Have you ever been told to “consult your tax advisor?” Are you left wondering who your tax advisor is—or how to find one? Taxes are a year-round aspect of financial planning, and it is essential to seek out comprehensive financial planning that includes tax planning. In this episode Michael, Tommy, and Ben discuss the crucial role taxes play in financial planning. A financial advisor who truly understands your individual situation and is willing to provide tax advice can help create a financial plan that is all-encompassing and perfect for you.
Listen in as Michael, Tommy, and Ben highlight the value of a comprehensive relationship between financial planner and client, where the advisor is proud and happy to give tax advice and the client feels comfortable enough to ask the right questions. By having a financial planner who understands all facets of your individual situation, you can make informed financial decisions that align with your long-term goals and integrate tax planning into your overall financial plan to take control of your financial future.
Listen to the full episode here:
What you will learn:
- Why tax is something that should be thought about year-round. (3:30)
- Why anyone giving financial advice should also be giving tax advice. (5:30)
- Who should be giving you tax advice. (8:30)
- The importance of having a financial planner who truly understands all facets of your individual situations. (13:30)
- How to get the best possible outcome for your taxes. (20:20)
- The value of a comprehensive relationship between financial planner and client. (24:25)
Ideas worth sharing:
“Tax is a year-round sport.” - Mason & Associates, LLC
“Your financial advisor should know your situation and be proud and happy to give you tax advice.” - Mason & Associates, LLC
“Sometimes, we have have home runs, and sometimes it’s a base hit, but we will be the person you turn to when you have the questions—and if we don’t have the answer, we will find the answer for you.” - Mason & Associates, LLC
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Mike Mason, certified financial planner. Absent tonight is John Mason, certified financial planner.
With us, Tommy Blackburn, also, certified financial planner and certified public accountant; Ben Raikes, certified financial planner, as well as IRS enrolled agent. Maybe the most credential financial planning podcast you can find, especially the most credential financial planning podcast for federal employees.
Folks, we have some goals. We have over three decades of experience helping federal employees. We are still taking clients, but we can only take so many clients a year.
So, one of the goals of this podcast is to spread that knowledge, 35 plus years. If we looked at combined experience, it would almost be a hundred. But we want to share that information, no sense keeping it pent up in our heads.
We do want to continue to add clients to the Mason & Associates book of business, and we can do that regardless of where you are in the United States of America.
And then we want to hear from you. We want to hear how we're doing, are there subjects that you would like us to do? Do you have financial planning questions? Your question may help other folks.
You can get to our website at masonllc.net. And then you can send questions through Mason FP (and that's FP as in financial planning), masonfp@masonllc.net.
Tommy Blackburn: And Mike, I think it's worth mentioning, so we do this because we want to share that information, as you said, and we are looking to bring on new clients that fit, those that we can serve.
And what that looks like is typically, doesn't have to be a federal employee, but that's definitely what we have a specialization in with $700,000 of investible assets that we can manage for them.
And so, if you fit that and you're thinking you'd like an advisor, give us a call 757-223-9898. And we promise that you'll leave that phone call better off than when you called us. Regardless of whether you move forward in a relationship with us, we will more than likely answer questions that you didn't even know to ask.
Michael Mason: And of course, you've got over by the time this airs, we're recording it January of 2023, Happy New Year. By the time this airs, Tommy, I'm guessing 30 episodes. Maybe you don't have that 700,000 of assets under management, maybe you're really early and you want to get to that point.
Well, you probably shouldn't be taking financial planning advice from anybody other than 30 financial planning podcasts for federal employees. You're going to get a whole lot of sage wisdom there at no cost.
Tommy Blackburn: Absolutely. It's definitely meant to be a roadmap for those that are a little earlier, as you say, as well.
So, I think tonight fellas, what we want to talk about is, as you said, Mike, it's January, New Year, and one of the things this time of year that's always coming is tax season.
So, tax time is coming, taxes are front of mind. We would also say taxes is a year round sport, so we should really be thinking and planning for this all year. But with it being front of mind, the topic for tonight is Consult Your Tax Advisor.
