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Why Government Should Get Out of the Business of Being in Business

In business you must be creative and adjust to changes in technology and improvements or you will not survive.

A good example of this is the vinyl record industry. A client of mine in Pennsylvania worked in this industry from 1974 until 1983.  He denied the fact that cassette tapes were becoming more popular and that eventually his job would end.  But sure enough, it did.  He was so angry when he lost his job and income that it took him one full year to accept this event and move on to different employment. 

Here’s how the vinyl record industry declined as new audio technology and innovation pushed its way into the market:

screen-shot-2016-11-24-at-1-12-18-am

As you can see, businesses must be creative, adaptive, and competitive if they want to survive.

Not so for government.

Take the Civil Service as an example.  For 133 years the Civil Service has grown and taken on a life of its own.  It has unions and lobbyists and no one is able to fire someone in the Civil service if they are poor performers. 

Here’s what Wikipedia says about the Civil Service an how it came to be and why its very structure promotes stagnation and inflexibility within government operations and employment:

1.  The Pendleton Civil Service Reform Act (ch. 27, 22 Stat. 403) is a United States federal law, enacted in 1883, which established that positions within the federal government should be awarded on the basis of merit instead of political affiliation. The act provided selection of government employees by competitive exams, rather than ties to politicians or political affiliation. It also made it illegal to fire or demote government officials for political reasons and prohibited soliciting campaign donations on Federal government property. To enforce the merit system and the judicial system, the law also created the United States Civil Service Commission. This board would be in charge of determining the rules and regulations of the act. The Act also allowed for the president, by executive order to decide which positions could be subject to the act and which would not. A crucial result was the shift of the parties to reliance on funding from business, since they could no longer depend on patronage hopefuls.

2.  In 1877, there was growing interest in the United States concerning the effects of the spoils system on the American political system. New York Cityestablished the Civil Service Reform Association to help address the issues, which would lead to several other organizations like it showing up in other cities. The presence of these organizations was one of the first steps in trying to up end the spoils system in America.

3.  The assassination of President James A. Garfield moved the Civil Service Reform from city organizations to a leading topic in the political realm. President Garfield was shot in July 1881 by Charles Guiteau, because Guiteau believed the president owed him a patronage position for his “vital assistance” in securing Garfield’s election the previous year.[4] Garfield died two months later, and Vice President Chester A. Arthur acceded to the presidency. Once in office, President Arthur pushed through legislation for civil reform.

4.  On January 16, 1883 Congress passed the Civil Service Act, which is sometimes referred to as the Pendleton Act after Senator George H. Pendleton of Ohio, one of the primary sponsors. The Act was written by Dorman Bridgman Eaton, a staunch opponent of the patronage system who was later first chairman of the United States Civil Service Commission. However, the law would also prove to be a major political liability for Arthur. The law offended machine politicians, or politicians who belong to a small clique that controls a political party. These politicians realized that with the Pendleton Act in place they would have to find a new means of income, since they could no longer count on donations from the wealthy hoping to receive jobs.

5.  The Act initially covered only about 10% of the U.S. government’s civilian employees. However, there was a provision that allowed outgoing presidents to lock in their own appointees by converting jobs to civil service. After a series of party reversals at the presidential level (1884, 1888, 1892, 1896), the result was that most federal jobs were under civil service.

In 1952, 1 in 22 workers were employed in the government but today it’s 1 in 3.8. This means that government hiring  is out of control.  If a business needs to make a profit to survive and thrive, how can it possibly do so if it must pay for so many government workers with a ratio of 1 to 3.8? 

It is time that government turned a profit and was in constant risk of going broke so that it would be forced to move with the times, cultivate creativity and ingenuity, and thrust from its midst poor performers — until then, we risk running the true grit of this country, private enterprise, into the ground.

Why Deferring Taxes on Retirement Funds Costs More than Just Paying as You Go…

 

People often think that by deferring their taxes, they will have more money later in life… NOT TRUE!  You will pay more tax by deferring, than by just paying as-you-go.

