Posts by Keith Taxguy

The Once-in-a-Lifetime IRA Transfer to an HSA

Take a once-in-a-lifetime distribution tax-free from your traditional IRA. Maximize your tax savings.The Tax Code is riddled with esoteric deductions even many tax professionals are unaware of. So rare is the topic of today’s discussion that I never once in my career had a client use what I am about to point out.

Before you get too excited, know that just because you can do something doesn’t mean you should. Only under a unique set of circumstances would using this tax strategy be beneficial so read carefully. You only get one shot at this strategy because it is only allowed once in your lifetime. 

It’s called a Qualified HSA Funding Distribution (QHFD). In short, a QHFD allows you to fund your HSA with pre-tax monies in a traditional or Roth IRA or inactive SEPs and SIMPLEs. 

Let’s dig into the details before we discuss when it is appropriate to use your once-in-a-lifetime election and when it isn’t. 

 

Characteristics

  1. You must still qualify for an HSA contribution when using an QHFD. This means you must have an HSA qualified health insurance plan with applicable high deductibles.
  2. You must remain eligible for an HSA for 12 months or longer after making a QHFD. If you are not HSA compliant for at least 12 months after the QHFD you must include the distribution in  your income along with any penalty if under age 59 1/2.
  3. You must use a trustee-to-trustee transfer. You are not allowed to take the money out and then put it in the HSA. (Well, actually, you can, but the IRA distribution would be included in income — along with penalties if under age 59 1/2. But you would get the HSA deduction, offsetting the IRA distribution included in income.)
  4. A QHFD does not increase the amount you can put in an HSA for that year. Contribution limits still apply.
  5. You also do not get an HSA deduction for funds transferred from an IRA; the money is already pre-tax.
  6. An inherited IRA can be used for a QHFD.
  7. The QHFD lowers your RMD by the amount transferred for the year of the transfer.
  8. There is no 10% early distribution penalty with a QHFD as long as you follow the 12 month rule and qualify for an HSA.
  9. This strategy can only be used once-in-a-lifetime per taxpayer.

 

Why Would Anyone Do This?

Learn how to use your once-in-a-lifetime tax election to transfer money tax-free from a traditional IRA to an HSA.When you think about this for awhile it might seem a counter-productive tax move. (We will discuss instances where the QHFD is advantageous later.) You are not allowed a larger contribution to the HSA with this strategy and you get no additional deduction either.

Roth IRAs are a non-starter. rIRAs are already growing tax-free so moving money from a rIRA to an HSA provides no additional advantage with the added restrictions, such as the 12 month requirement listed above and a QHFD is limited to pre-tax dollars.

SEPs and SIMPLEs must be inactive to employ this strategy. This means contributions are no longer added to the account. The IRS is silent on how long an account must go without contributions to be considered inactive or if the SEP or SIMPLE can become active in the future.

There are a number of situations where the QHFD is superior to just funding the HSA and getting an additional deduction:

  1. You don’t have the money to fully fund your HSA this year. Since you would not fund your HSA anyway you end up with additional cash in the HSA that now grows tax-free instead of tax-deferred (I assume throughout this post that you use a QHFD from a tIRA to an HSA.) 
  2. If your tIRA is large and significant RMDs loom, any tax-free distribution from the tIRA is advantageous. It also lowers the RMD by the amount of the QHFD for that year.
  3. This strategy is better than taking an IRA distribution and paying the penalty (if under age 59 1/2) and then contributing to the HSA.
  4. You want (or your facts and circumstances dictate) to turn tax-deferred growth into tax-free growth. Remember, a tIRA grows without tax until withdrawn; an HSA grows tax-deferred and if used for qualified medical expenses and/or Medicare premiums the money comes out tax-free at any age.
  5. High medical bills make it difficult to fund the HSA and access to HSA funds are needed for uncovered medical expenses.

There are other reasons to use a QHFD, based on facts and circumstances and personal preference. Personally, I think people with large IRAs might want to employ this tax strategy and these that lower their future RMDs

 

Gaming the System

For 2019 you can contribute $3,500 for individual health plans and $7,000 for family plans into an HSA. (Those 55 and older can add another $1,000 to their HSA as part of the catch-up provision.)

There is a little-known tax strategy that allows you to transfer money from your traditional IRA to an HSA tax-free and penalty-free. Learn how this tax strategy affects you.In The Wealthy Accountant private group on Facebook a member asked about this tax strategy. Since the issue never arose in my office I wanted to dig a bit before answering and then couldn’t find the original post on Facebook (fingers crossed the person who asked finds this post.)

His question was about gaming the QHFD to double the tax benefit by transferring two years of contributions by making the contribution in the cross-over months (up to April 15th of the following year without consideration for extensions). He wanted to know if he could make, say, a $14,000 family plan contribution: half for last year and half for this year.

He did his research and found the IRS and all other sources silent on the issue. I found the same thing.

However, after I thought about it for awhile I realized this would NOT work. The once-in-a-lifetime QHFD would have to go on two tax returns if you doubled the transfer during the cross-over months which would make the second election disqualified. Sorry. But I like the way you think.

 

Round Up

The concept is rather simple. The benefits are fairly small, but worth it if your situation dictates. Those facing large RMDs and those seeking to turn a small portion of their tax-deferred tIRA into tax-free growth in an HSA will find the most value.

Now I need to make a confession. When I first saw the question in the private Facebook group I thought the person posting was smoking something. I never heard of such a tax strategy (or it went in this ear and out the other.) I had to look it up to believe.

If you plan on using this strategy don’t get mad at your tax professional if they never heard of this. Just tell them to go to their software’s Special Situations tab on the 1099-R screen. All they need to do is add one simple number (the amount transferred to the HSA up to the contribution limit).

If you run across a tax strategy you never heard of before be sure to leave a comment. If possible I will leave a short answer. And, as in this situation, I may flesh it out a bit more in a post. 

Many of these strategies provide only a small tax benefit. Added together with several other small tax strategies can accumulate to serious tax savings. 

Hope this one works for you or at least gets you thinking about another tax saving strategy that improves your financial situation.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

High Interest Savings Account Few Use

Earn high interest on your: short-term savings, emergency fund, maintenance fund, Christmas Club account. Don't settle for low bank accountant or money market fund rates.Whenever I attend a conference I look for things the crowds pass by. The mainstream information is still absorbed, but there always seems to be something most people pass that contains a lot of potential.

Last year at FinCon such an opportunity screamed to me. Several companies were offering 5% on savings investments with few strings attached. One was geared toward military people, but had some fees and restrictions I felt uncomfortable with.

The company that impressed me the most was Worthy Financial Inc. (Before you run out and invest with Worthy you might want to read the entire review first. There are some caveats.) 

Worthy is a simple concept. You invest in $10 increments buying 3-year Worthy bonds that pay 5% interest. You can withdraw funds at any time without fee. The process looks and acts much like a savings account, but there are some unique feature you need to be aware of.

 

Background

Sally Outlaw (yeah, the name does cause one to pause) is the co-founder and CEO. She has experience coming from 5 years as CEO of peerbackers.com and several security licenses. I had several long conversations with Sally at FinCon.

They also have Alan Jacobs, a securities attorney with 40 years of experience.

There are additional team members. The CEO and experienced securities attorney on the team are of vital interest for those wishing to invest in Worthy bonds and therefore mentioned.

The business — the entire concept of Worthy — is relatively new. They have only been in business since February 2016.

 

How it Works

Worthy invests money from the bonds making business loans backed by inventory of greater value than the loan. Interest paid by the business loans is used to pay the interest on Worthy bonds.

 

Source: Worthy Bonds website

 

How You Can Invest

There are several ways you can buy Worthy bonds. 

The idea, as Sally pointed out to me at FinCon, was to make it easy to invest small amounts of money with Worthy. They have this neat little app (which your favorite accountant does not use) that rounds up all your purchases from a credit card, debit card or checking account. 

Example: You fill your car with gas with a total charge of $27.50. The app rounds up the purchase to $28 and the extra 50 cents goes to Worthy. When the rounded up funds reach $10 you automatically buy a bond and start earning 5% interest.

This seems like a lot of horsing around for minor amounts of money unless you are just starting out. In my opinion you shouldn’t be spending that much if you don’t have much money so there shouldn’t be much to round up. And if you do have money, the extra nickles and dimes might be a nice forced savings account, but folks around here generally are responsible with their money and don’t need such tricks to save.

