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Business Owner Wealth Building

Name Your Number

As a business owner, we care about one number: the value of our business. If someone were to ask you to name your number for your business, what would your number be? Would it be something realistic?

This is an important question business owners need to ask themselves because it forces the owner to find where the value in their company resides. If they are solely responsible for the profit in their business, they need to shift to being an active investor rather than an employee in their own business.

I have created a crude tool to help business owners determine a rough value of their business. Use the Business Value Calculator to determine the value of your business.

Launch the Calculator


Proving Your Worth

Proving Your Worth

Everyday you prove your worth – at least that’s what you tell yourself.  What have you done today to prove what your business is worth?

The Sounds of Silence are not what we should be hearing.  Even when you are fully committed to building more valuable businesses, you need to take the time to document the value you are building to prove your value to someone else.

Running your business by the numbers is a good start provided you have accurate and up to date Profit and Loss Statements and meaningful Balance Sheets.  Your bank or your buyer is going to ask for a 3 year look back so you might as well do it right the first time.  On at least a quarterly basis (monthly even better) get into your expenses and see where you can cut and examine your income so you understand what people are actually buying.

While keeping good books is a hurdle that many businesses struggle with, even fewer take the time to document how they do things.  Remember if someone is going to buy your business or lend your business money they will want an assurance that the business can thrive without you.  Documented processes will boost the multiple you get to your cash flow which will boost your valuation by 30% to 100% or more.

If you are preparing for a sale you need to spend more time on your company or corporate book or organizational documents.  The neater and more up to date they are, the more serious your prospective buyer will take you and your asking price.

I know you probably think about documenting your business value the same way you think about going to the dentist but think about it this way.  For every process you document, for every months P&L and balance sheet that are accurate, for every organizational document you produce you are producing $10,000 ($50,000, $100,000 or more) of value for your company.  That’s worth doing.

And that’s a lot of money you are leaving on the table if you are not doing it.  Join the Business Godfather LLC Family and start building your more valuable business today.




Building a Tax Free Legacy

Using the Self Directed Roth IRA as a Tax Free Business Mechanism for retirement is super cool (more about that here…) but the same set up is even better when you use it with assets you may not need during your retirement that you intend to leave as a legacy to your family.

With the current US Gift and Estate Tax allowing individuals to leave $5 million and couples $10 million without incurring tax if they set things up correctly, the estate tax is not the scourge to family businesses that it once was.

The Self Directed Roth IRA provides two benefits for Estate Planning.  One is that if you convert tax deferred assets into tax free assets, by paying the income tax on the transfer from taxable funds you reduce the size of your taxable estate.  Second, and why this is so powerful, is that you can then leave the Self Directed Roth IRA to beneficiaries who will then have tax free assets available to them for the rest of their life.

That;s right, you can extend the power of this strategy for decades beyond your passing.  Your beneficiaries will probably build a statue to you and celebrate the date of your birth (or death) with a parade and a celebration that lasts long into the night.

Your beneficiaries will not see the benefit of this until they are 59 ½ as they will have the same limitations on receiving compensation from the business as you would but that makes the compounding even that much more powerful.

Using the Self Directed Roth IRA Legacy strategy can be effective for businesses with a long time horizon like rental real estate.  This strategy can also be used to fund businesses on a tax free basis with cash from the original business.  And if you or your beneficiaries run out of imagination or energy you can always convert the business assets into financial assets and ride the slow sleepy preservation strategies on offer to a pleasant tax free retirement.

Join the Business Godfather LLC Family so we can start building your long lasting (tax free) legacy today.


Build a Tax Free Business

Back in my lawyer days, clients would come in and ask how they could make sure they would not have to pay taxes.  “That’s easy,” I would tell them, “Just don’t make any money!”  I would go on to tell them that they were thinking about it all wrong, “You should want to pay more taxes than anyone else because that means you’re making more money.”

Now I know there are charlatans out there selling ideas about how corporations, trusts, special purpose entities, insurance companies, etc. allow you great ways to avoid paying taxes.  The simple rule is this – generally if you make money, you owe taxes.  This has been going on for thousands of years and certainly since 1986 in the US.

