Business Innovators Radio - Interview with David Smart, CEO of Smart Benefit Group Discussing Tax-Free Retirement Solutions

Episode Date: September 10, 2024

With over 20 years of experience in financial services, I have focused for the last 12 years on providing retirement planning services. Our approach is guided by the golden rule of treating others as we would like to be treated. We prioritize understanding the needs of our clients before seeking to be understood.Learn More: https://www.smartbenefitgroupllc.com/The following concepts have been simplified; however, each individual has a distinct situation and should, therefore, consult a tax preparer about how the concepts will impact their tax outcome.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-david-smart-ceo-of-smart-benefit-group-discussing-tax-free-retirement-solutions

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with this David Smart, who's the CEO of Smart Benefit Group and will be talking about tax-free retirement solutions. David, welcome back to the program. Well, thank you, Mike, and it's good to be back. You know, I think anytime someone goes tax-free, tell me more.

You know, I mean, we all, when I was in corporate America and you would get your paycheck and you would go, hold up, what are all these deductions off of my paycheck? Or I don't want that Uncle Sam as part of my, you know, paycheck. So I think that this topic of tax-free retirement solutions is so powerful. and I know that a lot of times people are going to say, I have no clue how to prepare for and experience a tax-free retirement. Now, let's be clear too. I don't think that we're ever going to say to someone, we can eliminate all taxes because you've got to pay taxes,

but we can lessen or lower or mitigate them. So talk a little bit about where you start when you work with your clients to just help educate them on some tax-free retirement solutions. Well, first of all, when we do a needs analysis, we break down where all of their assets are at. And, you know, many, many years ago, and I remember it was my father, he had a pension with the phone company. And that was his secondary retirement income source for him and my mother, along with their social security checks. well, the time came where all of a sudden Congress said, you know, we could create these tax-free entities. I'm not going to say tax-free entities, but entities where people can put in free tax-tax dollars.

They'll grow them tax-deferred, and later on we will take the taxes out. And those became known as 401Ks, IRAs, 403Bs, TSP plans. And so instead of a company having to manipulate or to manage their funds and keep themselves profitable so that they could pay out a pension, it became a cost savings program to the corporations. And therefore, we can see that all after probably about the late 50s, early 60s, pension were dying out. And these self-funding retirement plans were starting. What people do not realize is that it's like, do you want to pay the taxes on the seed or on the harvest? If you pay your taxes. I've heard that one before.

That's a really great word picture. I love it. Yeah, you think about it. I plant a tomato seed. And when that comes to fruition, I've got several tomatoes on that one plant. Well, yeah,

I'd much rather pay it on the one seed or the two seeds versus the dozens of plants. Yeah, the harvest. Yeah. So consequently, we call it, You know, these pre-tax, tax-deferred accounts, they're truly IOUs to the IRS. Because what the IRS has done is they have now established what we call required minimum

distributions. So if an individual doesn't want to take his money out at the very beginning of his retirement, but it says, well, I'll wait until I'm 72 or 75 or 73, depending upon whether they fall in that period of time. The IRS has these R&D tables, and it's a lifetime annuity that you're tied into with the IRS. So you take your figure, and let's just say at 75, take the number of 24.6 and divide it into, let's say that you have $500,000 that's in your retirement account.

And if we divide that by 24.6, that says that I have to take out of that account an additional $20,000. Well, that $20,000 that you have to take out is going to affect the entire sum of all of your monies that are considered to be taxable. So now we create this problem. Because of that additional 20%, maybe that puts me into a different tax bracket. Second, it may then affect my Irma. Right now, if your income is at less than $204,000 a year, your Part B on your Social Security right now is $174.70. But if I have over $206,000, my Irma increases,

and they've got several different levels. Third is that because I've boosted myself into a different tax bracket, now the amount of my Social Security can be taxed. And it can be taxed up to 85%. Wow. So, you know, the government's got their hooks into us. However, there are steps that one can take that can minimize those taxes. And with a plan, plan and knowing how to plan, you'll be able to adjust and make those adjustments in your plan so that you can minimize or even reduce the taxes. Yeah.

