Many times people get very uni-directional in their thinking and make improper decisions. On some occasions it is because they do not know what they do not know. At a recent seminar I heard a young man (about 23), during a discussion about 401k plans, blurt out…”why should I invest into a 401k plan… since when I am ready to retire at 65 or 70, well, $401,000 dollars will not really be worth much.”
He thought a 401k plan was a place to put money that would only grow to $401,000. Don’t laugh- many people still think that when they sell their house, in order to avoid capital gains tax, they must buy their next home of equal or greater value. The law regarding this changed dramatically in 1997 (17 years ago), yet, the majority of Americans still think the old law is in effect. Get professional financial help and save a bundle before you make any move.
Here are a few examples that professional financial advisors have saved people bundle of money just by thinking outside the “uni-directional” box.
Example 1: A client was able to use capital gains to escape the tax collector: “Dad” was in the highest federal tax bracket (40%) and was planning to pay down his daughter’s $18,000 student loan out of his own income (we will leave the discussion why he was doing this for another time). Dad would have had to earn $30,000 of salary to net the $18,000 for the payoff using uni-directional thinking. (So it really would have cost him $30,000 to get rid of the loan not just $18,000.)
The daughter was in a much lower 15% bracket, and, the client (Dad) was holding appreciated stock. So rather than having “Dad” use cash which would be subject to ordinary income tax rates, the advisor suggested “Dad” gift the appreciated stock to his daughter.
Since the adult child was in the 15% tax bracket when she sold the stock the long term capital gains tax was ZERO. (By the way the Dad had bought the stock originally for $2,000… so his real cost to pay off the loan… was $2,000). All the time I hear people say I do not want to pay for a professional advice. Yet, by not paying a small fee for expert ideas in this case it would have cost “Dad” $30,000 instead of $2,000 to pay off the $18,000 loan.
Example 2: A couple owned a home on more than 5 acres of land. They did not want to leave the home and they did not need the excess land. At the same time they wanted to expand their condo in the city. Two different “brokerage firm advisors” told them to take money out of their retirement accounts to fund the condo expansion (at ordinary income tax rates). A Certified Financial Planner told them otherwise… “Sell your extra 5 acres at capital gains tax rates and keep your retirement accounts growing.” So they kept their home, upgraded the condo and kept their retirement accounts. Again, uni-directional thinking would have had them paying at least 39.6% ordinary income tax rates (plus state income taxes) on the retirement monies versus a 15-20% capital gains tax rate on the land.
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