However your munificent US government does allow for tax free business opportunities.  Yes, you can create a tax free business opportunity and not run afoul of the current tax code.  There are definitely restrictions on this and details that need to be followed to do this correctly but it is certainly worth your time to learn how to do it correctly.

One of the requirements is that you can not be paid a salary or as a contractor from the business.  So in order to make this work, you will need another source of income from another business or from your assets.  As a Business Godfather LLC Family Member you are already working on developing multiple businesses so this should fit into your overall Success Plan.

Keep in mind that you would not be able to derive any benefit from the business until you are 59 ½ at the earliest.  For some of you that may be a long way off but for others this may be a great strategy for you to add to your overall Success Plan.

The mechanics of this are first you would need to establish a self directed Roth IRA.  If you have a Roth IRA with a traditional financial institution you simply need to transfer the assets from the established Roth IRA into the Self Directed Roth IRA.  You can do the same thing with a Roth 401K from a previous employer or from a Roth 401K if you are already 59 ½ in most instances.

If you do not already have assets in a tax free account, you can contribute to a Roth IRA if contribution limits allow or you can convert from existing traditional IRAs, 401Ks (and the like) from a previous employer or 401Ks (and the like) if you are over 59 ½.  These assets will have a 5 year delay on when you can realize benefits from this account even if you are over 59 ½.

After you establish assets in a Self Directed Roth IRA, the assets in the Self Directed Roth IRA would be used to purchase original issue stock or other equity interest in a new corporation or business entity.  The new corporation or business entity would then use the assets to establish or purchase a business.  This needs to be arms length so don’t get any big ideas about selling your existing business to the IRA entity as this is a prohibited transaction.  You can serve as Director of the company as long as you do not receive compensation for doing so.

Now I know you’re thinking “Great, my Roth IRA owns a company that can’t pay me anything – Why would I do that?”

Well the company can pay dividends or profits to the Roth IRA.  This money can be used to invest in other businesses or can be distributed to you as beneficiary of the IRA once you are 59 ½ or, if the 5 year holding period applies, after five years of your initial deposit.

This strategy can work well for a cash flow business that others manage for you.  Imagine a franchised convenience store (or some other business) that generates a decent return on capital and then imagine a tax free income stream from that business throughout your retirement.  Probably a better return than your balanced portfolio that your financial services professional is producing.

For specific guidance on the mechanisms, join the Business Godfather LLC Family or review  Swanson v Commissioner 106 T.C. 76


IRS Field Service Advice Number: 200128011


Figure Out What You are Going to Do the Rest of Your Life

“I am trying to figure out what I am going to do the rest of my life” is something a colleague of mine told me after he had sold off his primary business.  He was looking for ideas because he knows retirement is not something most business owners are good at.

The most successful business owners I have worked with over the years always had multiple businesses and multiple streams of income so when they exited one business they had other business ventures to focus on.  When I talk about the Six Value Drivers in Your Business effectively what I am trying to get you to do is develop multiple streams of income and multiple streams of value within your core business.  At the same time you should always be developing other streams of income outside your core business.

In order to do this well, you need to extract yourself from the day-to-day as an Owner Operator and approach each of your businesses as an Active Investor.  For each business you are an Active Investor in, you need to identify the Strategic Objectives the business must focus on and then track Action Items and Results on a periodic basis.  I work with business owners to help them develop their strategic Action Plan to do these things and more.

Once you systematize your active investments and only focus on what’s important, then you can make sure you are constantly figuring out what you are going to do the rest of your life.

Your gift as a business owner is that you can take a big idea and enjoy the risks while the big idea grows.  Most people don’t have that skill.  What you are going to do the rest of your life is harness that skill.

Business owners sell themselves short when they take on someone else’s vision of what they should be doing.  Run a charity – maybe; Be a philanthropist – if you have nothing else to do with your money; Play golf? – really is that the best you can do????

