work as a doctor, I have patients all the time that kind of avoid talking about

00:32:17.360 | a lot of things that I could really help them with.

00:32:19.840 | And I'd like to avoid that sort of mistake when I seek the services of planners.

00:32:23.800 | So what can clients do to kind of help their planners help them the most?

00:32:29.000 | Wow, what a fun question.

00:32:35.000 | Two big themes occur to me right off the bat, and then probably some individual questions

00:32:43.760 | specifically.

00:32:45.800 | The first theme that occurs to me would be somebody simply making it clear that they're

00:32:53.000 | open to advice in any area.

00:32:56.600 | Frequently somebody has a stated scope.

00:32:59.200 | And as a financial planner, one of the things that you try to do is you lay out the scope

00:33:02.640 | of the engagement using kind of the formal language.

00:33:06.360 | What is the scope and nature of our engagement?

00:33:08.960 | So if somebody wants a review of their investment portfolio, that's one thing.

00:33:13.020 | If they want a review of their tax plan, that's another thing.

00:33:16.320 | But if somebody were to talk with me as a financial planner and say, "I'm interested

00:33:20.440 | in your thoughts in a review of my, say, life insurance policy," then that doesn't necessarily

00:33:26.520 | give me permission to start talking to them about their plans for their child's education.

00:33:31.960 | Now on Radical Personal Finance, I can do that, and I do that very freely.

00:33:35.560 | But in a professional context, that generally is not accepted.

00:33:41.220 | So the first thing that somebody could do is if they're interested in holistic advice

00:33:46.020 | or holistic input, then they can make that clear to a planner.

00:33:52.060 | And just by simply saying something like, "By the way, as we talk about this, I want

00:33:55.980 | you to know that I'm interested in anything you have to say or any insight that you have

00:34:00.960 | about any other aspects of my financial situation."

00:34:06.280 | And a way that they could do that practically would be to be clear about everything that

00:34:10.400 | they have.

00:34:11.400 | Instead of being secretive, they could just say, "Here's what I have.

00:34:15.120 | I have this here.

00:34:16.120 | I have this other thing here as well."

00:34:17.960 | Now, of course, you as a client would need to balance the need for privacy in those things.

00:34:23.520 | I've talked about that elsewhere on the show.

00:34:26.080 | But in general, most people, you don't have to protect every single thing, and just being

00:34:29.680 | straightforward with it helps a lot.

00:34:32.540 | For a financial planner, a financial planner is in an interesting relationship with a client

00:34:40.880 | where much as you, Nick, as a doctor, you – there's a bit of – you have to have

00:34:47.980 | a certain amount of respect.

00:34:49.220 | As a doctor, you can ask your client to say, "Take off your clothes," when it's an

00:34:53.820 | appropriate time for your personal examination to tell them, "Take off your clothes."

00:34:58.760 | But if you told every single one of your clients right when they come in, "Go ahead and take

00:35:03.120 | off your clothes," that would obviously be a breach of trust.

00:35:07.080 | It's not strictly necessary when someone has a problem in their throat.

00:35:12.000 | And so financially speaking, it's a similar scenario.

00:35:14.680 | Not everybody wants to get financially naked with their financial planner.

00:35:18.240 | But yet if they did, it would make it a little easier.

00:35:21.360 | And so the metaphorical parallel would be that, Nick, if every patient that you saw

00:35:27.640 | would come in, they would do all the vital measurements right off the bat.

00:35:33.160 | They would do blood panels and have everything right there, a comprehensive portfolio of

00:35:39.280 | all their past medical exams, all their history, all their other doctor's comments, and at

00:35:46.480 | the risk of pushing this too far and be standing there naked in the waiting room when you come

00:35:50.040 | in, you'd probably be much more efficient and much more comprehensive with your advice.

00:35:54.600 | You look at their diet log for their food log of how they eat, their calorie intake,

00:35:57.800 | et cetera.

00:35:58.800 | You'd probably give good advice.

00:35:59.800 | Well, the closer that you can get with a planner as far as opening things up in that way, that'll

00:36:05.600 | help.

00:36:06.600 | I think that'll really help.

00:36:09.240 | The second kind of major theme that I would see as valuable is forthrightly disclosing

00:36:18.680 | the opinions that you as a client hold and not hiding those for the sake of professional

00:36:28.560 | courtesy.

00:36:30.120 | For example, when I sold life insurance, it's never been a surprise to me that some people

00:36:39.040 | have strong convictions about what's the appropriate way to buy life insurance policies.

00:36:46.840 | Some people believe very strongly that it would be idiotic to ever purchase a whole

00:36:54.360 | life insurance policy or it would be idiotic to ever do anything except buy a 10- or 20-year

00:36:59.960 | level term insurance policy for 10 times your annual income.