A second way to invest in Worthy bonds is with recurring investments. In this situation you just link the bank account you want money drawn from at the interval you choose.

I don’t use the recurring investment feature either as it doesn’t fit my financial situation, but may prove valuable to you. A good example of using the recurring investment feature might include saving a monthly amount toward your annual property tax bill.

The final way to buy Worthy bonds (and the way this accountant buys them) is manually. You go online and set up a lump-sum amount to be transferred when you want. Simple as that.

I made two small purchases over the last six months. The process was smooth, as you would expect from any money transfer. And the interest keeps growing.

Note: When you open your account be sure to set the “Automatic Reinvestment” in the Account Settings to “active”. Your interest will not earn interest if you don’t, which means you lose compounding!

 

Risks

It cannot be stressed strongly enough that this is not a guaranteed investment. While the loans Worthy makes to businesses are secured by inventory, there is no guarantee a loan could not go bad and the sale of inventory insufficient to cover the remaining loan balance. 

In this accountant’s opinion, you should only invest a portion of your liquid funds with Worthy. I have no reason to believe Worthy will default, but it is prudent to include Worthy bonds as a part of your portfolio mix only. 

 

Investing Accountant Style

I use Worthy for a portion of my working capital in my tax practice. The remainder sits in the Vanguard Prime Money Market fund. Both are easily accessible, but the MM is far more secure than Worthy in my opinion because MMs are far broader in their investments. 

Worthy is a good tool for saving for recurring expenses, such as: property taxes, insurance, planned medical expenses and the maintenance account for landlords. The recurring investment feature works well for people with these needs.

Dave Ramsey fans might find Worthy bonds a great place to hold their emergency fund or portion thereof (as long as this is only a minor part of your liquid cash and others funds are easily accessible should an emergency occur).

In my office I dropped in a lump sum. There is no scheduled need for these funds. They are there, growing 5% per year, while I decide what I want to do with the money. It is also a buffer for the end of the year when fiscal needs are greater in the office (property taxes, year-end training of employees, client mailings).

 

Worthy bonds might be a good fit for your situation. Check out their website and do your research before investing. Since bank and money market accounts earn only token interest, Worthy bonds are an option with potential for at least a reasonable rate of return that is greater than the rate of inflation.

Finally, please share your experiences with Worthy in the comments. This posts will have a long shelf life and you might know something about Worthy before I do.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Finding Under-Valued Stocks

Find under-valued stocks for high profits. Use the most hated stocks for the best investment returns.Jack Bogle gave us the index fund. Warren Buffett has said most people should put their money into index funds.

Personal finance bloggers—especially in the FIRE* community—spout “index fund” like it’s a nervous tick. And you might have noticed this blogger has the same nervous tick.

Some are worried about all this index fund investing. The concern is index funds will control so much of the market that it will lose its efficiency. I remember the same concerns in the 1990s, when I was a stock broker, about mutual funds in general, most of which were actively managed.

Index funds will not break the market any more than actively managed mutual funds did. For one, there will still be plenty of people investing in individual stocks. And the hedge fund guys will do their share providing liquidity.

Index funds are automatic investing. All mutual funds and ETFs for that matter. You drop in your money (dollar cost averaging is suggested) and let time perform its magic. The broader based the index fund, the better your chances of enjoying the stellar performance of the market averages.

But some people don’t like “average”. And even the most hardened index fund investor periodically finds a company she would like to own a piece of directly.

That is where we come in today.  Finding a gem that can add to your portfolio’s performance isn’t easy, but possible if you know where to dig. Many have made a career out of beating the market with thoughtful investments. 

Index funds should be the home for a good chunk of your money. However, you might have a mad money account or even a serious money account for investing in businesses you feel are under-priced while possessing future growth potential.

Investing in individual companies can be very rewarding, but carry significant risks. I’ve been fortunate in finding great businesses that have performed well over the decades. My individual stock investments have outperformed the market. I’ve also noticed I think differently about an investment than most. 

Today I will share why I buy what I buy, and more importantly, why I pass on so many opportunities that seem so obvious. 

 

Buy the Hated, Be Leary of the Loved

Most people buy the hot stock because everyone is doing it and the recent price action has been tilted steeply up. These are the loved stocks. In the early 1970s they were called the Nifty Fifty; we now call them FANG (Facebook, Apple, Netflix and Google, the parent company of Alphabet) today. 

Buying hot stocks is easy because everyone is doing it. That always causes me to pause. 

For disclosure, I own one share of Facebook and a modest amount of Apple. I never owned any Google stock, but had a brief fling with Netflix.

Most loved stocks are priced accordingly. While I do own some shares of FANG companies, they are not predominant in my portfolio. 

Let’s do a brief rundown of the list. Netflix is sporting a 134 price/earning (p/e) ratio as I write. While NFLX has a dominant market share and there are reasonable barriers to entry from competition, NFLX faces stiff competition from Apple and more importantly, Disney. NFLX doesn’t have to fail to drop significantly. If Disney captures even a small slice of NFLX’s business the stock is in trouble.

Google is also richly valued at over 40 times earnings. Facebook is a company I want to own, but management is concerning. FB has a dominant platform and not much in the way of competition. When FB dropped below 130 in December, the margin of safety was large enough for me to buy. But it was a modest investment. 

Apple is a story we’ll address shortly.

I’m not saying there is never value in popular businesses. What I am saying is they tend to be over-priced. Warren Buffet once said he preferred a great company at a good price than a good company at a great price. Think about that for a moment.

NFLX and GOOG are excellent businesses, but are difficult investments to make at the current price. You don’t buy a great company at any price! You want to buy great businesses at a good price (or better) with plenty of margin for safety. Things do go wrong, you know.

Another area I tend to avoid are the socially acceptable investments. Everybody wants to invest in green companies these days. As a result, all that extra money is pushing these investments to levels too rich for this accountant’s blood. There can be select quality investments in this area, but none of it is cheap.

Since investing is about making money and not some ethical or moral statement, I seek value where others tend to avoid. Think of the most hated stocks: oil, coal, tobacco, processed foods.

I don’t own Exxon-Mobile (XOM), but I did take a look-see. As longtime readers are well aware, I own a lot of Altria stock, one of the largest tobacco companies on the planet. This is a good place to start our research on what makes a business worth buying.

 

Anatomy of a Good Investment

I think it was Warren Buffett who said, “It costs a penny to make and it’s addictive. What’s not to like,” about Altria (MO). In my opinion, Buffett would own a large slice of MO if he didn’t have a reputation to uphold.

Peter Lynch, in his book Beating the Street, shared his wisdom with a set of principles. Peter Principle #14 said: If you like the store, chances are you’ll love the stock. While Lynch is a legend in the investing world with a whopping 29.2% average annual return (better than Warren Buffett’s) when he managed Fidelity’s Magellan Fund from 1977 to 1990, there are times his principles are not hard and fast.

Use the secrets of hedge fund managers to find hidden gems in the stock market. Buy before the stock moves higher.Take, for example, Amazon. AMZN is a great company with great management. I love the company and buy plenty of stuff from the platform. Unfortunately, the stock price is not so great. Buying even a great company with great management at nearly 100 times earning is a serious risk. AMZN is a great company, but probably not the best investment for me.

Which illustrates a point. I don’t smoke. Never smoked. But I do love MO as an investment. Their track record is unbelievable and they are doing it in a shrinking industry. 

Still, my purchases of MO slowed these past few years. The price was a bit high for the situation and the 30 years of a declining cigarette market was starting to look problematic. True, MO has the world’s leading cigarette brand in Marlboro and are one of the best managed companies publicly traded. Management loves rewarding shareholders which is also a good sign.

The declining market size didn’t concern me the most; competition did. Peter’s Principle #16 says: In business, competition is never as healthy as total domination. I agree. And MO was facing serious competition for the first time in decades from a new foe: Juul.

Vaping isn’t exactly the most loved industry either. However, vaping was taking market share from MO and it was starting to move the needle. MO made attempts with their Nu Mark product to no avail. Juul was taking over the vaping market the way MO took over the cigarette market. And the regulatory environment creates plenty of barrier to new entrants.

