Transcript

Steven Jarvis:

Hello everyone and welcome to the next episode of the Retirement Tax Services Podcast, Financial Professionals Edition. I am your host, Steven Jarvis CPA. And in this show, I teach financial advisors how to deliver massive value to their clients through tax planning. I’m really excited to have on the show with me today, Phil Putney from AFS Wealth Management and Phil is a personal financial specialist. And as he describes himself: a recovering CPA. So Phil, welcome to the show.

Phil Putney:

Thanks Steve.

SJ:

It’s great to have you here. Why don’t we just, why don’t we just start out with talking about why you describe yourself as a recovering CPA?

PP:

It’s funny, I’ve been a CPA for 30 plus years, so added financial services at the request of clients. You know, so it took a long time to, I guess, change my mindset from that of being that the CPA mindset to more of a financial planner. It is a completely different mindset. We can talk about that a little bit through the show, but it really comes down to perspective and time horizon you look at.

SJ:

That’s really interesting that you’ve been through that transition because we talk all the time on the show about that difference in perspective and how to get financial planners to work more closely with CPAs. But from your experience, as you got into both, you actually kind of left the CPA world behind, you still do a lot of tax planning, but not really what people think of when they think of CPAs.

PP:

Right. Yeah. And I mean, as a CPA, when I first started in the financial planning and even early in just the financial planning aspect of it, I didn’t believe in the whole concept of long-term planning and, you know, running the numbers because from a CPA perspective, I mean, that’s not the world we live in, right? You know, this year, last year, next year, that’s kind of three years is always a world that a CPA lives in. And in fact, we’re, we’re taught, we can’t give those perspective views and statements, you know, especially as it relates to the financial aspect, the accounting side of it, which is primarily what a CPA is.

SJ:

Yeah. I really appreciate your honesty there of “I didn’t believe in the long-term planning”. I think that’s whether CPS will acknowledge it or not. I think that’s really what it comes back to is they just, they don’t see the value. They don’t believe it’s something a professional should be doing.

PP:

Right. You’re making these long-term claims and statements and running numbers that are never going to come true. And it just doesn’t make sense. Which means at the end of the day they’re not going to come true, but at least it gives you an idea of where you’re heading versus just running into this blindly in retirement, which unfortunately from a tax aspect, at least a lot of people do.

SJ:

Yeah. And you obviously know, I mean that the listeners know this. I mean, great financial advisors are not putting together a financial plan and saying, okay, this is never going to change. This is the gold standard forever. I mean, the joke is that the financial plan is wrong as soon as you finish it. Right. I mean sometimes.

PP:

Absolutely. Yeah. I mean, I’ve always likened it to my client of, you know, we’re putting together this plan. It’s like, you wanted to take a trip around the United States and see all the national parks, right. So you’re going to put together this plan of, you know, where you’re going to go, itineraries make reservation, that’s our plan. But I guarantee it, as soon as you start on that trip, there was going to be things that happen. You’re going to get a flat tire. Things are going to go wrong. You’re going to decide, “Hey, I wanted to see whatever this, you know, the big ball of yarn or whatever it is, it wasn’t on your original plan and you want to go see that”. So it changes, you know, so you’ve got to have that flexibility, but you still have to run the numbers up front to see, does it work? How can I make it work more efficiently? And especially from a tax aspect, how can I improve my tax situation?

SJ:

Yeah. And even though you’ve switched over to the financial planning side of things, you still fully incorporate tax planning into what you’re doing.

PP:

Oh, absolutely. It is probably the biggest piece of the planning process that we bring in to the equation. And I mean, it’s something that most individuals, advisors, I think alike that don’t understand taxes think, well, yeah, it has, you have to pay taxes. It’s our obligation. Not much we can do. So why don’t you pay the least amount you can today and worry about that next year and that kind of kicked that can down the road. And again, that’s the CPA perspective, right? Because how was your, how do you judge your CPA when they’re preparing your tax return? Well, what did you save me this year in taxes? You know, I had to pay more taxes this year where you’re not doing your job, who cares about 10 years down the road from now and what that looks like.

