Ed and Chuck remain in the Accumulation Phase and discuss “Why Income Taxes Matter”. The worst income source. Aaron Rodgers makes a zillion and his life is being threatened. CEO’s are custodians. How many cars can you drive? How many pairs of shoes can you wear? Fool’s errands. Ed’s old car. How much does happiness cost? Don’t be a blockhead. IRA’s ESOP’s. Teaching dogs to solve quadratic equations. Long-term capital gains. Die with debt.

Welcome to our listener-supported podcast, Money Talk, uncompromised absolute financial truths behind financial perceptions with host, Ed Sutkowski and Chuck LeFebvre. Let’s listen in.

Chuck LeFebre: Hello, I’m Chuck.

Ed Sutkowski: I’m Ed.

Chuck: Today, we are still talking about the accumulation process. Specifically, we’re going to be getting into the topic of why income taxes matter. Maybe for many people this is self-explanatory, but for some people it might be interesting to learn a little bit about the different rate schedules that it can apply to different types of income. We’re going to go from worst to best or maybe from worst to least worse as we run through today’s podcast. I’m going to talk about what is very clearly the worst type of income that a person can earn from a tax standpoint. That is also the most common type of income for a person to earn, and that is W-2 wages. In other words, you’re an employee of someone else and they pay you a salary. At the end of the year, they hand you a form called the W-2 form that declares how much they paid you in payroll and how much they withheld in taxes. Now, reason this is such a disfavored form of income is that, first of all, it’s considered ordinary income. We’re going to talk about different types of income, ordinary income, qualified income, and then investment income and its different categories. Ordinary income has a different rate schedule from other types of income. The rate schedule for ordinary income achieves the highest rates. For instance, in 2019, the highest marginal rate on ordinary income is 37%. Now that means that if you’re an individual and you earn over $510,300, then the first dollar you earn over that will be taxed at 37%. There’s a rate schedule that starts at 10%. It works its way all the way up to 37% on ordinary income. That can be fairly burdensome on its own but on top of that, if you’re a W-2 wage earner, there’s also what most people refer to as Social Security withholdings or Medicare withholdings. That’s another form of tax. You lump those together and really refer to them as the payroll tax. Collectively, there’s a 12.4% tax for Social Security half of which is paid by the employee and the other half is paid by the employer. Then an additional 2.9% that is taxed again split between the employee and the employer for Medicare. In the case of the social security taxes, that tax will only apply up to the so-called Social Security tax base, which is a number that’s indexed for inflation each year. Currently is just above $100,000, about $120,000 or so. I don’t have the exact number right in front of me. Above that number, the Social Security part of that tax will no longer apply, versus the Medicare tax which applies to your income no matter how high it goes if you’re a wage earner. You are taxed with these in addition to the income tax. Now if you add all this together, you add the payroll tax and the income tax and we’re just talking about federal. You can see how these percentages can add up and eventually get well in excess of 40% or even 50%. By the way, mentioned this on a previous episode. That employer portion of the payroll tax really ought to be thought of as a tax that’s paid by the employee. Economically, if you think about that if the employer were not paying that tax that would- economists who have studied this suggests that taxes paid by the employer would probably be reflected in increased salary if that were not being paid. Even though only half of that really comes out of the paycheck, it really effectively is all paid by the employee from what I understand. That is the worst type of income that you can earn. Now, Ed, you’ve spent a significant part of your career talking about this next type of income, which is really the tax-qualified arrangement. What’s the difference there?

Ed: Yes, my favorite topic along those lines, is the Aaron Rodgers, and the corporate executives, and all the folks that are making zillions of dollars for their activities. First, Aaron Rodgers, he gets a bonus of X dollars. That’s our ordinary income. That’s at 37%. Guess what? His Medicare tax is on everything. He can’t put any of that away. He’s not able to shelter it. Aaron Rodgers is a true reflection of market-driven compensation. He only makes what he makes because he performs as well as he does. As contrasted with, by the way, no corporate executive will like this. The corporate executive, not the founder, but the successor, custodians of the organization will make substantial amounts of $3, $4, $5, $10 million when they’re basically custodians. Let’s assume that’s our ordinary income. Well, so what? You get the 37%, plus the Medicare tax, plus the state tax. I don’t get it. Do you want to show what kind of car you drive or how many shoes can you buy? You got all this money, but it doesn’t relate to production. I have a great deal of concerns about why Aaron Rodgers is featured as making all this money when his life is being threatened every time he gets out in the field?