Now, have you ever heard that before? Have you ever had a question, maybe you turned to your own financial advisor, or you turn to your accountant and — where you had a broker statement, you had a K-1, anything that said, “You got a question about this, go consult your tax advisor.” What does that mean?
Michael Mason: The all elusive, so we're going to have some fun with this because people … they always kick this thing down the street to somebody else instead of the financial planner stepping up and giving some tax advice.
I've been in the broker dealer world where everybody in compliance suggested that your E&O insurance doesn't cover you for tax advice. So, they always have those disclaimers: “Consult your tax advisor.”
Of course, we just did an episode on SECURE Act 2.0 and how much can you put pre-tax into a 401(k) or an IRA. And the minute you have that conversation with somebody, you're giving tax advice, aren't you, Tommy?
Tommy Blackburn: How do you do anything financial-related without having taxes be a part of that conversation? And so, it is pervasive in all things financial planning. We've got to plan for, it's probably your largest expense over your lifetime, or one of your largest…
How do we not plan for it? How do we not give advice around it? It would be a mis-service to not address those areas. And also, how do you even give advice to somebody without thinking about this?
So, to your point, you've got to be giving tax advice if you're going to do this any justice. And then how do you disown it the minute somebody has a question? Well, did you not understand what you were advising somebody to do?
Ben Raikes: Tommy, it's so bad. And you mentioned this at the start, is you won't get a form K-1. And this form K-1 was generated by an accounting company that has thousands of highly credential employees, and it'll have 200 pages in that K-1. Do you know what it says on the very first page at the end?
Tommy Blackburn: Consult your tax advisor.
Ben Raikes: Consult your tax advisor. So, we've got thousands of accountants working for this company, we've got hundreds of pages of information. It should be everything you need. But everyone wants to pass that buck just one last time. So, we've got consult your tax advisor
Tommy Blackburn: And Mike, as we were talking, game planning for this leading up to the show, you were saying, this is pervasive everywhere, it's not even just consult your tax advisor.
We run across clients that engage attorneys and we don't even get clear, concise answers from their attorneys on what should be doing with these estate documents because nobody seems to want to take ownership.
Michael Mason: And it’s time to own it. And the only ones that we see that will do it, if you're waiting for I mean — Tommy's a CPA, Ben's an enrolled agent, if they weren't financial planners, they could make a living in the tax world.
But the people that you've hired to prepare your 2022 taxes, if you're waiting for them to give you tax advice, all they're doing is accounting for last year. They absolutely are not going to look in and see you at (I'm going to call it 210,000 guys: married, filing joint). They're not going to see 210,000 as adjusted gross income.
And then ask you, “Oh, Tommy, if you're not doing 20,000 into your TSP, if you just did 10, that would bring your AGI down to 200 and then you guys could do a Roth IRA.”
If you're waiting for that CPA that's accounted for last year to tell you that, it's going to be a sad day.
Ben Raikes: I would go one more step on that, Mike. And I would even say, let's say that you were someone who is astute enough to know all of the information that you just gave out.
You could go to that information with your tax preparer and say, “Should I do this?” And they're going to say, "You should consult with your tax advisor.”
Tommy Blackburn: “Because I don't want to own this, all I'm doing is getting this form out the door and filed with the government. I've got no advice giving to what I'm trying to do right now.”
And so, that's where we just … this one could be a little bit of a rant tonight, and we're going to try to keep me off the soap box, so to speak.
But we just really believe in that comprehensive financial planning relationship. And it just blows our minds how the financial advisor and the tax advisor are not wanting the same or at least talking and coordinating.
So, that's really what this is about. And Mike as you've joked about before, we really ought to say is consult your Martian, your Sasquatch.
Michael Mason: The Yeti, because we've yet to see the person that stands up and says, “I am the tax advisor.” Now, I'm going to take some of these companies off the hook, and that's why we put it right back where it should be.
Prudential, we've got some clients with some IRAs at Prudential. And if you call them and you ask, “What's my required minimum distribution?” And Prudential says, “Well, it's going to be $10,000.” Well, how's that going to be taxed?
Well, the person on the other line, the Prudential person knows that it was pre-tax. But maybe they don't know the tax laws in Florida and Virginia, so they don't want all these people answering things like, “Oh, you're going to pay state taxes in Virginia or Florida.”