What turned me the most positive on MO in my life was the 35% purchase of Juul. And the best part is vaping costs less than a penny to make and is also addictive. (MO also invested in a Canadian marijuana company.)

My greatest excitement with Altria is the potential size of the vaping market. When you review the numbers it is not hard to see Juul could be a larger company than MO. And more profitable due to the lower taxes on vaping products. 

Excitement is not a good thing when investing! Boring is best because this is going to be a long slog. Patience is the most important quality when investing. I bought my first shares of the now Altria in the early 1980s. If you reinvested the dividends, MO was one of the best performing stocks of the last 30 years. And you enjoyed a couple of profitable spin-offs along the way. 

Here are the things I looked at when purchasing more MO in December and earlier this year:

Is there an existential threat? 

The massive investments MO made in late 2018 required review. The question has to be asked: If the government shut down Juul today would if put MO at risk of collapse? 

After researching the issues it became clear the answer was “No”. If Juul went out of business MO would lose their $12.8 billion investment. But(!), this would not be enough to cause a dividend cut. Dividends would climb slower, no doubt, but the enterprise would continue. Also, if Juul disappeared, the people using the vaping products would probably turn to cigarettes for their nicotine fix, which MO has a dominant share of the market.

What about debt?

All else equal, I prefer companies with less debt. MO certainly has debt. The debt they issued to buy Juul will increase interest expenses. MO management said cost-cutting would be enough to offset the entire additional interest expense. Very encouraging. 

An over-leveraged company should be avoided as the risks are too high. The balance sheet should provide all you need to determine the debt level the business has.

Everybody hates it!

MO’s stock took it on the chin as investors hated the Juul investment, at first. For a brief moment I was able to buy a great company in a hated industry that was hated by even its own investors. And there was nothing to warrant such a response. Yes, MO paid plenty for Juul. However, looking at Juul’s growth, the price will look like the steal of the century in less than a few years. So I backed up the truck. Now my dividends are even higher.

Financials?

You do not need to be an accountant or tax professional to read a public company’s financials. But you do have to read them. Let’s take a look at MO’s balance sheet.

 

 

The balance sheet is the most important financial to review. (The cash-flow statement is a close second.) Income statements can be cooked, if you will. The balance sheet tells me how solvent the firm is. It also tells me if a recent investment creates an existential threat. 

As you can see, MO has reasonable amount in cash and investments in other companies. If MO sold all investments in other companies they own for the price they paid they would have enough to retire all debt. MO investments in Juul and ABInBev are solid investments so they probably could sell these investment holdings at a profit. But we’ll discount some of these investments anyway to pad our safety margin.

When you review MO’s cash and investments against it’s debt and consider the shareholder’s equity, it is easy to see MO is not facing an existential threat due to their Juul investment.

One thing to note. The reason for the large negative number for Treasury Stock is due to share buybacks.  This is not unusual.

 

A Few More Investments

As I noted in the beginning, I have a large share of my liquid investments in index funds. My retirement funds are almost 100% index funds or cash. My non-qualified monies (money in non-retirement accounts) are partially in index funds; a large portion is also in individual stocks. Buying good companies and holding them for a long time by default will increase the percentage not in index funds.

Apple is one of my newer investments. I will not provide financials as I did for MO. You can see Apple’s financials at CNBC

I prefer buying when a company is on sale. December last year when the market was down ~20% had me buying heavily. APPL has been in my portfolio for years and I added to it. I never used their products so I didn’t know if I’d love them or not, but I am fully aware of the cult status Apple users feel about their Apple products.

APPL is a popular FANG stock so it might be something to avoid. Except, the stock price increase was accompanied by increasing earning, low debt, loads of cash and stellar management. Of all the FANG stocks, APPL has the best management team. 

If you take the cash and subtract all debt, APPL still has ~$35 per share in cash! This means the p/e ratio is lower than listed. In other words, the enterprise has a 13.74 p/e ratio on it as I write. This is more than a reasonable purchase price for a company in a class by itself and a cult-like following. Though, I would prefer it “more” on sale before buying more. 

 

Knowing When to Sell

Selling can be harder than buying. Even the world-renown Warren Buffett, who says his favorite investing horizon is forever, sells investments periodically.

Even your favorite accountant has sold a few shares of his beloved MO in the past.

Let’s take an example of why selling is different than buying. Buffett’s fourth largest holding is Coca-Cola (KO). He bought KO in the 1980s (if memory serves) and has held it since. The dividend is solid and growing. 

Learn the secrets of buying under-valued stocks before they are discovered. Buy your investments on sale for quick profits.If you looked at KO today (a hated stock because they sell sweet drinks bad for teeth and accused of causing obesity) you would probably take a pass. The company is awesome with an awesome product and solid management, however. KO is dominant in their industry. But where is the growth coming from?

KO has a lot in common with MO. People are drinking less fizzy soda water and the world population is no longer growing fast enough to power profits higher. Unlike MO, KO can’t raise prices as easily. 

That said, If I owned KO I might not sell it. (I owned KO from the mid-80s to the late 90s.) The financials don’t excite me enough to buy a piece of the company. However, selling doesn’t make sense either. Selling would cause a serious tax bill if you held the stock a long time. And dividends like that are hard to come by.

When I sell it tends to be early on. If my original premise starts to erode I sometimes exit the investment. I bought Tesla and eventually sold. Of course I look smart because the stock was straight up at that time. However, my investment was more along the lines of keeping an eye on the company rather than a new serious investment position. The issue: Tesla without Elon Musk is in big trouble and they might be in big trouble anyway. I consider that a management issue in a very competitive market getting more competitive by the day.

When Facebook did a Faceplant in December, I bought. After considerable thought I came to the same conclusion about management and sold. 

Like Buffett buying KO, I bought Aflac (AFL) in the B’C.’s (actually the early 1980s) and held it ever since. I haven’t bought more in longer than I can remember. The dividends are climbing and it has been a good investment with a very accomplished management team. I looked at AFL recently (for this article) to see if I should buy more. There are certainly reasons to buy, but not enough for me to add to my position.

Certain things will have me selling fast. Hints of accounting irregularities are usually a sign to exit. If new management is failing, I leave. (I owned GE once upon a time and sold all of it because I had no faith in new management after Jack Welch left.) 

 

Waiting List

Patience is key to winning at investing. You wait for the right deal, then buy and wait forever as the business value keeps climbing. The stock price and dividends soon follow.

Finding a list of “hated” companies is easy. I want big, dominant companies in my portfolio. This reduces the chance of catastrophic failure. A good example is Boeing (BA).

BA is one of two major aircraft manufacturers in the world. (There are some smaller firms, but BA and Airbus control most of the market.) Recent crashes of Boeing 737 Max planes put BA under pressure. I bought a share so all the news stories would populate my feed. The stock started climbing so I thought I might not get a chance to buy at a “good” price. It happens. Most “watch list” businesses never become a real investment. 

BA came down again, but not enough for me to buy. Personally, I like BA more than airlines. Buffett disagrees, but I’m okay with that. 

Another watch list stock is JNJ. I owned JNJ in the past and I forget why I sold. (It was a dumb idea.) The recent asbestos in baby power/talc court ruling drove the price down. A little. Not enough to buy.

I’m watching Microsoft (MSFT) also. They really found their mojo after years where management struggled. I think Satya Nadella is a good leader at MSFT.

 

Of course, I own other businesses not discussed here. The idea is to give you the mindset necessary to win at investing.

Here is my final note: There is no crime is holding cash! Sometimes I catch heck when people realize I’m holding cash instead of investing in index funds. I can handle it. When the market is up I buy less because good investments are harder to find. When the market declines, like it did late last year, some businesses get discounted more heavily than others. Usually I find reasons to put my cash to work at those times. 

Now the market is near a new high again and new money is still looking for a home.

So I wait. Patiently. 

 

* FIRE: Financial Independence, Retire Early

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

How to Use this Blog to Earn a Quick $1 Million

People prefer the familiar over honesty. That's not good for your wealth. If you want money you have to stop following the herd.By now you’ve probably realized this blog is a bit different from others in the personal finance arena. Sure, we talk plenty about taxes, investing, frugality, retirement and more, but how we go about it is different on a very subtle level.

The general media and popular bloggers of personal finance preach the same information without saying anything new. They spout “spend less than you earn”, “invest in index funds” and discourse endlessly about the 4% safe withdrawal rate from retirement accounts. 