The world needs creative risk takers.  Don’t curl up in a ball when you have cashed in some of your success.  Use your skills to develop new opportunities for you family, your friends and your community. 

That’s what you are going to do for the rest of your life – with the help of your Business Godfather.


How Can you Make Your Business More Valuable?

You have come to the right place!

Simply put you can make your business more valuable by:

  1. improving your performance
  2. proving your performance
  3. demonstrating your attractiveness to others

Each of these focus areas will provide immediate impact on your value.  Even more important the better you master these focus areas, the better opportunity you have to increase the multiple used to value your business.

Most small businesses get valued using a 2X or 3X multiple of cash flow.  Owners that focus on building more valuable businesses can increase that multiple to 6X, 8X or more than 10X with proper strategic focus.
Let Your Business Godfather show you how.


ISO Perfect Business

Many Business Owners start their business with starry eyes and big dreams. After a while they realize their business has changed and they have changed. The business is not as much fun and they are effectively unemployable. This changes their relationship with their business often not for the better.

Without common purpose and effective focus, business owners can lose track of the awesome potential in their business and themselves.

One symptom of this is a business that is largely reliant on the efforts of the owner. The owner immerses in the business until the business owner and the business become one. This parasitic relationship does not yield healthy results for the business or the business owner. This is not the recipe for a perfect business.

Rather than becoming one with your business, you should work towards extracting yourself from the operation of your business. Actively work for your own obsolescence by developing people and processes that will allow your business to grow without you.

As you do this you will be able to realize more potential for you and your business. You will start building a more valuable business that can have a greater impact on your industry and community and provide more benefits to you both personally and professionally.

If you want to learn how to build a better relationship with your perfect business, contact your Business Godfather and we can start building your more valuable business today.


Prioritize Your Business Wealth

As silly as it sounds, most Business Owners like you do not treat their business wealth as a priority.

Now Business Owners know that their business is their most important asset but they are usually way more focused on the income and lifestyle their business provides rather than maximizing the value of their business.

Prioritizing your business wealth does not mean you need to spend more time on your business but it does mean focusing on how to make your business more valuable instead of wasting time on the tyranny of the mundane.

Back in my lawyer days, I had two clients in the same type of business. They both put in long hours and provided great service. The difference was that while one owner took pride in how busy he was, the second owner focused on how he could make his business attractive to potential buyers by documenting his processes and keeping a clean set of books.

You probably already figured out how the story goes. The first owner got burned out and sold his business to a local competitor for what amounted to an employment contract. The second owner sold to a national firm for a nice upside.

Same business. Same effort. Different results.

As Business Owners, we never want to confuse efforts with results. More importantly we want to focus our efforts on where we can get the most impactful results. Your Business Godfather can help you focus your efforts to build a more valuable business.

Contact me if you are interested in getting started to build a more valuable business.


Converting from an Owner-Operator into an Active Investor in Your Business

Business coaches and business consultants love to tell prospective clients that they will help them work “ON” their business and not “IN” their business. The business owner thinks that sounds better than what they are doing so they move forward. The business owner, coming from an Owner-Operator mindset, however rarely changes their focus from operations and interjects themselves into day to day operational issues and/or disconnects themselves from the business which ends up hurting their results and hurting their income, their wealth and their emotional well being.

The Business Godfather helps our clients approach their business as an Active Investor rather than as an Owner-Operator. As an Active Investor, you obviously need to be active in your business. As an Active Investor you are also expecting to get an above average return on your resources – your time, money and expertise. As an Active Investor, your efforts focus on how you can improve the return you are getting on your resources so you can grow your income, your wealth and your impact.

Liberate yourself from the tyranny of the mundane by focusing on the highest impact aspects of your business.   Transitioning to an Active Investor mindset also allows you to be involved in multiple businesses or to develop multiple lines of business within your existing business. This is where you will be able to leverage the skills you have developed as an entrepreneur and apply them to generate multiple sources of value for you and your company.

