When Mrs. Accountant and I got married we had a bucket list. Most items on the list are private and irrelevant to the story at hand. The one item on the list I will share is our desire to have foster kids early in our marriage.
The goal was to help foster kids at a higher level than the average foster home. We also wanted to have foster children early in our marriage out of concern for having foster children after we had our own children.
Mrs. Accountant and I realized our goal. Several foster kids were placed in our home over three years. Rather than collect a stipend (the county paid us $1,000 per child per month tax free!) and ram as many kids through as possible for some quick squid, we planned on helping these kids get the start they deserved in life.
After they settled into their temporary home I started a daily routine with them. Back then Tony Robbins had recently released his first version of his Personal Power program. This 30 day course took you from where you were at to accelerated growth in areas of personal development and even issues relating to money.
Monday through Friday I would sit with the foster child (we only took one child at a time) as we listened to another episode of Tony. The program strongly recommended keeping a success journal and completing each day’s tasks to move a step closer to your goals.
The kids were all reluctant at first, but the enthusiasm and promises Tony made on those tapes quickly drew them in. Some kept a journal, many only scribbled a few notes or had no journal at all. Most gave at least minimal effort to the assignments given at the end of each tape.
Foster care in an unforgiving environment even in a loving home. Too many of these young people (we took the hardest cases of junior high and high school kids) struggled and then it was time to leave for a group home or a new foster home. Some of these kids went back home to live with a parent. In at least one instance the parent got her child hooked on drugs shortly after leaving our home. It was heartbreaking.
Twenty years later one of our foster kids stopped by the office. It was such a long time I didn’t recognize him. He introduced me to his girlfriend and was so excited about his job. He grew up and was doing well. He told me about his many trials after he left our home. He mentioned our time together listening to Tony was the only thing that prevented him from taking his own life. He knew if he fought hard enough long enough things would work out.
Then he reminded me of one lesson Tony taught that shaped his life. And he came this close to getting into the NFL.
Turn Up the Heat
The concept our foster child clung to so tenaciously involved an internal thermometer which determines success and failure. According to Tony, when things go south your subconscious turns up this internal thermostat to get you back to where you used to be.
Your mind has powerful beliefs on where you should be in life based upon your values and experiences. If you view yourself as a married woman and find yourself widowed, the mental heater is turned on to remedy the situation. Once back in a relationship the heater is turned down as normalcy is returned, according to your subconscious.
The internal thermometer doesn’t always serve you well. The above example explains why everyone is familiar with the rebound relationship. This thermometer doesn’t guarantee you a nurturing and fulfilling relationship. The heater likes to force the issue to get back to the comfort zone as soon as possible. Sometimes faster isn’t better. (Usually faster is NOT better!) When you are below a perceived value in any area of your life the heater comes on. If you are seriously below the expected range the heater roars!
The opposite is true too. When things start going great your subconscious turns on the air conditioner to slow things down and even caused bad luck to knock you back into your subconscious normal zone.
This happens with money all the time. The plight of lottery winners is legend. Sports stars and successful entertainers also have a disproportionate number of bankruptcies. When things go too good too fast or for too long the air conditioner comes on. This internal AC has caused more fortunes to be lost than any other entity.
In my office an employee has been enjoying a good bit of luck. A difficult childhood followed by adulthood filled with more pain than anyone should endure has broken into vast opportunities. She is doing awesome at work and her income is rising fast. She is good and I let her know it. I want my talented team to also possess a positive attitude.
She recently said one sentence which brings the whole mental thermometer into clear focus. She said, “When thing go this good something happens that causes me to lose my job.” Oh, my God, woman! Things are going great for you and all you can think of is how you self sabotaged in the past? Tony might have been wrong! This isn’t always a subconscious thermometer going into action; it can also be front brain.
That kind of self talk will butcher anyone. I sat my employee down and explained to her why this time WILL be different. She had to change her thinking from ‘here we go again’ to ‘I deserve this’. The crux of the problem is just that. She did not believe she deserved things so good. A lifetime of pain and regrets all too often gives us the BS we need to continue the same destructive patterns.
Breaking the Thermometer
The heater and the AC exist in all of us. Both are equally destructive.
Breaking the thermometer is difficult, but necessary before you can move forward. Breaking up with someone you love isn’t fixed with a rebound relationship. Losing money in a market decline might encourage you to regain lost ground by taking unwarranted risks that destroy your remaining wealth.
The AC is worse than the heater. Over the years I have watched employees with massive talent self destruct after getting a raise or praise. I see it more often when a new employee comes from the poor side of town. Opportunity for them is lost because they can’t accept the gift of an improving life.
Regular readers know I come from a poor farming family. Life wasn’t easy and the AC was running full tilt more often than the heater. Since the family financial position was so low from a young age there was less need for the internal thermometer to trigger the heater to bring things back up to where they were expected to be.