00:37:04.160 | As a financial advisor, it's not surprising to me that people believe that.

00:37:08.900 | But it's much more valuable for me if they would just simply open their mouth and say,

00:37:13.000 | my belief is that with regard to life insurance, I should only ever buy 10- or 20-year level

00:37:18.540 | term insurance policy.

00:37:20.960 | What do you think about that opinion?

00:37:24.800 | Because then that would give me the opportunity as a financial professional to say, well,

00:37:32.200 | here's what I think.

00:37:33.560 | When I actually interviewed for the very first time with the company that I wound up working

00:37:38.840 | with for six years, which was a leader in the area of whole life insurance, this was

00:37:44.600 | in whole life insurance sales, so massive amounts of whole life insurance.

00:37:48.680 | I was at that time operating under the deep conviction that buying term life insurance

00:37:55.200 | was the only appropriate decision for every thoughtful, reasonable person who wants to

00:38:00.880 | make a good financial decision.

00:38:02.960 | So I led with that in my initial interview with the various life insurance agents that

00:38:09.320 | I talked to to try to figure out if this was a company that I wanted to associate with.

00:38:12.880 | I said to them, I believe you should only buy term insurance and invest the difference.

00:38:18.240 | What do you think and why?

00:38:20.040 | And then being able to listen to them say, well, here are the advantages of that approach

00:38:24.520 | and here are the disadvantages of that approach and here are various scenarios and here's

00:38:28.140 | how you would know what's right, helped me to come to a different conclusion than I had

00:38:32.280 | previously.

00:38:33.400 | But what I found is that clients always harbored their own opinions, convictions.

00:38:37.840 | You should only buy index funds.

00:38:39.840 | You should only buy term life insurance.

00:38:41.900 | You should never buy long-term care insurance until you're 55 years old.

00:38:45.440 | You should always buy disability insurance at your job.

00:38:48.640 | You should never buy individual stocks.

00:38:50.600 | You should never do anything except – you fill in the blank with whatever that I could

00:38:56.520 | pick up on them, but many people didn't have the confidence in their opinion to actually

00:39:01.420 | hear my responses.

00:39:03.680 | And so if they would just simply say, by the way, here's my personal belief.

00:39:08.080 | What do you think?

00:39:09.080 | That could get a whole lot of touchy-feely foreplay out of the way and we could get right

00:39:15.040 | too and I could say, well, here's what I think about that opinion.

00:39:18.600 | Here's where I think it's applicable and here is what I personally believe are the downsides.

00:39:22.760 | So let's talk about your situation and figure out what may or may not be appropriate for

00:39:27.160 | you.

00:39:28.160 | There are going to be two big picture approaches that I think are valuable.

00:39:33.120 | Here would be I guess one more very important one, Nick, that I think also makes a difference.

00:39:41.560 | Many people when meeting with a financial advisor feel the need to be reticent about

00:39:49.160 | the actual circumstances that they're going through.

00:39:54.280 | The best example of this would be family problems, family turmoil, marriage problems, et cetera.

00:40:05.480 | So they often want to pull back and not talk about things that they think are going to

00:40:09.360 | be uncomfortable.

00:40:11.520 | For a while when I was a new advisor, I didn't see it happen and I couldn't understand why

00:40:16.040 | did this person not do what I said they should do?

00:40:19.240 | I sat with them.

00:40:20.240 | I listened to them.

00:40:21.920 | Why did they not implement what I told them they should do?

00:40:26.640 | Some people would say no to the recommendations that I made or they would often just disappear

00:40:31.120 | and not respond to the recommendations that I made and I didn't understand why.

00:40:35.040 | I would go back through all the recommendations, through all the notes and I would say, "But

00:40:38.080 | this was exactly what they should do.

00:40:42.500 | My advice is right.

00:40:44.320 | Based upon everything they said and what they said was important, my advice was right."

00:40:47.920 | But as I grew and experienced and matured, I quickly realized that there were frequently

00:40:52.640 | things that they wouldn't tell me about and most commonly it was marital strife.

00:40:59.960 | They would say if I'm meeting with the husband or the wife, they wouldn't want to tell me

00:41:03.240 | what the husband, their spouse was saying in their actual situation.

00:41:11.360 | And so later I would find out when I talked to them a year later, well, they had since

00:41:15.440 | gotten divorced.

00:41:17.800 | And if they had just simply told me, then I could have provided some actual useful advice

00:41:21.920 | for them and said, "Well, here are a few things that you should do and with regard

00:41:26.480 | to your divorce planning and definitely if you are considering consulting a divorce attorney,

00:41:31.400 | you definitely should not do all of these recommendations that I've made to you, but

00:41:35.180 | you should do these other things to protect yourself or protect your wife or etc., to

00:41:39.920 | come through this in the most inexpensive and the best possible way for all the outcomes."

