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Christopher H. Loo, MD-PhD: Welcome, everybody to this week's podcast episode for the Financial Freedom for Physicians Podcast. I'm your host, Dr. Christopher Loo. And as you know, we talk about four different types of freedom: time, location, emotional and financial freedom. And we started out with a group of physicians and now I'm opening it up to the masses and offering individuals that are doing things on the cutting edge outside of the box thinking. So they bring you information education to empower you and inspire you on your freedom journey.
So today, we have Lance Belline, and he is a CFP Financial Advisor. And he's going to talk all about financial freedom, taxes, wealth management, and I'll let him share more of his story with you guys. So Lance, welcome.
Lance Belline: Thank you for having me, Dr. Loo. Pleasure to be on your show.
Christopher H. Loo, MD-PhD: We were talking backstage. You know, you have a very interesting background. A lot of physicians are interested in finances. So tell us how you got your start in the financial services industry.
Lance Belline: Yeah, I got started actually, right out of college. So not that I had a vision or crystal ball, what I wanted to do with my life. I had a finance degree. But that is not like I knew exactly that I wanted to be a financial advisor. And what I found is, I was a hard worker through school, but I didn't have great grades. And I didn't enter the best companies. And so, I kind of found out that when you don't have those two combinations, the companies in my area, which is in Northwest Arkansas like Walmart, JB Hunt, or Tyson, weren’t overly impressed. I wasn't wearing them.
And so I found that to go into the in more on the sales side, where I was able to get in interviews. And that's when I got introduced by a firm that said, Hey, why don't you consider being a financial advisor? And tell the truth, It's not like I knew exactly what that was, but it was a job at the beginning. But through, I'd say divine intervention led me there. And I then became a student of financial planning, and just really dove headfirst in it and worked very hard in those first five to 10 years, became a certified financial planner, after about four or five years in the industry. And then it just evolved. I started my company in 2009, with one person. Now that's evolved to nine advisors, and I think, eight full time staff. So it's a small boutique firm that I currently have.
Christopher H. Loo, MD-PhD: Yeah, that's a very fascinating story. And finances are so important in today's economy. What type of clients do you work with?
Lance Belline: Yes, Dr. Loo, generally speaking, we're working with individuals that have a little higher income, higher net worth, that are planning focused. They are wanting to get guidance and counsel that would help them, you know, combine tax strategies with investment strategies that's going to allow them to, of course, achieve their financial goals, but hopefully pay less taxes over their lifetime.
And at age 37, I formed a mastermind group, a study group of other advisors in the industry. And what I wanted to do then is share best practices, ideas, and concepts. In essence, I picked up the phone and called other certified financial planners, sharing with them my vision. And since then, it’s been really kind of a turning point in my career as far as changing and having an aha experience. I don't know if you've ever in your profession, had an aha experience. You're like, why didn't I think of that, that was amazing. And that's what happened.
And from our first meeting, a person from Seattle, Rich Stewart, kind of threw out a comment to me and the group, “I'm going to show you guys how to take money out of an IRA and not pay taxes.” And I was like, I just don't think that can be done. But long story short, it can be. And I have had a partnership with a CPA for over 20 years. I came back from that meeting and said, We gotta clear the calendar, get into your tax software, we're going to get our arms around this. And from that point, the bucket strategy of wealth accumulation is what has transpired. And so it changed the way I accumulate wealth myself. So of course, I'm going to make sure that's passed on to clients of our firm.
Christopher H. Loo, MD-PhD: Yeah. So with the high net worth individuals or high income earners, which is more on their minds? Taxes, financial freedom, or wealth management?
Lance Belline: Obviously, taxes are generally the highest topic, right? And it should be. Because in my opinion, that influence has the biggest influence as far as our impact on the wealth we do accumulate, and the wealth that we do transfer, maybe to our next generation. And then second, I would say, having a financial plan in place, right. Because generally, they're going to be either entrepreneurs or successful in their career. And they need to know that that work is not all for naught, and that they're making sure they're setting aside the resources to meet their financial goals and need to partner with a firm or advisor that they can trust and get good wise counsel to.
Christopher H. Loo, MD-PhD: Hmm, yeah, I was reading that some people, I think it was Rich Dad, Robert Kiyosaki, saying that taxes are your biggest expense in your entire life. So what are some of the ways to reduce or eliminate the amount of taxes high income individuals can pay the IRS?
Lance Belline: I would say I'm gonna, I'm gonna throw you a little curveball to say, I think people put too much emphasis on paying less taxes in their current year, right. So 2022, for example. And not enough time accumulating their well strategically, so that they can lower the amount of taxes they pay, and have it in the future. And let me kind of explain that.