Think of it this way – there is only one CEO of Exxon Mobil or any other similarly large company. My bet is if one person can manage a huge operation like that then one person can manage your business as well as others provided that focus is placed in the right areas. Even more so with all the technology and services that allow you to slice and dice different functions available today, there is no better time to be an Active Investor in your business and businesses.

As an Active Investor, you will understand how the 6 Business Value Drivers apply to your business and then you will focus your efforts on the Value Drivers that will build the most value in your business. The Business Godfather helps you identify three strategic initiatives that will help you make the 6 Business Value Drivers work for you in your business.

By linking all your actions to these three strategic initiatives, you will be focused on building a more valuable business. Almost as important, you won’t be focused on mundane operational tasks that are not helping you build a more valuable business.

If you are interested in learning more about how the Business Godfather can help you build a more valuable business send me an email HERE (link to


What Are You Best in the World At?

The first thing Business Godfather clients do is figure out what they are best in the world at (or at least what they plan to be best in the world at).

Now for the humble among you, you may think that is too bold. You will be content with putting some bold sounding adjectives and adverbs around an extremely, remarkably, incredibly average business concept that prides itself on high quality results, excellent service, focus on the customer and _____ (insert favorite promotional cliché here) rather than attempt to carve out how your business stands out from the 7.3 billion other business ideas out there.

If you are not planning to be best in the world at something then you should probably rethink your business concept and business model.

Success as a business owner starts with crystallizing what your business strives to be best at everyday. This makes sales easy. This makes hiring easy. This makes marketing easy. This makes operations easy. Knowing what your best in the world at is at the core of confidence and confidence is at the core of performance.

This does not need to be empirically based or even provable other than to yourself. In my younger days I considered myself the best wiffle ball player in the world – true or not this fed weeks and weeks of not making outs and great pitching performances. As a business attorney, I was the best at providing legal solutions with a practical business perspective. As the Business Godfather, I am the best at building more valuable businesses.

People cloud this up with Mission, Vision and Values statements that sit on walls or on bookshelves. If you know what you are best in the world at you already know your mission, vision and values because you actually live it every day.

The other side of this is that if you are spending time on something that you are not best in the world at, you should probably hire someone else to do that.

If you hem and haw about what you are best in the world at or give a mumbled answer filled with jargon and buzzwords, you would probably benefit from taking some time to articulate what you would like to be best in the world at. I guarantee you will feel energized and excited about your business.

Once Business Godfather clients complete this first step, we focus on identifying three key strategic initiatives to focus on that will help the business demonstrate what it is best in the world at and which allow the business owner to transition from being an owner-operator into an active investor in their business.

If you are interested in learning more about becoming a client of the Business Godfather send me an email HERE (link to

Diamonds Are Forever: Polishing Your Wealth Diamond

Enjoy the Video for Background Music while you read this Post:

Back in my lawyer days, I would have deduction-crazed clients come to me and say, “I don’t want to pay taxes, how can I do that with my business?”  My response was always, “That’s easy, just don’t make any money.”

I would continue like this, “Your goal should be to pay more taxes than anyone else, because that means you made more money.”  And while that is true for most businesses today, one of the greatest benefits of developing your Personal Financial Business is that trading is the only business that your very own, U.S. Government says you can do TAX FREE.

TAX FREE.  No dodgy tax shelters, no claiming the US tax system is voluntary or any other malarkey.  Once you are 59 ½ you can extract money from your Roth IRAs (or Roth 401ks) tax free.  Totally above board, totally AOK with the U.S. Government and totally liberating from the fear and loathing offered to you by the financial services industry.

With more imaginary and real fiscal cliffs, debt limits and other financial firestorms brewing in our future,  recognize that we have another decade or more of this uncertainty and very real threat of higher taxes and lower growth.  So how do we protect or insure ourselves against this uncertainty?  We can choose to be victims or we can get on the right side of this trade.  As business owners of our own Personal Financial Business, our job is to get on the right side of this trade.

Once we start building our Personal Financial Business and have identified what our success looks like, what our 3 income sources, our 3 wealth management strategies, and our 3 wealth preservation approaches will be, we need to start looking to how we can manage our business as tax effectively as possible.