Chuck: We can probably fast forward to the end of Episode 100.

Ed: [laughs]

Chuck: Isn’t one of the punch lines of this entire endeavor that we’re engaged in, is the fact that chasing higher income, especially wage income, is a fool’s errand, isn’t it?

Ed: It’s silly. Not only a fool’s errand, it is absolutely silly.

Chuck: I think people are going to be a little bit shocked to hear us say that, but that’s not meant as a statement to create shock. Truly, if the focus is on increasing income, then that strikes me as, maybe someone– if they’re if their goal is to accumulate wealth, then increasing income and focusing on increasing income. My observations of people that many of the people with the very highest income, and again, especially W2 income, they do not have the wealth that people led focus their efforts elsewhere have achieved.

Ed: Well, strange truth to what you’re suggesting. I’ve run across these corporate executives, the law partners with these mega-firms are making $3, $4 or $5 million a year. Some accounts certainly some directors, but how much have you put away? What do you have? More often than not, they have multiple homes. Guess what, are they marketable? Kind of. They’re nice. In other words, I don’t know what it is but the drive to display, your economic benefits is overwhelming and it’s short-sighted.

Chuck: Now, I will say this, if someone’s going to pay you a salary of let’s say $10 million a year, or $20 million a year, or $30 million a year, you’re going to have a very hard time not accumulating substantial wealth. That’s not what most people who are chasing income achieve. Most people who are chasing income are going to maybe get themselves from the point of making, they start out and they’re in a job where they’re making $100,000 a year, and they really work hard, and they get up to 150 or 200. My experience is that until you’re in those stratospheric numbers, that your efforts are better placed elsewhere. Big part of the reason is because the income that you’re earning is more and more approaching these higher tax rates and being dragged down from the tax. You would be far better off diverting your efforts to achieving some tax savings or tax growth.

Ed: I think of the word envy, comes into a lot. My world, advertising is nothing more nothing less than envy. A new car, who needs a new car? Well, I want a nicer car than my neighbor.

Chuck: Ed, you need a new car.

Ed: I do not. [laughs] I don’t think so. That’s a sticking point. I drive my dad’s quite old inheritance car and I love it, the car that is. It just drives itself almost. Getting back to this question, the envy, “I only want to make a little bit more than my brother-in-law.” Envy is pervasive. I can’t envy Aaron Rodgers. I can never be Aaron Rodgers. I do envy my brother-in-law that makes $25,000 more than I do, irrespective of whether it’s $525 or just $500,000. Envy comes into this. The government recognizes it and takes advantage of it, right?

Chuck: Well, yes. I’ve seen this with so many people where what they’ll do is, they think they can get over that. They’ll agree with what you just said. They’ll say, “Yes, I’m envious of this person who’s down the street from me. I’m making $250,000 and that person is making $350,000. You know what? If I made $350,000, then I’d be happy because I can see that from where I’m at, and that’s my definition of happiness.” Then what happens is they make $350,000 and now suddenly they don’t care about that guy down the road. There is someone new that they’re spotting because then they met somebody by virtue of running in these new circles or whatever, and now I need to make $600,000. Then I’ll be happy. It is a never-ending cycle.

Ed: Yes. Quest for happiness, that could be a whole book. First, what is happiness?

Chuck: I think it’s been written.

Ed: Yes. What is happiness? What does it take once you’re there? I remember talking to Pete, and he was envious of Charlie, who’d made all kinds of money. I said, “Pete, how much more money do you want?” He said, “Just a little more and more than Charlie.” Again, it’s a gain. Getting back to today, what is my favorite, so to speak, my middle ground of tax planning? That would be tax qualified plans through deferred compensation, tax qualified arrangements we’ll call them. We’ll have several podcasts breaking each of these out. The bottom line is that those contributions are not subject to the payroll taxes, to the Medicare tax. The funds growing can be tax deferred, and in some cases the amounts are not taxed for state tax purposes. When you put all those numbers together, for every $10,000 you put away, there is a tax never paid of at least 25% on that.

Chuck: That can be pretty significant. The regular taxes, the ordinary income taxes, are deferred then.

Ed: Yes, getting a return on the money you’ve put in without paying a tax. Now, there’s an exception and we’ll not get into that today. Rough IRA, rough 401(k) plan, or rough plan that you can prepare tax, but then you sub it also to in other issues. The bottom line here is for every dollar that’s put away, deferral of self-gratification is worth a dollar versus if you receive it and invest it that’s worth 75 cents.