Here is evidence of this fact:

When you start withdrawing retirement income from your tax-deferred account, you will pay more tax than when you were working — that’s because people reaching retirement age have a lot less deductions.  Mortgages have often been paid off and children are grown and hopefully out of the house.  If they are not gone, but still at home, no tax benefit is available.

How much tax will you pay at retirement? You need money to live on during retirement.  Therefore, you start taking money from your IRA and it is this income that forces your Social Security benefits to be included for income tax purposes.  You will have to pay an additional $5,000 to $6,000 in taxes because of the deferred account money.  Add this $5,000 to your other taxes and I think you will find you will be paying much more tax at retirement, than you ever paid while working and earning money.  This as a disaster and a big surprise.

You didn’t see this disaster coming.  I know that.  But that’s why I’m writing this now — you are being forewarned. You have an Uncle Sam that has grown bigger than any other time in the history of the world, and he wants your money.  Uncle Sam has laid out a plan so you think you have money as you read your annual report, but can’t get at it until after you die and have paid the maximum tax.  Your name and total account values are printed right on the top of the page.  This may be an ACCURATE NUMBER, but try getting this money today.  Call the plan administrator and ask how much money can you get today, after you pay the taxes and early withdrawal penalties?  The answer to this question will tell you what your real number should be at the top of the report, and one not likely to be too much bigger at retirement, thanks to increased taxes.  Now ask yourself how great you feel about your retirement options?

Using this lower number, calculate how long it will last at retirement by withdrawing your necessary expenses annually and see when you will be out of money and become totally dependent on Social Security.  I wager it will be seven years or less.  This seven-year mark in time is a disaster!  You run the numbers and see for yourself how deferring your taxes has given you a false sense of security.  Get sick to your stomach and then stop depositing money into this tax-deferred account!

So all this begs the question, “then where does a person place retirement savings for the best growth, safety, and fewest taxes?  Answer:  A properly structured whole life insurance policy.  Email me your information regarding your tax-deferred account and I will prepare a side-by-side comparison and prove to you that you will have double the amount of money than by “deferring your taxes” in a 401(k) or IRA. You will be happy you did:  peter@moneymastery.com

 

Start Saving into Whole Life Insurance (And Stop Saving into a 401k)…

At the end of my last post called “Stop Saving Into a 401(k),” I promised to share options to save for retirement that could trump a 401(k) to provide, tax-free, vibrant funds. Here’s how to do it…

Create a savings account using a “High Early Cash Value” whole life insurance policy from Mass Mutual Life Insurance Company. This will yield incredible results.  Please feel free to challenge me on this. Here’s how:

Send any and all investment opportunities to me at peter@moneymastery.com and I will answer you with details, diagrams and numbers that will contend with what you suggest.  If your investment option is better than mine, I will send you a $25 Visa gift card. I admit it will be hard to balance all the benefits to analyze which is best, because there are so many wonderful features and benefits to consider when looking at a life insurance savings program that builds cash value.  But I am willing to do the work to add to anyone’s perspective. Please include the following:

  1. Your date of birth.
  2. The amount of money you want to save each year.
  3. Whether you are male or female.
  4. Include your financial goals, ever so briefly
  5. Contact information

Now the structure I am referring to is a high early cash value design.  The extra cash created in the first few years causes a larger dividend.  This bigger dividend allows you to purchase much more paid-up-additional life insurance, which creates a bigger dividend and compares very well to any other standard investment being sold in the market.

Remember that your investment option must beat my structured policy in these ways:

  • Keeps ahead of inflation.
  • Cannot have any market risk.
  • Can never create a tax liability of any kind.
  • Creditors cannot have access to the cash.
  • The money must be liquid, meaning available to you within one week.
  • The net rate-of-return, after all the costs that may be associated with your investment option, must be better than a bank or credit union’s 5 year Certificate of Deposit.
  • After being able to use this money to pay down debts, help with college education and invest in new businesses, the balance has to triple in value upon your death without any taxes.

