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We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.

Steven Jarvis:     Hello everyone, and welcome to the next episode of the Retirement Tax Services Podcast, Financial Professionals Edition. I’m your host, Steven Jarvis, CPA. And in this show, I teach financial advisor out to deliver massive value to their clients through tax planning. Very excited for my guests today. Natalie Taylor is not only a CFP, she’s also a behavioral financial advisor. And in addition to her own practice, she’s the head of advice for Monarch Money. And Natalie does a lot very intentionally in her practice to provide education and to make sure that taxes are included in her planning. And so just Natalie, I’m so excited to have you on the show today.

Natalie Taylor:     Yeah. Thanks so much for having me. I appreciate it.

Steven Jarvis:     As we were getting ready to do this show together, one of the things that you said that really stuck out to me is that as you work with your clients, you really encourage them to Dream Net. And of course, since this is a tax show, that net is talking about net of taxes, which I love, because this gets missed all the time. People think about the balance in their retirement account or future income and just the gross number and okay, here’s what I can do with that. And so I love that you do that, but it definitely brings with it this almost obligation your part to educate your clients on what that even means. So I’d love for you to talk about how you got to this place where you are so committed to the tax aspect and then how you get your clients to be really clear on what that net dream really looks like.

Natalie Taylor:     Yeah. Great question. So it’s funny, Dream Net started as an inside joke between my husband and I, when he first got equity comp more than a decade ago. And I was a financial planner at the time I happened for getting close to 20 years. But as he did the calculators and said, “Oh my gosh, I could get half a million if the price is this, or I could see a million or 2 million or 5 million, if the share price goes to this.” I started telling him, “You got to make sure that you’re dreaming net,” meaning don’t look at that big number. To be safe, cut it in half because if it comes in as income and we’re in a really high tax bracket, that’s 37%, plus we’re in California, so let’s say that’s another 10% or 11%, plus any other taxes, some version of Medicare surtax, et cetera, and FICA taxes.

So that became a thing that we would always say dream net. And our baseline was just cut any number in half. And when I went back into private practice, I was in private practice for the first almost decade of my career. And then I went into FinTech. Now I’m back in private practice and have been for the last couple of years. And I work with clients in their 30s and early 40s who have big dollar equity comp numbers, big enough to really have an impact in their life. Not so big that it solves every problem or solves every goal, but enough that there are plenty of zeros on that number. And that the gross number is very different than the net number.

And so a lot of what I do within the first four meetings with a new client is we go through exactly how much they can expect to pay in tax. I guess I shouldn’t say exact, because I’m not a CPA and I don’t prepare taxes and I very much respect CPAs and tax preparers and try to work closely with my clients as CPAs. But we talk about, okay, this is the part that’s going to come from income tax if these are short term capital gains or taxes on exercise on non-qualified stock options, for example. And then this is the amount that’ll come from state tax, and this is the amount that’ll come from Social Security or Medicare. And then the Medicare surtax, for example.

We’ll also talk about AMT if there are ISOs that are going to be exercised and held for a qualifying disposition. So a lot of it is just walking through what those taxes are and how they add up, so that we can come up with a good net number for clients to ballpark in their head of okay, I’ve got to cut any number by 40% or 50% or whatever their magic number is to dream net.

Steven Jarvis:     I love the intentionality behind how you approach that. And for advisors listening, if you don’t have clients with equity comp, this general framework really applies to any pre-tax number. So if you have a client base, that’s more just, hey, I’ve got money stocked away in IRA accounts, we still need to apply this concept because it’s all about setting reasonable expectations so that we can plan appropriately for the future.

Natalie, I’d love to hear more about how this conversation actually goes with a client, because I would imagine that you don’t want this to come across as just raining on their parade and being a downer on their dreams, that, oh, well you thought you get this much, but no, no, no. Sorry. Check the brakes there. Actually you are not really getting that much money. This isn’t this isn’t trying to be negative. This is trying to set clear expectations. Is that fair to say?

Natalie Taylor:     Yeah, that’s very fair to say. I would say that my clients will describe the experience as a more positive, optimistic, hopeful experience. I wouldn’t say there’s much negativity in the experience-

Steven Jarvis:     Good.

