The Truth Behind Qualified Plans – Episode 014

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Again, we’ve got our co-host, bestselling financial author Kim Butler. How are you Kim? Very fine, Todd. Thank you for joining us for today to taking the qualified plan through an opportunity filter known as the Seven Principles of Prosperity, our state seven principles that are so helpful in helping us figure out whether any type of structure on the investment world is beneficial

[00:48] to us. Super. Well, let’s start real quick by talking about qualified versus non-qualified plans. A lot of people don’t understand that particular terminology. So when we’re saying qualified plan, what are some other names that people might know that as? Yeah, boy, we’ll want to bring that up and make sure that we get that clear because that is a somewhat inside term, qualified plan, and it just means anything that the government has set forth. So typically they’re known as IRAs, 401k plans, 403Bs, which are the nonprofits and sometimes deferred compensation, sometimes the SEP, old KEO plans, K-E-O-G-H was an old term that was used around them, simplified 401k. Let me think. Are there any others that you think I’m missing?

[01:39] Nope. I think people that are got to get the understanding that this is specifically referring to the tax treatment of the money and about one out of every 10 people that we have on the show or that we talk to in person says, yeah, my qualified plan is the way that the government lets me save money tax free. What do you think? Not quite the whole story. So yeah, let’s be clear that, for example, the Roth IRA is not what we’re talking about today because it is not the same tax treatment. What we’re talking about is the 401k or the IRA. Those are the two most common ones. You could just even use the word retirement plan where you put money in and the government gives you a tax deduction. It’s actually more accurately named a tax deferral on the tax of that money.

[02:34] And then, of course, as most people know, it grows without taxes, but then the government gets their pay. And that is because all monies inside an IRA, 401k, qualified plan, retirement plan, et cetera, 403b included, come out taxable and they come out taxable at whatever the income tax rates are at that time. So that should be pretty obvious to some, but just in case you didn’t know that, that’s the order of the qualified plan taxation. And we want to take the qualified plan through our seven principles of prosperity and see if that structure, the qualified plan retirement account structure is truly beneficial. The government says it is, the media says it is, but let’s really take a look at it.

[03:21] Super. So we’re talking about deferring the taxes on the money today. So it lowers my income. If I’m making $50,000 and I put $3,000 into my 401k, I now effectively have $47,000 in income to pay taxes on this year. I defer that $3,000, the taxes on that $3,000 out into the future, preferably, or I guess supposedly after I’m age 59 and a half. And then I pay taxes on that money as I pull it out and I spend it at that time. We’re in agreement on that, correct? That is correct. Okay. Now let’s start with the seven principles of prosperity. Go ahead. So the first principle is think. And it’s because we want you to be consciously, actively thinking about things when you put money in them. And so this is the first red flag because the government and a lot of the media and

[04:13] the financial institutions are trying to make the retirement plan environment a set it and forget it structure. And the biggest way that they are doing that just in the last five or 10 years is been the target date funds. So this is the kind of thing where you say, oh, okay, well, in the year 2025, I’ll be around 65. And so I’ll just pick a fund that is set for the year 2025. And that’s my target date. And I’ll just blindly, without thinking, put money in this thing every single month. And that’s where your first red flag should show up. If the government or a financial institution is asking you to not think, if they’re asking you to just blindly follow the herd and do this particular structure, then that should

[05:09] be the first sign of a problem. Because in order to gain prosperity, you need to have your brain on. You need to be thinking, you need to be consciously doing things, not just letting it happen. Got it. And just to clarify, I mean, prosperity follows responsibility. So we’re not discouraging the habit of saving 10% of your income. It’s the habit of having somebody blindly else, somebody else blindly take responsibility away from you for that 10%, correct? Correct. And when you’re not thinking, that’s what’s happening. So brains on, actively engaged, even if it’s only once a month or once a quarter, be thinking about your finances. If you want to develop prosperity, that’s what it takes. Super.

[05:59] All right. Well, let’s move on to principle number two. Which is C, S-E-E, we always have to spell it out, lest you think we’re talking about the ocean and we’re not. But seeing things from the big picture, or you could even use the term macroeconomic, I realize that term scares a lot of people, but just seeing things from the big picture is such a critical aspect of good decision making around our prosperity. And so often we don’t. We look at a particular decision, typically the retirement plan, the 401k IRA arena, and we make a decision based on that particular structure, the investment that happens to be in front of us at that period of time. And that can really get us into trouble. So think about this.