00:41:44.580 | But they didn't want to tell me they were facing marital problems and therefore we basically

00:41:48.120 | all wasted our time.

00:41:49.720 | And then I guess a corollary of that would be when I'm in a competitive situation.

00:41:54.160 | It's no surprise when I'm in a competitive situation with another advisor that I'm in

00:41:59.720 | that situation.

00:42:01.200 | I'm meeting with Joshua and I'm meeting with a firm across town and we're both presenting

00:42:06.840 | proposals on a $2 million portfolio that we're trying to bring under our stewardship.

00:42:12.320 | Okay.

00:42:13.320 | Well, that's fine.

00:42:14.320 | That's fine competition.

00:42:15.320 | We know it's a big competition, but let's talk about what you're doing and I'll help

00:42:19.120 | you make that decision.

00:42:20.440 | Here's what we do.

00:42:21.440 | Here's what we don't do.

00:42:22.680 | And at least if I know who the competition is and what they're proposing, then I can

00:42:27.000 | tell you here are the flaws in it.

00:42:28.960 | Same thing used to happen with insurance policies and one of the little things that was helpful

00:42:33.520 | with insurance policies is that when legally speaking, if somebody is seeking to replace

00:42:39.560 | a life insurance policy, which means a newly issued policy is seeking to be canceled and

00:42:44.180 | replaced by another contract, legally there has to be a notice made to the company who

00:42:50.480 | holds the contract and that company could then notify the agent.

00:42:54.400 | But frequently the client wouldn't say, "Oh, I'm meeting with this other firm across town

00:42:58.840 | and I'm considering replacing your policy with this other company."

00:43:01.920 | And I often found that so maddening where I would say, for sake of example, "Listen,

00:43:08.680 | I can sell you a Prudential policy or I can sell you a MetLife policy or I could sell

00:43:12.740 | you a Northwestern Mutual policy or I could sell you a New York Life policy.

00:43:16.200 | Here's why I've recommended for you policy number one.

00:43:19.760 | And yes, I understand that this other agent who you met through such and such is recommending

00:43:24.120 | to you a MetLife policy instead of my Prudential policy or my Northwestern Mutual policy and

00:43:29.640 | here are the advantages of that that they're telling you about, but here's what you don't

00:43:32.800 | know that could hurt you."

00:43:34.380 | But so frequently people didn't want to hurt my feelings by telling me they're in a competitive

00:43:37.740 | environment, that I'm in a competitive environment.

00:43:41.200 | And the only person that was hurt by that was themselves.

00:43:44.320 | So honesty, frankness, and a recognition of the fact that these little questions are not

00:43:52.480 | unknown.

00:43:53.480 | In the same way, Nick, that you're in competition with WebMD and whatever so-and-so says on

00:43:58.640 | the nightly news, that's not a surprise to you if I come in and I'm curious, but you

00:44:03.860 | also have a lot to add that if I'm open to you that I could really gain from.

00:44:09.520 | So those would be my thoughts in answer to your question.

00:44:11.760 | Okay, thanks for that, Dr. Huffman.

00:44:15.280 | That actually sounds remarkably similar to kind of my thoughts on seeing patients.

00:44:19.720 | So I was going to spin it around on you.

00:44:22.640 | All those things apply.

00:44:23.920 | So I was going to spin it around on you and let me just ask you, if you were answering

00:44:27.760 | that question from the perspective of a medical professional, how would you respond to it?

00:44:34.720 | I mean, really, most all the things that you said certainly still apply.

00:44:41.160 | You know, one, kind of going back to something you kind of said about people being embarrassed

00:44:47.920 | about certain situations and things like that, you know, we hear, you know, "What to you

00:44:54.160 | is a weird, embarrassing, I can't believe this is happening to me situation."

00:44:58.840 | We see this stuff all the time.

00:45:00.720 | So don't be embarrassed to bring something up to your doctor or, you know, as you said,

00:45:06.920 | you know, if there's trouble at home or, you know, your job is going to get lost, you know,

00:45:10.520 | don't be embarrassed to talk to your planner about that.

00:45:12.560 | I would imagine, you know, that's kind of one of the big, big things.

00:45:19.600 | And also, you know, the, you know, say up front, you know, here are the issues that

00:45:25.680 | I'd like to kind of work on today because, you know, we get so many patients and I've

00:45:30.200 | certainly been guilty of doing this in the past of, you know, "Oh, hey, I know we're

00:45:35.000 | all done here, doctor, but X, Y, and Z as well."