Those are the parameters.  Best of luck!

Stop Saving Money Into a 401(k)…

Okay, I’ve said this before and I’ll say it again: Stop saving money into a 401(k). Why? I’ll use my friend who recently confessed that he just paid this year, the most income tax he’s ever had to in the last 30 years to try to explain.  He said his house is paid off, so he gets no interest deduction.  His children are married and gone so there’s no tax deductions there.  He is just out of any tax deductions.  To top all that off, he has some retirement money in a 401(k) and at his age of 72, he is required to take out 5 percent each year or pay a 50 percent tax penalty. Of course, when he withdraws this money he must pay income tax on  it (because he deferred paying it all those years he was building it up). This forced withdrawal increases his income to the point that it causes his Social Security benefits to be included for tax purposes. Because of this, he lost another $5,690 this year.  The way the tax system has intertwined 401(k) deductions, taxes, withdrawals, etc. with Social Security income gives me one more reason to urge serious thought about just how sound the advice is to invest a bunch of money in a 401(k). Tax complexities seem to negate any worth they may have.

If you are dead set on saving using a 401(k), then be sure you ask about whether your employer matches funds you deposit. If your employer doesn’t offer a match, run away! Now! As fast as you can and look at other options for building retirement. Okay, if you must invest in a 401(k) and your employer offers a match, at least put enough money into the account to qualify for the match, but please, please, please don’t look at a 401(k) as THE way to save for retirement. It simply isn’t doing the job, and we can see that now after 30 years of playing around with them.

 Seriously, don’t put your hard-earned money into a tax-deferred account, only to find at retirement you will pay out tons of taxes.  In future articles I will identify where to put your money to keep it safe, vibrant, and free of any more tax.

Have Your Cake (Life Insurance Money) and Eat It Too!

If you purchased a specific “High Early Cash Value” kind of whole life policy from Mass Mutual, for example, all your premiums will be saved as cash values inside the policy.  For example, if you were to deposit a premium of $12,000 a year into this life insurance policy, you can have well over $60,000 by the end of year five.  This will certainly be more than what you deposited.  Building cash value such as this is like having your cake and getting to eat it, too!

In addition, you can borrow from you own cash values to pay off debts and then pay back to your policy the same payment you made to the creditor, thus recapturing all principal and interest payments.  These payments made to yourself are like eating your own cake without your serving ever Screen shot 2016-06-01 at 4.07.57 PMdiminishing…  Let’s examine the details.

Do you know how much interest you will pay out to creditors over your lifetime?  The average amount of interest that my clients pay is $194,000 over the many years of owning a home, buying cars and paying on some credit cards.  If you were to pay this $194,000 to yourself through your life insurance policy and get a 3 percent gain each year on all these payments, you would have accumulated $1 million of cash values over the life of the policy.

For this discussion, I am not talking about the death benefit, or the tax-free status on the growth, just the amount saved within the life insurance policy itself.  Pretty impressive, huh? Let’s say you never use your death benefit, but just use the cash value while living to pay off debts and then pay yourself back the principal and interest expenses.  You will have created over $1 million in the life insurance policy that can be used for retirement income, or starting a 8259new business, or paying children’s college tuition, or investing in rental income properties, or myriad other wonderful opportunities.

What might be the catch, you may be thinking… or is there one?  There is no catch. The only requirement is to act NOW and start saving money into a life insurance policy.  The money is safe as it can possibly be (much safer than your 401(k) money you keep squirreling away each month that is subject to serious market drama), and this is especially true for such companies as Mass Mutual, that has an A+ rating for financial strength.  They are over 150 years old and have helped millions of people with their financial needs through two World Wars and the Great Depression.

How can I get started saving money?  Please refer to my recent post in this blog called, 6 Tips for Finding Money You are Wasting.  From these “money-finding” activities alone, you should be able to save at least 5 percent of your annual income each and every month.  