Chuck: Let’s say you’re a person who’s making $40,000 a year and you work for an employer who has a 401(k) plan. This is the quintessential question is, how much do I put into that plan?

Ed: As much as you can. If you don’t put away as much as you can, you are a perfect blockhead. [laughs] What was her name? Charlie and Lucy called Charlie a blockhead over the pumpkin quest. I’m overstating it, but the point is if you’re really looking to accumulate, not certainly mega bucks, but a nice retirement package, you’ll put the most you can put away, even if you have to borrow to make your living standards acceptable.

Chuck: That’s more important the younger you are, which also happens to be the point in life where it’s the most difficult to make that decision for a lot of people. Just get out of college, you have a lot of debts, you’re in what may end up being the lowest income job of your entire lifetime if your career progresses. You’re 20-years-old, 21-years-old, 25-years-old and you have this choice between, should I save some money outside of the retirement plan so they can get a down payment on the house?

Ed: Why do you need a house?

Chuck: You fast-forwarded to the end of my question. That versus put that money away in the retirement plan, where it’s not going to be accessible so you can have a down payment on the house.

Ed: If you live in a big city, why do you need a car?

Chuck: Yes. Well, more and more people are reaching exactly that conclusion.

Ed: Shared car, the point is you do not put your assets, your cash in the dead assets. Your home is not an investment. Your car is not an investment. Your golf clubs are not an investment.

Chuck: Your 401(k)?

Ed: Is an investment. It’s a big-time look at later on as to how that 401(k) plan should be invested. That’s a function of your age. The greater the risk, the younger you are and what are your fears and what are your concerns.

Chuck: It’s worth pausing. We’ve embedded this advice a few times in this episode already. Just to emphasize, when you make that deferral into a 401(k) plan, that is– Now, of course, for many people there’s an employer match. You might for the first 1% or 2% or 3%, the employer matches that either dollar for dollar or 50 cents on the dollar. Even if the employer isn’t doing that, you’re getting a direct subsidy, so-to-speak from the government. Because the money that you are putting into this plan is the W2 earnings, the money that is taxed and is characterized the very worst that income can possibly be characterized for tax purposes. You’re taking it out of one of the worst tax categories that exist and you’re putting it into temporarily at least a category where no tax is paid. You won’t pay any tax on that until after you retire, and even then, some of the taxes you won’t pay at all. It’s a no brainer.

Ed: It absolutely is. Let’s- in an overview fashion address the different types of arrangements that we’ll be discussing in more detail down the road. The very simple is your IRA. Let’s assume you’re self-employed, an IRA or a SEP-IRA or a simple, these are arrangements offer one form. It’s on the IRS’ published website. It’s one page. Double-sided, but one page. With a SEP-IRA, you can be putting away a lot of money. We have the 401(k) plan and trust, and that’s very important. It is a plan, typically with the trust, and therefore, there are all kinds of issues relating to the management of those assets of fiduciary. What is the correct composition of the assets versus the for example, the SEP-IRA, where that is your own individual IRA, has the same limits as many of the tax-qualified plan limits in terms of the amounts have set aside. With that IRA, there’s complete flexibility investment-wise. You want to make an, so it’s worth– By the way, I’ve seen some IRAs, older folks guess the amount in the IRA.

Chuck: Well, I think I’ve seen them too. Yes, we’re not talking about seven-digit figures. We’re talking about the eight-digit figures.

Ed: $22 million, and those folks are not young puppies, but they’ve put away a lot of money at the very earliest point. Not everyone should have $22 million. I’m not suggesting that but my point is, the opportunities of deferring and providing for a lifestyle that you can do what you want to do and now the big issues what you need to do with that money, but that’s for another day. The point is we have the 401(k) plan and trust, the profit-sharing plan and trust, critically as the Employee Stock Ownership Plan and trust, or ESOP. You’ll see this as an employee owned arrangement. That is the employees have quote, my favorite phrase, skin in the game. As I’ve suggested before, you visit a location that’s owned by an ESOP, and you’ll find those employees really acknowledge that they’ve got skin in the game. This is part of my company and I’m going to treat you as a real customer, versus one where the original tax-qualified arrangement or some mere 401(k) plan. The very best is the ESOP. Why? There’s a special exception with respect to an ESOP that permits you to convert which would otherwise be ordinary income to long-term capital gain? We’ll talk about that. It’s the best opportunity in the entire internal revenue code.