00:45:37.920 | Well, okay, you've, you know, just like the divorce situation you talked about, okay,

00:45:42.120 | now we're in a completely different situation, you know, maybe that changes everything that

00:45:45.840 | I just spent the last 10 minutes talking to you about.

00:45:48.880 | So yeah, I would certainly say a lot of things you said, but I'm going to add those two things

00:45:53.240 | on top of, you know, don't be embarrassed about what you've got going on and, you know,

00:45:58.520 | kind of say everything up front so that we kind of have all the information going in.

00:46:03.640 | Yeah, absolutely.

00:46:06.480 | I have found that there's a strikingly consistent among the professions, and I'm lumping financial

00:46:16.560 | planning in with the professions that are more frequently considered, such as the practice

00:46:21.200 | of law or the practice of medicine, among the professions when I interact with other

00:46:26.360 | professionals, there's often striking similarities between the different approaches and the things

00:46:32.920 | that many of us struggle with.

00:46:35.280 | And I think more than anything, frankness and honesty is usually the most helpful thing.

00:46:43.440 | Sometimes it's hard, frequently it's hard, but forthrightness, honesty, at least there

00:46:49.160 | we have the opportunity to make progress.

00:46:51.800 | You had a second question.

00:46:52.800 | Nick, go ahead with your second question, please.

00:46:55.640 | Yeah, the second relates to switching from a sole proprietorship to an S-corp.

00:47:02.920 | I've been working as an independent contractor for the last two years, basically just under

00:47:07.120 | my own name, making about $120,000 a year.

00:47:12.000 | I am considering switching to an S-corp, and I've been thinking about this for a while,

00:47:18.920 | and, you know, with some of the new tax law changes, it looks like that might even be

00:47:23.280 | a more attractive option now.

00:47:24.920 | But I'm just wondering if my, you know, what I'm being paid and what I'm doing is not changing,

00:47:33.080 | you know, same jobs, same pay, is that going to kind of trigger the IRS to say, "Hey, you

00:47:39.000 | were making $120,000, and now your salary is $90,000, but you're getting these $30,000

00:47:44.840 | in dividends.

00:47:45.840 | Is that going to cause a problem for me, or is that okay to do?"

00:47:51.520 | So the basic question is, is changing the approach to business, such as entity from

00:47:57.960 | sole proprietorship to S-corporation, is that conceivably a red flag that the IRS would

00:48:03.400 | say, "Hey, by the way, because you're doing this, we're going to give you extra scrutiny

00:48:09.400 | to your situation"?

00:48:10.400 | Is that an accurate summary of the question?

00:48:13.000 | Sure, yeah.

00:48:15.400 | I guess it makes more sense if you're kind of starting a whole new business or something

00:48:20.080 | like that, but for mine, everything else would be staying the same, just how I'm being taxed

00:48:24.920 | on it.

00:48:25.920 | So, yeah.

00:48:26.920 | Trevor Burrus: Right.

00:48:27.920 | I don't believe that that is something that is appropriate.

00:48:32.640 | I think it's – and here would be my more extended answer.

00:48:37.960 | Number one, I think it's a good idea.

00:48:40.360 | I am scared of the IRS.

00:48:43.080 | They have guns, they have men with guns, and they have jails.

00:48:47.920 | I'm scared of people with guns who have the law and all the legal authority of all

00:48:54.160 | of the force in the land at their disposal.

00:48:56.960 | So I treat people in that situation with a very healthy amount of respect.

00:49:02.160 | So I'm scared of the IRS and I recommend that you be too.

00:49:06.720 | That's something that's very, very important.

00:49:08.760 | And they've cultivated that reputation over the years, especially in the area of tax enforcement.

00:49:14.160 | Number two, I'm not scared of the IRS because at the end of the day, the IRS doesn't put

00:49:20.320 | you in jail for just about anything except not reporting income.

00:49:24.800 | They don't put you in jail because you messed up on your taxes or because you took a deduction

00:49:30.260 | that you were – that they don't think that you should be allowed to.

00:49:36.460 | So on the whole, although I think it's good to be scared of the IRS, you don't think

00:49:40.760 | we need to walk around on tiptoes thinking that they're all of a sudden peeking in

00:49:44.840 | the window and that we should never do anything that might ruffle their feathers.

00:49:51.400 | I appreciate when people are aggressive with the IRS.

00:49:53.800 | I think they have a moral – that we have a moral duty to push back in any conceivable

00:49:59.480 | thing and to push back in our own business practices to take every single deduction that

00:50:07.200 | is allowable.

00:50:08.200 | We have a moral duty to make our tax bills as low as possible and then to press back

00:50:13.280 | in whatever way possible politically to make the overall system of taxation fairer and

00:50:20.960 | cheaper as is – in any way that is possible.