I developed the concept of the Wealth Diamond a few years ago to open our student’s eyes to the power of developing a tax free trading business as part of their overall Personal Financial Business.  There are four basic ways that we hold our wealth in the U.S:  Cash or Cash Equivalents, Taxable accounts, Tax Deferred Accounts and Tax Free Accounts.  The perfect distribution would be a split with Cash and Tax Free (heavily weighted).  While this is possible, most of us have legacy accounts and are where we are so we have our wealth distributed across each of these categories.


Significantly, to make this work you need to have developed the skills of trading and investing as identified in your Personal Financial Business Plan.  Once you have that skill you can either start building up your tax free account or once you are 59 ½ use your tax free account to generate income so you can tax less risk or keep more of what you earn.  Pretty cool.

I recommend that just about everyone have at least $10,000 set aside in a Roth Account to use once you know what you are good at in trading.  In our current tax schema, anyone can convert Tax Deferred Assets into a Roth IRA provided they pay the taxes of this taxable event.  There are no income restrictions on a Roth conversion.  If you do not have Tax Deferred Assets, you can deposit funds in a Traditional IRA to the extent of your earned income with the goal of converting that at some future date provided this does not change.

You are probably saying, “But I thought I could only own mutual funds or stocks in my Roth IRA.”  Actually the US Tax Code allows for more types of assets than you can imagine in a Roth IRA including financial assets such as Futures, FOREX and Options.  Most of the restrictions come not from our beneficent government but from the Mutual Fund Company or Stock Broker who set up Your Roth IRA.  Whose side are they on anyway?  Not yours.

Our goal is to balance our assets across the wealth diamond in different proportions based on our goals and needs.  Each of the four categories have strengths and weaknesses, advantages and disadvantages.  We want to have enough Cash to cover us for the foreseeable future and for rainy days.  Taxable accounts are beneficial for learning to trade and as long as tax preferences remain for certain types of income such as from Municipal Bonds and Dividends.  Tax deferred accounts help us amass assets for retirement and may have loan features and other benefits for our Personal Financial Business.  Tax Free accounts should be part of most everyone’s post 59 ½ income strategy.

Once you have your primary income from Tax Free sources, you will not need to care about fiscal cliffs, financial tsunamis or just plain higher tax rates.  The Wealth Diamond insures that you can turn off your TVs and get back to enjoying life.

Few things get people excited like the US Tax Code so please let me know what questions you have related to the Wealth Diamond and building your Personal Financial Business.

Pry this Business from My Cold, Dead Hands

Many business owners primary asset is their business. When you raise the issue of retirement, they laugh and then say they will work until you can pry this business from their cold, dead hands (or something like that). This mindset comes from never transitioning from an Owner-Operator to an Active Investor in your business.

As an Owner-Operator, you and the business are co-dependent – one cannot stand without the other. This dependency relationship provides the benefit of certainty and security, but as with all things, security is the enemy of freedom.

As an Active Investor, you look at your business as just one of your many assets including time, energy and effort. Each asset you have should have a purpose – e.g. to provide you with monthly income, to pay for your healthcare costs, to support the lifestyle you want to lead, etc. You then focus your efforts to optimize the production of that asset.

If the only thing that your business can provide you is a monthly income, then you need to start developing other assets. That may mean developing additional sources of value in your existing business – adding income streams or acquiring or developing assets. Owning multiple businesses is also a logical step for most business owners as this allows them to apply their primary skill set across multiple assets. Active investing in real estate is also an option that works well for many Business Godfather clients.

As an Active Investor, you can still be involved in the important decisions in your business but you will have developed the people and processes to a level so that you can extract yourself from the tyranny of the mundane and focus your efforts and expertise to develop multiple sources of value across multiple businesses. This will allow you to help more clients, provide for the livelihood of more employees and change your relationship with your business.

Converting yourself from an Owner-Operator to an Active Investor will allow you to enjoy your business more and not have to worry about holding onto it tightly to the grave.