Well, no, you're not. Or they don't know what your other income is. We like to say hey, maybe 10,000 of it flows into federal taxable income or maybe it caused 18,500 to flow in.
So, the answer is, we're not your tax advisor. We can't possibly give you tax advice, and that CPA is not going to give you tax advice. The only one that's really positioned to give it to you is that comprehensive financial planner that knows one, knows the taxes; two, knows everything, or is supposed to know everything about what you're doing.
Tommy Blackburn: And if you turn to that person who you probably think does that for you and they are deer in the headlights or won't give you a straight answer, I think you should be concerned. I think that's what you're looking for in a relationship, you clearly don't have it. And we think a real financial planning relationship has that, so you should look for it.
I guess, I'll give a little bit of disclaimer here, here I go trying to disown some of this. When we say given tax advice, we're (Mason & Associates at least) going to give answers that we know it's going to be clear as to what the rules, the law is. And we're going to advise you all day on that and we're going to advise you on what's best for your financial plan.
We're not going to do something illegal. We're not going to take uncertain tax positions. You need a tax attorney and you might be looking at jail. I don't know what your financial plan is calling for that you need that. So, no, we're not doing that.
But everything that we provide advice for is well-researched. We either already know the answer or we know how to go get the answer. And if we don't, we're probably going to tell you maybe we're not the right planner for you anymore.
Mike, you've mentioned before, if you're an NFL football player, maybe Mason & Associates is not the right advisor for you. And that could be that case.
I know if you're a professional athlete, you've probably got a lot of states you need to file in because you're playing ball all over the country. That's not us. And we'll be honest with you. Like that's …
Michael Mason: How about Donald Trump? The IRS finally said, “We can't really audit him, we don't have enough people smart enough to look at 457 pass through entities.” So, we're going to tell you, you need to go to some other firm.
Tommy Blackburn: But we're not going to shy away from if it's an area that we know we should own it — we're going to own it.
And I guess, I don't know if we want to jump into an example, and maybe this is even somewhat of a topic we've covered and will cover in a future episode. But I know I had a client pass away recently and the son and daughter are now clients. The son was already a client.
And so, this is just the front of my mind, one that comes up, which is them being able to turn to our firm and know that, “Mason & Associates has done the work on the front end. We had beneficiaries in place,” but how does everything work now guys?
We didn't just throw our hands up and walk away, we started counseling them. Now, we have to thread a line of, we're not lawyers, but we can say, “Obviously, IRAs move according to beneficiaries. The house that your dad owned, that was a life estate, that's not going to go to you. But he was also renting it to your son to do his grandson a favor. But now, you guys are landlords.”
So, we started walking them through all of these things. We also had a non-qualified brokerage account. So, that's things like stocks could be, I don't know, Apple, Northrop Grumman , Dominion, anything.
We were holding those for dad because we knew dad probably wasn't going to be around forever and he had a lot of big gains, so we didn't want to pay the taxes because we knew when he passed, we would get what's called a step up. So, at that point, his heirs could sell it and there'd be no tax consequences.
That's tax advice, that's tax planning, this is exactly what happened. So, now, the children have gotten that stock and we're going to be able to liquidate it and help them fund their goals and reinvest it without incurring all these taxes.
Michael Mason: Go ahead, Ben.
Ben Raikes: Mike, something you mentioned earlier that really stuck with me is you mentioned the word “comprehensive” and knowing everything. And when you said everything, you did not mean we have all the answers immediately that we know everything.
It's that we have a relationship already with these clients and we know everything about their situation. And that's why as Tommy is walking through that example so eloquently before, we're really able to take these clients and walk them through these really complex, complicated processes.
Where if that client was going to go anywhere else, they're going to say, “Well, you need to talk to your estate attorney about exactly how that works. You're going to need to call Prudential and ask about your beneficiaries. You're going to need to call TD Ameritrade and get this statement and that.”
We are able to be that one source for everyone that combines all of these different areas together, because we do take so much care and attention to our clients in knowing their personal situations.
Tommy Blackburn: And as we talked about in a previous episode (and I know we'll hit on it in future ones) is we also take pride in that because it allows the client to grieve. They can turn to us and know clearly these guys are all over it, and they're taking action and advising me when and as I'm ready. So, it's just one less thing to stress about.