Well, duh!

Yes, you might find often repeated advice motivational (I do), but you can go almost anywhere to hear it. Dave Ramsey is right. Get rid of debt! You do this by spending less than you earn. Baby steps help as you develop your financial skills. Then what?

However, once you get serious—I mean really serious—advice like “spend less than you earn” seems darn basic. Heck, grandpa told you that 30 years ago without referencing any blogs or media outlets. You need better information if you are going to climb to the next level.

In the early days of this blog I worked hard to find a place in the demographic. I always wanted to take the less traveled road. If everyone said you should retire early and travel the world, I pointed out the flaws in the logic. Conventional wisdom—much like the herd of lemmings racing for the cliff—is wrong!

If I was to add something to the heap of personal finance material already in existence, I would need to take drastic measures. And do it subtly!

You might notice the bloggers spouting the same gibberish get picked up by mass media outlets while your favorite blog (that had better be this one!) gets nary a mention. The reason for this is people prefer the familiar to an honest answer that could make a real difference.

 

Comfort Zone

Therein lies the risk to your wealth. The pantheon of bloggers telling you the same message risks you joining the herd. And as we all know, the herd gets slaughtered. (Grilling season is right around the corner.)

If it’s easy and fits in a witty soundbite (or click-bait title) it gets more attention. But this isn’t necessarily good for you financially. 

I made you, readers of this blog, a promise. Last autumn I promised to change the tempo of this blog, focusing on you, the reader. Prior to that I provided good information, but always with a jaundiced eye toward what would bring in more readers. That required me to sound like everyone else.

Put an extra $1 million into your investments easily. These proven methods are used by the wealthiest people today.But you can’t point out the flaws in over-simplistic information by sounding the same horn. If I was to give my readers a chance to put at minimum $1 million dollars in their pocket, I had to step up my game.

I did that before to some extent with a few notable exceptions when I sold out to the crowd. Time for consistency.

Things are different now. When was the last time a blogger dropped north of $16,000 to test outsourcing so his readers could benefit?

I’m not talking about building an addition to your home and making a blog post out of it. The blogger benefits regardless. I’m talking about dropping serious cash to explore an option with the benefit going to the reader whether it worked or not.

In the office they said I was nuts with my outsourcing idea. It turns out I was. Still, readers won! Other tax professionals (even those hiring a tax pro) received valuable information on a powerful trend affecting many industries.

That is what I mean by being different for the benefit of the readers of this blog.

 

Million Dollar Opportunities

So how can reading this blog add $1 million to your wallet?

You have probably read blog posts on side gigs that pay well. All those posts and articles in the popular media outlets spout pretty much the same thing. And the biggest complaint is that they don’t work as promised. 

The reason they don’t work as promised is because they require a special skill (maintenance man for landlords) or have low expectations (dog walker or Uber driver). Sure, you can make money house sitting and walking the neighbors dog, but the opportunities are limited and frequently less than satisfying ways to spend a day. Doing what nobody else wants to is not a side gig; it’s as torturous as working for the man!

This blog has offered several side gig ideas over the years as well:

Several additional idea have been interspersed throughout the text. 

The nice thing about my side gig recommendations is that they are rarely mentioned outside this blog. And you can do these all from home. Many small tax offices are run out of the owner’s home. It keeps costs low and allows you to stay small so it doesn’t overtake your life. 

Forensic accounting, for example, is a wide open field. Yes, you can work for someone else, but you can also start your own business specializing without any formal education, except what you learned reading The Wealthy Accountant. Nothing is more rewarding than helping people find financial stuff they thought lost forever.

I also warned about side gig risks and even offered a side gig tax guide

 

Flaws and Solutions

So how do you get your hands on the promised $1 million? 

Lists of side gigs have one inherent problem—they lack details. It’s wonderful to tell someone they need a dog walking job, but then forget to provide a play-by-play to do so. My post on 12 seasonal, high-paying side gigs has the same flaw. It takes the shotgun approach and fails as all other similar attempts do.

I did a better job outlining tax preparation and forensic accounting as a side gig. I recommend reviewing those posts if you are serious about a side hustle that is fun and very profitable.

Most opportunities are more subtle. Last week I published on when it’s a bad idea to add to your retirement account. The wire to my email box melted off after I published that. I think I had more people contact me asking for help on this than read the article. (That’s not as much of an exaggeration as you might think.}

The flaw with most blog posts and popular media articles is trying to serve everyone. The solution is to serve just one person: you, the reader. 

You can’t give 30 good ideas and expect people to use any! Research into retirement plans has made this clear. (Several research papers have found that the more options you give people the less action they take.) 

That is why I don’t tell you each week is yet another great side hustle idea. 

Take last week’s post, for example. I provided multiple examples of situations where adding to a retirement account would exacerbate future tax problems. Several solutions were provided while special note was made that facts and circumstances of the individual would prevail (we are all unique). 

I know many readers understand full-well what I was talking about. Focusing on this one special situation is a massive side hustle opportunity with plenty of income potential.

I charge $350 an hour for consulting on stuff like this and I’m booked out till Christmas. You can be just as booked with a few strategically placed speaking presentations at a local Optimist Club or Eagles. The average client will save well into the six figures in taxes and net worth. You will log an average of over 5 hours per client at your regular rate.

 

Show Me the Money

It’s all about focus. You can’t be everything to everyone. (God knows I tried.) 

Find your niche, get good at it and sell it to the world. 

Warren Buffett’s Berkshire Hathaway owns a lot of different companies. But Warren does only one thing: allocating capital. He is really good at one thing and let’s others do that they specialize in.

The same applies to you. Find that one niche that tickles you and exploit it. 

Don’t worry about not liking it down the road. I tried a lot of different things. That is why I have so much to share here. I’m always into something. 

It’s okay to get good at something, do it for a while and then move to something else. I did it my entire life (all under the umbrella of my tax practice, my true focus) to great success.

 

It’s About More Than Earning Money

So far I focused on earning more. Plenty of readers have reminded me it isn’t worth cutting taxes if you are earning minimum wage. Many have lamented not having money to invest so I started with earning more money.

You can pick almost any post on this blog and turn it into a profitable side hustle. I warn you to only focus on one project at a time if you want to keep your sanity. It’s also more profitable that way

The amount of wealth you have is in direct proportion to understanding the secrets of money. Wealthy people know how to focus on the right things for maximum wealth creation.But now that you are earning more money you need to know what to do with it. I’ve discussed that a lot too.

The conventional wisdom is to drop the whole shebang into an index fund and live with the results. It’s sound advice if you can live with the decision.

Instead, I encourage readers to put most of their liquid assets into index funds and also have a small mad money account for crazy ideas. 

But serious money doesn’t belong in a mad money account! That is why I recently revealed I’m dropping my mad money account. Money is too important to just throw away on crazy ideas! 

When it comes to investing, emotions are the most important element. I’ve witnessed so many clients over the years in my office lose money on investments they were stellar performers. The constant buying high, only to be scared out of the investment on a temporary pullback, is cancer to a portfolio.

Last December the stock market dropped around 20%. People in the demographic that read blogs like this one were starting to panic. And there was no real pain at that point! On Facebook people were screaming they were ready to pull the plug (sell into the down market). 

I was buying more. I actually bought my largest portfolio addition of the year on Christmas Eve, the market low of the pullback. I was able to buy when others panicked because I had no emotional attachment to my investments.

When it comes to investing I recommend reading the same thing again and again until it sinks in as long as what you are reading tells you to not trade based on the current direction of stock prices.

If you are good with numbers and have a small amount of business training (you read good business books) you can research potential investments outside an index fund.

I frequently share what I am buying (and every so often, selling) in a private Facebook group.  If you want to join just make a request. Since I run the group you have a good chance of becoming part of our tribe. Just mention this blog post and I promise quick approval.

 

Here’s Your Check

None of this should be surprising. Picking up a side gig where you don’t have to run the world (just focus on a narrow service) is the perfect solution to increasing your income. 

Learning to set aside emotions (something I publish about a lot when the market is down so readers don’t make a stupid mistake) takes practice. If you master that trait you will watch your net worth rise higher than Jack’s beanstalk. 

And it doesn’t take long either. I’ve seen more people build a million dollar income and/or net worth in a manner of a few years more times than I can count. It happens a lot more often than people realize.

