Business Innovators Radio - Interview with Pasquale Sacchetta, President of CFIG Wealth Management Discussing Tax Risk

Episode Date: July 3, 2024

Mr. Sacchetta is the president of Westport-based CFIG Wealth Management, LLC. He is president and an investment adviser representative of Continental Five Investment Group, LLC. He is a CERTIFIED FINANCIAL PLANNER® practitioner, an Accredited Estate Planner professional, and a Chartered Life Underwriter designee. He specializes in retirement planning, estate planning, and business planning.Mr. Sacchetta is a member of the Estate Planning Council of Lower Fairfield County and the National Association of Estate Planners & Councils (NAEPC). He is a qualifying member of the Million Dollar Round Table, the Premier Association of Financial Professionals®.Mr. Sacchetta was born and raised in Connecticut. He graduated magna cum laude from Connecticut State University in New Britain, received his MBA from Fordham University in New York City, and his Chartered Life Underwriter (CLU) designation from the American College in Bryn Mawr, Pennsylvania. He is a life member of the U.S. Tennis Association and a member of the U.S. Golf Association. He is fluent in Italian.Mr. Sacchetta was recently named in the newly released editions and has been named in multiple previous editions, of the Marquis Who’s Who in Finance and Business, the Marquis Who’s Who in the East, the Marquis Who’s Who in America and in the Marquis Who’s Who in the World. He has earned numerous industry awards and distinctions. He has been quoted in local and national media.Learn More: https://www.cfig-wealth.com/Investment advisory services are offered through Continental Five Investment Group, LLC, a Registered Investment Adviser, 1555 Post Road East, Suite 206, Westport, Connecticut 06880.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-pasquale-sacchetta-president-of-cfig-wealth-management-discussing-tax-risk

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. Oh, and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us, Pasquale Saketa, who's the president of CFIG wealth management, and we'll be talking about tax risk. Pesquil, welcome back to the program.

Thank you, Mike. So, first of all, nobody has a crystal ball and knows what taxes will do or what bracket people are going to be in. But we do know that the tax topic is a vast, deep topic that people must understand. Where is it that you first start talking with your clients regarding taxes? Do you feel like taxes will go up or stay the same or how do you approach that with your clients? Well, we make the assumption that taxes are going to change on a regular basis. In fact, I don't think there's been a period of time where taxes have stayed the same. Yeah.

So that's something that we make an assumption, but we know. And also, the taxes depend on the client's situation. So not everyone's tax rate is effectively the same. And so we have. So we have to basically plan for the worst and hope for the best. Yep. That's a good point. And, you know, the only thing constant in life is change.

So we know that. And I don't, I'm not as well versed in financial matters as you are, but it kind of makes me think that the deficit that we keep hearing in the trillions and gazillions, the only way to tame that is to raise taxes to be able to, you know, tamp that down, which we know that is, you know, that is out of control. And secondly, if we want to close that gap is to have government, you know, get their spending under control. And we know that that's probably not going to happen. So given those two things, probably taxes are going to change, like you said, and it's probably not going to change in our favor in years and in years to come. And also Congress has to abide by certain budgetary rules. And so whenever they do change taxes, there's usually a sunset provision, which we have one coming up.

So this election coming up will probably decide what happens with that sunsetting. So people going to the polls may or may not realize that they're voting on their own tax rates. There's no way to know exactly which candidate would do what, but it is important to keep in mind that administrations, you know, have to submit budget requirements to Congress. Congress has to vote on them, and the IRS enforces them. And usually they go up. Well, and although, you know, they do go down sometimes, but they. But they always had a sunset provision where they're going to end unless Congress acts. And, of course, the reason why they do that is they hope that Congress won't act and the higher taxes kick in again.

Yeah. And that's another factor that people don't realize is, you know, taxes going up that's out of her control. Right. But it's not just a bunch of people, you know, raising taxes for the sake of raising taxes. there's legislation that's involved that keep them down or allow them to go back up. So that's something that a lot of people, a lot of times people don't realize. But the thing that kind of strikes me is if you think about your bucket of retirement money to live to and through retirement and then you picture, you know, some cool punching holes in it, you know, like a bucket of water, well, taxes is going to be a big hole because when you're in retirement and you have to pay taxes. now all of a sudden you don't have as much money to use in, you know, the way that you want.

