Capture the Upside Podcast
About this Episode:
In this podcast, uncover the strategic advantages of Roth IRAs for your financial planning. Learn how to utilize Roth IRAs for tax-free growth, estate planning, and securing a prosperous future. Kevin will guide you through maximizing your investments and navigating the complexities of Roth IRA contributions and conversions. Whether you’re aiming to enhance your retirement savings or optimize your estate, this episode provides essential insights into making Roth IRAs work for you.
Episode Insights:
• Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank
• Grand Rapids: Furniture City USA
Connect:
Phone • 616.977.2639
Web • https://hillislandfinancial.com/
Email • kevin@hillislandfinancial.com
Transcript:
Sean:
I am Sean.
Kevin:
And I’m Kevin. This is Capture the upside brought to you by Hill Island Financial for families with a minimum of $2 million to invest. We have among the lowest client two advisor ratios in the industry, and we pledged to invest our own assets consistently with how we invest. Yours. Today we’re going to be talking about that humble piggybank savings account, the Roth IRA. Sean, do you have one of those?
Sean:
I am humbly embarrassed to say, no, I do not.
Kevin:
That’s clearly because you’re in my in trouble. And, you know, you’re such a high income earner, right? Like you’ve never been eligible to be able to put into a Roth. I mean, when you are.
Sean:
Well, we’ll go with that. Yeah.
Kevin:
So I know getting in your tax bracket, that might be a brilliant strategy. Taxes have actually gone down over the last 25 years, believe it or not.
Sean:
So it’s my my letter to my lethargy paying off.
Kevin:
I was exactly right. Procrastinate, I think, to come back in time. But today we’re talking about a Roth IRAs for rich people. And again, a lot of times this humble account that is intended for lower income earners just gets ignored. You never been able to contribute to it. You’ve always made too much money. And we use it all the time For clients that have states under $25 Million. It’s a really powerful, versatile tool. Now, you may have noticed back in 2021, middle of the pandemic, who knows? That line could have passed you by ProPublica released some information it wasn’t supposed to have about rich people and their Roth IRA account balances and again, Roth IRAs, just to make sure that everybody understands withdrawals out of a Roth are totally tax free.
It’s a really great you put the money in there. You never pay taxes on an ever again. And I can get into all of the different ways in which withdrawals when you take them aren’t subject to net investment income tax. There’s a million different really positive things about a Roth IRA fundamentally. Right. They’re supposed to be for people in lower income tax brackets. And this guy, Peter Thiel, had 5 billion with a B billion dollars that he had in a Roth IRA, which cut all the headlines. And by the way, it should. That’s just an amazing amount of of capital to be able to avoid taxes on whoever suggested that he put his startup shares and PayPal in there. I mean. Right. That was that was it was a great move. But if you kind of really read between the headlines, one of the other people that they pointed out was a guy named Ted Weschler. Ted Weschler is one of the co managers out of Omaha, Nebraska, of Berkshire Hathaway, famously, Warren Buffett’s fund and Ted Weschler actually responded to ProPublica when they said, Hey, how did you get over $260 million in an account where normally you’ve only been able to invest a couple of grand every year?
And he says, Hey, I’ve invested entirely in opportunities available to the public common stock. None of this is some sweetheart deal. And when you start looking at that and start thinking about our clients and goals they may have for their portfolio in terms of inheritance, leaving some money to the kids in terms of their own withdrawal strategy, we use the Roth IRA as a tool on a regular basis. And again, you wouldn’t expect it because if you think about the Roth that began as an idea back in 1989, they created this concept called the IRA plus turned into ten years later. So Delaware Senator William Roth had the account named after him. And it was, you know, put in a couple of grand. Pay your taxes now and you never have to pay taxes again. But you have to be under certain income levels. You’ve got to be like under $100,000, something like that back in the day. And it’s kind of grown a little bit. In 2010, they took the limits off to do what’s called a backdoor Roth conversion. Now I got to do a big disclaimer on this episode. Every situation is individual. This is a complex strategy that is intended for high net worth individuals. You really do need to consult with your tax advisor on this one. When we talk about that backdoor Roth conversions strategy with no income limits, that is often where we use the tool. But there are kind of two ways. So John, you can actually take private Equity Founders Capital and put it into a Roth IRA.