So, and all your listeners could Google this, federal historical tax rates. And if you do that, you're going to find that in our US history, we've had federal tax rates as high as 90%, as high as 70% 50%, in this to the 80s. Over the last 20 years, we actually have been in a historically low tax rate environment. I mean, the highest federal marginal tax rate is 37%. Right. And that's if your income is over $650,000. So I know that you and your listeners might feel that they pay a lot of taxes, but I am actually going to argue that we're actually in a lower tax rate environment right now.
And I'm not an economist, and I'm not going to make any guarantees as far as what the future tax rates are going to be. But I do know, our federal government has a very high deficit. I do know that some federal programs like Social Security, Medicare, Medicaid, right, are financially bankrupt. And the government is going to need to raise money. Or they're going to decrease expenses. So the way they're going to increase revenue is through what? They're going to raise tax rates. So I think we need to have a mentality that’s: alright, how do I grow my wealth so that I can pay less taxes over my lifetime, but that is not necessarily right now.
Now, if you're a small business owner, there are definitely strategies that you have, I have it in my book. But if you're a W2 employee, like some of your physicians that are working, if they are W2 employees, there's very little that you can do in order to lower the amount of taxes you pay.
If you're self-employed, you can implement some strategies to lower your taxes, but not if you're a W2 employee. So the way to think about your wealth accumulation strategy is let's say I throw out a comment. What if I could show you how to have $120,000 of income in retirement, and you only pay $1,410 of taxes, right? Less than a one and a half percent rate.
So how do we do that? So you have to think about wealth accumulation. So you know, if you can pay a one and a half percent tax rate, let's say for 20 years of your life, that significantly decreases the amount of money that goes into the government. And that would either allow more money to go to your friends and family, or charities.
And so in order to do that, you have to position your wealth and plan with a distribution strategy in mind. And this was the aha experience I had, again, when I was 37. And I was just saving money and advising clients to save money and accumulate, but I wasn't thinking about the distribution strategy. And what I mean is that, there are three types of investments or categories that you can accumulate wealth in, and I call them buckets. So bucket one, I call it your pre tax bucket. And probably you're most aware of this, have you ever heard of a 401(k)? Or an IRA?
Christopher H. Loo, MD-PhD: Yes.
Lance Belline: And when you put money in those, it lowers the amount of taxes you pay based on your contribution. So if you put in $10,000, and you're at a 30% tax rate, you avoided paying $3,000 in taxes, that's a good thing, right? But that money then grows tax deferred, never being taxed until you make a withdrawal in retirement, and then it becomes actually your new W2. And that's what a lot of individuals are not aware of.
Your bucket two investments, I would call your after tax investments, that's where you take some money, you have some excess money, and then you decide to buy a stock, a bond, a mutual fund, you invest in real estate, you grow that wealth, and then that money does not have an income tax rate, it has a capital gains tax rate. And there's three tax rates that exist for income, for your capital gains, 0% 15%, and 20%.
And this is where at the end of it, many individuals don't understand how the tax system works. So you have income tax rates on one side, and you have capital gains and dividend tax rates on the other side. So I'm going to share with your listeners how we can qualify for that 0% tax rate in just a little bit. First, let me cover bucket three.
Bucket three is what I call your tax free investments. Have you ever heard of a Roth IRA or a Roth 401(k)?
Christopher H. Loo, MD-PhD: Yes.
Lance Belline: That came into existence in 1996. And later in 2000, retirement plans when you work for a company or hospital, a lot of them now have amended their plans to allow contributions to be into Roth. You also have health savings accounts, you have cash value life insurance to be in there, you have the backdoor strategies, backdoor Roth IRAs, the mega backdoor Roth IRA strategy.
So those are your three categories: pre tax, after tax, and tax free. The three buckets: bucket one, bucket two, bucket three. So what we want to do is grow your wealth strategically in each of those buckets, and then I can influence or camouflage the amount of income that Uncle Sam taxes when you decide to retire. So, picture this, let's say that you have a million dollars in each of those buckets. pre tax, after tax, tax free, we would draw $40,000 from each of the buckets. That is 120,000 in total. Uncle Sam considers your withdrawal out of bucket one, that pre tax bucket as your W2.
Now remember, you're no longer working right, so you've retired. So $40,000 is your gross income. They then allow you as a taxpayer to get a standard deduction, that is $25,900. And so when you take $40,000 minus $25,900, that equals $14,100. That is your taxable income. Now, because your taxable income is less than the 12% income bracket, which is 83,550, you qualify for a zero percent tax rate on your after tax investments, or bucket two. And that’s the magic of qualifying for the 0% tax rate. But in order to do that your taxable income has to be less than $83,550.
