Save a quarter of a million dollars or more on IRA or 401K withdrawals. In this
episode, we are going to address the question "How can I save tax on my
withdrawals out of an IRA?" This is an actual example. I change the names and
we're going to call them the Smiths and the Jones. But put on your seat belt. This
will blow you away just like it does CPA's and tax attorneys when I show them
this example. My name is Doug Andrew and if you've watched some of my other
educational episodes, welcome back. But I'm going to share with you a very powerful
story and that is actually taught in my book The Laser Fund. Because I have 62
actual stories and examples of clients where we have saved them a quarter of a
million, a half a million. One couple, 1.2 million dollars of unnecessary tax on
their IRA's or 401 K's. Now, when i say unnecessary, it means they didn't have to
pay the tax if they learned how to do this strategic rollout. So, we're going to
call these 2 couples the Jones and the Smith. Now, as we talk about them, they're
both 60 years old. And at age 60, since you're over age 59 ½, you can
access money out of your tax-deferred IRA or 401K without a 10% penalty. If you
take money out of those accounts before age 59 ½ and they --the IRS will
penalize you 10% on top of the tax. So many times, people hit age 60 and they're
still working but they want to slow down. And so, they go to their accountant and
they say, "Well, we don't need the money out of our IRA's. What would you
suggest?" -"Oh, well. if you don't need it, leave it there. Keep deferring it until
you're age 70 when you plan on retiring. Why would you want to take it out and
pay tax when you don't need to?" it sounds good on the surface, right? Let's look at
the Jones who did that. The Jones, they're 60 years old. They have a
quarter of a million dollars in their IRA's or 401K's. So far, so good. They decide
to leave it in there. Let's say they're earning 7.2% rate of return. Now, I
like that number because I've actually averaged 7.23%
in the worst decade since the Great Depression using my favorite vehicle and
strategy. It's called affectionately The Laser
Fund. I wrote a book about it. And the Laser Fund is the only vehicle in the
Internal Revenue Code that allows you to accumulate access and transfer your
money tax-free. I have earned 7.23% in the worst time.
I've actually averaged way more than that because of other strategies I teach.
But this couple let's say that they are confident and that their money in their
IRAs will earn an average of 7.2. So, let's use apples to apples here.
At 7.2%, if you understand rule of 72, in 10 years from
age 60 to age 70, their quarter of a million will double to
500,000, okay? Now, at age 70 ½, it used to be you had to start
withdrawing money or there would be a 50% penalty on what you should have
withdrawn. That now was age 72. But let's say they're ready to start taking money out
but they only want to take out interest only which is under the limit to not
have a 50% penalty on a RMD. So, if they're earning 7.2% on
500,000, that's 36,000 a year. They pull out 36,000.
That's on the front of their tax return. That's portfolio income. You
pay tax on earned income portfolio and passive income. Let's say between federal
and state tax and they pay 33% in tax which is very typical for
many retirees. A third of 36,000 is going to have to go out the
window in tax. It's what Uncle Sam planned on. Uncle
Sam's been planning on this revenue. You pull out 36,000, you pay
12,000 in taxes and you net 24,000 thousand a year to buy gas,
groceries, prescriptions and golf green fees. The Jones follow the herd. This is
what most people do. You want to see what the Smith did
to end up with double? Watch. I have been a tax minimization specialist for 47
years. This is what CPA's go, "Oh, my heavens. I can't believe I have never been taught
this." The Smiths, they come to me at age 60 and they asked
for my advice and I go, "So, tell me your plans." -"Well, we would like to slow down a
little bit and sell our home. We can sell our home and not pay a capital gain tax
on it. Because we have a limit of a half a million to do that. And so, we want to
get a little retirement home that's taken care of in a retirement community.