Chuck: Just to clarify for people, that opportunity applies to a pure ESOP plan that people would typically recognize as an ESOP. It also applies to any kind of 401(k) or pension plan where employer stock is an investment option. You have that same opportunity, if the, at least, if the plan provides for it. It may be crazy not to have the plan provide for it.

Ed: Yes.

Chuck: There’s an aspect of this, even though today we’re focusing on the tax aspects, that I think is worth mentioning while we’re talking about these qualified plans. It seems like there’s different takeaways for listeners in different economic circumstances. First of all, if you’re talking about folks that really are economically in a situation where it’s hard for them to save, and it’s hard for them to imagine building substantial wealth, people who say, “Look, I’m never going to have a $22 million IRA.” It seems to me that for those people, the benefits of avoiding that payroll tax in particular on the deferrals into these plans, and then having that growth occur over the lifetime, is just absolutely critical advice. Don’t even think about wealth accumulation unless you’re using this vehicle. If you’re a wage earner that is, let’s say below the 50th percentile in terms of national income, you just simply have to take advantage of these plans, if you expect to accumulate any wealth. I hate to be so blunt about it, but I think that that’s just mathematically a fact in that case. For people who are on the upper end of the income stream, there’s a different takeaway here, which is still a lot of the same tax advice applies. We talked about this in another episode when we were talking about different business organizations and people who are trying to avoid personal liability, I’m talking particularly about the physicians. These plans are the best thing going there too, aren’t they? You put money into an employer sponsored pension plan, and it is protected from creditors.

Ed: I found that 80% of our licensed professional clients, have their assets in an IRA. I’m sorry, make sure I’m very clear here. 80% of their assets are in an IRA. 80%. Why? Because they couldn’t otherwise get to it. I’m not denigrating licensed professionals. I’m just telling you, when you’re a licensed professional, your passion is to do the job for your clients, your patients or whatever, so you don’t have the energy, let alone the educational background to fully understand these other opportunities. In the case of licensed professionals, 80% of their assets are in an IRA. That is that we’ve worked through, I can’t say that’s nationwide. If you don’t like that, get out of the office, so to speak.

Chuck: My advice for anybody who’s listening, who’s a physician, or a lawyer or an accountant, or a financial planner, or any other type of licensed professional, where you’re talking about generating high income. Is that, if you’re in a management position where you can have influence on the way the organization designs its employee benefit plans. Then you should use that authority, use that opportunity to have very, very serious discussions about putting in place a very serious and aggressive, qualified plan that can be taken advantage of by everybody in the organization. Regardless of where someone falls on the income stream, there’s just tremendous benefits to having these plans in place.

Ed: Once it’s there, you have to watch out for fear and greed. Who’s going to be managing the assets? What are the charges. We’ll get into that. Get your pencils out and just put the math to this. If you have $1, you’re putting away $1, you put away $1 in year one, and that grew at the rate of 10%. At the end of the 20-year period, you’d have $6 and 73 cents. If you put away and multiply that by whatever, 10 or 100 or 1,000, and let’s assume the same thing, but you put $1 away every year. At the end of the 20-year period, you’d have $57.27 for each dollar. It’s incredible. Turning to the next most important vehicle would be the defined benefit plan and more specifically, the cash balance plan. Very complicated. I must tell you, the greater the deduction, the more complicated the device or the opportunity or the arrangement to secure. Nothing is simple. Yes, we have the IRA, or the simple, or the SEP-IRA, very straightforward. If you’re talking about big money, you’re talking about something that’s more complicated.

Chuck: That really does require an organization that there’s some, let’s say, a small group of people with control who are able to put a plan like that in place. It takes a lot of customization.

Ed: Yes, it does. Strange example. I’ve worked with several law firms in major cities, Denver, Chicago, and whatever. High performing professionals to talk to them about putting money away is like, assuming I can teach my dog how to do quadratic equations. It just doesn’t happen, and I’m astounded by that. I had an occasional lecture before groups of personal injury lawyers and talked about cash balance plans. There was 250 people in the audience, one person did it. One person. I don’t understand it, I didn’t understand it then, but I do now. It’s a consumption. It’s the absence of deferring self-gratification.

Chuck: Well, it kind of gets back to that whole concept we were talking about before about entrepreneurs in a previous episode, versus other types of people. There is just a different attitude that different– You either have that mindset or you don’t.

Ed: The upside-down nature of that is, these licensed professionals are well schooled.

Chuck: Very well-schooled, but what I find– and disagree with me please, is that most licensed professions and– We’re talking lawyers, we’re talking doctors, we’re talking accountants, we’re talking architects. If you get a license, I’m talking about you. Most licensed professionals, and there’s exceptions, but most of them just do not have the entrepreneurial mindset.