SJ:

Yeah. And I want to get into this more, but when I was on your website, there’s actually a great quote that I think is going to frame up the rest of the discussion. We’re going to have that you put on your website from a John F. Kennedy. And it says “The great enemy of the truth is very often not the lie, deliberate, contrived and dishonest, but the myth: persistent, persuasive and unrealistic. Belief in myths allows comfort of opinion without the discomfort of thought.” I love that quote and it, and it fits so great with this conversation. We’re going to have about tax myths and you already touched on one of them, of this idea that we don’t really have a lot of control over what happens. And as long as we didn’t pay very much tax this year, we must have one that most taxpayers look at their tax return and say, “Did I get a refund? Super. I beat the IRS this year. Hooray.” And that’s just, that’s so far from how we should be thinking about this.

PP:

It’s a complete mind shift that unfortunately we’ve got to help clients walk through because they’ve been trained just the opposite. You know what I mean? As a CPA, as you know, 401k, even, you know, when you’re putting money into the 401k, the same concept there, you know, I mean, I can’t tell you how many years is a CPA, that whole idea of tax deferral of, you know, well, you get a deduction. So the IRS actually helps you contribute. Cause you put in 16, but it only costs you 12 out of your budget, your net pay drops by 12 or something, you know, something to that effect. So that’s just how we’ve always been trained in and thought of taxes as a way to pay the least amount today. Then you really don’t have a lot of control on turnover, what you do today.

Two Tax Myths Advisors Have To Address With Their Clients [6:16]

 

SJ:

Yeah. So really those first two tax myths we need to hopefully advisors are already on board with these, but we need to definitely get our clients on board with that first one being, we shouldn’t measure the effectiveness of our tax planning based on whether or not, or how big of a refund we’re getting. And the second myth being the idea that we don’t have control over our tax situation. There are, there are things outside of our control, but we can make a lot of choices.

PP:

Absolutely. Yeah. And the more diversification from a tax standpoint you have, the more long term control that you have. Most clients that I work with when we start with, I mean, they’ve saved in 401ks, IRAs, deferred retirement vehicles, that’s where the majority of their money is at. And if that’s the case, they really don’t have a lot of control long term once they hit the required minimum distribution age because they get forced to start taking money out, even if they don’t need it, you know, and that can be this ever increasing snowball, so to speak of taxes, because next year you have to do it again. And if you didn’t really need the money, you just reinvest it back into a taxable or a non-qualified account that’s generating interest dividends and capital gains, which you pay tax on that, you know, and next year you do the same thing. So it just happens over and over and over again. So yeah, if you do nothing, you’re right, you have no control. But if you want to look at it ahead of time and say, wait a minute, I don’t want that. Let’s do something today to get ourselves better, prepare for that time and have money in not only the tax deferred, but a taxable bucket and ultimately tax free buckets too. Because if you got all three of them, now you are more in control. You know, you can pick and choose where money’s coming from.

SJ:

I love that description. So as we were getting ready for the show, one of the other tax myths that you brought up was this idea that a lot of people have that someday I’m going to retire and my taxes are going to magically go way down. That I retire and I don’t get my paycheck so that must mean I make way less money and so that’s why I should just defer everything. There’s no other possible situation, just defer at all. So talk about how you explain this to clients and help them see how that may not. In fact be the case.

PP:

If you look at total taxes, including social security and Medicare. That might be the case, right? Because while you’re working, you’re paying that higher rate. But if you look at just really the federal and or state income taxes, generally, if somebody has prepared well for retirement, they’ve saved enough in their 401ks, those deferred accounts. You know, they have social security and maybe they are delaying that, you know, maximizing that benefit. And if they’ve got a pension on top of it. Yeah ultimately I can almost tell you what those three things, they’re not going to be in a lower bracket when they retire. In fact, they’re probably going to be in a higher bracket at some point once required, minimum distribution starts. And again, it’s back to that planning concept of, to help somebody see that you have to run them the math, run the numbers, you know, and I always tell my clients when we start this process, if you don’t like math, you know, unfortunately you’re probably not going to like this. Cause there’s a lot of math involved. You’ve got to run a lot of numbers and figure it out, you know? And again, yeah, it’s a projection. You gotta make certain assumptions, but you still have to do that because it’s going to look something like this.

SJ:

That’s a great way to help clients understand that just based on their income streams, they’re likely to be in a higher tax bracket in retirement. And that’s setting aside the fact that we all know that the tax code is written in pencil, then Congress can change it as often and as much as they like.