Michael Mason: I would say to you, the only time we've said something like “You're going to have to consult your tax advisor or your financial planner” is when somebody asks … we 18-years run a live radio show. You can't call in and ask us a tax question without us knowing the background.
Tommy, I want to tell a dad story, to reiterate what you were saying as far as stocks go. Dad got some shares of AXA Equitable when they demutualized and he got those shares and there was no cost base in those shares.
And then he bought a few more, long story short, it might've only been 20 or $30,000. But at any point if he sold those, he was going to pay taxes, he had a zero basis. I was his trustee at the time.
The day after he passed away (because they were just in his name), we logged into Computershare and we sold those stocks because we knew that a step up in basis, that means his basis was the value the day before the day of his death, and we sold them.
Well, that's what somebody that knows your situation is going to do and they should be proud and happy to give you tax advice.
Tommy Blackburn: They should. And it's sometimes scary how our minds work. I'm going back to this example. I think it was valuable to them too just to know like, “Hey, do I need to go to court?” Because everything was beneficiary, there really was no probate process here, which I think is a benefit to them. They might have a small estate affidavit they have to do, but simple process there, money's moving quickly.
The other question is, “Do I need to file an estate income tax return? Do I have trust tax return?” And because one, we can answer, we're knowledgeable enough to answer the question.
So, we can tell you in that case, “No, you don't have an estate income tax return. The reason is because everything was beneficiary. So, there never was an estate.”
Being able to answer those things, give that advice, I think gives a lot of peace of mind. And the other process, I was thinking about where I said scary, is that as I'm thinking about the children's financial plan, now — I know I've got all these step-up assets, all of a sudden, these inheritances — and we just recorded SECURE 2 on another episode talking about how mega backdoor is still alive, when my mind is already moving in, the daughter is working for a company that has an after-tax availability.
So, one of the pieces of advice if she chooses to take it is, “Hey, let's put as much of your salary into this super backdoor Roth where we can put more money that'll never get taxed again. Let's take advantage of that because you just got an inheritance so we can live off of that.”
So, I'm already tax planning, we are already tax planning for the next generation as the situation changes.
Michael Mason: And to add clarity to that, maybe she's 50-years-old, that's an easier story and she's thinking the most she can put into her 401(k) is $30,000. But when you have this opportunity for this super back door, some companies locally, Huntington Ingalls is one of those where you can contribute after tax. Once you've hit your 30, pre-tax, you can contribute after tax maybe another 20,000.
One, it's good to know it, two, it's good to have a financial planner like Tommy that can say to you, "Yes, it's got to come out of your paycheck, but that doesn't mean you have to suffer because you just inherited 400,000 or whatever the number is. Supplement your income from there.”
Tommy Blackburn: And I know we all do this similar thought process. They got an inheritance, our clients are generous, they care about their families. So, they're thinking about giving money to the next generation below them because they were never planning on this money to begin with.
So, yes, we're able to advise them on that too. What's the annual gift tax limitation if you go over it and do we need to file a gift tax return?
Ben, I know you reached out to a tax company we frequently partner with to get the cost on what that tax return would cost.
So, this is what we're talking about, is really, hopefully, driving home what a comprehensive relationship looks like and what we think your advisor not your Martian should be able to answer.
Ben Raikes: And I think these situations for all of us at the table are kind of what I would call the fun situations. Where there's something complex going on where we know that we can be a huge benefit because we have specialized knowledge. We can be a huge benefit to our clients in that case.
But I'm thinking here of some cases where we are a huge benefit to our clients where again, you could go to a tax preparer and say, “Hey, I make charitable contributions.” And that tax preparer would say, “Well, you take the standard deduction, I don't need any of those slips.”
What about qualified charitable distributions? That's something that a tax preparer is not going to care about. They don't want to know about it, they just say, “Hey, you don't need it.” Whereas, we'll say we need to make that distribution from our IRA and we're going to be able to save probably thousands of dollars of taxes over a lifetime.
Tommy Blackburn: One of the most tax efficient ways to give, and not only do we know that we should do that, the tax preparer is not doing it, but we as the advisor are also checking that tax return to make sure that the good advice was reported correctly.