Contact me for details of how to create a properly structured whole life policy that builds cash values. If you need help with saving money, I stand ready to help you with that too.  Here is my email:  www.peter@moneymastery.com.  

Changes in Social Security Law Will Cost Everyone Over $40,000 in Two Weeks

This article is for everyone ! I urge you, no matter your age, and especially if you are already full retirement age to go to https://www.ssa.gov/planners/retire/ to see what your Social Security benefits are worth today. The reason I state this with some urgency is because anyone old enough to receive “full retirement” benefits today must elect to “file and suspend” by April 30, 2016 or lose this option forever. Because there are 1.2 million of you who fall into this category, I figure it might be worth posting about it here. Not filing and suspending by the deadline means you lose another $40,000 in Social Security benefits. But, and this is important too, not even knowing what your benefits are worth and how to set them up for retirement right now, no matter your age, is also costing you big money!

The Website will give you several links straight from the Social Security Administration that can help you gather tons of great information about what will happen to your Social Security benefits. Typically most people don’t seem too worried about this until they are knocking on the door of retirement. But here’s some facts that may entice you to inquire about certain Social Security provisions today that will help you make better decisions and create a lot more money in the future:

  • The average person at this moment is receiving $1,378 a month for life (from the Social Security Administration) and this total amount will average $297,648 being paid out to each worker who qualifies for these benefits.
  • If you will do what I suggest by checking out all your benefits and options, you may add to this large $297,648 amount.
  • Remember, however, you may also lose 25% from this total amount because of what you don’t know. That is a difference of $74,412 plus or minus, depending on how you structure things and how well you understand the laws that govern your Social Security benefits based on age, etc. Don’t lose 25% of benefits that could be coming to you simply because you choose not to act.

At this moment I feel like I am standing on a tall mountain way up in Canada, yelling as loud as I can, but not one person is within 150 miles of me. There might be a fisherman that may hear me, but most likely he is a Canadian, and cannot even use this information. I am not joking.  Nobody listens to what the bureaucrats are saying as they are tired of hearing a story that is constantly changing. But the real information you need to pay attention to is coming directly from the SSA and is available on their site, so again, I urge you to go there.

Why are people so unorganized and disinterested? Why aren’t you more proactive at determining your benefits? I hear comments all the time24773043 (b:w) like “Social Security probably won’t even be there when I retire, so why bother?” Well, guess what? Since 1935, everyone in this nation who has retired has received 92 percent of all their retirement income from Social Security. Say what you wish, but if these benefits were to be cut in half, you would still receive almost $150,000 in retirement income. Okay, so it’s not $297,000, but it’s quite a bit of money and certainly better than a poke in the eye! There really is huge value located within these complex rules of Social Security and Medicare. I challenge you to get proactive about protecting your money, whether it’s close to $300,000 or $150,000. before it is too late!

When you click on the site, you can get information about all of the following:

  • Retirement planners (https://www.ssa.gov/planers/retire/). This provides detailed information about your Social Security retirement benefits under current law. It also points out things you may want to consider as you prepare for the future.
  • Information on retirement age.
  • Estimate of life expectancy.
  • Your personal retirement benefits estimate.
  • Other benefit calculators that let you test different retirement ages or future earning amounts.
  • Information on other Social Security programs.
  • Information on what happens if you decide to work after you retire or are already a Medicare beneficiary.
  • Information on how certain types of earnings and pensions can affect your benefits.

And if you are already near retirement age, you can:

  • Learn what your retirement options are at your current age.
  • Get information about how members of your family may qualify for benefits.
  • Find instructions on how to apply for benefits and what supporting documents you will need to furnish.
  • Apply for retirement benefits.
  • Information on how to apply for Medicare.

