We look forward to the Van Mueller newsletter every month. It's chock-full of sound bites, sales tips, and eye-opening statistics. Here are our favorite parts of the February 2020 edition. We're sharing the full introduction, and 2 of the 7 monthly sales ideas. If you like what you read, we encourage you to click here and become a subscriber.
Reprinted with the author's permission.
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February 2020 – 7 Ideas and Views Newsletter by Van Mueller
I have been writing this newsletter for over 12 years now. For those twelve years and another 18 years beyond that I have declared to everyone who would listen to me, that it is impossible to achieve the success you desire and have the ability to help as many people as possible without having a basic understanding of income tax law.
We sell tax deferral in IRAs, 401(k)s, 403(b)s and 457 plans. We sell tax deferral in annuities and certain kinds of cash value life insurance. We sell “tax free” in Roth IRAs and Roth 401(k)s and again certain kinds of cash value life insurance.
If we can't explain the difference between a marginal tax rate and an effective tax rate how can we inspire people to take advantage of tax laws that are beneficial to them? If taxes are historically low now, why would it ever make sense to take a small tax deduction on a small amount of money and build it into an enormous pile of taxable money in the future when government will need to tax an increasingly larger percentage of that money so they can provide the promised benefits for Social Security, Medicare, Medicaid, Defense, Homeland Security and interest on our ever-increasing debt, etc.?
If we can't explain the difference between a marginal tax rate and an effective tax rate how can we inspire people to take advantage of tax laws that are beneficial to them?
Wouldn't it make more sense, and wouldn't it be smarter to pay your taxes now on that money and build a large amount of money that the government could never get their hands on again? Really think about this: How beneficial would 10, 20, 30 or even 40 years of “Tax Free” compounding be for our customers? How do we get them to understand that a tax deductible “match” is not beneficial in a 401(k) if the government can take it back in the future with much higher taxes? Isn't it really an inducement to trick you into contributing?
When is the “match” beneficial? When the match is for a Roth 401(k). Now you have many years of tax-free compounding. The results can be more than surprising. Tax free deferral and accumulation is the “secret” our customers must discover. Having a basic understanding of the tax law helps to explain those benefits.
I would like to talk about one of the biggest mistakes we make as insurance and financial professionals. We assume Americans understand income taxes. Nothing could be further from the truth. Not only do most of our customers not understand income taxes, there are very few insurance and financial professionals who understand income tax law and how to explain the benefits and challenges of those laws.
I will say it again: If you desire a quantum leap in your production and your ability to be of amazing service to your customers, you MUST UNDERSTAND and have a basic knowledge of our country's income tax laws.
If you desire a quantum leap in your production and your ability to be of amazing service to your customers, you MUST UNDERSTAND and have a basic knowledge of our country's income tax laws.
I have Canadian subscribers and the same is true for them. Even though people believe Canadians pay higher taxes now, they are nothing compared to what they will be when Canada's demographic time bomb explodes. Understanding tax law in Canada will help agents and advisors to sell more Tax-Free Savings Accounts and more cash value life insurance.
When you show prospects and clients how to be in control of the taxes they pay, rather than be controlled about how much they pay, you become a super-hero to your customers and interesting to prospects.
Another important secret to success in our industry always involves these three words, “Find the Money”. The amount of money in IRAs, 401(k)s, 403(b)s, 457 plans and tax deferred annuities is enormous. Our success depends on who gets to that money first. Will it be the government and the Internal Revenue Service, or will it be us and our customers? It has to be us and our customers, doesn't it?
Another important secret to success in our industry always involves these three words, “Find the Money”.
As I promised in last month's newsletter, the Internal Revenue Service would make available the new 1040 instructions some time in January. They did so in the middle of the month.
Here's my question to all of you: What would be the fastest and easiest way to build a basic understanding of the income tax laws of our country? Here is my advice: Please go to the website www.irs.gov. Click on forms and publications. When you view that page you will find a highlighted “1040 instructions”. Please click on that and print out the 108-page instruction manual and read it. I would read it as many times as it took me to get the gist of the material. I would pay close attention to pages 28, 30, 33, 103 and 104. Those pages will help you to inspire your prospects to take action and then find the money to accomplish the financial and retirement goals that they desire.