Natalie Taylor:     … for my clients. And at this point, I don’t know if it’s because they’re in their 30s and early 40s, but they know that there’s a tax component and they know that there’s something that they don’t know. And that’s part of what they’re coming to me for. So I’m not the first one to say, “Hey, did you know that that’s going to be taxable?” They know that, but they come to me to find out, okay, well, what does that exactly look like? And it’s interesting, when we walk through the pros and cons of maybe exercising and holding options, or going for a qualifying disposition for ISOs, we go through the difference in taxes between each option, whether you get rid of them right away, or you hang on to them for long term capital gains, and we’d go through the risks associated with that.

And oftentimes the tax difference is 14%. For my clients it often ends up being this 14% number where, sure you could put some money up, you could take the big risk of investing hundreds of thousands of dollars in your company stock and holding it for over a year and hoping that it’s worth more later. And if you can wait over a year to sell it, then you’ll get to keep 14% more of the game. And when we’re able to overlay what the actual tax numbers are, it’s not so appealing. And it’s interesting, some clients have opportunities where they have maybe ISOs with very low strike prices and it’s worth it. But in a lot of cases, it isn’t really worth it, knowing that the difference between optimizing for tax strategy or optimizing for risk is just a 14% difference.

Steven Jarvis:     Yeah. I love that you’re putting an actual number to it. And one of the other things that really stood out to me as we talked before the show was that you really put an emphasis on making sure the client is clear and that you are clear on what these dollars are anchored to, I think is the way that you refer to it, or what’s this really mean to the client that, yes, we want to get into the numbers. We want to make sure that we’re making an informed decision, but at the end of the day, even though I am the tax guy in the room, I fully support that taxes shouldn’t be the main reason we do something. We need to decide what makes the most sense for our goals and then figure out the tax efficient way to do that. So how does that conversation go with your clients? Because I think there’s really some dialogue that goes on even before you get to this 14% piece.

Natalie Taylor:     Yeah. I love that you say that. And especially as, as a tax guy, because I find that so many CPAs are just focused on saving as much as possible in taxes. And for me, I’m looking at the bigger picture of what is this money going to do for you in your life and when do we need it to come to fruition and how much do we need? And one of the things we do is I’ll map out for a client, okay, here are the funds available for goals that isn’t already pinned down to a goal. So what I mean by pinned down is, their 401k, that’s going to be for retirement. Their 529 Plan, that’s going to be for college. But equity comp or cash or non-qualified brokerage accounts, those are somewhat unpinned. And so we get to decide together, what are those dollars available for? What goal are we going to pin those to?

And that really informs, okay, well, what does that mean about the amount of risk that we want to take? What does that mean about the dollar amount that means success versus failure for that goal, for accomplishing that goal? And we’ll break out the goals into, forgive the sports analogy, I know I’m a woman in a man’s industry, but I’m still going to use a sports analogy, playing sports, but we’ll talk about base hit versus home run money. So if the goal is a base hit goal, like we want to be able to retire by the time we’re in our mid 60s, that would be a base hit goal. If the goal is we want to retire by the time we’re 40, that would be a home run goal. If it’s we want to just make sure that our kids can go to public school and do summer camps and have a normal life, that’s a base hit goal. If it’s we want to make sure they can go to the best private school and pay for the most expensive college ever, that might be more of a home run goal.

And so when we’re going through their goals, we’ll talk about which ones are base hit goals and which ones are home run goals. From there, then we can decide, okay, well we want less risky money to be linked to base hit goals. So maybe that’s RSUs, that we’re selling RSUs every time they’re investing. And we’re diversifying those into a retirement portfolio for them because that’s base hit money. And if their company stock doesn’t do well, we don’t want their ability to retire in their mid 60s to be impacted by one stock’s performance.