5 Essential Rules for Successful Active Investors

Whether you are an Active Investor in businesses or financial assets here are 5 Essential Rules for Successful Active Investors:

  1. Buy Wholesale – Escape Retail
  2. Expand Your Universe
  3. Use Smart Leverage
  4. Scale Matters
  5. Pull Out Your Crazy Meter

1. Buy Wholesale – Escape Retail: Every business owner knows that you need to work to get the best price available but to the greatest extent possible you want no part of the retail or standard experience. I love the story how Steven Spielberg would don a suit and bluff his way onto the Universal Studio lot so he could work as an unpaid intern in his early days. Going through the front door rarely works – unless you’re overdressed for the part.

Any time you are going through the front door in a standard way (retail) you are going to have a lot harder time to be successful. Experienced real estate investors prefer tax liens, foreclosures and estate sales over conventional retail real estate transactions. Seasoned restaurant owners would never pay for more than the cost of used equipment, fixtures and furniture. Wise financial investors would never buy a mutual fund or use a conventional financial adviser.

2. Expand Your Universe: Generally great business innovations come from taking an established process from one industry and applying the established process to a different industry. Expanding geographically can help a local business go regional, a regional business go national and a national business go international. For financial investments, professional have broken free from old school stocks and bonds and moved into futures, FOREX (currencies) and options. Breaking free from the conventional and expanding your universe will allow you to see the great opportunities that surround you every day.

3. Use Smart Leverage: When I was growing up I read about business icons like Ted Turner and Donald Trump and one of the things that jumps out at you is not their success as much as how when they failed, they failed spectacularly. Now the inspirational lesson is they did not give up but while they were crashing and burning my bet is it wasn’t very much fun. For many boom and bust entrepreneurs and real estate investors, the problem is they are always RISK ON.

On the other side there are many personal finance pundits like Dave Ramsey and Suze Orman who abhor debt and are largely RISK OFF advocates.

Neither of these approaches provide a sustainable, consistent way for most people to generate income, build wealth and retain it.   The problem with being RISK ON all the time is that when the inevitable sine curve of life hits, the high leverage collapses the house of cards as we saw with the Savings and Loan crisis of the 1980’s and the Great Recession of the 2000’s. The problem with being RISK OFF is that for most people, except multi-millionaires like Ramsey and Orman, you can’t generate significant income and wealth without the use of leverage.

What I mean by Smart Leverage is recognizing there are times when it is appropriate to be RISK ON and other times when it is appropriate to be RISK OFF. Allowing your personal business to phase back and forth from RISK ON to RISK OFF to RISK ON to RISK OFF allows you to ratchet up your net worth and reduce the likelihood of taking significant steps back. Success in life and business is about taking calculated risks when we are ready willing and able to handle those risks and giving ourselves some respite to prepare for the next great opportunity after we realize some rewards we earned.

4. Scale Matters. The Internet has removed all excuses for thinking too small. You can have a footprint as large as you can imagine. Part of your evaluation of opportunities has got to consider what opportunities you will be giving up by pursuing certain investments (“opportunity cost”) and balancing the potential upside for the opportunity to the opportunity cost.

Every opportunity needs to be large enough for you to get excited about the upside but not too big of a risk where it gives you ulcers. Your answer to this has nothing to do with the size of your bank account but goes to your core risk tolerance and reward satisfaction level. I know multi-millionaires that can’t stand losing $100 and thousandaires who would place everything on RED and a spin of the wheel. It all depends on you.

5. Pull Out Your Crazy Meter. If everyone agrees it is a great business, you should NOT invest in it. Every good investment will make someone say “that sounds crazy to me.” This was true of the internet in 2000, real estate in 2006-7, and other manias throughout history. As the Wall Street wisdom tells us, when the shoe shine boy gives you stock tips its time to get out. For business ideas, if everyone agrees you will be paying retail and the opportunity has probably passed.

So when you are evaluating great Active Investing Opportunities, pull out your crazy meter and make sure it registers a little crazy to others but which has a risk-reward balance you are comfortable with.