So talk a little bit about how these potential future tax changes impact retirement income of your clients. Yes, see, most clients, and I would gather many financial advisors as well, assume that a client goes in a lower tax bracket at retirement because they're not earning wages. And that's, there's actually no truth and basis for that. What happens is clients, if you take money out of an IRA, if it's a regular IRA, you're going to have to pay taxes on it. So, you know, in some people's cases, when that becomes an RMD, a required minimum distribution, it could be a substantial tax. there could be a substantial tax bill due on that.

If you receive a pension, you know, in certain cases, clients have to pay taxes on their social security earnings. Capital gains. So, you know, you might own real estate as an investment where you might have gains or cash flow there that's taxable. You might have an investment portfolio that's not in an IRA that is taxable. and you have dividends or capital gains that flow through that. So it's not a good assumption to make that a client's tax rate is going to go down in retirement because for a lot of people, it won't. It might actually go up.

Wow. And you might have to take that tax hit on the chin, even if you didn't want to. Meaning, like what you mentioned about required minimum distributions, you might have accounts where at a certain age, you have to take out a certain percentage and here come the taxes because it's never been taxed before. So it's not just a matter of, you know, oh, your tax bracket went up or the tax rates went up. It's going to trigger that tax event given those required minimum distributions. So is there any way to plan for that, mitigate that, or even prevent some of those? Or is that just part of the factoring in in your plan? Well, what we focus in from that situation is whatever the amount is, because there was a case study some years ago that from the standpoint of an IRA tax standpoint, what one of the things that clients really kind of lose sight of is if you make, let's say that, you know, you have.

$2 million in your IRA because you did well and you rolled your pension over and now you have a substantial balance and you want to take out, you know, $50,000 or $100,000 either for, you know, a grand trip or to buy a boat or something like that. What you have to remember is if you're taking out $100,000, you have to add the taxes to that. So when you fill out your tax return and you note that $100,000 RMD, excuse me, Mike, when you note that RMD, your taxes are going to go up. So if you're in the 33% tax bracket and you had $100,000 of income,

that's roughly $33,000 in taxes. So what do you do? If you don't have the money, if you haven't budgeted properly for your cash flow from a tax standpoint, now when it comes tax time, you have to write a check for the $33,000 plus whatever else you owe for that year. But you don't have it. So what do you do?

You go to the IRA and you take out another $33,000. So that goes on the following year because you're probably doing it in April. So now the following year, you have your RMD plus the $33,000 you need it for taxes. Guess what? Now you take you taking that money out. So for that year's income, you have your normal income that's taxable, but now you have the amount that you took out to pay the bill in the $33,000 tax on your withdrawal. So what happens is that if you do not plan accordingly between inflation and taxes, it would really eat your retirement account alive. and it won't last as long as you think it will.

But having a plan in place so that you're not doing any more than you're legally required to do from a tax standpoint and you're managing your other risk, then you will not be put in a position having to worry about making those kind of decisions that just complicate things and just make it, you know, from worse to even worse. Yeah. So what are some things that you see or you're advising your clients to do to make sure that you're mitigating that as much as humanly possible? Well, number one, the R&D is part of our planning. So we know in advance, you know, when clients have to start taking out the required minimum distribution from their IRA or returns. So that's part of the plan. And we already make allowances for that. And one of the things that we do is it depends how, you know, it depends to the extent or the timing and the relationship. So, you know, if somebody's been our client for 10 or 15 years,

we've already been planning for 10 or 15 years. So there's certain things that are in place that have matured over that of time or in a position to the where we need them to be. If it's a newer client that's been working with us for a few years, but we haven't had the time to put a lot of that in place. So it's like a rolling mechanism where as more time goes by, there's more opportunity to have different scenarios in which, in essence, what we're doing is we're building flexibility for clients.

Yeah. And that's coming from, like you said, working with them for many, many years and having a feel for what their need is and not getting caught off guard. And the thing to remember is, if you, you know, if you own a piece of real estate or an investment property, that you rent, you know, a home, an apartment building, what an office building. If you own any asset like that, upon death, there's a step up in basis, at least according in our current tax situation. So, you know, if you originally bought a building for $100,000 and it's worth a million upon death, that million dollars is stepped up in basis, which means that there's no

taxes due and you inherit an asset that's gone from $100,000 to a million dollars in value. Same thing as if you have stocks or bonds. At death, whatever the value is at death is what becomes the new basis for whoever inherits those assets. an IRA, it doesn't matter how many times you die or don't die, you're going to pay taxes on that money. Yep. It's just a matter if you do it while you're alive or if your beneficiary does it, you know, at death, but you're going to pay taxes on retirement accounts, especially IRAs.