Once you learn the secret (it’s not much of a secret anymore) all that is left is controlling emotions.

Set your focus on one post here and read it several times. Then follow the links, if provided. Read outside this blog, too. I don’t know everything and my worldview isn’t absolute. 

Where possible, run scenarios. (Example: If you plan on helping people optimize the right amount to invest in retirement accounts versus non-qualified accounts, run a few few tests to see how the numbers interplay with the tax code.) 

Then set a game plan to acquire clients. I’d tell you how to do this, but I already have (check the link).

Now that you have more money, sock half of it into an index fund. Leave a bit to the side for what I call pleasure investing. Research companies you are familiar with (maybe you use their product or work in the same field they serve). When you find an under-priced gem, buy. (Next week I’ll show you where I find under-valued stocks.)

It’s as simple as that. 

If you follow what I outlined in this post you should see no less than $1 million of income and net worth growth above what you already have. All you need to decide is how fast you want it.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

When Adding to Your Retirement Plan is a Bad Idea

You're retired now; you're not supposed to pay taxes anymore. Simple strategies to avoid taxes on capital gains, retirement distributions and Social Security.Building a large nest egg fast requires fancy footwork involving a high savings rate and avoidance of taxes. At least that is the conventional wisdom. 

But conventional wisdom has been wrong before and even in demographics such as the FIRE* community where the idea of maxing out retirement accounts is practically a religious belief, cracks are beginning to appear.

Less understood are the benefits of NOT investing in a retirement account. Yes, traditional retirements accounts (tIRA and t401(k)) reduce your taxable income while providing tax deferred growth. But when the money comes out it is all taxed at ordinary rates while a similar investment in a non-qualified account will largely have been taxed at the lower long-term capital gains (LTCG) rate, though without any tax deferral.

Other serious issues arise from fully funded retirement accounts. Once you hit age 70 1/2 you must take a distribution from traditional accounts—the dreaded required minimum distribution (RMD). RMDs reduce your ability to control your tax matters which means fewer potential tax credits, higher Medicare premiums and taxation on up to 85% of your Social Security benefits.

 

A Growing Problem

Recently I was a guest on The FI Show podcast. Cody and Justin did a great job prying solid tax information out of me. Things I think are normal problems to deal with are unheard of by the general public. Except the general public will suffer the consequences. And Cody and Justin knew a good story when they heard it. 

The one issue I brought up that shocked most was the size of the RMD some people will face and the catastrophic tax issues involved as a result. I mentioned I have a few clients looking down the barrel of a half million dollar RMD when they hit 70 1/2. This was shocking news, but it shouldn’t be.

The broad stock market averages in the U.S. (S&P 500, for example) tend to increase about 10% per year on average, or about 7% after inflation. (Stocks for the Long Run by Jeremy J. Siegel)  Depending on the time frame covered skews the averages a bit above or below the stated returns so we will use these numbers loosely for illustrative purposes only. 

5 ways to avoid taxes on required minimum distributions. Tax-free retirement income. Why a non-retirement account can be better than a retirement plan.This means if you invest $1,000 today in a broad-based index fund you can expect the investment to double in nominal terms in around 7 years and in real terms every 10 years. 

Here is where the problems begin. A common question from clients is how to add even more to their retirement plans to defer taxes. If the client is in the early stages of building wealth this makes sense. But if a client is 50 with $2 million in traditional retirement plans we need to discuss the issues further before adding to the stack.

Remember, a 50 year old will need to start taking required distributions in 20 years. Since, on average, the investment will double every 7 years in nominal terms the $2 million doubles to $4 million, then to $8 million and then to nearly $16 million when RMDs kick in!

While $2 million sounds like a lot—and it is; trying to save a few more tax dollars today can hurt you a lot later. In the example above the RMD the first year exceeds $500,000! There is not a lot of tax planning I can do for you at that point to help you. It’s required! That means control of your tax situation is reduced to the point of Band-Aide solutions, if that. 

Now I understand you might be younger and have less than $2 million socked away. But the earlier you start (I’m talking to members of my FIRE community here) the bigger the numbers get. If, for example, you manage a mere $100,000 in your traditional IRAs and 401(k) by age 30 and never drop another dime into those accounts and the market just performs average you get 40 years of compounding growth, or almost 6 doublings! 

Visualize the growth. From $100,000 to $200,000 to $400,000 to $800,000 to $1.6 million to $3.2 million to almost $6 million! (Remember we get just shy of 6 doublings.) 

Six million is a smaller problem than our first example, but still an issue. And it assumes you never defer another dime into your traditional retirement accounts.

 

5 Ways to Avoid RMD Problems

Whenever I consult with a client I have to make clear my advice will consider “all years” rather than just “this year”. If my advice saves you money this year but increases your taxes the next or some future year, the benefit is less than it appears up close. 

Traditional retirement plans are just such an example where “all years” planning is so important. A few million in a traditional retirement account with generate adequate RMDs to cover a very ample lifestyle. The drawback is the increased taxes on Social Security benefits and taxes on the RMD at ordinary rates.

When adding to your retirement account can cost you taxes later. Alternatives to retirements plans. Retirement planning for tax-free living.Solution 1

After a certain point (your facts and circumstances will determine that point) it is better to fill your Roth IRA or use the Roth feature of your 401(k). Yes, the Roth gives you no up-front tax deduction. But, the earnings growth is NOT deferred; it is TAX-FREE! 

RMD issues don’t plague the Roth investment the way it does traditional plans. Roth distributions are also tax-free which add flexibility to tax planning in later years. This makes the job for a future Wealthy Accountant working with you to save you money easier. (I assume I’ll retire at some point, if only because I forget to breath one day.) 

Also where traditional retirement plans are a tax nightmare for beneficiaries when you die, the Roth is a much more pleasant experience. 

I’m perplexed when people show reluctance in filling a Roth investment. The tax deduction today in minor compared to the future taxes avoided due to the tax-free nature of Roth growth! Remember, this thing tends to double every 7 or so years. A 25 year old dropping a mere $5,000 into a Roth can expect somewhere around $500,000 at age 70! That means $495,000 tax-free dollars. I’m sorry, I can’t find you a better deal than that. (Not legally, at least.)

Solution 2

There also seems to be a fear amongst some when it comes to investing in non-qualified (non-retirement) accounts. To these people there is something sacrilegious about not getting a deduction and paying taxes as you go. And I can’t understand why.

Think of it this way. When you take money from your traditional retirement plan, the one you got a deduction for up front and enjoyed tax deferral on the gains, you pay tax at ordinary rates which currently top out at 37%. And state taxes can add more.

But your non-qualified plan also enjoys a lot of tax deferral! Index funds are by design tax efficient. This means they are not trading a lot to get incremental gains at the expense of extra taxes. This also means most index funds throw off few capital gains, hence a de facto deferral. Only dividends are currently taxed and most of these are qualified and taxed at LTCG rates. 

The highest LTCG tax rate is 20%. And many will pay 0% tax on LTCGs. (In 2019 a joint return can have income up to $78,750 before LTCG are taxed. And the 20% rate doesn’t kick in until your reach $488,851.) 

Because a lot (most) of your gains are deferred anyway with an index fund and the tax rate is lower when you do sell (compared to traditional retirement accounts) and there are no RMDs or early withdrawal penalties, non-qualified accounts should play a central role in the portfolio of most investors.

The deductible retirement account investment is not the default.

Keith’s Rule 76: If investing in a deductible retirement account doesn’t provide additional tax benefits outside a simple deduction it is probably not worth it.

This means that dropping money into a 401(k) at work needs matching to offset the future losses from higher taxes and RMD issues. It also means you need to consider if a contribution to a traditional retirement account will provide larger credits elsewhere (Education Credits, Saver’s Credit, Earned Income Credit, Premium Tax Credit, et cetera). 

It’s not always a simple calculation. An IRA deduction might not work while profit-sharing in your business might. Facts and circumstances play a vital role. 

Solution 3

Once you reach age 59 1/2 you can start taking money out of your retirement accounts without tax penalty. This makes a lot of sense if you retire early, even if you don’t need the money.

Your income level will determine if this works for you.

By the time you reach 60 you may either have retired or slowed down to part-time or accepted a less stressful, lower income profession. As a result your tax bracket might be zero or something close to it.