So, we take it a step further just to make sure that things are actually coming out the way they should be. That is, again, to me, that's a comprehensive tax financial planner.
Michael Mason: So, guys, I'm going to set this up for a little round Robin and we'll take it as many lengths as we want to
So, first and foremost, we're recording this in Virginia. We are licensed nationwide so we can take clients anywhere. So, I want us to tell some of our favorite, unique tax advisors where we were the tax advisor stories.
And Ben, you're going to know this one: there is military. He was retired military, she's retired civil service. They worked their last 10 years here in Virginia. So, they paid at the top rate federal and the 5.75 Virginia tax, and then they moved to Illinois.
And as I'm giving them some advice, we hear about Illinois being one of the highest tax states in the country. Well, you dive in, and you find out that that military pay is not taxed, that civil service pay is not taxed, and withdrawals from your IRAs are not taxed in the state of Illinois. So, here …
Tommy Blackburn: So, it's tax-free for a retiree in Illinois.
Michael Mason: So, we stepped up and we did three years’ worth of $200,000 a year’s, IRA to Roth conversions because we didn't know that rule off the top of our head. But what we did know (and this is something that I influenced John on years ago), ask the question where the answer you get is the best possible answer you could hope for.
Ask that question, and if that one turns out negative, then ask for the second best outcome. But you have to have somebody willing to ask and research.
Tommy Blackburn: I'm thinking about when we worked together, Mike. I think we've got a lot of stories here we can choose from, but you're asked a question that's making me think about it.
We had a client who was retired military, then they were defense contractor, then they were a federal employee getting ready to retire, became our client. So, we were looking at the defense contractor part of it. They had stock in that 401(k), highly appreciated it. They also were very charitable.
And so, this is where we looked at it and I remember you said, I was like a dog on a bone that just wouldn't stop asking a question because I kept seeing this — I mean concentrated position of stock of the large amount.
I kept thinking maybe this is a NUA and we didn't have the information. So, we called with the client, Fidelity, who was the custodian, and we found out there was, out of a $200,000 position, I think $160,000 gain.
And so, because we asked the question, our mind started then moving, which is, “Hey, Mr. and Ms. Client, we can take advantage of this provision called NUA, get the stock out of your 401(k), satisfy everything else, and we'll only pay tax on 60,000.”
“Now, we're deferring, the rest of it, may have to pay capital gains, which is still better than your ordinary. But here's the thing, we just got the stock out and you're also extremely charitable.”
Then our minds started moving to we can give stock to charity, then we got to avoid all of that 160,000, help them meet what was important to them. And of course, we then even had to take it a step further, Mike, it's kind of crazy.
And we did a Roth conversion because we created a huge deduction. So, we did a huge Roth conversion to offset that deduction. That to me, is a super home run story there.
And the client was tickled, has been an advocate because it saved him tax dollars and helped them do the things that were important to them.
Michael Mason: So, Ben, we're going to get yours, but let me just make this point. Tommy used tax advisor and quipped the tax Martian or the Yeti.
Well, this couple, found the Yeti, they found the Martian, they found the real tax advisor. Somebody was willing to read the rules, go out on the limb, and give them the best advice they could get. They found that elusive tax advisor.
Alright, Ben, what you got?
Ben Raikes: Gentlemen, you had some great stories and I think the story that I’ll tell goes more to again, the kind of the comprehensive nature of what we do and knowing every aspect of the client.
More or less, there was a client situation where we knew that they were going to need to go on the Affordable Care Act, and it was a similar situation where there was an inheritance and we have a pool of money and we're wondering, “Well, where should we take this money from?”
We've got an inherited IRA that we could use, we could sell some stocks and generate some gains. We did have some step up in basis, but essentially, through carefully monitoring their income sources throughout the year, offsetting gains and losses when we could, when the market went down, not touching the inherited IRA that was going to generate taxable income, we essentially kept them from paying what would've been 15 grand in premium tax credits to about a thousand dollars.
Michael Mason: So, you just have to find the elusive tax advisor. And Tommy, I know you've got a bunch more notes, so you're going to lead us in this next direction. But your tax advisor, the only person they can be is your financial planner because nobody else is going to know.