PP:

Yeah. And they will, are we in, we’ve seen a lot of that over the last, probably what, eight years. It’s just like a never ending change of the task coordinator proposing another one now, you know, in the process of making more changes. So yeah, you have to make sure your plan has flexibility built into it to know that it’s going to happen. It’s just inevitable. That’s what taxes do: they go up, they go down, they get changed on a regular basis, but that doesn’t mean you don’t plan today. And the other side of that though, you’ve gotta be very careful in planning based on what it could be. We always look at, you know, taxes going up. I mean, that’s everyone’s concern long-term. I don’t plan that way. I plan if the law, as we know it today stays in effect. What does it look like?

Can we improve your scenario based on that? If the answer is yes, then if taxes go up, it’s even better typically than the only time that that planning is going to be worse is if taxes go down, you know, and, and then I was bringing that back to the client. “What do you think the likelihood of that is?” And again, it’s something you’ve gotta, you gotta make your own personal judgment and opinion on. I can tell your mine but you know, I can’t force my opinion on you. You gotta be comfortable with where you think taxes are going term.

Transparency In Communication Is Key For Long Term Planning [10:48]

 

SJ:

Yeah. That’s so critical. Both from how you evaluate making that plan and then how you communicate to the client. We need to make sure that we’re doing, we’re making these decisions based on the best information we have now. But keeping that transparency in there that, that this all could change. This isn’t the first time I had a dart board and try to guess what the outcome’s going to be. We want to be proactive and intentional.

PP:

I mean, taxes are one of those things that there’s huge planning opportunities, but I think it’s become a very hot marketing topic where a lot of advisors are jumping on this concept of tax planning but then using the fear tactic of all the taxes are going to go up so we’ve got a plan towards that and running in that direction where you might actually be doing harm to a client. You know? So, I mean, there, there was harm in the other direction too, if you’re not managing taxes long term based on a plan, you’ve got to run the numbers to see what makes the most sense. Not just, oh yeah, well, I’ve heard taxes are going up so we’ve got to move everything we have into a rock. And we’ve got to make some, you know, harsh judgment decision today that long-term might not have played out to the client’s advantage.

SJ:

We’ve got to balance those and planning is a long-term commitment for advisors as well, because this is something you have to revisit every year, if not multiple times a year.

PP:

Yep. It’s something we, we work with clients on every single year. Most of our clients, we’ve got broad conversion strategies in play. So every year we’re getting together to calculate and manage the Roth conversion for that year. But then also looking at the plan based on what we know the current tax law is you’re on what the likelihood of changes are going to be in the next couple of years to see, so do we need to make some changes to that.

SJ:

Move on to another tax myth. And the next one I have on my list is this idea that all CPAs are tax experts, which means they know everything about taxes. And just by working with a CPA, you’ve taken care of every possible tax scenario out there.

PP:

It’s kind of the, the myth of a CPA, you know, that’s who you go to for the best tax advice, right? They prepare your return. They must know it all relating to the taxes. And I mean, Steven, as a CPA yourself, you know, and I know, I mean that that’s not necessarily the case. I liken it to being, you’re a general physician, right. To be a CPA, you have to take this exam that’s very broad, covering a lot of… the vast majority of its financial aspects, a very small component of it is the tax aspect. But I think most consumers look at the CPA as being the quote unquote tax experts, which they can be if that’s their specialty and you know, the way they focus their career in education. So for me personally, I mean, I ended up getting a Master’s in tax right after I finished my undergrad and got the CPA. Then that was the next step for me, because that was my focus that I wanted to concentrate on what is tax.

Why CPAs Are Valuable Allies To Have [13:32]

SJ:

And to be clear, as we talked about this myth that you pointed out that this is consumer’s impression, uh, I am a huge advocate for the CPA designation and what CPAs do we have to understand when we’re working with our clients that that kind of default impression from consumers is, oh, I work with a CPA, all of my tax things are covered. They don’t really understand the nuance of most CPAs are focused on tax compliance and mostl CPAs will tell you that too, that, “Hey, we’re going to make sure your return gets filed. You’re asking us to reduce your tax liability this year. So we’re going to let you know how you might be able to do that.” So yeah, this, this is a myth really from consumers that we need to get past, right.