Now, of course, Roth IRAs are different because the tax, you, the, the, money was taxed before it went in. So the taxes on a Roth IRA are not the same as a regular IRA. And, you know, it's just a matter of clients have a choice sometimes of whether they would rather pay up front or pay later. You know, I've heard that that's a potential strategy for managing tax risk is taking money out of like a taxable account, like a regular IRA and putting it into a Roth. how does that work and is that something that is a good consideration for some people? It's always a good consideration to keep in mind because going forward from that point, you know, as long as the IRA, as long as the Roth IRA is in place five years, you pretty much can do whatever you could let it ride and let it grow completely tax-free

or you can, you know, manage income from it. But there's a five-year holding period for routes. But I, sometimes the government will sort of, you know how stores will give you promotions and lost leaders? Well, some, the government has done that at certain times where they've removed all the restrictions and said, you know, anybody can, can take their taxable. our IRA and convert it to a Roth and we'll let them do it and a bunch of people have done, you know, a lot of people take advantage of that because it's really a good opportunity.

Also, there's, depending upon the client situations, those conversions also can help to in charitable situations. So there's, you know, there's a lot of good things about the Roth, even though, in essence, what you're doing is making a decision of it's either pay me now or pay me later, but you're going to pay me. Talk a little bit about that charitable situation. That sounds interesting. Exactly, right, right. Uncle Sam. So how does the charitable work?

Well, if you, whatever the amount is by creating the, by taking the money out of the Roth, By taking IRA money and creating a Roth account, whatever that amount of money is becomes a taxable transaction. If you make an offsetting contribution, a charitable contribution, it wipes out your taxes. Gotcha. So, you know, some clients like to combine their, you know, philanthropic goals with their retirement goals. And it's also, it doesn't have to be a one-for-one type offset. You know, the contribution could be less or it could just be enough to mitigate whatever the taxes are doing that distribution. But, you know, it basically, it helps the client and it helps the charity.

Yeah. And just like we've said many, many times, there is not one specific strategy that works for every single person that you cookie, cutter template and say next. Everybody is different. Everyone's tax situation is different. Everyone's retirement needs are different. So you have to assess and make sure that that is the right plan for what you wanted to accomplish. And how do you do that? Ask the right questions, right? Absolutely. Have a plan in place and know where you want to go. Know what your goals are. or, you know, you don't, it doesn't have to be super detailed, but you should have some overriding goals that you can share with financial advisors so that everybody's on the same track.

And the goal is to make sure you fulfill whatever it is that you need to do. And from a tax standpoint, the best thing to do is to have cash. plan in place so that you know if taxes are due, you know exactly where that money's coming from so that you're not putting it put into a situation of having to redeem or sell something prematurely. And the way that you keep that finger on the pulse of what is going on is check and recheck and do your quarterly reviews and your annual reviews and just make sure what has changed. Maybe something in your personal life regarding the, you know,

capital you need for retirement has changed or maybe some of the markets or things like that have changed. So I think those annual and quarterly reviews are so important that people just need to make sure that you do that and then you know that you're on track. And the most common ways that things change, for example, for younger people, younger people will tend to buy a house or have children. older people tend to inherit money you know because most of the time you know people are living to such long ages now you know

I mean it's not uncommon for someone to live into their upper 90s well when they leave money to their kids their kids are probably in their 70s and so you know, that's probably one of the common things that affects retirees or seniors planning is that inheriting something which, you know, obviously will help their situation if they're inheriting something. But if they're inheriting an IRA, for example, that's going to directly affect taxes in the short term, at least. So it's, there are different things that can happen that can change what those dynamics are.

As long as you're focused on what your goal is, short-term and long-term, you know, you'll do fine if everything is working in sync with that goal. 100%. Well, I think it's just so important to keep these things in mind because they often slip in our calculations. We can't take into consideration exact numbers of what my taxes will be, but we know that taxes are going to impact retirement. And should we do a Roth conversion, should we do a different strategy, it all is going to depend on your situation. So, Pascal, if someone is listening to this thinking, can you give me a second opinion on what I'm doing or currently in, what's the best way that they can learn more and then also reach out and connect with you? Well, our website address is www. www.cfig-welfth.com.

Our number is 203-221-200, and we're in Westport, Connecticut, and we'd love the opportunity to engage in the answer. Excellent. Well, thank you so much for coming back on. It's been a real pleasure talking with you today. Thank you, Mike. Thank you for your time. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes,

visit www. www. influential entrepreneursradio.com.