We are going to have a more detailed discussion of each of those pages. I want to share why they are so important and how to share that importance with your prospects and clients. Once you understand how to use the information that those pages provide, you will see a dramatic increase in your appointments and of course, your production. Your customers will be much better able to understand the magnificent value of tax-free compounding and our “progressive tax system” and how to take advantage of that information rather then be hurt by it. Let's start with page 28 of the 1040 income tax instructions and then continue with the rest of the pages that I recommended.
Page 28 – Social Security Benefits Worksheet
This page helps you to determine if any of your Social Security benefit is income taxable and how much is income taxable. If you are single and your income exceeds $25,000 some of your Social Security could be taxable up to 50 percent. If your countable income exceeds $34,000 and you file single, up to a maximum of 85 percent of your Social Security could become taxable. If you are married and file a joint return up to 50 percent of your Social Security can become taxable if your countable income exceeds $32,000. If the married couple's countable income exceeds $44,000 up to a maximum of 85 percent of your Social Security benefit becomes taxable.
Sounds ominous. Because it does, it prevents Americans from doing the planning they need to do to achieve financial and retirement success.
Here are a couple of facts: Currently the average annual Social Security for a single person is $18,000. For a married couple it is around $30,000. The higher a person's income, the LOWER the effective tax rate becomes on that taxable Social Security. It is vitally important to understand that. Also, if taxes are historically low currently, why not pay those taxes now, rather than wait until the government needs a much higher percentage of your income? Knowing and understanding this information becomes very valuable for middle and upper middle-income taxpayers. It is especially important for high income earners.
The higher a person's income, the LOWER the effective tax rate becomes on that taxable Social Security. It is vitally important to understand that.
In the January newsletter I presented a married couple prospect with a $30,000 annual income that came solely from Social Security and an IRA with $300,000 in the example. First you must show the clients that if they wait until both the husband and wife die, their children could easily pay 30 or 40 or even 50 percent in taxes because that income is added on top of their children's best earning years. So, somewhere between $90,000 and $150,000 does not go to their family, it goes to the Internal Revenue Service and the government. In many cases it could literally be everything they have earned in the IRA or 401(k) over the years. That is literally galling to our customers when they finally realize what will happen. In example number one in the January newsletter, I showed what would happen if we withdrew the full standard deduction of $27,400 for 2020 from their IRA or 401(k). This would cause $5,200 of their Social security to be taxable. If that is taxed in the 10 percent tax bracket, they would have to pay $520 of income tax on that $27,400 fully taxable withdrawal. Ask them if they would rather pay less than 1 percent tax on that withdrawal and eliminate the taxes forever or would they want to wait and pay 30 or 40 or even 50 percent on that account in taxes when their children inherit their money. What do you think the answer is? If you understand this information, then ideas two through five will become even more impressive ideas for your customers. Having your Social Security become income taxed becomes a valuable concept rather than something to be avoided.
Page 30 – Standard Deduction Worksheet
This is vitally important information for you to know and to be able to easily share with your customers. It essentially shows the amount of taxable income you can earn before you have to pay ANY income taxes. It is a great way to start a conversation with a prospect or client. “Did you know you can earn $27,400 of fully taxable income if you are over age 65 and filing a joint return with your spouse, before you have to pay one cent of income tax?” “Are you and your spouse taking advantage of the opportunity that presents to totally eliminate taxes forever on fully taxable money?”
This is vitally important information for you to know and to be able to easily share with your customers. It essentially shows the amount of taxable income you can earn before you have to pay ANY income taxes. It is a great way to start a conversation with a prospect or client.
The standard deduction for a married couple over age 65 can be found on page 30 of the 2019 1040 instructions. It shows that deduction is $27,000. In 2020, that increases to $27,400. On the top half of page 30 it shows the standard deduction for a couple filing a joint return under the age of 65 in 2019 was $24,400. That increased to $24,800 in 2020.