However, if those dollars are for a home run goal and the client knows full well how much risk they’re taking on and says, “You know what? This is cabin money. This is us buying the million dollar cabin in the mountains money. If our company stock goes through the roof and we get to buy the cabin, great. If we never buy a cabin in our whole lives, no problem.” Then I might be more likely to say, “Well, those could be shares that you might want to hang onto because you can accept the risk. You have greater risk capacity on those dollars because the goal is a home run goal instead of a base hit goal.”

Steven Jarvis:     So as you’re working with clients, then order of operations is that you’re understanding what these dollars would potentially mean for the client, what their goal is, and then deciding what the strategy to balance that risk profile, and then figuring out what the tax efficient way to do that is.

Natalie Taylor:     That’s right.

Steven Jarvis:     Even though I’m the tax person in the room, I love hearing that’s the approach because honestly my tax planning is much more effective and impactful if the advisor is coming to me after they’ve gone through that process. And so that I know that we can have a conversation around, okay, what’s the most tax efficient way to accomplish whatever this goal is, as opposed to… Because if you give me no direction and we can just say, “Okay, we’re trying to save as much in taxes as possible,” that’s a different conversation. We’re going to go down all these different rabbit holes of trying to figure out these different nuances of the math, when really what we want, we want to plan that the client is excited to follow through on because there’s so much more likely to follow through on it, because all of the fancy math in the world means nothing if we don’t follow through on the plan.

Natalie Taylor:     Yep. That’s right.

Steven Jarvis:     So Natalie, as you work with clients in all of this, you’re throwing out acronyms there. You’re talking about a lot of different pieces of this, which for people who live in the equity comp space, that this might be a little bit more common knowledge. I’m sure you work with clients who some of these things are new or more complicated than they’re used to. What are some ways you’ve found that are effective to find that balance of helping to educate your clients while still being the professional they’re looking for? They’re coming to you because you have this expertise, but I would assume this isn’t just a, hey, sit back and trust me. There’s got to be some balance there. Let’s make sure it’s clear what we’re trying to accomplish here.

Natalie Taylor:     Yeah. That’s such a good question. I would say that I’m in the do it with you camp instead of the do it for you camp. I never want to be the hero for the client. I want to set the client up to be the hero for themselves. And so it’s very important to me that they understand and take ownership over and feel empowerment over the decisions that they’re making. They’re not coming to me to make the decisions for them. They’re coming to me as a thought partner to help them contextualize and understand the decisions in front of them and the trade offs in front of them and avoid some pitfalls that maybe they’re not aware of. But they’re the ones making the decision. So it’s rare that a client is asking me what should I do? What I try to do in my process is set up the information in a way that the client can really understand what’s happening and say, “Well, it seems to me that this would be the best option.”

And then I can say, “Great idea. I think that’s a great way to go for you.” So that’s what that looks like for me. And in order to do that, it’s interesting, I think a lot of clients are attracted to working with me because I work with really successful people who are really great at what they do, but that doesn’t mean that they’re financial planning experts. They’re almost never financial planning experts, and they need to be at once respected and educated in some cases. And that’s what I want to do for them. I want to help them understand and fill the gaps where the gaps are. I don’t judge where the gaps are. I just fill them in for the client so that they can feel confident and empowered in the decisions that they’re making. So that means walking through information on how do ISOs work? What does that mean? What is an ISO and how does it work and what are some of the things that we need to consider when we think about what to do about these ISOs? What are the risks ahead of you? What are the pros and cons and what are the most likely outcomes here? I think it’s important to walk through that stuff with clients so that they can feel really good about the decisions.

Steven Jarvis:     So let’s take a real world example. I know as we are getting ready for the show, you mentioned that at times you’ll do backdoor Roth and mega backdoor Roth with clients. So client comes to you and says, “Hey, I read some headline about I should be doing Roth. What does that actually mean?” How do you explain to a client just something as simple as Roth versus traditional IRA.

Natalie Taylor:     Yeah. So in terms of Roth versus traditional, I’ll explain that with retirement accounts, you get to choose when you want your tax benefits. You can either put money in before paying taxes, or you can take it out tax free, but you don’t generally get to do both unless you’re using an HSA, and we won’t go off on the HSA direction. But I explain that you want to choose the tax benefits for when your income is the highest. So for my clients, a lot of them are making, 250 to 750 a year, even before their equity comp kicks in as a couple. And they’re in really high earning years. They’re also in really expense years, because a lot of them have childcare costs and big mortgages because many of them are coastal either here in California or Washington or New York in high cost areas.