With the standard deduction for joint returns now $24,000, many will have ample room to move money from retirement accounts early. If your income is comprised of LTCGs only there is an opportunity to move some money from retirement accounts tax-free.

Remember, joint returns enjoy tax-free LTCGs up to $78,750 of income. If you take a $24,000 distribution from your traditional retirement account and have another $40,000 of LTCGs you would pay zero tax. The standard deduction would cover the retirement distribution and your income would not exceed $78,750 so your LTCGs would also be tax-free.

Take taxes out of retirement. You paid taxes your entire working life. It's about time you got to live without government fingers in your pocketbook.Solution 4

Some of you are hyper-savers and started maxing out retirement accounts at a young age. Now you have $1.5 million and you still haven’t reached the ripe old age of 40. Your RMD issues are going to be huge even if you stop adding to the pile now.

Your reasoning for building such a large nest egg at a young age was so you could take time to be with family and travel.  Enter Section 72(t) of the Tax Code.

Section 72(t) says you can withdraw money at any age from your traditional IRA without penalty if you follow a few rules.

  1. Distributions are based on IRS tables. The larger your account balance and the older you are the more you can access under 72(t).
  2. Once started, you must take the same distribution each year for at least five years or until you reach age 59 1/2, whichever is later. (There are some rules that allow for increasing your distribution each year based on inflation.)

Distributions under 72(t) are taxed as ordinary income without penalty. 

Warning! If you fail to continue taking the required 72(t) distribution for 5 years or until age 59 1/2, whichever come later, all prior distributions under 72(t) are subject to penalty.

Section 72(t) is a powerful tool in tax planning for early retirees. Since your income is lower you effectively get tax-free, or nearly so, distributions while also enjoying potential tax-free LTCGs.

Solution 5

Sometimes I have to pull out all the stops to protect my client. That is why I consider it vital to keep RMDs below a certain threshold if at all possible.

The reason I mentioned on The FI Show podcast a few clients I have facing $500,000+ RMDs is because I lose all control in tax planning with these clients. Which begs the questions: At what level of RMD do I retain at least some control?

Glad you asked.

The answer is: $100,000.

Here’s why.

Under current tax law I can have my client elect to have up to $100,000 of her RMD sent to a charity of her choice and not include it in income.  

This is more important than you think! The ability to not include up to $100,000 in income allows me to potentially access a large sum of LTCGs are low or no tax. It might also allow fewer Social Security benefits to be included in income. 

This strategy allows me to micromanage with the client for an optimum tax outcome. The more room I have to move, the better the magic I can perform.

 

Final Comments

Conventional wisdom is NOT always right! Filling retirement accounts to the brim make for great titles on CNBC and personal finance blogs, but around here we are more interested in workable knowledge. One size does not fit all.

Consider this one last point. A non-qualified account not only enjoys significant tax deferral and lower tax rates on LTCGs, but also opens the possibility to tax-loss and -gain harvesting. Two additional powerful tools in the wealth-builders toolbox.

Always consider your facts and circumstances. I’ve consulted with several thousand clients this past decade and it is rare that any two got exactly the same advice. It is never that easy. Never. The individual is important. You are the most important part of the equation. 

These ideas I shared with you today are only a start. They are the framework to build your financial plan. But the details require the master’s touch.

 

* Financial independence, retire early

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

 

The Benefits and Pitfalls of Tax Outsourcing

What are the benefits and pitfalls of outsourcing tax returns? Here is the one reason you never want to outsource your tax work.There is a growing problem in the tax accounting industry. Attend a continuing education program for tax professionals and the problem is impossible to miss: the silver in the crowd is worse than Sunday morning church service.

The tax profession is aging. Attracting new people to the profession is difficult because it lacks the glamour of other professions. But sit in any public forum and mention you are a tax professional and you will be inundated with tax questions and offers to take them on as new clients. The tax profession is a good field with ample opportunity to do good, but few even consider accounting or tax as a career option.

Those of us still practicing know the qualified tax professional shortage is bad and getting worse. Hiring a qualified tax professional is as hard as finding a unicorn.

Demand for our services grows while the number of people available to service this demand shrinks. Tax professionals have taken extraordinary steps to fix the problem with automation, reducing client lists and outsourcing. Each action has its unique set of benefits and pitfalls which we will explore.

 

Getting Work Done Correctly and in a Timely Fashion

For several years now I’ve experimented in my office with a variety of methods to deal with the workflow and demands of regular clients and those seeking to be clients. 

These issues are of interest to the client and other tax professionals alike. Each new method instituted (or merely tested) in my office had its benefits and pitfalls. Clients need to understand the difficulty tax professionals have keeping their head about the paper waterline and tax professionals will continue to explore extraordinary means of managing growing demand with a smaller workforce.

The easiest—and most logical—way to solve the problem of too much demand is to cut your client list to a manageable size and decline taking on new clients. While this solution works, it lacks a satisfying outcome. There is an uncomfortable feeling knowing you can help someone and passing anyway. 

If no other options exist then a reduced client list is the only choice. If you are nearing the later stages of your career this might be a good way to transition certain types of clients to new tax professionals. For everyone else in the crowd we need better options that both serve your client and allow you to retain your sanity.

I will review 3 solid options with special emphasis on outsourcing tax work.

 

1: Maximizing the value of experienced staff

Experienced tax professionals probably remember the days when they did all the work alone. They would meet with the client when the return was dropped off, they would prepare all aspects of the return, have support staff print the return and call the client, and finally, meet with the client at pickup to review the results and answer any questions the client has.

The old way of doing things no longer works when there are not enough experienced tax professionals to go around. 

The solution used in my office focuses each task of the tax preparation process to different teams. Clients drop off their material with a receptionist; notes are taken for the tax accountant. Most of the tax return is processed by a team scanning and preparing the return for the CPA or enrolled agent. Data processors, many with no tax knowledge, enter the raw data.

Once the data processors enter as much as they can the file goes to the CPA’s desk. For all intents and purposes the CPA moves straight to review unless there are serious tax issues unresolved by data entry. 

Experienced staff are always working at their highest capacity under this method. Raw data entry doesn’t consume the tax expert’s time. However, many returns have significant tax issues only an experienced team member can handle. While data processors help, the tax pro still spends significant time with each file, but does avoid the mundane part of the preparation process.

At the end we sit with every client to review the return. This is where we discover if we misinterpreted documentation the client provided and to answer questions. 

It’s not a perfect solution, but it allows for the maximum value extraction from each experienced members of the team.

 

2: Automation

Automation has been an integral part of the tax office for decades. We moved from paper to e-filing; from filing cabinets to digital storage; from hand preparation to tax software. 

There are additional automation processes too few tax professionals use. In my office we use Gruntworx, for example. 

Depending on the tax software you use, there are similar programs offering the same service to tax offices. I use Drake Software and Gruntworx is built right into the program.

What Gruntworx and similar programs do is enter the basics from standard forms (W-2, 1099, K-1, etc.). Unfortunately this doesn’t offer more benefits to the skilled CPAs in the office. Gruntworx partially replaces the data processors only.

The biggest advantage of Gruntworx is cost. It is a poor use of time entering W-2s when the computer does it automatically for pennies.

There is one pitfall to consider. These programs reading forms and entering data periodically make mistakes. The reviewer must double-check the entire return! The same issue applies to human data processors. The review process is a redundancy designed to reduce errors.

 

Outsourcing

This is what I really wanted to talk with you about. Outsourcing payroll and bookkeeping is rather easy. Tax returns are another issue.

First we need to define what I mean by outsourcing. Gruntworx is not outsourcing! Outsourcing, as I will refer to it here, is the sending of the entire return to another firm for preparation with only a review required at home office end.

My office has tried several outsourcing models the last few years with the gracious permission of a few clients to allow me the luxury. My results are decidedly mixed so if you ever considered outsourcing tax returns you will want to review my experiences.

 

Domestic Outsourcing

Outsourcing to a domestic (U.S. based) firm requires less disclosure to the client. I recommend always being upfront with the client and disclosing anyway. 

The biggest drawback of domestic outsourcing is cost. I have never been able to find a domestic outsourcing company that was cost effective so I never used one. Therefore, I can’t vouch for the quality of any of these services.

Also be aware that there are several firms claiming to be domestic when they are not! Just because they have a New York office doesn’t absolve you of disclosure rules. My first foray into tax outsourcing was with one of these firms. I outsourced my own return as a test and they crucified the return. At least it didn’t cost me anything.