00:50:25.300 | So that's kind of just a little bit of ideology.

00:50:29.360 | Practically speaking, what you're describing would not raise any red flag whatsoever.

00:50:34.100 | The natural progression of businesses is that they will grow and change over time.

00:50:40.280 | It's natural for businesses to begin as a sole proprietorship, to move into an S-corporation

00:50:47.600 | or an LLC and then as they grow to change to a C-corporation.

00:50:52.040 | So practically that is the normal progression of many businesses and practically there are

00:50:57.760 | many reasons why that would be very much in your best interest, none of which necessarily

00:51:04.600 | relate to tax savings.

00:51:07.400 | So that is definitely not going to be a red flag.

00:51:11.900 | In addition to that, there is nothing wrong with structuring your affairs in the most

00:51:17.820 | tax-efficient way possible.

00:51:19.840 | There's nothing wrong with it morally and there's nothing wrong with it legally.

00:51:24.940 | I think that you should morally and legally do both of those things to structure your

00:51:28.820 | affairs in the most efficient way possible.

00:51:31.580 | You simply have to pay attention to any stated rules that do exist on what you can and cannot

00:51:39.220 | do.

00:51:40.380 | So the only danger in pursuing what you're describing would be if you were to ignore

00:51:47.020 | the rules or the policies that the IRS would follow and enforce with regard to S-corporation

00:51:54.380 | taxation and of course most specifically, practically speaking, to the actual structuring

00:52:00.380 | of your income with salary versus dividends.

00:52:05.180 | If you move to an S-corporation and you started taking $1 of salary and $119,999 of dividends

00:52:14.860 | as compared to currently where you have $120,000 of self-employment income, that probably would

00:52:21.260 | trigger an audit.

00:52:24.500 | That probably would trigger the red flags.

00:52:26.700 | But it's because that's out of the guidelines.

00:52:30.900 | It's not because it's wrong to go from a sole proprietorship to an S-corporation.

00:52:35.740 | It's because the requirement of an S-corporation is that, especially for professional services,

00:52:40.180 | that you're paid a salary commensurate with the salary in the area.

00:52:44.140 | So what you should do is you should research what's the salary in the area, figure out

00:52:47.660 | your scheme of defending that based upon the data that you've gathered in your area of

00:52:52.940 | what's an appropriate salary, and then you should set your salary appropriately.

00:52:56.260 | I think that's the best way to handle it.

00:52:58.500 | But no, making the transition that you're describing is not wrong.

00:53:03.340 | Even if it were solely for the savings of tax savings, I don't think that would be a

00:53:07.980 | problem.

00:53:08.980 | The IRS has a doctrine where if the only reason for making a move is to save on taxes, for

00:53:19.500 | example, you structure a transaction in a certain way, and if the only reason for doing

00:53:23.740 | it is to lower your tax bill, they'll disallow that.

00:53:27.140 | There has to be a compelling business reason.

00:53:30.380 | But changing entity is perhaps the easiest thing to properly, legally, and morally justify

00:53:38.260 | as an appropriate business reason.

00:53:40.780 | And you're not just structuring something to lower your taxes.

00:53:44.060 | There are many other benefits that will accrue to you from that perspective.

00:53:47.660 | So short answer, Nick, don't worry about it.

00:53:49.780 | Be scared of the IRS because, again, they've got the men with guns who will come and back

00:53:54.820 | them up, and you should be scared of those people.

00:53:58.060 | But don't be scared of the IRS because the time that they show up with guns and the ways

00:54:02.160 | that they show up with guns are pretty well known, and what you're describing is nowhere

00:54:08.460 | near the line of danger.

00:54:10.900 | Good answer?

00:54:11.900 | Yep.

00:54:12.900 | Sounds good.

00:54:13.900 | All right.

00:54:14.900 | Very good, sir.

00:54:15.900 | All right.

00:54:16.900 | Final caller for the day.

00:54:17.900 | Let's go to Ruha in Alabama.

00:54:18.900 | Ruha, welcome to Radical Personal Finance.

00:54:19.900 | How can I serve you today, please?

00:54:20.900 | Hi, Joshua.

00:54:21.900 | Thank you for taking my call.

00:54:22.900 | My pleasure.

00:54:23.900 | Okay.

00:54:24.900 | Let me just hand my baby off.

00:54:25.900 | How old is your baby?

00:54:26.900 | She's going to be 18 months and a day or two.

00:54:33.900 | What a beautiful stage.

00:54:36.900 | Yeah, she is wonderful.

00:54:39.900 | We are so blessed.

00:54:42.900 | So today I wanted to talk to you about filing my taxes.