[06:46] Your typical employee, you’re sitting down at the lunch and learn that the financial institution has provided for your company, or you’re a business owner and you’ve got a guy in front of you that says, hey, look, you can do all these things for your employees in the arena of a 401k plan. And you tend to just learn, think, strategize around those particular dollars. Not 10 to 20 grand a year as an individual or those X dollars as a corporation that you’re identifying as, hey, we could benefit our employees in some way. What do we do with it? And so while obviously in that one particular meeting, you have to pay attention on that one individual thing, it’s so important that afterwards you step back and you see

[07:29] the whole forest of opportunity, not just the one individual tree that was presented to you and that seeing that whole forest is seeing S E E seeing things from the big picture perspective and not getting tunnel vision or vacuum based in your decision making. Got it. And again, in that same line of thinking about seeing if we look at this from the government’s perspective, we have a government that has higher deficits at any time in the, in the history of our government and they’re providing this tool. So you have to ask yourself why. So if you think about it from the government’s perspective, if you’re able to set aside $10,000, grow that $10,000 to maybe $20,000 over a period of time, they gave you a tax deferral

[08:21] on the seed. If you want to consider it that way, I hear a lot of people use that analogy and then that seed has grown into a harvest. And now that harvest is, you know, certainly we hope larger than what we started with, maybe even double or triple. So our $10,000 that we save taxes on has now grown to $20,000 or whatever it has over a compounding effect over a period of time. We now pay taxes on the larger amount. So this is not a benefit that the government’s giving. This is a possible win for the government too, isn’t it? Absolutely. In fact, it’s through the qualified retirement plan that the government is able to, quote, invest in the stock market, whereas they can’t really on their own, they get to because

[09:08] of our work. And so that really tells us something. This is a way that they are benefiting. And when the government’s benefiting, it typically means that we are not. Super. And again, I’d just like to point out, I don’t know that, you know, we’re telling everyone who’s listening to this to never use a qualified plan. We simply want to make people understand the environment that they live, the systems that are functioning around them so that they can make the right choices with them. Certainly this is one area where you probably shouldn’t make these decisions alone, should you? Very true. And you’re right. There are times that investing in the qualified plan or the IRA or the 401k that’s available is totally fine, especially when there’s a match.

[09:53] And so that really brings us into the third principle of prosperity, which is measure. Now typically we identify the measure principle as making sure that you take a look at opportunity cost and in the qualified plan arena. That’s a very important thing because the opportunity cost in this case is that that money is locked up till you’re 59 and a half. So that’s the trade off. That’s the cost of the opportunity to get the match. If your company does provide a match. And our general rule of thumb is that if your company provides a match, you should contribute up to the match MATCH level only. Whereas a lot of people’s default position without really identifying the lost opportunity of money being tied up is that they’re they’re contributing up to the max MAX.

[10:46] And we do not as a general rule recommend that you’re so much better off contributing up to MATCH only to the match level and then using those other dollars to go do other things that are not locked up until you’re 59 and a half. Because again, the lost opportunity, because you have money locked up in a particular qualified plan, I don’t know that we’ll ever truly be able to measure because it may not even come about if you don’t have money available to you. Super. And we also invite you to go to www.partners, the number four prosperity.com for additional information. And Kim, I think you may have just written a book on this subject, haven’t you? I have. Thank you for remembering that it’s called Busting the Retirement Lies.

[11:33] And the first half is about the specifics of the qualified plan, the 401k IRA arena. And it uses a lot of calculators to make very, very clear what’s really going on there. And then in addition to that, it has some really fun stories on people that have taken a different look at the idea of retirement. And instead of the typical society-based definition, they’ve chosen to go do other things. They are having second careers, they’re doing major volunteer work. They’re not just sitting around letting life happen to them. They’re out there still giving like we talk about so much on this podcast. And because of that, they’re being provided with lots of opportunity and energy and excitement in their lives.