 

True Tax Outsourcing

After a few false starts and reviewing several outsourcing firms I found one that had it all put together. They had a good portal to transfer documents and a good team domestically and in India (where most outsourced tax returns go). 

Once I was satisfied with their work and security I asked a few clients permission to send their tax file to this firm. (The name of the firm will not be mentioned because they did what they promised. Since I’m pulling the plug at a large loss it would not be fair to them since they did nothing wrong.) This was last summer. The additional test returns came back prepared correctly.

A good outsourcing firm requires money for their service. My firm paid $16,750 for the smallest contract they had. (The low-ball guys are not professional and should be avoided. You want quality first, price second.)

Know the difference between automation and outsourcing. You need to know this information if your tax accountant ever asks to outsource your tax work.The biggest advantages of outsourcing to a quality firm include better quality preparation and less need to find additional in-house staff (qualified tax professionals). 

However, there are serious pitfalls I could not resolve. 

It became painfully obvious early in the tax season this year the outsourcing firm lacked the most important qualification: knowing the client. The time it took to ready materials for the outsourcing firm along with the excessive time needed to review the returns they prepared did NOT save meaningful time of experienced tax accountants in my office! It wasn’t their fault. The issues always revolved around knowing the client and they had no way of knowing the client as I do. And the problem is unsolvable.

It is hard to grasp how powerful and valuable the accountant-client relationship is until you see tax work done without the relationship. 

This one glaring issue caused me to pull the plug with only $2,000 of the contract used. The rest is a loss for my firm. If it weren’t for this blog I wouldn’t try out so many of these things. But with a large number of tax professionals haunting this blog I feel it my duty to try things and share the results so readers can benefit without the extraordinary expense.

Clients of tax firms also get a peak under the hood of how things work when they submit their return for preparation.

There is one additional glaring issue: disclosure.

I sent a modest number of clients a disclosure statement. If they signed I was allowed to send their return to outsourcing. (Only a few select clients were chosen and they were not required to sign.)

Some signed; other, not.

What brought this home for me is when one client signed the form and later read it completely and called begging we don’t send his return to outsourcing. We complied. 

The truth is there is no shortcut. While outsourcing offers the promise of a better back office, anything is further from the truth. Even a good firm with quality preparers can’t give the service required without knowing the client. It’s just too large a hurdle to overcome!

 

My Opinion

It is my informed opinion that all tax offices should tread lightly and slowly if they are considering outsourcing of tax returns. I can’t find a way to provide the quality I demand for my clients from a distant source so outsourcing is starting to look like a rear view mirror issue for me. 

Automation is fine. Gruntworx and similar programs work within the framework of your tax software and is only a data processing system. When it comes to a full outsourcing, total return preparation, there is nothing like handling it in-house where the accountant and client have an intimate relationship built to serve the client; the way it should be.

 

Ongoing Research

Even though my outsourcing days are over I still intend to educate myself on the subject and share the inside information with you. In May I’m attending an outsourcing conference to learn more on a variety of outsourcing options. The conference cost a cool $1,000, plus hotel and travel costs. You will get the important information for simply stopping by this blog in late May or June to read all about it.

Is outsourcing right for your tax office? Discover the risks and why you might want to forego outsourcing even when it can be done expeditiously, accurately, cheaper and securely. Now you know why I have ads on this blog and other forms of monitization. I’m not trying to irritate you. I just need funding to try these experiments so you don’t have to. 

And unlike other blogs, the experiments we conduct here sometimes cost more than a few dollars.

My goal is to reinvigorate this graying industry. We need to spread the message this is a very good career choice. Even your favorite accountant is looking toward his last decade in the field as a full-time practitioner. (If I didn’t shave my head the gray would be showing on me as well.) 

My practice in unlikely to grow much in the future. My job is to teach the next generation and figure out all this new stuff we need to think about.

Thank you for coming along for the ride. If there is something you would like me to test be sure to leave a note in the comments. 

New or old hat, our profession is in high demand. People are in desperate need of our services. 

If we don’t rise to the challenge, only the wealthiest will have access to quality tax help in the future. The middle class and poor can’t afford that. And we have our work cut out for us.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Recovering From Financial Mistakes Like the Wealthy

Financial losses are hard to take. This is how the wealthy deal with financial hardships and mistakes.Regardless how experienced or educated you are you will still make financial mistakes, some of them humdingers. Personal finance blogs and media outlets frequently share basic financial mistakes to avoid: spend less than you earn, invest in index funds, avoid debt and so forth. All this is good advice, but it goes a lot deeper than this.

There are financial mistakes that involve much larger sums of money that can cause permanent damage to your financial situation. To top it off we are in a much different economic environment than ever before. 

Side hustles are more common than ever and no matter what kind of activity you consider a side hustle it is still a business. And business can inflict as much, and even more, pain than student loans, credit card debt or job loss. 

Today we will move beyond the basic advice and delve deep into the financial mistakes that are harder to plan for and hence avoid; the financial mistakes that can not only surprise, but destroy a fortune of any size. 

To help you understand the seriousness of these mistakes I will use examples from my past. The good news is I recovered from each disaster much wiser, using the new-found experience and knowledge to push profits to greater heights.

Some of the issues we will touch on are foreign ideas compared to the “spend less” advice. For example, you will see how over-confidence and arrogance caused me plenty of pain throughout my life. What seemed like a great idea was anything but, and I walked into it eyes wide open because of that pair of rose-colored glasses I like to keep handy.

Worse, I should know better. As a tax accountant with a history as a financial adviser, I should have know better. The things that got me were not alien concepts. And if they can get me they can get you no matter how smart you think you are.

My goal is to give you the tools to avoid these errors in thinking that virtually guarantee financial disaster. I will also share how I recovered from each event and grew from it. Hopefully you recognize the patterns of my errors in your behavior and make corrections before you suffer the same results.

 

Young and Dumb

In my younger days I made a lot of solid financial decisions. I also got lucky. 

I avoided the over spending and debt issues that plague so many and I never put any of my education, formal or informal, on the credit card. That means I was able to invest in mutual funds (I used actively managed funds back then) and individual stocks. 

Growing up in the backwoods of Nowhere, Wisconsin had its advantages. I never made a lot of money, but had nowhere to spend it even if I did. I was on a sort or forced frugality diet so don’t think I was somehow smarter than you. I wasn’t! 

Those first years of adulthood were formative years. I grew up on a farm and knew of nothing else. Then the family farm went teats up (we were dairy farmers) just under six months after I graduated from high school. Now what was I going to do with my life?

Growing up rural and poor meant I dreamed of wealth. I wanted to be the richest man alive some day and go to the moon, too. To farm, of course. I was an even mixture of Elon Musk and Warren Buffett.

Things didn’t pan out as planned, but I did better than most, so no complaints. I was also on the cuff of my first of many significant financial mistakes.

The family farm was gone, but the dream lingered on. It must have been about 1984 when I decided I would move my investing horizons to something that could grow wealth faster than the red-hot stock market of the mid 1980s. 

I kept money in individual stocks and mutual funds, but I was ready to tackle commodities. Soybean futures to be exact. 

Well, I had a farming background! I knew (I thought I knew) more than those pinheads sitting in an office about farming and soybeans. So I started trading soybeans and (OMG!) soybean options. 

10 success lessons taught by the rich. Turn failure into success! Your response to failure determines your level of success. Recover from financial mistakes like the wealthy.As with most financial disasters, things started out promising. I had the golden touch and don’t think for a moment people weren’t noticing. 

I knew farming and I knew soybeans, though we never grew soybeans on our family farm. 

I turned a small investment of a few thousand dollars into nearly $40,000. And that is when this poor farm boy started to experience an inflated skull.

I had managed to accumulate other investments (mutual funds and stocks) of nearly $100,000. Not bad for a 20 year old that started out with maybe a thousand or so when he turned 18.

Now that I had another $40k to grace my net worth ledger I wanted to get serious about this soybeans thing. I sold only mutual funds at the time to fund my next big push. However, family noticed my talents, too, and dear old dad thought he would hitch a ride to the tune of $9,000.

Well, if I hadn’t made every possible move to hex my parade I don’t know what else I could have done to accomplish it. 