I've created some solutions for clients that when they got to that magic age of when they're taking the retired minimum distributions between their... Social Security income. And because they had now had this tax-free income that they could draw from and add to their Social Security, they were not paying any income taxes. Well, talk a little bit more about that because I know I've heard of Roth conversions. And I think that's a little bit different than just, oh, set up a Roth IRA. But how does a Roth conversion work?

What are some of the advantages of doing that? Well, one of the things when you're doing a Roth conversion, you're actually creating like a Roth IRA. So you're moving this pre-tax dollars into a tax-free account. So now all of a sudden you have a tax obligation. The current thought or conversation you'll have with most financial planners or advisors is they'll say, well, we want to do this. version at the lowest tax level that you're at. Or we may have to turn around and maybe looking at doing some type of charitable

contributions. You have like QCDs and charitable remainder trusts that you can spend some of that money off. Another one is they can say you can do a QLAC, which is an annuity that you're able to put $200,000. but you can't touch the money until you're 85. Well, the associates that I work with, we've developed a predatory process

to where we're able to convert your taxable IRA 401k, 403B, into a Roth without you having to pay the taxes. That's pretty huge. That principle 100%. Now, think about this, Mike. You have a million dollars in your retirement fund. Well, by the time you get through paying your taxes on that, realize that you don't have a million dollars.

Right. You only have less 35% of that. That's your money. Because you've not paid taxes yet. Uncle Sam. Yeah. That's a great point. And so consequently, it's the strategy.

And the sooner we can get a client in their earlier years to do these conversions, they're better off. Now, just the other day I had a client or a prospect, 75 has $1.2 million in his IRA and 401K. he's now having to take required minimum distributions. So the problem becomes a little bit more complex. But the bottom line is we're able to save this individual by doing this strategy whereby they're able to move their money into a Roth account and use other people's monies to pay the taxes.

So consequently, he will have some taxes, but instead of maybe 35% of that money going to Uncle Sam, let's say that if worst case scenario, it's less than 10% of his entire retirement dollars ends up in Uncle Sam's pocket, and the other 90% ends up in his. contrast that to a client that I have who is 64. Another one that has $1.2 million in his IRA account. We can convert this money over a seven-year period of time, not put him into a higher tax bracket, and to be able to pay the taxes from how this program is established

so that now he's able to move that $1.2 million in seven years into a Roth IRA account tax-free money. That's pretty amazing because I know that people are familiar with the fact that I know my money that is in this 401K or IRA over the last two decades has not been taxed yet. So I know I've got to pay taxes sometime. And then they piece together in their mind, well, I know that the tax rate, today is whatever that it is, but probably tax is going to go up in the next five, 10, 10, 15 years. So may as well pay taxes now, but I don't want to take it on the chin to pop, you know,

a huge amount in, you know, throwing me in the highest tax bracket. So if, if they're seeing the possibility of this program and you've got a way to have their tax burden covered, that's a pretty powerful aspect. And then with Roth, as then that money grows inside the Roth,

then it's growing tax-free. So that's tying into the, the tax-free solution that you're talking about. Well, you know, Mike, you talked about there's going to be a tax increase. When Trump was our president back in 2017, he created this what we call tax cut and jobs act. And it's going to sunset 2026. We are now having the lowest income tax brackets who we've ever.

experienced. As an example, did you realize that between 1945 and 1963, the tax brackets were all the way up to 90 percent? In 1964, they dropped down to 70 percent. I can remember back in 1980s, I'm sitting at my desk and I'm completing my tax returns, filling in all that blank spaces and my father comes in and says, David, what is all this interest I see that you're writing off? Do you remember we not only could write off the interest on our mortgage, but any car payments, any credit cards, anything that was interest related was a tax deductible event. The next year, because Congress said, we've got a better price. plan for you. We're going to give you a standardized deduction, but we're taking away all these