[12:19] And so there’s a bunch of fun case studies, if you will, or stories about that. Super. And that book is available on Amazon. And Kim, one more time, the title? Busting the Retirement Lies. It’s available on Kindle as a paperback and also as an audiobook. Got it. And if you’re looking up Kim, it’s under Kim, the letter D as in David, the letter H as in Henry Butler, Kim D.H. Butler, if you’re looking her up on Amazon. And let’s go to the next principle. Well, I love this and it’s flow. This is principle number four, F-L-O-W. And it is our shortened definition of cash flow because we feel that people should be investing for cash flow from the get go. Now, a lot of financial advisors don’t recommend focusing on cash flow until you’re, quote,

[13:11] But number one, because we don’t really believe that the concept of retirement is a valid way to live life. And number two, because we believe that you need practice having your investments create cash flow. We want people investing for cash flow early, early in their lives. And there’s a variety of reasons for that. But one of the biggies is the practice. The second one is if you have cash flow, in other words, if you have investments that create money caused to be pulled away from you, that’s a good thing because that forces you to save and invest and money that is caused to be put to you. In other words, flowing to you or providing you an income. That’s a good thing because it frees up those dollars to go do other things

[14:00] with like pay car insurance premiums or life insurance premiums or even your mortgage payment or car payment or all kinds of things that you can do with cash flow. So principle number four is flow. And the qualified plan has none of that. The money goes in. It is completely locked up. It cannot create create any kind of cash flow until you’re 59 and a half. And so for a lot of people, that’s 30 years away. And that’s too long of money just being stagnant. Super. I think this is by far the most important. You know, we’re kind of getting to the point where we forgot about what happened in the 2008, 2009 area. But if we looked for the real estate market as an example, there were investors who invested for cash flow.

[14:45] Their rents were what was important to them. It was enough to cover their mortgage payments and still provide cash flow. Then there were those who invested strictly for equity and equity disappeared. And it’s the same inside the qualified plan. Same exact example. If you are investing for cash flow, it is very difficult for you to get subject and hit with those huge market swings. I mean, not that you can’t take losses, but your your odds of getting harmed are a lot less than if you focus again on making sense, on making cash flow, on having money that’s accessible to you pre 59 and a half as well as post 59 and a half. Correct? Absolutely. Always focusing on cash flow will give you greater results because of the

[15:38] freedom that that cash flow creates. Super. What’s our next principle? It’s called control. So principle number five is control. And very clearly inside the qualified plan, retirement accounts, you have none. And so that is a problem. We believe that you should have control over your structure and over the investments inside that structure. And in this case, you’re in partnership with the government where they control the deal 100 percent and you control it zero percent. And so we see that as a problem. In fact, some of our clients agree with us so much in this area that they’ve chosen even to give up the match. Now, maybe their match wasn’t very high, so it wasn’t that big of a deal. But a lot of times this issue of control or lack thereof in this

[16:25] case is so important to people that once they realize they don’t have the control, they don’t want to be participating in that structure. And then furthermore, you don’t have control over your investments because you only have a choice of certain investments, whatever your qualified plan retirement arena says its investment options are. Now, there’s been some change of law recently and supposedly that was supposed to be freed up a little bit, but I have not seen evidence of that at all. There was supposed to be the ability to have an in-service withdrawal to give people more control. I am not finding that that’s happening in practice. It might be a rule or it might be law or maybe people are getting away with

[17:09] it because of certain parameters that they’re meeting or that they don’t meet. But the general clients that we talk to on a daily basis all across the country as a rule of thumb do not feel like they have control over their 401K plans, their 403B plans, their qualified retirement plans. And that is a problem. When you lose control, you lose the ability to have an impact on it. If you want to see an example of that, I challenge anyone on this that’s listened to this now, pull out your statement from your IRA, from your 401K, whatever your qualified plan is, look at even how they address the envelope when they send it to you. It says, for the benefit of you, it is not even in your name. If you want to know how little control you actually have.

[17:57] Great example. Super. What’s our next one? Principle number six is move M.O.V.E. And this is just to remind us that ideally, if we are looking at investments, we want our dollars to have the ability to move. And I want to separate this out from cash flow. Cash flow is money going to away from us and back to us. Movement is dollars that are able to go through assets, in other words, to an asset and then out the other side. So through it as opposed to only to it. And the qualified plan has a big brick wall that stops our dollars. The second they are inside that box, they cannot go through it. In other words, they can’t come out the other side and go on to do other things. They are stuck inside the qualified plan.