And so for most of them, they’re going to need a lot less income in retirement than they need now because of where they are in their lives and where they are in their earning years. And so for that reason, I’ll talk about, we don’t want to give away opportunities to put pre-tax dollars away. So pre-tax 401k makes sense for you. We need every dollar of tax deduction today that we can find. However, if we can open up any additional Roth buckets for you, it would be great to have as many of your dollars as possible grow in a place where the earnings will be tax free when you retire. And one of the ways to do that is to use your, and then I’ll talk about backdoor Roth IRAs or mega backdoor Roth opportunities in their 401ks.

Steven Jarvis:     That’s so great and really shows the power of having a client base you focus on, because if you Google traditional versus Roth, I’ve even written articles on hey, your retirement income is probably higher than you expect it’s going to be, but that might apply to a lot of people, but people hire financial advisors because they want unique and specific advice. And for your client base that’s going to go against that conventional wisdom if we want to call it that, that for a lot of people, yes, if they’re just a W2 employee making a decent wage, when they get to Social Security and RMDs, they most likely will have higher income in retirement. But for someone especially in the tech space or in the equity comp space where they have these very large salaries even before the equity comp, they’re going to have some very high earning years that they’re never going to come anywhere close to during retirement.

And so you’re adding so much value to them by applying that to their specific situation, as opposed to just leaving them on their own to go try to interpret those articles that are written for thousands, if not tens of thousands or millions of people, but being able to take that and say, no for you individually, as I’m looking at your actual salary, your equity comp, here’s what makes the most sense for you. And we either need to just get as much tax deduction as possible right now, or we can talk about some of these backdoor options, but love the value that comes out of that focus on a specific client base.

Natalie Taylor:     Yeah, it’s so true. And I’m in that season as well. My kids are at least elementary age, so our childcare costs are way lower, but I have clients who have childcare costs that are 4,000, 5,000, 6,000 a month because they have full time childcare, maybe a nanny or private school. And they do the full day program because they’re working full time. And that’s a boatload of money to spend every month that truly isn’t going to happen for the rest of their life. They’re not going to go spend that amount traveling when they retire. And same with mortgages. They’re buying their family homes that they want to be in forever, but they are going to pay off those mortgages before they retire, and so that’s another $4,000, $5,000, $6,000, $7,000, $10,000 a month of principle and interest that is truly going to go away when they retire. And sure, some other expenses might increase, maybe medical expenses, long term care, et cetera. There are other expenses to consider in retirement, but for the clients that I’m working with, the amounts that they’re paying now for these ultimately temporary expenses truly are larger than what they’ll be spending in retirement.

Steven Jarvis:     Yeah. That’s making me just think back to how you were so easily able to say, hey, the difference between short term versus long term on some of this equity comp is about 14% for a lot of your clients. And I’m just thinking back to that, because again, it reinforces that while it’s still going to be unique to each client, even when you have a similar client base, you’re still going to have to go through and say, well, in this case, is it 12% or 15%, but it’s going to be about that range, but that’s so much different than if you worked with dozens of different kinds of clients to have to start over every time and say, okay, well, what, which tax planning are we talking about here? And so you’re not worried about the latest on cost egg studies or other things for business owners. You have this narrow focus of people with equity comp. So you can really quickly and confidently tell them, hey, this is what we typically see. And that’s such a powerful place to be able to come from for your clients.

Natalie Taylor:     Yep. That’s right. And it’s really helpful because I can often fill in a lot of blanks. I had a client who came to me who, she earned a little above what I typically work with, but was still very much in the realm of who I help. Recently had a baby. So it’s still very much demographically in who I serve. And she came to me with no expenses. Said, “I have no idea.” When we started working together, she’s like, “I’m pregnant with my first kid. I have no idea what this is going to look like.” And I had to guess her budget. And I guessed her budget within, I think, less than a thousand dollars of what it turned out to be once her baby was born.