It's going to cost 250,000. We want to get one down in southern Utah and you have
another little house. Now, it depending upon the area of the country, they may
now cost twice that. But this is a couple several years ago and all it relates no
matter what the cost of retirement housing is. So, stay with me. So, they have
the same quarter of a million bucks in their IRA's or 401K's as the Jones. In
fact, they work at the same company. But what do they do different? I tell them,
"You know what? Your house is paid off. You've killed your tax deductions. Sell
your house and make the new properties the little retirement home here and for
a quarter of a million and the other one. And just pay 20% down and finance the
rest." So, they finance $500,000. So, what's really happening is they sell their
house and they keep 500,000 of the equity and they only used the rest, they
sell their house for 6 or 7 hundred thousand. They only use what they
have do to but to pay down payments on their 2 retirement homes. So far, so good.
What? They have a mortgage? They didn't want a mortgage in retirement? Is this
good or bad? So, they have a 500,000-dollar mortgage. Now, at the time,
mortgage rates were 7.2%. So, at 7.2%
I told them to do an interest-only
mortgage because this will keep it simple. 7.2% interest
on a $500,000 mortgage balance between the 2 retirement homes is 36,000 a
year. That's 3,000 a month. They have to pay interest?
Where are they going to get the money to pay the mortgage payments? They withdraw
36,000 out of their 250,000. See? There 250,
would have grown to 500 like the Jones. But while as doing that, they're
pulling out 36,000 subjecting it to tax to pay the interest
on their mortgage. So, it's a wash. They pull out 36,000, they have
to report it on the top of their 1040. But then underneath that, they get to
deduct the interest. And so, it's a wash. What's happening here? They're
withdrawing $36,000 a year out of their IRA's
with no tax consequence. It's a wash. Let's go over the 10 years. They took
out 36,000 out of their IRAs over 10 years. They withdrew 360
thousand tax-free. What was the trade-off? What was that for? The half a million
that they did not put into those retirement homes has been in their Laser
Fund. And it's been earning just 7.2%. Actually, history has shown it
has done far better. But I'm wanting to use apples to apples. So, they're half a
million in the Laser Fund doubled to a million. They have a million. They have
twice as much money as the Jones. "But the Smiths have a mortgage." Yeah, a million in
the Laser Fund minus the $500,000 of mortgage balance. They have the same
half-million of the Jones but what's the diff? The Smith's million is tax-free.
They could take out half of that and pay off their mortgages. When they asked me, I
said, "I wouldn't do that." -"Why?" Hello, you want to be your own banker.
Watch. So, if you need to stop, pause, rewind to understand this, do it. But
here's where I'm going to connect the dots. What's the difference? The Smiths have a
million bucks accumulating tax-free and they're Laser Fund. The Jones have
500,000 their IRAs they have to pay tax on the
rest of their life. Yeah, The Smiths have a mortgage of 500. A million -
500, is the same 500 they have. But this one's tax-free. Why is
it tax-free? It's because it is grandfathered in the Internal Revenue
Code to be that way. And that's why I call it the Laser Fund. Liquid Assets
Safely Earning tax-free Rates of return. So, the Smiths have a million and they
want to start living off of their money. At 7.2%, that's 72,000
a year. They take out 72,000 bucks a year. It doesn't deplete
the principle there of a million. That's tax-free is not deemed earn passive or
portfolio income. The IRS knows that receiving it but they know it's tax-free.
It's not even worth auditing because it's always been tax-free. Out of the
72,000, I told them to keep their mortgage. Now, the $36,000 a
mortgage interest is still deductible. So, in a 33-percent bracket, they
write-off that interest the rest of their life.
36,000 is really only costing them a net of 24,000
a year. Because they're saving 12,000 in tax. So, the dollars
to dollars, apples to apples comparison shows this is their net mortgage payment.
They take out 72,000. They have to pay 24,000. Their
portion of the mortgage payment. The IRS covers the rest. *Gasps* Watch! They have
48,000 leftover of annual income. How much better is
48,000 than 24,000? It's double. We do this all the time. I have
helped thousands of people double their net spendable retirement income and get
their money out of their IRA's or 401 K's with no tax consequence by resurrecting
deductions. They paid off their house. We didn't pay cash for the 2 new houses.
We became our own banker resurrected deductions and we got our money out of
the IRA or 401K tax-free. If this is making sense to you, I want you to watch
these episodes and see other examples of how we've been able to do this for all
kinds of people no matter how much money they had
trapped in there yet to be taxed IRAs or 401 K's.