Christopher H. Loo, MD-PhD: Interesting.
Lance Belline: While you're working, and you're growing wealth, you don't want to make less than that. If you did, you probably raised a family and paid for it. But in your distribution years, you definitely probably could live on $120,000. But you're only paying income taxes on the $14,100, you qualify for the 0% tax rate for your capital gains. So that $40,000 that was normally getting taxed at 15-20%, now gets taxed at 0%. And then you have your other 40,000 from your tax free, which is tax free. And so you're paying 10% on $14,100. And that's how I got to that $1,410. Federal Tax.
Christopher H. Loo, MD-PhD: That's interesting.
Lance Belline: And so that's the concept. If you can do that and lower your amount of taxes that you would pay by 10-15% a year, let's say for 15 or 20 years, that's a significant impact as far as the amount of wealth that you're going to keep in your family, versus giving to Uncle Sam. So that's the error that I find many individuals are making. And again, I was doing it myself. And I was in the industry, right? As a finance certified financial planner, but I I wasn't thinking outside the box until Rich Stewart opened my eyes a little bit as far as thinking differently. It's like, how are you going to get your income in the future, and then grow your wealth strategically, so that you can substantially decrease the amount of taxes that you pay?
For the individuals listening, think about, how much do I currently have in pre tax? How much do I currently have after tax? How much do I currently have in bucket three? And then, where am I saving money right now?
And part of this free resource will be on my website where they can download an Excel spreadsheet that will help them with this. But its forecasts were based on how much I'm saving in each bucket each year, and what's going to be my future net worth in each bucket. And then from that we can determine approximately what your taxes are going to be based on what you want to live on. Right? Because not everybody wants to live on 120,000. Some people can live on less, some people need more.
But if you do that, then you're going to be in a position to influence how much tax you pay. Versus, Dr. Loo, let's say you have 100% of your savings for retirement in bucket one. And you wanted to live on 120,000. When you make withdrawals from that it's taxable as income, right? So you would have to withdraw 150,000 or 160,000 to net 120. And then you're always going to gripe about taxes during the New Year because your income is 150 or 160, that's greater than the 12% bracket limit of 83,550. So then you're going to always continue to still pay 15 or 20%, a dividend tax rate or capital gains tax rate on your bucket two assets. And so you're always going to kind of be frustrated, I would say, and feel like you're paying too much in taxes.
Christopher H. Loo, MD-PhD: Yeah.
Lance Belline: Try to not be as focused on paying less taxes today. Because one, we're in a low tax rate environment. And two, you can't really influence that much.
Meaning, if your listeners income, let's say is a half a million dollars. There's not a lot that you can do except donate money to charity to lower the amount of taxes you pay. This federal tax code is not set up to benefit that person. The federal tax code is set up to benefit individuals that are in what I would call mid Mid America, which is usually families making less than $100,000 a year. And so you have to grow your wealth strategically so that you can become one of those in the future, when you retire.
Christopher H. Loo, MD-PhD: Yeah, it's interesting once you know the tax laws and the tax codes and which buckets to allocate how much on savings and how much more financially free you can become. So, yeah, I think you've given a lot of value. It's been a very interesting discussion. Taxes and wealth management are huge topics, especially for high income earners and high net worth individuals. So, how can people get a hold of you, contact you and possibly work with you?
Lance Belline: Yeah, my company’s name is Lighthouse financial. That website is www.LHFinancial.net. My personal website for my book that's coming out in the fall is just my name, LanceBelline.net. And I'm going to have resources, a lot of the inserts from the book are available on my personal website.
And then the book, which is called More Wealth, Less Taxes, is hitting the market on November 15, but preorder sales will be available after by going on to my personal website.
Christopher H. Loo, MD-PhD: Excellent. Excellent. And for all the listeners out there. Lance's information, links and resources will be in the show notes. So Lance, was a fantastic discussion. Thanks for coming on in. I'm sure all the listeners got so much value from your information.
Lance Belline: Thank you for having me.
Christopher H. Loo, MD-PhD: Many thanks again for being here. If you’re new, you can find me online at Christopher H. Loo, MD-PhD, where I have links to other episodes or links to online resources that will support you on your financial literacy journey. I’ll see you there in on next week’s show. While I bring you thoroughly vetted information on this show regarding a variety of financial topics, I cannot promise you a one size fits all solution. This is why I caution you to continue to learn. Educate yourself and seek professional advice unique to your situation. If you want to talk to me, I welcome it. Please reach out via my website or email at Chris@drchrisloomdphd.com. I read and personally respond to all of my emails. Talk soon!
Editor's note: This transcript has been edited for brevity and clarity.