And wouldn’t you know it. Now that I was all in I started to believe in my infallibility. I made a risky (all commodity trades are risky by nature unless you are hedging: buying and selling commodities as a producer or consumer of said commodities) all or none trade. If it worked there would have been a six figure gain. If it failed I would lose most of my account value.

At the time I didn’t realize how much I was putting on the line. I was too arrogant to see it. In three days it was over. Soybeans locked limit (the maximum move a commodity can move in one trading day) and it wasn’t going my way. 

I was actually lucky! When a commodity locks limit against you it is impossible to close your position. The losses can mount fast and the leverage is massive. 

Dad did not get much of his $9,000 back and most of my $40,000 was gone. I will never forget that feeling. It took a long time to recover emotionally. Good thing dad accepted what happened. He doesn’t talk about it all these years later.

 

Lesson 1: Commodities are not an investment!

I know this is a hard concept for people to understand, but commodities, along with land and other such so-called investments, are not real investments. 

Land is not an investment unless you intend to improve said land, creating value, the basis of investing. Gold, corn, pork bellies (bacon) and soybeans are NOT investments; they are speculative tools unless you are hedging your production or consumption of the underlying commodity. And if you are hedging it is a business tool to control costs; still not an investment.

Lesson 2: Don’t get cocky!

Just because you are on a roll doesn’t mean you are right. I thought I was so smart as every trade went my way. Then I lost all those gains and more in one stupid trade thinking I was smarter than everyone else. (Remember those office pinheads this farm boy was smarter than?)

Whether it be in business or any other endeavor in life, always know it might be luck working your way temporarily. Luck is a fickle creature and only a fool relies on such a fickle beast. Caution is warranted at all times when investing and in business.

Lesson 3: Don’t borrow to invest!

While I didn’t borrow from the bank, I did take money from dad (actually an equity investment) to increase the size of my trade. Both choices (bank loans or an equity investment from dad) are incredibly bad.

Lesson 4: You can’t consistently trade profitably!

I know, I know. Everyone thinks they can do it. We hear about money-center banks earning gazzions every quarter trading. Except they are hedging more than speculating. And when they decide to speculate we remember their name as Lehman Brothers: 158 years of conservative investments pissed away in a breath. 

Back when I was young I didn’t have the experience I have today. Now, after all these years as a tax accountant, I can show you an endless list of clients who have traded their way poor. I’m trying to recall even a single client who traded his way to a fortune and coming up blank. I do have several in mind who lost a life of work “playing the market”. 

Lesson 5: You don’t “play” the market!

Enough said.

Lessons Learned

The all or none mindset died for me that day. I never again bet the farm on a flyer. 

The loss also instilled in me a deep desire to research investments before investing or adding to an investment. I have made investing mistakes over the years, but nothing like that fateful day in 1984 when soybeans were going to send Hillbilly Accountant to the promised land. 

When it sounds too good to be true it probably is. I missed plenty of deals due to my caution. I also missed a fair number of blood-lettings, too.

Over-confidence, cockiness and arrogance are hard to avoid when enjoying a temporary visit from Midas. Controlling emotions are more important than almost any other factor when investing. People want to buy a “hot” market and get scared out of a bear market. Buying high and selling low has never been a good strategy. I have trained myself to react emotionally the opposite of normal human nature. When a great company is on sale I buy (after adequate research). I only sell if it makes sense in my personal situation. The “market” has nothing to do with my decision process.

 

Changing the World

Now I will share a business disaster from the archive. 

When it comes to business, including side gigs or side hustles, mistakes will happen and there is always a cost. A well thought out plan has half a chance of creating a profit. Then there are those times when we are introduced to humility.

Sometimes an opportunity that looks incredibly good fails miserably. Usually rose-colored glasses were involved.

You can reach your financial and retirement goals. See what this child does that virtually assures he will be a success in life.In this situation I was going to change the world and challenge the Big Guys.

You might have noticed the 1040.com banners on this blog where you can prepare your own tax return. Well, back when that program was just beginning (it was in beta the first year offered to the public) I saw an opportunity to create a massive platform. 

My professional tax software provider created the 1040 environment. I wanted to capitalize on this as soon as possible as other clients of the software provider had the same chance I did. I had to move quick to lock up market share.

To do this I developed a large advertising campaign: television mostly. My ad schedule was aggressive, especially for such a test idea. But I wanted to get a jump on the competition.

Long story short, I spent $80,000 in advertising before I pulled the plug early in the tax season. The revenue: $3,000. 

Yes, I lost $77,000 is a few weeks. Thank God I didn’t get caught in the sunk-cost fallacy! It was also a good thing my tax practice was established. I still had a profitable year, just $77,000 smaller.

The story is short, but the lessons many. Since the program is still around and much improved (one of the best, if not the best, in my opinion) you might surmise there is a happy ending to the story. There is, kinda.

 

Lesson 6: Don’t trick yourself into rushing a project!

It is tempting to forgo proper testing before a full product launch. The 1040 project had plenty of potential, but the program was still in beta. There were issues that first year of operation. And I had no exclusive. Even a jump-start on the competition didn’t guarantee I’d keep the clients.

The competition never materialized. Yes, the Big Guys were there and still are. But the worry other accountants might want to capitalize on this, squeezing me out of the market, never happened. I rushed for no reason and dropped a cool 77 grand for nothing. Plus all the aggravation!

Lesson 7: Sunk cost!

Good fortune smiled on me. This project was new enough and the capital invested didn’t cause a sunk-cost mindset to manifest itself. If it had the damages would have been multiple times larger. 

Lesson 8: Arrogance again!

I was so cock-fire sure I was right on this I was willing to go all in with a pair of twos. Stupid!

Liking an idea is NOT good enough! I needed to do market research and test the product more fully before unleashing such a large investment. I put the cart before the horse and paid the price.

Never fall in love with an idea or project. it’s business and nothing more.

Lessons Learned

Some mistakes are merely a lesson. In this case I knew I had a good idea on my hands, I just executed wrong. As 1040 improved their product, clients from the first year came back (at least a few did). So I had a quasi annuity on my hands. In 3 or 4 thousand years I might break even.

I continued to love the DIY tax preparation idea. Every year since that fateful first year I continued to promote the program with free promotional ideas. I published articles mostly with links to the platform. Growth was slow, but noticeable.

Then I had this idea to hook up with a popular blogger and sought an audience with Mr. Money Mustache. MMM didn’t care to partner with me on the idea, but gave it a push, which helped tremendously. 

This blog has also provided steady pressure on the growth trend. To date I have recouped nearly $40,000 of the original $80,000. At current rates I will break even in about six years; if it continues to grow, a bit faster.

Lesson 9: Never give up!

If the business plan is solid never give up. But always evaluate before leaping! And always test before spending. There are plenty of free opportunities to share information on your product or service. If I hadn’t sunk $80,000 into this beast I would already be profitable!

Lesson 10: Think before leaping!

As I already said. But it was worth repeating since this is the cause of a great many errors.

 

Coda

Of course I made many, many more than these two financial mistakes in my life. Thankfully most were small and I was a fast learner (maybe that should be Lesson 11). 

The biggest mistake you can ever make is to get gun shy after a financial disaster. Once you are too afraid to take action you are in a death spiral. 

You will make mistakes! Lots of them. Show me someone who never made a mistake and I’ll show you someone who never tried. 

All is not lost if you learn from your mistakes. 

Sometimes you even try something knowing it is a mistake just to gain the knowledge and experience! Keep the investment small so the damage is light, but do try. It is the only way to learn.

 

This post is the result of a question on Facebook. In the Choose FI group the question was asked about what our biggest financial mistake was. I commented tongue-in-cheek that I would need a few million words and plenty of time to explain the errors of my ways. A reader of this blog commented to me this would be a good blog post idea. I agreed and here we are.

(Tax season is getting long and fatigue is setting in. I didn’t want to research another tax issue to publish while swamped with tax issues at the office.)

We learn far more from our failures than our successes. Success convinces us we are right, like my original soybean trades. Of course we sometimes discover we were not as right as we thought we were. 

Failure on the other hand leaves its mark. We remember pain a lot longer than the pleasure. 

You will make mistakes, lots of them. I’ll make many more as well as my tax practice evolves along with this blog and the courses I plan on publishing soon. If any of these things fail they will only cause minor pain. 

I learned my lessons.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.