I struggled those early years. I always thought I’d shovel manure for a living only to watch the family farm lost to bankruptcy less than six month after I graduated high school. My expectations were low and my brain was determined to keep me there.
Over the next four years I managed to add to my small stack I saved in high school. Excessive frugality and a kind stock market jacked my net worth into the six figures. This wasn’t enough to retire even in the mid 1980s, but it was enough to allow me a chance to slide for a while.
For a year I immersed myself in books, learning everything I could. Then the best thing ever happened to me; I met Mrs. Accountant. We talked a lot and built a dream we soon put into action.
I kept reading, but fewer novels were in the mix as I devoured anything that would help me grow internally. I didn’t know it back then, but I was resetting my internal thermometer. Good thing, too. All I was to become is a result of this massive indoctrination.
Before long I met a real estate agent who sold me on investment property ownership. He also introduced me to Tony Robbins and invited me to see Zig Ziglar live. (I have a picture on my office wall shaking hands with Zig.) I bought the books, I bought the tapes, and listened and read and listened and read.
I was a poor kid from the wrong side of the hill (the rural version of the wrong side of town). There was no chance I would be anything. Ever! I saw myself as poor and I was going out of my way to screw up what was a darn good start to my financial success.
Well, you know how it turned out. I bought a cassette player (remember those) with ear buds and listened to those tapes whenever I was working. If I wasn’t reading I was listening. I changed the thermometer; I changed the functioning of the heater and AC. No longer was I a slave to some subconscious voice keeping me in my place.
After all these years I still read voraciously. I listen to tapes less often. But now and again I give Tony or Zig my attention as I drive to the office or work around the house or barn. More often I read Warren Buffett or books recommended by Bill Gates today.
If you think about where you are at today financially, emotionally, in your faith, in your relationships, I think you will find the heater and the AC has been treating you with disrespect. Deep down you know where you belong and that is exactly where you will stay, adjusted for inflation.
You must reprogram yourself if you are to break free of this harsh taskmaster destroying your dreams. It’s possible, but you have to do it. No one can do it for you. You have to change the picture of how you see yourself before you can break the thermometer forever.
An old country boy from the backwoods of Wisconsin with no training happened to chance across a real estate agent who admired Zig and Tony. If not for that chance encounter I probably would not be here. My brain, my subconscious, needed reprogramming, programming for success.
And now you met me.
On a recent ChooseFI podcast where I was the guest speaker I mentioned the possibility the backdoor Roth and her sister tax strategy, the laddered Roth, could be going away. Many people heard me say it WAS going away. That is false. It is only a proposal at this time.
Because so many potential tax law changes now whispered in the halls of Congress have the potential to cause great damage to those in retirement or working an accelerated program toward financial independence (FI), now is the perfect time to review those with the highest possibility of happening. A word of caution before we begin. These are only ideas floating around Congress. They are NOT current tax law! Not all ideas whispered in the halls of Congress become law, but all laws start as a whisper in the halls of Congress. There is a difference.
Most ideas for tax law changes never see the light of day or are significantly modified before becoming a law. Some ideas become law in a few years, other may take a decade or longer before working through both houses of Congress and signed into law by the President. As we review the ideas now floating around Congress I will give my opinion on the likelihood the change will take place and how soon.
Remember, this is one guy’s opinion. My opinion carries weight because I have decades of experience. I also rely upon sources outside my own viewpoint, such as continuing education courses I’ve attended, The Kiplinger Tax Letter, and calls to several Congressmen. (It should be noted I rarely get to speak with an actual lawmaker. Usually I speak with a staff member. They can still be very helpful with potential tax law changes working through the system.)
What’s All the Hubbub, Bub?
The Republicans control both houses of Congress and the White House. There is a strong desire to cut taxes on businesses massively while not raising taxes on individuals. This is easier said than done. Cutting the top tax bracket for most businesses to 15% – 20%, while leaving individual rates unchanged, would blast a multi-trillion dollar hole in the federal budget. This is a serious problem.
The only way to make it work is to reduce or eliminate deductions and tax strategies. Congress can pass a tax bill without a tax bracket increase and claim they didn’t raise taxes even if what you owe goes up. But if you pay more in taxes it is a tax increase! So you can get a tax increase while the politicians smile big claiming they didn’t raise anyone’s taxes. Taxes make liars out of everyone, especially politicians.
Some changes make sense even if they hurt the demographic reading this blog. I don’t like the idea many powerful tax strategies might go away, but I understand why Congress may plug certain tax loopholes. Always remember I am on your side.
The original premise of this post started from my statement the backdoor Roth and laddered Roth would go away. I love the backdoor Roth, but it is really an end around of what Congress intended. The current law says you can contribute into a Roth IRA until your income reaches a certain level and then the Roth option is phased out until it is completely unavailable to high income taxpayers. The backdoor Roth is just a sneaky way to do an end around regardless of income. The laddered Roth the same.