Code of the West in Business

When I was a little kid I dreamed of being a cowboy – not very practical for some one growing up in New York – but I still find the Code of the West a great guide to living life.

Here’s a few excerpts that you can apply to your life today:

“A cowboy’s word is his sacred bond” – People are so inundated with the tyranny of the mundane they are incredulous when you do what you say you are going to do

“Bargains sealed with a handshake are more binding than legal documents” – As I used to say in my lawyer days, a contract is only as good as the people you make it with.  The first day of law school they teach you a contract is a binding promise.  The second day of law school they teach you you can break a contract (as long as you pay damages)

“Be loyal to the boss and the brand.  Be thankful for your job.  Lay down your life for the privilege of defending your outfit”  Unless you are an owner, we are all on one day contracts so be part of a company you believe in and that has a mission that you are proud of.  Investing your loyalty and appreciation will yield rewards.  Not investing your loyalty and appreciation will cause you harm.

“Be Cheerful.  Endure hardships without complaining.  Don’t make excuses”  Nothing worth doing is easy.  Own your results.  Be someone that others want to be around.

“Grant quick assistance to friends and strangers in need.  Try to be better than the other fella.  Be generous with your life and your money.”  If you are not in the business of helping others, you will soon be out of business.

“Demand square dealings.  Never tolerate cowards.” Stand up for what you know is right.  Don’t accept what you know is wrong.

“If its not yours, don’t take it.  If its not true don’t say it.  If its not right, don’t do it”  Simply said but challenging for many.  Make sure you are on the right side of this one – we want to avoid everything that starts with an “i” – incurable, insane and indictment.

And of course, “Never sell your saddle”

How can the code of the west help you do better at work or in life?

If Its Free, Its for Me: Tax Free Investing Opportunities

My old friend Matt was famous (in our little world) for saying “If its free, its for me!”

As I work with people on their Personal Financial Business, I realize not enough people are taking advantage of the best free there is for investors:  TAX FREE

Reviewing the Wealth Diamond, there are four basic ways to position your investment assets: Cash, Taxable, Tax Deferred and Tax Free.  Even if you are a true patriot, the most logical way to hold your money is Tax Free – in a Roth IRA or Roth 401K.  Unfortunately, most people have the vast majority of their money in Tax Deferred accounts.

Now tax deferral is generally pretty good, as it allows you to build up your gains over time without reducing your assets to pay taxes.  Unfortunately when you take your money from a tax deferred account you realize you were only holding a good portion of that money in trust for your government when you pay income tax or Alternative Minimum Tax (AMT) on everything you take out.  Even with this Tax Deferral is generally better than taxable accounts but in any event Tax Free is better than both.  Under the current US tax code, you have the power to convert your tax deferred assets to tax free.

As a general tax planning rule, you want to accelerate your deductions and defer paying taxes.  However if you are paying taxes to establish tax free income in most circumstances it makes sense to pay taxes up front to receive the tax free income over the course of your retirement and the retirement of your beneficiaries.  If you use taxable assets to pay the tax on conversion, this is a no-brainer decision.  Effectively, in this case you are converting taxable dollars into tax free dollars.

If you are paying the taxes from the tax deferred assets then the calculation is a little more complicated because you have to project how your tax rate during retirement compares to your current tax rate and also determine how much of the gains you would pull out on an annual basis.  If you will use more than half the gains each year, a conversion to tax free may not make sense.  If you plan to use less than half the gains each year a conversion generally makes sense.

If you intend for your tax deferred assets to be part of your legacy than a tax free conversion also makes good sense.  A traditional IRA has Required Minimum Distributions once you get over the age of 70 1/2 but a Roth IRA does not.  This way you can maintain your assets in a tax free state as long as you are alive and even better, you can pass your tax free assets to your beneficiaries and they get the benefit of tax free income in their retirement as well.

Take a look at your wealth diamond and ask your self, are you taking advantage of the best and most underutilized strategy available to US residents – TAX FREE income in retirement.  What would Matt say?