00:54:50.900 | In 2017, we made the big exciting transition from real house to tiny house, and that move

00:55:03.020 | actually precipitated a whole bunch of other actions and behaviors that should be pretty

00:55:11.700 | advantageous to us for reducing our tax liability for the year.

00:55:19.740 | And then others, of course, will actually add to our tax liability.

00:55:23.620 | But long story short, this is my first year ever when we've had more than just a personal

00:55:32.580 | income from, what do you call that, a W-2, I guess?

00:55:39.220 | So because of all these added complexities, I'm feeling like it might be a good decision

00:55:46.220 | to get a professional to do our taxes this year.

00:55:51.820 | But my other concern with that is, for instance, I've just been going through Jeff Schnepper's

00:56:00.140 | How to Pay Zero Taxes book.

00:56:03.980 | And I want to hire that professional.

00:56:08.780 | I want to hire the one who's really looking to help us save every dollar that should be

00:56:16.740 | ours and someone who's not just going to treat us like one more client through a revolving

00:56:23.540 | door.

00:56:25.900 | You want to hire them.

00:56:26.900 | I want to hire them.

00:56:28.540 | Every business owner I've worked with wants to hire them.

00:56:32.260 | And unfortunately, they're a hard person to find, and they don't come cheap.

00:56:39.700 | So I think you've got to justify.

00:56:42.520 | So let me ask a couple of questions, and I will be able to help guide you in the right

00:56:47.140 | direction.

00:56:48.140 | So this last year, 2017, was your first year in business.

00:56:52.060 | So this is your first year with revenue gained from your businesses.

00:56:55.900 | Is that right?

00:56:56.900 | Yes.

00:56:57.900 | And about how much money in total revenue would you say that you've earned from your

00:57:03.940 | business activities?

00:57:08.740 | Probably around $8,000.

00:57:11.860 | Do you have good records of your various financial transactions for the year across the board,

00:57:19.460 | personal expenses, business expenses, et cetera?

00:57:24.140 | They could be better, but they're not bad.

00:57:29.380 | So here's been my experience.

00:57:32.900 | The biggest value of an accountant, a good tax planner, is in two things.

00:57:43.540 | It's in bookkeeping for a busy business professional, and it's in proactive tax planning.

00:57:51.820 | Those are the big, big valuable points, especially the proactive tax planning.

00:57:57.980 | And so if you're wading into a book like Schnepper's book, which is excellent – it's called,

00:58:02.260 | again, How to Pay Zero Taxes, Your Guide to Every Tax Break the IRS Allows – he issues

00:58:06.480 | a new version every year – it's excellent, but it's also overwhelming.

00:58:10.220 | But if you're wading into a book like that and even looking at it, then you probably

00:58:14.260 | have the temperament or at least the willingness to study certain things to help you in the

00:58:18.220 | planning direction.

00:58:19.860 | I don't know how to find a good planning – a good tax planner in your local area.

00:58:25.260 | My personal experience has been that many accountants are competent to provide good

00:58:32.980 | planning, but they get very accustomed to their client base not valuing it.

00:58:38.940 | And most clients just want their returns done.

00:58:41.700 | They just want their returns done seemingly as quickly as possible and as cheaply as possible

00:58:45.960 | so they can get their refund back.

00:58:48.020 | And many accountants build and structure their practices in that way.

00:58:54.940 | They build and structure their practices in a way that serves the person who brings in

00:58:59.860 | their stack of stuff and just wants it done fast and cheap.

00:59:04.300 | So how to find – and frankly, if I were an accountant, I would probably build a business

00:59:10.380 | like that because it's much harder to build and market the business related to advice

00:59:15.820 | and strategy than it is to market the advice related to doing the return.

00:59:23.440 | So I don't know how to help find someone like that.

00:59:28.500 | But here's how I would approach it if I were looking for somebody.

00:59:31.260 | I would start to call different people in my local community that I had a relationship

00:59:37.580 | with, business people especially, any business person that I know from any context, someone

00:59:42.780 | in your church, someone in your local chamber of commerce, somebody that you are connected

00:59:48.540 | with and say, "I'm looking for a tax planner.

00:59:50.940 | Do you know anybody in the area who I can talk to?"

00:59:53.820 | And you can start to get referrals in your local area to people and most accountants

00:59:58.500 | will be happy to sit and talk with you without charging you.

01:00:01.820 | The best time to do tax planning with them is to do it not during tax season.

01:00:07.100 | Here in the beginning of January is still a decent time where you can get an accountant's

01:00:11.260 | time.

01:00:12.260 | But much farther than this, this is their busy season and the best time to talk to them

01:00:16.020 | is in July when they're not up against the corporate deadlines or the personal deadlines

01:00:21.020 | in July or December, something like that when they have more time.