Since the backdoor Roth raises very little tax revenue it is an easy target. Money not invested in a Roth IRA might be spent, increasing economic growth, leading to modest increases in tax collections by the government. The real advantage is down the road when the tax-free growth is taxed instead.
Once again, now is not the time to panic. This is NOT tax law yet. It may never happen. It could be effective January 1st of 2018, which is the earliest I think it could happen. A more likely outcome is a January 1st, 2019 effective date. Time will tell.
What all this talk of reducing the advantages of retirement plans you need to kick it in the tail and max out those retirement accounts now while you have the full advantage available. If ever there was a motivation to supercharge your FI goals, now is the time. The backdoor Roth and the following ideas to change the tax code makes waiting to up your savings rate a dangerous, expensive and wealth endangering exercise.
The Bad News Bears
Many of the ideas being toyed with by Congressmen are vague. What is coming out of Congress in whispers are not complete tax code changes. Some of what is reaching my ears requires some background tax knowledge to understand what is probably being proposed. Some of these ideas are so vague I am only making an educated guess as to how the change would be accomplished. Regardless, you need a basic understanding of what lawmakers are anticipating changing in the tax code. It is essential in your tax planning process.
Many of these proposals come from a 2014 tax reform plan that never got traction. As mentioned above, these things frequently take time before they start moving forward. Variations of some of these proposals are likely to be enacted.
Now it’s time to scare the bejesus out of you.
Have a seat, kind readers, there are lawmakers serious about a proposal to reduce the amount of pretax contributions to your 401(k) by up to half! The current annual contribution limit is $18,000 with an additional $6,000 allowed for those 50 and older. This means you could only deduct up to $9,000 per year or $12,000 for older taxpayers if this proposal is enacted. The key word here is pretax. The contribution level would still be $18,000, but any amount over $9,000 would automatically go into a Roth 401(k). On its surface this may not seem like a serious issue. However, it takes away a massive planning tool. Many credits are calculated off total income or adjusted gross income. Your mix of retirement investments between traditional and Roth plans can be modified each year to maximize your tax savings. If this controversial proposal becomes law it will seriously curtail your ability to reduce your tax burden by adjusting your retirement investment mix.
The above proposal also means if you are in a higher tax bracket while you are working—a common occurrence—you will be limited in your deduction at today’s higher tax rate and will be unable to take advantage of your lower tax rate in retirement.
Another idea floating around is to eliminate all traditional (deductible) IRA contributions, limiting IRA contributions to Roth IRAs only. As much as I love the Roth IRA, this accountant is horrified over the loss of flexibility from the loss of deductible retirement contributions. People do not save enough already in the U.S. These proposals will take away a massive incentive to get people to start or continue to save and invest.
Short-sighted goals to raise tax revenues for the government will end badly. The low savings rate of the U.S. would be forced lower to raise a small amount of revenue to offset massive tax cuts for businesses. The small added gain to economic growth would be temporary. With fewer savings, hence a smaller personal safety net, would exacerbate future recessions and strain the system more as people age; forget about early retirement.
Another bone-headed idea is to eliminate the Simple 401(k) and SEP plans. Existing plans would be grandfathered. This idea has been bounced around for several years now. If you are able to open a Simple 401(k) or SEP, now might be the time to preserve the option. (Note: Simple 401(k) plans look and act a lot like SIMPLE IRA plans.)
If all this isn’t damage enough, there are some lawmakers who favor cutting the cap on retirement contribution by employers and employees or freezing the contribution limits so they are not inflation adjusted. The Republican proposals are built on a foundation of discouraging savings and investments. Your favorite accountant does not favor short-term solutions to solve long-term federal budget problems. It seems to me if more Americans had a higher liquid net worth it would be better for the country, not worse.
According to Kiplinger (not an affiliate link), the White House claims retirement plan incentives are safe. Considering the current environment, I take no comfort, nor do I trust, what comes out of Congress or the White House. This could be a fight for the ages. Stay tuned.
Some (Modest) Good News
There are several proposals to improve S corporations. The most notable is allowing IRAs to be eligible shareholders. This could open powerful possibilities if it becomes law. There are additional S corporation changes proposed, but they will affect a much smaller group. Due to their complexities and time I will leave that discussion for another day when it appears the changes are imminent.
The one piece of good news seems unlikely to become law unless it is part of a larger tax reform bill.
Sorry for the downer this morning. It was too important to leave unsaid. You, kind readers, need this information to plan accordingly. Now more than ever it is imperative you increase your savings rate now. Eliminate debt, save and invest. A solid plan can reduce the damage the government inflicts. Those who wait will take the full blunt force of the assault.
As readers of this blog there is no need for you to be the victim.