Again, take my advice and get comfortable with the SSA Website. You will be glad you did.  For more information about retirement planning (and I’m not talking standard investment advice you will get from a financial advisor, but real information you can use today on how spending, debt, and taxes are affecting your ability to retire, contact me: peter@moneymastery.com, (801) 292-1099.

What It Means to be “In Business”

In my last post, I tried to explain why starting a small home-based business venture is one of the keys to mastering your money, and one of the ways you can bring real benefits into your life, including making more money and paying less taxes. I hope you are seriously considering starting one.

Sometimes I find my clients who are excited about the prospect confused about what it really means to “be in business. This stems mostly from not knowing what a business really is.

There are three distinct parts to every business venture. Understanding each and differentiating them from each other is vital to the success of a business:

1. You. You are the controlling entity that owns the business. But remember a business is not you and you are not the business. You own and control the business entity but you are not the business itself. Differentiating yourself from the legal business entity is crucial.

2. Business Entity. This is the legal structure of the business. For example, your business may be formed as a Sole Proprietorship, an LLC, a partnership, or a corporation. The business has a name, and has license from local controlling authorities to operate as a business entity for the purpose of bringing in various income sources.

3. Income Sources. Your business entity needs to bring in money to survive. It could have just one income source or a variety of sources, it doesn’t matter. What’s important is that the income sources themselves not be considered the business itself. For example, you own a business entity called “Getting Ahead Enterprises, LLC” that operates as a Limited Liability Company (LLC). This LLC’s income source for now is property management, which you do part-time on Saturdays when you’re not working your W-2 job. You own the LLC and the income source is your part-time property management activities. Later you may add additional income sources to the business, such as trading in foreign currency, rental properties, or providing consulting services.

I created this little graphic to further illustrate the point:

Business Entities and Ventures

By separating yourself from the business and properly structuring it as some type of legal entity, you will be able to more clearly define what kind of income sources you will participate in to help your business survive without seeing those income streams as a definition of who you are. Remember, the business is a separate legal entity by definition of tax and business laws and must be treated as such.

Contact me if you need more information about this concept: alan@moneymastery.com.

4 Horrible Ways to Avoid Probate

I have been helping my clients get organized financially for over 45 years.  I have seen many successes and some disasters. One of the worst disasters is to not take action against having your estate probated in court.  Probate, which is where the court must “prove” or settle your estate for you since you did not take any action to settle it for yourself before your death, is an expensive process. It’s better to avoid but some people, in an effort to get out of probate and not wanting to take the time and trouble to set up a will or trust, try to do estate planning themselves and end up hurting the ones they love.  

I love the following 2009 article by Jack Helgesen about the four bad ways to avoid probate in the state of Utah. Although it is specific to this state, the ideas Helgesen conveys about the wrong way to go about avoiding probate can be applied across almost all states. 

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Bad way # 1: Put your kids on the deed.  Marie’s heard she could avoid probate by putting her four children on the deed to her home. The deed cost her a fortune. Five years later, Marie’s daughter Terry filed bankruptcy after an accident. Her creditors discovered Marie’s deed and the court ordered a sale of Marie’s home to pay Terry’s debts. To save the home, Marie’s other children jointly signed a new mortgage to pay Terry’s creditors. The IRS discovered the deed and mortgage and denied Marie the tax IRS Rulesdeductions for the mortgage interest. The IRS also required a gift tax return for the value of the house. When she sold the house to pay the mortgage, Marie lost the once-in-a-lifetime tax exemption
for most of the house. She and her children paid over $30,000 in capital gains tax caused by the deed.

Bad way # 2: Sign an unrecorded deed for your property. Some Utahns think they can avoid the problems above by signing a deed but not recording it in the county records. This is risky. A deed which is recorded years after its signing can cause title problems. Living in a property for years after you deed it to another can suggest the deed is invalid, and may open the deed to an attack by creditors or other heirs. If the deed is accepted, large taxes may result from a transfer on the signature date.  Sometimes, the deeds are not found or are discarded by heirs who do not like the result. In other cases, they are forgotten and contradict estate plans created after the deed.   