PP:

And, you know, back to our original discussion of that, that world that CPAs live in and not, not to knock CPA, it’s a great designation I’d do it all over again. I encourage people that are wanting to pursue that tax aspect it’s a great step, but the CPA has blinders on, you know, it’s like a horse with blinders, right? I mean, they’re looking at this year, last year, next, that’s it, that’s the three worlds, three years they’re always living in.

SJ:

Yeah. Which is a really great perspective for advisors as you work with CPAs, which we talked about a lot on this show of how you can improve those relationships. But having that in mind that, okay, here, here’s what this CPA is going to be focused on. So as you bring things to a CPA, as you’re working on client specific situation, make sure that, that, I guess the, the way you’re framing this, you’re at least acknowledging the importance of those steps because that’s what the CPA is going to go to first. And even coming to them and starting with, “Hey, here’s something we’re working on with the client, want to make sure they get taken care of the right way. We’d love to get your perspective on how this gets reported this year and over the next couple of years” and let them let them be the expert in the places they’re an expert.

PP:

That’s a big key, especially if you’re not working with a client on the tax aspect, as an advisor and working with an outside CPA, don’t give the plan to the, to the client and have them communicate to the CPA. You need to be the quarterback. So to speak of the overall plan, working directly with the CPA. And, and they’ve got to be able to see long-term what is the plan? How does this make sense? Because if we’re doing a conversion and you’re telling the client, okay, this year based on the plan, we’re converting a hundred thousand dollars and you’re going to have to pay 30,000 of federal and state taxes. And they go to their CPA and said, okay, we’re going to convert. You know, and this is, they’re going to say, “what are you doing? Are you out of your mind?” You know, so you can’t, and then that’s going to start bringing questions in the client’s mind, because this is the trusted professional they work with probably for years. So you need to bring that relationship together upfront so that the CPA understands long-term what does it look like? Even though, again, that’s not the world they live in, but you can help them better understand long-term well, look, here’s the scenario. And we do this with every client. Let’s run what we call our base plan. Let’s do no conversions. What happens if we do nothing, just let it all play out. What does that look like? You know, and show the CPA that here’s that scenario we’re trying to improve that. And here’s what we’re doing.

SJ:

Yeah. Love that approach. What are the other things we talked about as we were getting ready for the show, as far as myths, you know, so this is the retirement tax services podcast. And so that name probably really resonates with people who are about to retire or advisors who work with retirees or pre-retirees, but this can lead to this idea that, “Hey, we should really only be talking about these things if we’re near or in retirement.” And that’s just not the case. While this show focuses on retirement taxes, this idea of the six or seven figure tax bill you’re going to pay over the course of your retirement. In fact, the earlier you start thinking about this, the better off you’re going to be, the more time you have to plan and make proactive decisions.

PP:

Absolutely. Yeah. And it, it’s funny when I’m working with clients, that’s probably one of the biggest concerns I hear come back is why didn’t somebody talk to me about this before I have never heard this. They come to one of my classes that we do, and we talk about taxes in retirement, run the numbers out and I give them some examples. And their mind is just blown because they’re like, “well, that’s not at all what I was told. This is not what I thought it looked like from a tax aspect.” Cause they were living under the myth of, well, I’m going to be in a lower bracket in retirement because I’m going to have less income, you know, and really helping somebody younger understand that can be greatly beneficial, especially early on because they now have even longer for that tax-free type of money to grow. Yeah. So I mean the earlier you start looking at this long-term perspective, the better. And then making sure you have some Roth money and tax free type of investments upfront so that you’re not left in this scenario at the end of everything’s in one bucket, it’s all in tax deferred.

Starting To Plan Retirement Taxes As Early As Possible [18:11]

SJ:

Yeah. It really, the earlier we start the better, because even though there are proactive things we can do to make sure that we don’t overpay the IRS over the lifetime of our wealth, the IRS does put a lot of limits on how much we can do in a given year. They’re only so generous with giving us choices. And so the earlier we can start and take advantage of those limits year to year, the better off we’re going to be in the long term.

PP:

Yeah. I mean, it’s, it’s no different than, you know, trying to get in shape, right. And starting into some kind of a physical improvement plan, right? I mean, it, it doesn’t happen overnight. If you’re in whatever shape you were in from a tax standpoint today, you have to start where you’re at today and make the change, the sooner, the earlier you start that the better off you’re going to be long-term.