Let's go back to example one in the January newsletter. If the average Social Security is $30,000 for a couple and they withdraw $27,400 because the are over age 65, their gross income will be $57,400. That would be a solid retirement income. Using the Social Security chart on page 28 of the 1040 instructions we would determine that $5,200 of that Social Security would be taxed.
That $5,200 is in the 10 percent income tax bracket. Therefore, the tax would be $520. The tax would be approximately one tenth of a percent. “Mr. & Mrs. Customer, if you don't need all that income wouldn't it be smart to put what you don't need into a strategy that would help you accumulate that money income tax free? What if you never had to lose any money ever again, yet that money would be available to take advantage of opportunities, wouldn't that be amazing? If you had a critical illness like a heart attack, stroke or cancer wouldn't it be wonderful if you could access this money to help you to transition during this difficult time? Wouldn't it be amazing if that money was available for long term care expenses? Wouldn't it be a wonderful surprise if you could use most of the values while you were alive and when you finally died the strategy would replenish what you used for your family? Here's the best news of all; if you don't need the long-term care benefits you have not wasted one cent of your money on premiums. This saved money could be used to supplement your retirement income tax free later in your retirement. And when you die that strategy will pay whatever is left income tax free to your family, your business or your charity. Mr. & Mrs. Customer may I ask you a question? Do you know anything else in the world that can do what I just described?”
A little thing like knowing the standard deduction becomes spectacularly important in opening up conversations that will inspire our customers to take action. I want to be very clear. I could write an entire book about all the opportunities that are created if you just understand some basic income tax information and then learn how to share that information so a customer can understand its implications.
Page 33 – Qualified Dividends and Capital Gain Worksheet
I created a rule for this page. I call it the “Van Mueller rule of 106-12.” It essentially says a married couple can make $106,000 and still be in the 12 percent income tax bracket. This information can be used in several ways.
The “Van Mueller rule of 106-12” essentially says a married couple can make $106,000 and still be in the 12 percent income tax bracket.
First, if my clients have a joint income of $80,000 doesn't that mean they could take $26,000 out of an IRA or 401(k) and still be in the 12 percent income tax bracket? The marginal tax rate is 12 percent. The effective tax rate is 8.57 percent. Even a 3.43 percent reduction results in over $3,600 of tax savings. Think about that number compounded over 10, 20 or ever 30 years. It becomes an enormous amount of income tax savings for our customers when thought about in those terms. It makes you unique.
Second, aren't we nearing the end of the longest bull market in the history of our country? What if they could harvest gains from stocks, bonds, real estate, mutual funds, etc. at little or no income tax? Wouldn't they want to know? Let's look at the Van Mueller Rule of 106-12. Same couple as above. They are 55 years old and make $80,000 per year. Under the long-term capital gains rules if you are in the 12 percent, 10 percent or 0 percent marginal income tax rate you pay ZERO percent long term capital gains tax on assets held longer than one year. So, the Van Mueller Rule of 106-12 tells me this couple could take $26,000 in gains and pay zero percent income tax on those gains. Wouldn't they want to know that? What if you could reallocate that money into something that would never have any income tax liability ever again? Would 30 years of tax-free compounding be beneficial for our customers? Above $106,000, instead of paying 22 percent ordinary income tax they would only pay 15 percent long term capital gains tax. On line 15 of this Qualified Dividends and Capital Gains Tax Worksheet it also shows that if you make between $106,000 and $488,850 you would still only pay 15 percent long term capital gains rate rather than an ordinary income marginal rate of 35 percent. Wouldn't this create a wonderful conversation with a prospect or client at the end of a record-breaking bull stock market?
I could write and write about this however; I am just planting some seeds that will allow you to create great conversations with customers.
Page 103 – Major Categories of Federal Income Tax and Outlays for Fiscal Year 2018
I could talk for hours and hours about this page alone. There are two sides to the page. The left side shares where the government gets its income. The right side shows how we allocate spending the money.