[18:45] Again, they are subject only to the investments that are available inside that qualified plan. They’re also subject to all the rules that the government has. So the desire for money to move through an asset, while it’s a little harder of a concept to understand and it’s a little bit of a challenge to find investments that do provide that, when we can get dollars to move through assets and one of the easiest ways is when we can collateralize those dollars. Because if we have an asset that we can collateralize, then we can get those dollars to go on through and do something else. But a qualified retirement plan, 401k IRA, cannot be collateralized. It doesn’t matter how big of an IRA you have, not only does the

[19:29] bank not want it, they can’t have it. And so you have disabled your dollars to move through. And because money, when it’s in motion, when money is moving, when it’s being moved through an asset or when it’s being collateralized or leveraged in any way, it is healthier money. Think about currency of money. Think about the correlating term current of a river. Water that’s in a current that is moving and flowing is healthier water than water that is stagnant. And our money is no different. It is very, very stagnant inside a qualified retirement plan. Super. And again, you and I both have had a chance to work at banks and certainly banks encourage us a lot of times to put our money someplace where it’s not moving for us.

[20:22] But yet, if you look inside a bank, that’s exactly what they’re doing. I mean, they have that money moving all of the time and generally they can move a hundred for every ten dollars we put in. So that’s how wealth is generated for the bank is through moving money. And what we encourage people to do is to learn how to move your money like a bank does, not like a bank says. What’s our next one? Very well said, Todd. Thank you. So the last principle of prosperity is multiply. And this is the ability for dollars to do more than one thing, for dollars to do more than the original job that they were set up to handle. So let’s say if we look at the qualified retirement plan, those dollars are set to handle retirement and they give us a tax deduction

[21:10] when we put the money in. We know that’s a tax deferral, but it is called a deduction. So we could say that that money did two jobs. It got us this retirement account and it got us the tax deduction. But that’s as far as it can go since it cannot move. So these two principles, the sixth of move and the seventh of multiply often go together because when our dollars can move, they can do other jobs. So earlier I just counted two jobs. Well, what if we looked at something like real estate or life insurance, either of those products, those structures, enable dollars to do five or six or seven jobs. Let’s take real estate as an example. So this is an example of dollars multiplying. A dollar goes into real estate, you get the property,

[21:55] you get appreciation, you get depreciation, you get cash flow. You possibly get use of the property. There’s tax benefits, etc. Life insurance, same way, a dollar goes in, you get cash flow, you get dividends, you get cash value, you get the death benefit, you get the waiver premium. So five or six jobs immediately available just within that individual account. And then because those types of structures, accounts, products, whatever can be leveraged, they can be collateralized. Those dollars can do other jobs. It can be multiplied to do many, many, many jobs. And that’s what we want with our money. When dollars are just doing one job, if they’re just enabling us to retire, or if they’re just educating a child,

[22:40] that’s not as effective or as efficient as dollars that could do both. And so the principle of multiply, the idea behind it is to have our dollars freed so that they can do as many things as possible. Super. And I think one of the best examples that illustrates this before we wrap up here is take whatever your age you are now, 35, 45, 50, doesn’t really matter. And think about it. If you had $100,000 sitting in a qualified plan, what are the odds of going from your current age now to the age of 59 and a half and not having an event happen that one was bad, where you might need that income to survive, or two, was not so good that you wanted to personally invest in it. And in both of those instances,

[23:31] you’re going to have to pay huge penalties and taxes to use your own money. To me, that’s the largest argument. Absolutely. And when we look at the control and the loss of capability, the control the government has and the loss of capability that we have, it is a very telling aspect of this qualified plan. And it’s just why at Partnership Prosperity, it’s not our favorite thing. So use these seven principles as an opportunity filter for the various financial structures that you are being suggested by the media, by your various other advisors, by your friends, etc. And use the principles as an opportunity filter to run whatever it is through. And see, does it keep you thinking from a prosperous mindset

[24:16] where your brain is on and you got the capability? Does it enable you to see the big picture and have lots of things in mind when you’re making the decision? Does it enable you to measure the opportunity cost? And what is that opportunity cost? Does it provide cash flow? Does it put you in control? Does it let your money move or have those dollars move through assets? And does it multiply and have that money be available for lots of different jobs? If you have any questions about this, please feel free to reach out to us at partnersforprosperity.com. There’s a contact us form. You’re welcome to shoot us questions. We also love to have comments on the blog and more importantly, things that you want us to talk about.

[24:56] Tell us what you’re interested in hearing about and we will lay it out. Super. Well, again, special thanks to bestselling financial author Kim Butler. This is No BS Money Guy for the Prosperity Podcast. Take care, everybody. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.