 Bad way # 3:  Give away your property just before death.  Death-bed transfers of property are common. Two weeks before his Cemeterydeath, Robert signed deeds transferring his rental property and farm land to his children. He died not knowing his deeds had cost his family more than $100,000 in capital gains taxes on all of Robert’s gain on the property. If Robert had let the property pass through his will or trust – just two weeks later –  his heirs would have had no tax. 

 Bad way # 4.  Make one of your heirs the co-owner of your bank or brokerage account.  Thousands of Utah citizens have done this without realizing the heir will be treated as the sole legal owner of the account after the original owner dies. This creates the risks and problems described above. Don’t do it.  

 If you want to avoid probate, create a living trust, which satisfies Utah law.  (Published October 1, 2009, © 2009 UtahElderLaw.com)

How to Use Your Retirement Savings, Penalty-free… Right Now

People can use retirement money before age 59, but most people don’t know it. 

Thanks to Section 72(t) of the IRS code, you can take out your savings at any age, even if you are in your 30s or 40s, without paying a penalty.

Of course, if you use the money now, it won’t be there later, when you may really need it, i.e. when you’re too old to work or your health doesn’t permit it. But the important thing to remember here is that it is YOUR money, and you should be able to use it when you want to, right?

A Forbes article documented how a chiropractor, Alfonse DeMaria, took $700,000 from his IRA and converted it to a $3,000-a-month income stream.  He bought himself a new six-bedroom home on Funding269 acres and started enjoying more time with his family.

Here’s how you can use Section 72(t) to access retirement funds now:

1.  You must pay income tax on the retirement funds you convert, which you would have to pay at the time you withdrew the funds at age 59 1/2, anyway.

2.  You must continue collecting your money for five years or until you hit age 59 1/2, whichever comes first.

3.  You must withdraw money in an even series of withdrawals.

The IRS lets you decide how much you’re going to withdraw in three different ways:

1.  Required minimum distribution.

2.  Fixed amortization.

3.  Fixed annuitization.

The IRS uses your life expectancy to figure out how much you should take each year.

If you’re thinking about doing this, I recommend STRONGLY that you first have a Spending Plan in place and are in control of your emotions and your spending.  Second, make sure you have a retirement plan in place so you know how taking the money out early will affect your long-term picture.  And finally, check with a Money Mastery expert and accountant before proceeding with this option.

Getting to a ZERO Tax Bracket

This is a follow up to a previous post, How to Legally and Ethically Stop Paying Income Tax, about the importance of getting all income into a tax-free environment. This post will discuss how to make all qualified money tax-free.

Let’s say you have $100,000 in an IRA, or an old 401(k) that you control.  You are much younger than age 59 ½ years and you are in a 20 percent tax bracket.  The goal here is to not pay 10 percent penalty for early distribution.

The IRS rule on this stipulates that all tax-deferred accounts are locked into the investment until the money “matures.” Typically money in these accounts matures when the investor turns age 59½. Any and all funds taken out of thee accounts prior to their maturity date are subject to 10 percent prematurity fees in addition to any income tax incurred by the withdrawal.  Section 72(t) essentially allows investors to forgo the 10 percent fee by making a series of substantially equal periodic payments.

Here is an example in plain English:  Using the 72(t) rule, a person age 52 with $100,000 can withdraw $3,981 each year until age 59.5 and not pay the 10 percent penalty.  The money can be spent on anything you wish.  If you want, use some of this money to pay the income tax on this $3,981.

Other ways you could spend this money?

  • Deposit into a whole life insurance policy and keep it in a tax-free environment for the rest of your life.  This money can be used over and over again as needed.
  • Pay down debt and save interest expense.
  • Invest this money and attempt to make more.

Whatever you want to use this money for, at least it isn’t compounding your income tax for the future. In future blogs I will show how to properly structure a whole life insurance policy to maximize its benefit to you while living.