Steven Jarvis:     Wow.

Natalie Taylor:     Because these are my people. This is who I work with every day and it’s a gift to be able to specialize and really go deep in my niche, because I do think that I can provide more perspective that’s unique to them. And it means that I’m not the ideal client for… I occasionally get referrals to people in their later 50s, 60s, 70s who are retiring or already retired. And I don’t serve those clients. I try to find a good home for them because I don’t have the niche expertise for them. I really focus on who I help and try to do my best job for that niche.

Steven Jarvis:     Now you’ve highlighted a few different areas that need to be considered when we’re dealing with equity comp. And there is certainly a lot of complexity in there. You’ve been doing this for a long time and you can speak very eloquently on it now. Talk a little bit about what that was like early on, because I’m guessing that when you first started into this area, it wasn’t quite as easy for you. And there was a learning curve. Or maybe you’re the exception to the rule, but we’d love to hear about how that development happened for you. And if there are any bumps along the way that really stick out as far things you learn from.

Natalie Taylor:     Yeah, I am not an exception to that rule. I am not an exception to most rules, but yeah, there was definitely a learning curve and I had to take the initiative and proactively teach myself. I found a study group where we’re going through, I’m still part of, that we’re going through and educating ourselves on equity comp. There’s some websites that have been helpful. Mystockoptions.com has been one that’s been helpful. A couple of books that have been helpful, like Know Your Options for example, and the advisor counterpart to that book as well. And I’ve had enough experience personally with equity comp, both for myself and for my husband, that that’s been a really tangible way to understand all the variations of what equity comp looks like for public companies and private companies, small startups to IPO, I’m going through an IPO, RSUs, NSOs, ISOs, all the things. Carta, Shareworks, being able to see it all with my own information and with my husband’s information, honestly really helped bring everything to life in the early days and helped me have a base understanding before I even went into this niche. But I think there’s definitely work to do for advisors who want to be in this niche, to learn and to educate yourself. And thankfully there are some good ways to do that out there.

Steven Jarvis:     Yeah. That was a great list of resources for people who are interested in learning more about this. There’s always going to be bumps along the way, but there’s so much value for the client. That’s such a unique position you’re in, having gone through personally what a lot of your clients are going through, because so many advisors focus on retirement. Understandably so. It’s a big life event people are planning for, but to be an actively practicing advisor, almost inherently, you have never been through retirement yourself. Maybe you have family that has. Obviously you’ve worked with clients that have, but just the fact that you are still working, you clearly haven’t retired. And so that’s really interesting. It gives you a really cool perspective that you’ve been through this big piece of what a lot of your clients are going through.

Natalie Taylor:     Yeah, I will also say about that that in training, a lot of the advisors at LearnVest, which was the first FinTech startup that I worked for, I trained a lot of our advisor team there. I don’t share a lot of my own personal experience with clients because it’s important to me that my credentials and my expertise and what they’re paying me for to be a professional is not like a, I did this and you can too. That’s not where my value comes from for them. It’s in my expertise that I’ve honed and knowledge and all that kind of stuff. So I rarely talk about my own experience with equity comp, but I find that just having gone through that experience has given me a base level of understanding of what it looks like and what it feels like. And I think that allows me to understand how clients are feeling about it more, but I kind of take a therapist relationship with my clients in that you never know much about your therapist, but they know everything about you.

Steven Jarvis:     Sure.

Natalie Taylor:     If a client asks me something personal, I will answer it. I’m not trying to hide anything from anyone, but even though that experience of going through it myself has been very useful to me as I serve clients, I don’t share those specific experiences because I don’t want to detract from the attention that’s on the client, because this is their time and not mine.

Steven Jarvis:     Sure. That makes a lot of sense that it gives you some really unique perspective, but it’s not the story you lead with every time.

Natalie Taylor:     That’s right.

Steven Jarvis:     So Natalie, we always like to make sure that the information we share is valuable to our listeners. So we like to make sure there is action tied to what we’re are talking about. Before we go to action items, if there’s people listening who are really interested and excited about what you are doing, how can advisors learn more about what you do?