other deductions that you're taking so you don't have to worry about it. I ended up paying more taxes the following year than I did the year before. So taxes are a big thing, and it makes me think of like the old proverbial bucket of water representing your money, and then when there's holes in the bucket and money's leaking out, out, it doesn't matter how much new money you're putting in if it's leaking out. And those taxes can be one of those holes in the bucket. So we've got to plug it up as much as possible. Well, it's one of the other things, too, Mike, that I think about an article that I read

just the other day about a member of the House of Representatives, he represented the state of Utah. and he was talking to the Hinkley Foundation in Salt Lake City and talking to the students there about, he says, we've got, we have a tremendous problem on our hands. That is, right now, we're over $34 trillion in debt. And our gross domestic products production is not even getting close to solving that debt problem. And he says, we need to focus. on solving the problem.

And I know that there's been, I know that Mitt Romney and some other senators wanted to form a coalition so that they could turn around and create, you know, a solution to this problem because it's not going to go away. It's only going to get worse. We don't know what the outcome of our, of what's going to happen in November. But, you know, you think about in, 2020, what were you paying for gas at that time? Probably maybe a buck 75, maybe $1.89. Yeah, I just don't remember.

What are you? Three bucks. Yeah. I walked into the grocery store with my wife. And of course, you know, that's the last place you're going to find me. And we're going down the aisles and she says, oh, the prices went up here. The prices went up there. The prices went up here.

Totally unaware of it. until I went to buy a, you know, a dozen eggs. I couldn't believe that 12 eggs were over $3 for me. Wow. So, you know, there's a lot of rhetoric out there. There's some issues that are not being discussed, which should be discussed. But in 2026, we are going to have, I believe, a tax increase. We'll probably go back to a minimum is what the conversation is in the financial circles.

of going back to 2017. So your tax bracket is going to change. If you are in now a 22% tax bracket, if we go back to 2017, you'll be now in a 24% tax bracket. So it sounds like you've got a really dialed-in approach to looking at taxes and how to mitigate and lessen taxes,

what is your approach, how is that different than a lot of traditional methods that people will see out there? Because I think a lot of times, many, you know, without naming names, but many companies just kind of ignore it and just go, let's grow your money and here's your retirement. But you're looking at retirement planning and let's make sure that you have a tax free retirement. So how does your approach to tax planning a little bit different than traditional methods? Well, you know, there's, we take the position as a retirement planner to be familiar with doing tax planning, but the tax preparation is done by the accountant. And so we like to form a relationship with that accountant and be able to make sure that as we're working with our client, that we don't end up putting somebody into from a 24 to a 32 percent or from a 20, to a 24% tax bracket. Now, in this conversion process, it's going to be a partial conversion.

And we use a solution by the life insurance companies. And one of the benefits of it is that by putting money into this annuity, there is a bonus that is added to that premium that is put into it. and because it is indexed driven, you're now going to have earnings that will be added to your principal balance. So let's just say that you have, well, just use a round number, a 10% bonus. So if you put $500,000 into this annuity, you now have $550,000 is your account value. and let's just use an average rate of return of 5%. Then we can create a strategy and we can spread it over any period of time.

We've got to find out the one that makes the most sense, which is we're not wanting to put you into a different tax bracket and do partial conversions. Well, the amount that it comes out for taxes is paid from that surplus that comes from the bonus and from the dividends that are credited to your account. So now your account balance, the principle that you put into it, is never touched. And so doing it that way,

by the time you've done that conversion, and I'm just thinking off the top of my head, off of one of my clients that I talked to the other day, the individual had $500,000. We did a partial conversion illustration for him, for a five-year period. And at the end of his five years, he had not only $500,000,

but he had $534,000 in his Roth account that now was completely tax-free. Now, one asks, what's the benefit? Why do I want to do that? What's the benefit? And let's look at it. Number one, you eliminate your required minimum distributions. Two, you've got tax-free money, which now can be passed on to your heirs instead of that qualified money in that 401K, that IRA, that 403B, TSP, whatever that qualified account is, because of the Secure Act 2.0, when that money transfers to a beneficiary, they have to pay taxes on it and have to spend it down over the next 10 years.