Let's talk about income first. 41 percent of the government's revenue comes from personal income taxes. 28 percent comes from Social Security, Medicare and unemployment taxes. Here's the scary part: Our government now borrows 19 percent of the money they spend, and the percentage is increasing. Ask your customers what will happen to Social Security and Medicare taxes when 140 million Baby Boomers and Generation Xers start retiring and instead of paying in, they start taking out? Won't we have to borrow and borrow more money? The more debt we create will cause more of our budget to be spent on servicing that debt rather than providing services. Can you say OMG!!
Ask your customers what will happen to Social Security and Medicare taxes when 140 million Baby Boomers and Generation Xers start retiring and instead of paying in, they start taking out? Won't we have to borrow and borrow more money?
Now let's look at our outlays. There is very little of our budget that is discretionary. 41 percent goes to Social Security, Medicare and retirement benefits. 22 percent goes to social programs like Medicaid, Snap (food stamps) etc. 20 percent goes to defense and veterans' benefits. 8 percent goes to pay interest on the increasing debt, so that will increase as well. Essentially 91 percent of our budget is non-discretionary. If we ever do decide to cut budgetary costs it will probably come from these so-called non-discretionary budget expenditures. Doesn't that mean higher taxes and lower benefits? Mr. & Mrs. Customer, what if there was a way to not be hurt by these events and better still, what if you could take advantage of these situations. Would you want to know before or after they happen?
Page 104 – 2019 Tax Rate Schedules
There are four categories; single, married filing jointly, married filing separately or Head of household. The two you will use most often will be single and married filing jointly. You will notice that the rates start at 10 percent and work their way up to 37 percent. There are seven income tax brackets. That is why our tax system is called a “progressive” income tax system. The higher your income, the progressively higher percentage of tax you pay as the income increases. So, even though a married couple makes $106,000 over age 65 and their marginal tax rate is 12 percent, they do not pay 12 percent on every dollar. The first $27,400 they pay 0 percent in income tax. The next $19,400 they pay 10 percent in income tax. The next $59,550 they pay 12 percent in income tax. The marginal tax rate is 12 percent. The effective tax rate on every dollar is 8.57 percent. If we understand the difference and can easily explain the difference between 12 percent and 8.57 percent, we help customers dramatically decrease their income tax liability on their money.
That is how you find success and help a lot of customers find the money they need to achieve all their financial and retirement goals.
Don't forget, pages 28, 30, 33, 103 and 104. They will change your career and your life.
Let's get started with our sales ideas for this month.
Idea #2: No More Stretch! What about Cash Value Life Insurance?
This is a really important article. It explains what a stretch IRA is. It explains the effect that the Secure Act had on stretch IRAs.
What is exciting about this article is that it includes alternatives to the stretch IRA including the use of cash value life insurance. Get this information.
I do not think the loss of the stretch is that big a deal. It was used in less than 5 percent of the IRA transfers. I always asked grandmas and grandpas whether their children would take their inheritance now or stretch it over their lifetime. Most took the money now in spite of the taxes. I would ask those grandmas and grandpas if we could eliminate the income tax liability while they were alive, if it didn't hurt them, would they do it? They ALWAYS say yes. Now it is vitally important to ask this question: Grandma and grandpa, if we could show you a way to stay in complete control of your money until you take your last breath, but instead of giving that money to the government, nursing home or a hospital, you could keep that money in your family for generations to come, at the very least wouldn't you want to find out about something like that?
Title: Life Insurance and the Demise of the Stretch IRA
https://www.thinkadvisor.com/ (Think Advisor, January 9, 2020)
Idea #6: Learning to Deal with Families Where Alheimer's Is Present
Read this article. We are going to have to deal with scenarios like this more and more. Make sure you encourage that our clients' lives are not over when they develop Alzheimer's. Be patient. Allow your Alzheimer's clients to speak. They will appreciate your consideration. Help your clients have a sense of humor about their situation as humor releases tension. What about having the clients getting a Power of Attorney in place and having family present during conversations so that compliance isn't ruffled? Please read this article.
Title: When Financial Advice Meets Alzheimer's Disease
https://www.fa-mag.com/ (Financial Advisor, January 2, 2020)
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