So that’s what Peter Thiel did with his PayPal shares. They were point one and he put them into the Roth IRA account when you can only put in a couple of grand. And they took that couple of grand up to 5 billion. Right? This backdoor conversion is the tool that we use much more often with our clients. If you are going to do private equity, if you are a founder, it again in general, the folks that we work for, they’re going to be multigenerational family wealth or they’re going to be founders, entrepreneurs that private equity does take some savvy. You got to have some talents to be able to understand what’s going on. You can put that into a custodian controlled, self-directed IRA. You can use a self-directed IRA that’s essentially called checkbook control, where we create an LLC and open it up at the bank. But if you’re going to do it, there is some really clear prohibited transaction rules with the IRS. And I understand this is not the most compelling conversation, but it’s possible you want to be able to get 5 billion totally tax free for yourself, pass on to your heirs. It’s worth getting into the details to understand, Hey, I’ve got this opportunity with these very low cost basis shares. Sometimes the best place for those is going to be putting them into a Roth. We just have to figure out how do we get it there? And then you got to figure out, well, how do I actually withdraw that? How do I actually potentially get that to the kids if that’s a goal of yours? So we talk about conduit trusts, accumulation trusts, the pros and cons. There was a recent legislation that got passed Secure Act 1.0 that got clarified and secure x 2.0 that, yes, you do have to take out a required minimum distribution depending on the age of the IRA owner, and that required minimum distribution of the Roth.
It is tax free, but you can’t wait all ten years, then withdraw it at the end of ten years. It’s a very easy tool to incorporate primarily as an inheritance vehicle, but additionally as a way to give yourself a nice pot of money for the one time withdrawals that don’t impact in your long term. Cap gains or any of your IRA for one year withdrawals. Let me give you an example. This past week we were talking with a recently retired Steelcase executive. Now Steelcase is the publicly traded office furniture maker. Side note, did you know that Grand Rapids, Michigan, is known as Furniture City USA?
Sean:
I actually did know that.
Kevin:
Congratulations. 100% wins that big.
Sean:
Huge. I think you told me that.
Kevin:
But I may have. I’m proud of it. But I think it’s got a cool and you can really actually get access to some really cool furniture. Herman Miller is around here anyway, so now getting back to it, we were dealing with this retired executive and it’s important because this executive retired relatively young. He had a concentrated stock position and had saved up in four one KS also had a variety of different rentals that he’d picked up at a great price, 28 And we were looking at not only how to best support their income needs while they were retired, but also take the wealth that had been created in this G one or the first generation and pass it down due to three. So if you think about my example where we have Ted Weschler using publicly available rules and investing in common stock, having a $260 million Roth here, we’ve got an example of somebody who is relatively young, doesn’t need to necessarily start taking their required minimum distribution. So they’ve got four or $5 million in a trust called non-qualified. So in a non IRA account. So their taxable income is that plus rental income, right? We can do some interesting things with those that rental income, depending on what we need to deduct, we can adjust given a specific year if we’re going to do some capital improvements. Given COVID and the huge increase in housing prices, we’re starting to liquidate that portfolio.
So we’re essentially saying between now and the time at which Congress is going to force him to take a required minimum distribution from his 41k or his. Therefore, with Social Security stops increasing, we have this window of very controllable income. Given that opportunity, there are some really interesting planning strategies you can engage in One of those if your goal is to ensure that your children are going to get the most money they possibly can from the estate doing a conversion. In this situation, all the kids are in a higher tax bracket than mom and dad are right now, even though they’re worth 10% of what mom and dad are worth. Right? If their kids are making $250,000, they’re paying more in income taxes than my retirees are living on. You know, capital gains, dividends and some rental income. Right. So we’re in a situation where we’re able to do an IRA two Roth conversion at a preferred tax rate.
And as I said at the beginning, you know, whether you’re doing $100,000 or you’re doing $300,000, I mean, you are looking at more than doubling the amount of money that you would have otherwise had. So when you think about this as a tool, more people than you might expect actually with the extension of the required minimum distribution or delaying your Social Security until age 70 are in these interesting sweet spots where we can go ahead and do this. Side note, you do want to be aware, and this is a big deal if we do these conversions, there are these Medicare Irma rules that increase your Medicare premium. So it is a complex transaction to be able to understand, okay, not just is it a tax calculator that somebody’s got to do, they need to understand the full implications of these conversions and make sure that we’re getting out ahead. And in general, oftentimes they do come out ahead. Employing the tool is a strategy, whether it’s for their own income or it’s for an inheritance work.
Sean:
So how can people get a hold of you to start having these conversations?
Kevin:
Kevin My information is down below in the show notes. My email is Kevin at Heel Island Financial dot com. I answer all my fan mail and it’s absolutely worth having a conversation to see if this is an opportunity and if it is, how much and when.
Sean:
Fantastic. Thank you very much. Kevin. This has been captured. The upside. We’ll see you next time.
Kevin:
Sounds great.
About
Hill Island Financial is a fiduciary focused on goal-based guidance to help you tackle today’s challenges and achieve your dreams. Our wealth management services team is here to help!
No commitments are ever made based on our first conversation. Instead, we will provide you with a list of actionable to-dos to get you started. If you decide you’d like help implementing anything on the list, we’re here to help, but we will never pressure you.
We look forward to getting to know you.
Important Disclosures
Hill Island Financial, LLC is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.
• Investment Advisory and Financial Planning Services are offered through Hill Island Financial, LLC, a Registered Investment Advisor.
• Hill Island Financial, LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.
• Opinions expressed are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