Natalie Taylor:     LinkedIn is the best place to find me. I’m Natalie Taylor and pretty easy to find on there, but anything I do is on there. So I occasionally run workshops for other advisors on my deliverable process, on my approach with clients and I always post them there. And I think I’ll be adding to my team later this year. And so I’ll post that as well, but that’s where I share content and perspective. That’s really the best place to find me.

Steven Jarvis:     Well, congratulations on the growth in your firm that you’ll be adding more to your team. That’s really exciting.

Natalie Taylor:     Thank you. Thank you. I added another lead advisor who’s really been a terribly overqualified para planner for me for the last couple of years. CFP former lead advisor, but took a couple years when her kids were young to not see clients. And she just started seeing clients again in January. And gosh, we’re here having this discussion in mid-March of 2022. And I think she’s gotten nine new clients so far this year. So we’re filling up really quickly. I’m already full. So I anticipate building the team later this year.

Steven Jarvis:     Wow. That’s exciting. All right. So let’s talk about action items. So Natalie, as you think about the conversation we’ve been having today, what are actions that you’d recommend to listeners to make sure that they are taking this information and turning it into value?

Natalie Taylor:     Yeah, I think if you’re interested in serving the equity comp niche, I think going through the coursework, the Learning Center on mystockoptions.com is a really helpful place. Just a helpful resource in general. There’s so much searchable content there. Some of it is a little bit repetitive sometimes, but it’s so helpful. And I think the book I mentioned earlier, Know Your Options. It’s written for the consumer. It’s written as if you’ve been granted equity and you’re trying to figure it out and it’s very approachable and I think it explains things very well. And there’s some good rules of thumb in there. So I think that would be another great resource if you’re interested in pursuing this niche.

Steven Jarvis:     Awesome. I would also say out of this conversation that whether you deal with equity comp or other areas where taxes have an impact, which news flash, that’s everything to do with money, make sure that you’re really taking to heart this idea of talking net or dreaming net to, I didn’t see a trademark that. Hopefully nobody goes and steals your tee shirt or anything, but this is such a great way to frame it to clients. Again, whether we’re talking about equity comp or just an IRA balance, let’s make sure that we’re setting clear expectations and talking in terms that are going to mean something when that turns into cashflow to the client.

The other thing that really stood out to me in the comps you made is that you mentioned the power of having a study group and that you’re still part of one. So whether we’re talking about taxes or other things related to being an advisor that comes up over and over again. So if you have a study group, make sure you’re really committed to it and getting value out of it. If you don’t, find one. I’m partial to what we’re doing at Retirement Tech Services. Feel free to go to retirementtechservices.com/welcome to learn more about our membership. But whether you use or someone else’s, you really need to commit to this idea of having a community, having people that you can learn from.

And while it didn’t come up on today’s episode, it’s always relevant. And so one of the action items that, of course I always recommend is that you are getting tax returns for all of your clients, because whether we’re talking about equity comp or other areas of taxes, if it doesn’t get reported correctly to the IRS, it may as well have not have happened. So make sure you’re taking the time to, like Natalie mentioned, collaborate with the tax preparers in your client’s lives. Get those tax returns, make sure that these things are getting reported correctly.

So Natalie, thank you so much for being on the show today. I really appreciate you spending the time on this.

Natalie Taylor:     Yeah. Thanks so much for having me. I really appreciate the content that you put out and I really appreciate your focus on tax, but in the context of financial planning. I think that’s really unique. And I really appreciate it because it is so refreshing from the vast majority of CPAs that I hear and listen to and connect with that are just only focused on the tax piece. I love that you have that perspective of planning first and taxes within every decision, but that context of the plan and of the client’s whole life is so critical. I love that.

Steven Jarvis:     Well, thank you. That’s very nice for you to say. If you’re listening and feel like Natalie does, feel free to go out and give us five star reviews so that we can keep spreading the message or follow us on social media. We definitely spend a lot of time putting out this content. Thanks to everyone for listening. And until next time, good luck out there. And remember to tip your server and not the IRS.

We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.