Now, Mike, let's say that your father gives you or you inherit from him from his 401K. Let's be generous, $100,000. Well, if you break that out, he's say, okay, I'm going to have to break it out over 10 years. That's an additional $10,000 of income that goes to. to your gross income. Will it have an impact on your tax liability? More than likely. So that's one of them.

The other benefit about that is that now, remember that surviving spouse we talked about in another podcast? Yeah. Okay, when you're married, you have a joint filing status. When you're the surviving spouse, it becomes now single. If you're a single spouse, your tax brackets automatically is going to change.

Why would I want to have additional income that's going to increase a higher tax liability for me when I can avoid it? So, you know, those are the benefits of doing Roth conversions. And that's what any CPA or any financial advisor will tell you, but then you're saying, but oh, man, I don't want to pay the tax. Yep.

Well, what if I can show you pay that? You don't have to pay the tax. We have a system in place that will pay the taxes for you, and you're now moving at principal at 100%. So instead of a 30% loss in that $500,000, so you lose $150,000, right? It goes to the government. now you have $350,000 of tax-free money.

What would you rather have? $350,000? Or would you rather have $500,000? I think we know the answer to that question. I know. I call it my no-brainer. Yep. And if they say, well, I'd rather have the $150,000,

then I say, well, you know, you're not my kind of client. Because it just makes no sense. But it's like this, is that, and one of the things that is very, a matter of fact, go to YouTube and look up Ed Slott. He's a CPA, and his interviews are phenomenal. And he talks about this,

but he made a comment that I never really thought about, but think about this. Money lost to taxes never recovers. Yeah. And so when you're able to convert your money to a Roth and not have to pay down on your principle, do you realize that you've given yourself a 30 to 35% increase in your spendable dollar? That's huge. It is. And when you couple that, we need to wrap up here time-wise, but we don't need to get into the aspect. of compounding.

But if you have the aspect of compounding factored into now if you don't have tax hit coming out and that money still is in there and it's growing, then the next year it's growing at the next, you know, a level of rate of return. That compounding really gets that momentum going. Well, you know, Mike, that compounding feature, here's the beauty of it. Once it's in a rough IRA, as it continues to grow, it grows tax. free. Yep. I mean, what a win-win. Yep. But I tell you, you know, the misconceptions that people have, you know, they've got their local financial advisor at, you know, Joe's Bar and Grill. Or, you know,

they're listening to some radio host out there that has a product or a service to sell and downplays it. or you may read about, I think of one of the financial ads that I see out there from a financial advising company. It was very interesting, is that that company, its largest holdings, was in a life insurance company, in a life insurance company, and that life insurance company, which offers annuities, they were downplaying and telling people, oh, you do. you never want to get your money into an annuity. I thought, what a contrast.

Their largest amount of portfolio that they had of monies was in this life insurance company. Yeah, that's pretty amazing. You know. Yep. Those are pretty amazing facts there, David. And I tell you, so many times people just don't know how to set these things up to prepare for retirement, to have that, you know, tax-free income to last for a lifetime. So these have been some really powerful concepts.

If someone is interested in learning more about mitigating and lessening their taxes in retirement, what's the best way they can reach out and connect with you? Well, first of all, I have a website, www. Smart Benefit Group LLC.com. my tagline is get smart about retirement planning and retire smart. They can reach me on my phone, which is 480, 600, 3806, and or they can turn around and me at D-smart, N-A-Z at gmail.com.

Any one of those three places they can reach me at. and I promise them that I will get back to them as soon as I can't. Perfect. David, thank you so much for coming back on the show. It's been a real pleasure talking with you. Well, thank you, and I appreciate the invitation, Mike. I enjoy working with you, and I enjoy the whole opportunity to be able to share my thoughts and what I do.

and like, you know, the model of our company is seek first to understand and then seek to be understood. And then we couple that with as do unto others as you would have them do unto you. And those are the guiding principles of how we continue to do business in our organization. Well said, my friend. Thank you so much, David. Make it a great day. I will, and I wish you the same, my friend. You've been listening to Influential Entrepreneurs with Mike Saunders.

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