SJ:

It’s really more about the consistent intentional action, as opposed to these one time huge fad strategies, whether we’re talking about fitness or taxes, a lot of people want to have just this, this one-time super complex unicorn idea of here’s how I’m gonna save a million dollars in taxes. And every now and then you hear those stories, but they are the exception. That’s not what we should all be striving for. We’re all going to be better off if we just have a consistent, intentional approach and that we’re doing these things early and proactively.

PP:

Yep. And always keep that long term view in mind. You know, you’ve got to look at sure what’s going on today. What’s the tax costs today? How does that fit into my budget and overall finances today, but don’t forget what does that look like long-term? Because you don’t want to make your scenario look good today only to make your long-term scenario even worse because the further you get into retirement or closer to retirement, you start losing years and options.

SJ:

Yeah. There’s all sorts of variations of the quota. You know, don’t let the tax tail wag the investment dog or whatever dog we want to talk about. Then I’m a huge advocate of that. Obviously we focus on taxes here, but there’s a lot of considerations that go into this. Especially when we take this long-term approach, we’ve gotta be looking at cashflow and income needs and all these different things. But if we leave out this tax element, honestly, we’re kind of by default overpaying the IRS. If you’re not proactively doing things, you’re leaving the IRS a tip and you’re not required to do that.

PP:

Absolutely not. In fact, that leads right into one of my favorite quotes. And I use it in my classes all the time by a very appropriately named judge, Judge Learned Hand. This is “anyone may so arrange his affairs at his taxes shall be as low as possible. He is not bound to choose the pattern which is best to pay the treasury. There’s not even a patriotic duty to increase one’s taxes.” So I always paraphrase it. I say, my paraphrase is you got to pay unto Caesar what Caesar’s is, but you don’t have to tip him. So don’t give them any more than you have to. They give you the rules and things that you’re able to manipulate and change to your advantage today. Use them take advantage of what you can for the long-term effect.

SJ:

Yeah. Our friends over at the perfect RIA, they usually summarize it as there’s no patriotic award for tipping the IRS, but whatever, whatever resonates with you, I am all for it. Hey, every dollar of tax you owe, but let’s be proactive so that we owe less in tax.

PP:

Yeah. And you’ve got to look at it term again, you know, don’t, don’t just look at it today. And that’s always been the challenge from a kind of a media perspective. And what we’re always led to believe is, you know, what’s my number. I mean, that’s always been out there, you know, what do I need to retire? And the thing that most people forget is you’ve got a million in an IRA. That’s great, but that’s not your money. It’s like having a house that’s worth a million, but you still owe the bank a mortgage. Right. So you owe the IRS a mortgage on that, that IRA. And it’s a variable rate mortgage. Right. They control the rate. Yeah. So why not prepay that mortgage? And let’s try to get that down ahead of time under your own plan, your own control.

SJ:

That’s a great analogy that definitely speaks to another common tax myth related to retirement balances of, oh, Hey, if I have a million dollars in my retirement account, that means I can withdraw a million dollars. And if that’s a, if that’s pre-tax money, that’s just not the case. But I really liked that analogy of that’s your mortgage to the IRS. And it’s a, it’s definitely a variable rate mortgage if you haven’t taken care of that tax bill.

PP:

Yeah. And that’s, again, just something you’ve got to work in educating clients with, as you go through this concept of doing tax planning and conversions or whatever it is, moving money into that tax-free bucket, because they’re going to look at the quote unquote statement value of an account and see, well, I just lost money. Put just simple numbers on it. If you had a million dollars, we converted it all today and move it to a Roth and you paid 30% tax. You only have 700,000 left. And they’re going to say, wait a minute, I went from a million to 700,000 and what kind of, that’s not a good deal, you know, which is the statement value, which you can’t look at just that you have to take into consideration, okay well that million really isn’t yours. You have to pay the taxes to get it, and the other side of it too, it’s not just your taxes is what happens if you passed away. And that goes to your kids and they completely changed the rules on that. Now, you know where your air is no longer has that ability to stretch and spread this tax liability out over their lifetime. It’s a very shortened period of 10 years now for most people,

SJ:

Yeah the goal posts are always moving on us when it comes to taxes, which really reinforces the value a good financial planner can offer their clients of being that person in their life. Who’s proactively looking for these things. Cause like we talked about, if you’re working with a tax preparer, most likely they’re focused on this year, last year, next year. Well, Phil, this has been a really great conversation. I really appreciate it. Um, really great insights there. We’d like to make sure that we’re always giving our listeners action items so that they can take knowledge and really turn it into value by taking that next step. So what’s an action item you could recommend to our listeners from this conversation that we’re having today.