01:00:25.960 | So you can potentially pursue somebody in that area.

01:00:30.780 | With your current business revenue, I wouldn't think that it necessarily needs to be a high

01:00:36.820 | priority.

01:00:38.220 | The tax programs, like TurboTax being I think the most well-known one or TaxCut or other

01:00:44.760 | competitors to those, the tax programs do a really good job of walking you through all

01:00:51.460 | of the potential deductions that you can take, all the potential approaches to business.

01:00:57.820 | And so here's what I would recommend that you start with at the very least.

01:01:02.740 | Print or compile as comprehensive of an inventory of your financial transactions for last year

01:01:12.580 | as you can get your hands on.

01:01:15.360 | Any accounts that they have, print the statements, et cetera, the best outcome is if you have

01:01:19.620 | a register or a spreadsheet or something that has every financial transaction possible.

01:01:26.180 | And then start by going through something like the TurboTax software.

01:01:30.220 | I've used them for years.

01:01:31.500 | They do a fine job.

01:01:33.020 | I'm sure the others are excellent as well.

01:01:35.380 | But start by sitting with something like the TurboTax software and go page by page through

01:01:39.820 | every question that they ask you.

01:01:42.860 | And when they ask you the question, sit and carefully read it and think, "Do I have any

01:01:48.020 | of these transactions?

01:01:49.640 | Is there anything related to this that I have?" and follow the prompts.

01:01:53.580 | Most people who are basically competent in the language of business, which you clearly

01:02:00.500 | are if you've taken the action step of buying a book like Schnepper's book, most people

01:02:05.300 | will be perfectly able to go through TurboTax and to walk their way through it.

01:02:12.140 | You can walk your way through it without buying it.

01:02:13.780 | You can use their web interface.

01:02:15.700 | They don't charge you until the very end and you can start to see your results and see

01:02:18.900 | what you've got.

01:02:20.620 | And I would start with that DIY process.

01:02:22.940 | My experience has been that I've gotten big value when I was confused on certain things

01:02:31.260 | by consulting with a couple of accountants.

01:02:35.420 | But then, for example, one of my favorite accountants that worked with me and that I

01:02:39.380 | used to file my returns for a number of years then sold his practice.

01:02:42.700 | And then the next guy, I didn't get much value.

01:02:45.340 | And he wouldn't take the time to sit and talk to me, wouldn't take the time to do proactive

01:02:48.260 | planning.

01:02:49.260 | And I actually learned through the process of going to TurboTax and then starting to

01:02:52.460 | read more books, I learned much more to the point where I feel like there's a hard place

01:02:59.660 | for an accountant to be able to help me.

01:03:01.740 | And with $8,000 of business revenue at this point, it's going to be hard for an accountant

01:03:05.780 | to make a measurable difference in your tax bill, I would guess, if you do a good job

01:03:09.720 | with TurboTax.

01:03:10.940 | As your business grows, then I would start to solicit the advice of a professional.

01:03:19.980 | Anything else or any specific questions?

01:03:20.980 | That sounds reasonable.

01:03:21.980 | Well, my plan was to start with TurboTax and start to go through it myself and then

01:03:28.900 | see if I can maybe get someone to review it.

01:03:34.620 | And I think I'm aware of a few services that will review it for free.

01:03:40.340 | And then if you want advice back, they'll charge you.

01:03:44.300 | I don't know.

01:03:45.300 | I'll have to look into that a little more.

01:03:49.500 | But that pretty much covers my questions.

01:03:55.260 | It just had to do with the move.

01:04:01.300 | We had a few relocation expenses.

01:04:05.300 | And then we started renting out our old home.

01:04:09.180 | We're actually taking tenants on our new-- the land that we bought to develop to park

01:04:16.260 | our tiny home.

01:04:17.260 | And we actually have a tenant there as well.

01:04:20.820 | So just with those few different categories of-- and charitable donations as well, the

01:04:29.700 | different categories I thought might make it worthwhile to have someone kind of on my

01:04:34.820 | side looking through things and saying, oh, look, you missed something there.

01:04:39.420 | The challenge--

01:04:40.420 | But I've been using those.

01:04:41.900 | Right.

01:04:42.900 | The challenge to that-- you're not wrong.

01:04:45.280 | But the challenge that I've experienced practically is the quality of the advice that you'll get

01:04:49.660 | from a tax accountant will be dramatically impacted by the quality of your records.

01:04:56.220 | In my early years in business, I didn't have very good records.

01:04:59.940 | And most people don't have good records.

01:05:01.820 | And so their accountant is essentially forced to make a good faith estimate on certain things

01:05:07.820 | and to do the best that they can to say, well, this is probably what happened.