Ed: That’s true and I don’t understand it, but then again, who cares? I would bet with 1000 visitors of this podcast, maybe one will look and act on, and that’s okay with me. We’re designed to kind of demonstrate what’s really going on. Whether it works for you or not, that’s your question. It’s not our question. I’m going to sleep at night the same way I did last night, if you don’t take the observations.

Chuck: At the very worst type of income from a tax standpoint is W-2 income. These tax qualified arrangements, we’ve been sitting here singing their glories for the last 20 minutes or, I don’t know 15, 20 minutes or so. They sound like the best thing since sliced bread, but that’s actually in the middle.

Ed: That’s right.

Chuck: What is the best type of income then?

Ed: Long term capital gain. You have to have a capital asset, but long– you hold it more than a year, sell it. Best thing is, I hate to say this, but with this appreciation you’re dying to get a new tax basis, there’s no tax. We’re not getting into that today. Let’s adjourn to this long-term capital gain issue, Chuck.

Chuck: Yes. Here we’re talking about an investment asset, a capital asset, that ideally something that is growing in value, and you’re holding it for– it’s referred to as long term by the tax code if you hold it for more than a year. For this to really have its tax benefits, we’re talking about holding it basically for a lifetime. You’re talking about holding something for decades and the value of it is appreciating over that entire period of time. During that entire period of time, while the value is appreciating, you’re not paying any income tax on the appreciation and value. So far, it’s looking at an awful a lot like one of these tax qualified plans. You get the growth without any tax that’s occurring on the growth while the growth is occurring and I think what makes this an even better outcome than having a tax qualified plan, is that there’s only two things that are going to happen to this asset someday in the future. Item number one, the first thing that can happen to it is, you sell it at some point in time. When you sell it, then you’re going to pay the tax on the gain. That is the difference between what you sold it for and what you purchased it for, but that tax is going to be at the most favor great that the tax code provides, which is the long-term capital gains rate. If you’re in the very top income bracket, the bracket where you’re paying 37% on wages, the rate that will apply to long-term capital gains is 20%, and for most people the rate is 15%. If you get into the very top income bracket that caps out at 20% for those capital gains. Now ever since Obamacare was passed, there’s an additional Obamacare tax that would apply if the total AGI for the taxpayer. If it’s the couple that files a joint return, if AGI is above 250–

Ed: Now AGI is?

Chuck: Adjusted Gross Income. That would be what is on the very top line of the second page of your tax return, is your adjusted gross income. If that number is above $250,000 for a married couple that’s filing joint, then that additional 3.8% tax will apply to long-term capital gains. It actually applies to all investment income and that will include this particular income.

Ed: Including dividends and interest?

Chuck: Including dividends and interest. Basically, things that are not, there’s obviously a lot of nuances here, but in general if it’s not earned income, then it’s going to be considered investment income and 3.8% tax is going to apply to it. If your adjusted gross income in total, it’s over $250,000 for a married couple filing joint, or $200,000 for an individual who’s filing their own returns.

Ed: Let me make sure. Does it apply to tax qualified plan distributions?

Chuck: It would not qualify. Those are in a unique category because they’re considered earned income for the purposes of deciding whether this Obamacare tax applies. They’re considered to be wage income or they’re treated like investment income in the sense that you’re not paying the payroll taxes on them ever. You avoid both of these kinds of taxes on those.

Ed: You’re avoiding FICA, FUTA, unemployment comp, Medicare, whatever. That’s the 25% at least savings put away $100,000 in a tax qualified arrangement, versus otherwise you’re only going to be able to put away 75 if you’re putting away stuff outside the plan. It’s a big deal, oftentimes overlooked.

Chuck: With these long-term capital assets, if you sell it, the most you pay ignoring state taxes. The most you pay in federal income tax, so adding all the taxes together is going to be 23.8%. That’s significantly lower than the ordinary rates. Particularly, it’s significantly lower than the W2 rates. There’s another possibility, which is that you don’t sell it. Now, that can happen in two forms. Either you die without selling it or you don’t die, and you don’t sell it. Let’s talk about if you don’t die and you don’t sell it, why are we even talking about this? Well, because there’s something you can do that’s relevant that doesn’t involve selling it, but still involves getting some economic value out of it and that’s borrow against it. Which is just amazing that more people don’t do this? You can borrow against an asset that has accumulated in value and that’s a way of pulling money out. You’re generating cash that you can use to otherwise invest or do whatever it is you do with cash.