Your insurance agent's not going to know enough about you. It's going to have to be a comprehensive financial planner and if you don't have that person, you should be in search of that person.
Tommy Blackburn: And I don't know how many more stories I should or shouldn't tell. I think the main thing is we just want to get the theme across of the value and the comprehensive relationship that we have with our clients. And that's what every financial planning relationship ideally should be.
That's something you're interested in and you think you fit what it takes to be a client of Mason & Associates, we certainly would love to talk to you. We're not always going to find turnover a home run, but we're going to look for them.
And we're also going to look for base hits and we pretty regularly are going to find base hits. That could be those things like how we give maybe smaller amounts of money, like those qualified charitable distributions, substantial way to save taxes over time.
So, sometimes, we'll have these huge home runs, sometimes these base hits, but we're going to be there and we're going to be … the biggest thing is we're going to be the person you turn to when you have questions and you're trying to figure out how does this all come together.
We are going to be there with you. If we don't know the answer, we're going to find the answer.
Michael Mason: What a great point, Tommy. Guys, we could carry this on and tell story after story. We're not going take it that long. Let me just say base hits win baseball games, home runs win a lot of them too.
It's always nice to get two or three base hits and then a home run, that brings in three or four guys. We love our base hits and we just recorded SECURE Act 2.0 fresh off the press and I don't know that we know all of it just yet because it's early January 2023.
But one of those base hits is a mechanism to move 529 money that hasn't been used and probably won't be used into a Roth IRA. A better way to get it out. So, SECURE Act 2.0, that'll be live on our website within a month, I guess.
Many of the podcasts on the website, death of a federal employee — boy, you really want somebody that understands taxes and is willing to give you tax advice. So, many of the podcast — the last quick story that I'll tell you, remote law that many financial planners won't understand in Virginia: non-qualified annuities.
These are annuities that you put money that was already taxed in, but now, it's grown tax deferred. So, let's say you put a hundred thousand in, now it's grown to 200,000, you die. So, I die, I leave it to Tommy. Tommy's got a tax burden, one that I avoided, a 100,000 the gain from a 100 to 200.
Well, remote law, very little-known law in Virginia, if you take that as a lump sum, Virginia treats that like life insurance. So, you would not pay tax in Virginia on that a hundred thousand again, you'd still have the tax at the federal level.
But again, it's one of these laws that I had to educate, CPA firm on its existence. So, find that tax advisor, that tax advisor is going to be your financial planner. And if it's not, then you probably need to find a financial planner that can be that tax advisor.
Tommy Blackburn: Well, no surprises that maybe they weren't aware of that. They probably should have been being a Virginia CPA. But as we were preparing and talking about things; the tax laws just continue to change constantly, and we've had more tax legislation, more law changes in the past 10 years it seems than we've had in the past 30 or 40. And we just recently had one.
You've mentioned Mike, that SECURE 2.0 — we are releasing a podcast on that one as well, at least as far as our understanding of it, because it's hot off the press. We think we've got a good understanding, but more to follow.
That was part of a spending bill. So, it wasn't its own bill, it was wrapped into a 4,000 plus page bill. So, as all of these changes happen and they keep getting buried in things and we don't even believe our congressmen and women are even fully reading things that they're signing on as fast as it's happening …
This is why you have to look for the elusive Martian apparently the tax advisor because it's hard work. Staying on top of all of this is changing constantly. SECURE 2.0 is definitely changing things. We've got some new special treatments with 529s being able to go into Roth IRAs amongst many other things. So, that is why it's difficult to find that tax advisor.
But when you do, I think you're going to be happy to find that great financial advisor, that good relationship.
Guys, it's been a great episode. And folks, we appreciate you continuing to listen into us. Please be sure to rate us five stars and share it with your friends if you think it'd be helpful.
If you think you could be a client, if you're interested in being a client, please reach out, find us. You can schedule an appointment at masonllc.net or you can give us a call at 757-223-9898.
We also want to hear your comments. Please shoot us any thoughts for future episodes or questions you may have at masonfp@masonllc.net. It's been great and we're looking forward to continuing to release these episodes and we hope to hear from you.
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