01:05:13.140 | But in general, if you don't have good records, it's going to be hard for them to be aggressive.

01:05:17.900 | And they're certainly not going to be aggressive.

01:05:20.320 | And that's, I think, what many of us would like, is we'd like to have an accountant who's

01:05:23.420 | aggressive.

01:05:24.540 | But their license is at stake.

01:05:27.060 | And they're not going to-- if you think about it, if you're one of 200 clients, your accountant

01:05:31.620 | is not going to risk their business for the benefit of you, one of 200 clients, to be

01:05:36.500 | aggressive with something that you don't have.

01:05:38.740 | And so if you don't have good records, then frequently, they can't help you all that much.

01:05:43.500 | The flip side is, if you have good records, it's relatively easy for you to go ahead and

01:05:48.380 | enter those records into the program.

01:05:51.440 | Most accountants don't sit down and manually fill in a Form 1040.

01:05:56.860 | They use a professional tax preparation software.

01:05:59.900 | Usually they have a data clerk who will do the entering of the data for them.

01:06:06.140 | And then they'll sit down and review the overall return.

01:06:09.460 | And so if you're looking to save yourself a little bit of money, and you're looking

01:06:12.900 | to develop some skills, I don't see any reason for you not to start with a TurboTax.

01:06:18.780 | Use TurboTax as your inspiration to dig through your records and build good records for the

01:06:23.500 | year and reconstruct anything you have.

01:06:27.020 | And then if you get stuck, go ahead and at that time go and solicit advice.

01:06:31.180 | And then take the output from TurboTax, which you learn, and go ahead and potentially consider

01:06:37.020 | getting a second opinion and use that referral process to try to work with a couple of accountants.

01:06:43.420 | If you find a good accountant, they're well worth keeping.

01:06:47.780 | Just like with any professional, it's sometimes harder to find a good accountant as measured

01:06:53.660 | not by their competence, but as measured by their willingness to work with you in the

01:06:58.380 | way that you want to be worked with.

01:06:59.740 | And if you find them, I think you should continue to engage with them.

01:07:02.460 | But they're not easy to find.

01:07:06.780 | I wish you all the best.

01:07:07.780 | And if you have any specific questions, then feel free to connect with me or feel free

01:07:12.820 | to use the power of – there's some great tax professionals in the Radical Personal

01:07:16.220 | Finance Facebook group, really strong professionals.

01:07:20.340 | Go ahead and ask your questions there, and sometimes that will point you in the right

01:07:23.660 | direction as well.

01:07:24.660 | That is it for our Friday Q&A show.

01:07:27.620 | Thank you all so much for listening.

01:07:28.900 | Man, it's good to be back to these Q&A shows.

01:07:31.220 | I enjoy doing them.

01:07:32.220 | I invite you to join the show next week.

01:07:35.540 | In order to do that, remember to sign up to become a patron, RadicalPersonalFinance.com/patron.

01:07:43.580 | And you'll be able to support the show there and also to gain access to these calls.

01:07:48.420 | Feel free if you want to talk to me, feel free to sign up there and that's a good way

01:07:52.620 | to do it.

01:07:53.620 | If you'd like to speak with me privately, please remember that I do a limited amount

01:07:56.980 | of private phone consulting.

01:07:59.660 | What that means is if you want to speak to me about a specific issue, it can be a private

01:08:03.260 | issue or if you want to review, if you want some feedback on advice you're hearing from

01:08:08.060 | another professional, feel free to go to RadicalPersonalFinance.com/phonecall and you can book a call with me, RadicalPersonalFinance.com/phonecall.

01:08:16.260 | That call you'll pay by the minute for however much time you choose to speak with me there.

01:08:22.140 | So go to RadicalPersonalFinance.com/phonecall and you can find those details.

01:08:26.780 | In general, I can't remember how many, I've got several dozen reviews there but I've not

01:08:31.220 | had any phone client express dissatisfaction either in a public review or dissatisfaction

01:08:39.980 | with their experience to me privately.

01:08:42.940 | I can cut straight to the chase and oftentimes simplify complex questions and give you a

01:08:48.060 | valuable bit of feedback.

01:08:50.060 | And if you take the cost of a phone call with me and you compare it to the potential cost

01:08:55.660 | of a major financial mistake, I'm very confident in the service that I offer there.

01:09:02.380 | I think that's it for today.

01:09:04.780 | Next week we'll get back to it and I look forward to speaking with you then.

01:09:13.540 | Thank you for listening.

01:09:23.420 | This show is part of the Radical Life Media network of podcasts and resources.

01:09:29.040 | Find out more at RadicalLifeMedia.com.

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01:09:57.380 | sale at our Torrance location.

01:09:59.100 | Visit Picksexchangehh.org for more details.

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