Ed: How am I going to pay the interest on the loan?

Chuck: Well, you pay the interest on the loan through whatever– You can even borrow to get more interest if you don’t have any other source of income. You’d use, either your investment income or your retirement income or whatever other source of income you have at that stage in life to be able to pay that interest.

Ed: Well, ideally, if I buy a stock or a series of stocks, had them for a long time that generate enough in the way of dividends to cover the investment interest. The carrying cost is net zero.

Chuck: Well, that’s the perfect scenario is when the asset that you’re holding that has accumulated in value is an asset that’s also generating income, then you can borrow against it, and the income that it’s generating is going to pay the interest that is incurred on that loan. You can get the, at least part of the benefits of selling that asset as in you get some liquidation features, you get cash against it without paying the tax. Given the fact that that is absolutely, of all of the things that we’ve talked about, the very best scenario for a person to enjoy during their lifetime a form of income, we’re talking about zero tax, just zero. In fact, you might even be able to deduct the interest so now we’re talking about negative tax.

Ed: My point is, you would hope that the dividends would cover the amount of the–

Chuck: Yes.

Ed: Folks who have been investing for a long time, you’d structure your portfolio, you’d have high dividend producing stocks, or dividend producing stocks and then you’d determine the amount of interest that the margin loan would require you to pay and you offset the two. You’re getting the cash out of it to buy whatever you’re going to buy, and yet you are having the appreciation in the stock over a period of time.

Chuck: It continues to appreciate and value because you haven’t sold it, even after you’ve borrowed against it and the dividends are paying this interest. Sometimes I’ll have a conversation with someone about this and they think, “Gosh, all I’m doing is kicking the can down the road, because obviously I’m going to have to pay off that loan someday.” My answer to that is, “No, you don’t. You actually don’t. It’s okay to die with debt. In fact, that’s not a bad plan when you have an asset that’s accumulated like this because guess what? You get a new cost basis or tax basis in that when you die, so that whoever is inheriting it from you, or the executive of your estate can sell it and then they pay no capital gains tax on it at all. They can pay it after your death, pay off the debt that was incurred on it after your death, and all of that tax that you never paid during your lifetime never gets paid at all. No Obamacare tax, no capital gains tax, no ordinary income tax. No payroll tax. This is a tax-free opportunity that exist that people typically think of as, “Well, gee, I can avoid the tax if I die with it, but then I never get to enjoy it during my lifetime.” The answer is, you don’t get to enjoy it during your lifetime if you’re afraid to borrow against it.

Ed: We get to the issue. Let’s go and make sure that I understand that example. Let’s assume for a moment that I’ve found mega stock and I paid $10,000 for it when I’m very young. It’s now worth $110,000, and I’m a ghost. My successors can sell it, assume the fair market there was 110, that $100,000 of built-in gain is never taxed.

Chuck: Right. That’s exactly right.

Ed: When I can offset the dividend income against qualified dividend income, you got to make an election, against have the carrying cost of the margin loan, I’ve got the cash out of it and I can do whatever I want with it.

Chuck: That’s exactly right. Ed, think about how much capital gain that is unrealized. We’re talking about gain that has not been taxed that Warren Buffet has in Berkshire Hathaway stock. We are probably talking about who knows, maybe over $1 billion in untaxed income. He’s a smart guy. I guarantee you that if he needs cash, he’s going to borrow against that and he’s going to die owning that stock and his estate will sell it.

Ed: Now, Chuck, because Warren’s talking about a lot of charitable distributions and contributions. When you’re at the mega bus stage, how many more hamburgers can you eat, so to speak? The bottom line here is the Internal Revenue Code takes advantage of the psychological inhibitions people have. You want wages. I understand that. That’s the worst possible. Borrowing against stock, oh my gosh. Borrowing against a stock? What happens if it fails? 20% of the stocks you buy are going to fail. Can you handle that? The psychology drives you to the worst possible form of compensation or income, but the reality is the best form is that that requires little discipline. Discipline the 80-20 rule, debt-equity ratios, and it requires some very disciplined approach.

Chuck: Right in the middle there’s is opportunity that really applies, is available for almost everybody. Again, requires going against what is the human condition here in deferred gratification and putting money into a retirement plan.

Ed: Good, well, next time we’ll have a little more fun. That’s it for today.

Thank you for listening to Money Talk. Please join us again and do check out our previous Money Talk topics.