Phil Putney’s Action Items For Advisors Looking To Debunk Tax Myths [23:39]

PP:

Well, I, I love what you guys are doing and helping advisors understand the true tax aspect of retirement. It’s not some marketing organization with a great marketing idea of here’s how you can get more immuno, more butts in the seats, so to speak and people in your office to sell something by talking about taxes. And it works because it’s a big concern to clients, but you have to understand how it works, you know, and get educated on it. You know, so whether you’re working with individuals now that in that aspect, work with RPS and understanding what they do and helping, helping, or let them help you provide better service to your client and will get partnered up with a CPA, whatever it is you need to do, make sure you’re understanding fully what the tax aspect is and how to best prepare a client.

SJ:

Well, I certainly appreciate that. We definitely are really excited about what we’re doing with advisors here at RTS, but yeah, that getting educated piece, whether you’re coming to RTS or a different resource, that that’s huge. We’re all about that. Another action item that I’ll throw out as we’ve been having this conversation, you know, as we prepare for this and it kind of made my list, I’m just going to turn this into essentially a checklist that I can use with members of RTS. And I would be happy to send it to listeners of the podcast as well. So if you send an email to advisors@rts.tax, be more than happy to send you our list of top tax myths, you should be talking to your clients about, and we’ll have these ones from Phil. And I talked about today and we’ll add a couple more with just some really short, um, kind of explanations of, here’s why you need to be talking to your clients about these. And here are things that your clients probably don’t currently understand.

PP:

Yep. And don’t rely on the CPA or their tax professional to plan for taxes. Cause I mean, that’s one of the biggest challenges out there is that I think most advisors have always been taught well, unless you’re trained and educated in taxes that the no-no, you can’t talk about it. So tell your client, go talk to their advisor, their CPA, their tax professional. And I can tell you as a CPA, you know, before I was wearing that financial advisor had as well for my clients, I never happened. Clients never came to me and said, Hey, what is, you know what, what’s the tax ramifications of doing this? Because they were, they were going to have to pay me, right. An hourly fee to do that. And they weren’t going to pay a fee to do that. You know? So you have to help your clients now better prepare for that. Don’t leave that up to them because they’re not going to do it.

SJ:

Yeah. And the piece I’d add on to that is I think the other reason clients aren’t asking is because they’re worried, they’re not going to understand the answer because we’ve got all these stereotypes about CPAs and our social skills. And some of them are true, unfortunately, but as the advisor think about conversations you’ve had with CPAs where you’re asking a tax question and it’s a hard conversation to get through the technical aspects of it. Your clients are going to be so intimidated by even broaching that subject. That if you can prepare them, you can give them more information. You can have that conversation with them and the tax preparer. I mean, your clients are gonna become so sticky that it’s going to be incredible.

PP:

Absolutely. Yeah. I mean, if you’re hoping the client with this and helping them communicate that with the CPA who is ultimately going to be the person doing the complaints, you’re making this plan actually work from a tax aspect, you know, then it actually will get done. Because there’s nothing worse than doing all this planning. And yet it makes sense on paper, but then nothing happens, you know, because they’re not talking to the CPA. They’re too afraid they’re going to, and the CPA, maybe doesn’t understand the big picture. Yeah.

SJ:

All right. Well last action item. Be sure and follow retirement tech services on social media, on LinkedIn or Facebook, go out and leave us a review, get us those five stars wherever you get your podcasts from so that we can keep expanding our audience and helping more advisors with this stuff. And we’d love to hear from our audience for potential topics. So advisors@rts.tax is how to get ahold of us. So thanks everybody for listening today. Thanks so much, Phil, for being here really enjoyed the conversation from,

PP:

I appreciate, I appreciate you having me on it was fun!

SJ:

Definitely. And until next time, good luck out there, everyone. And remember to tip your servers, not the IRS