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Top 5 Tax-Free Investments to Consider - YouTube
Channel: Toby Mathis Esq. | Tax & Asset Protection
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- Hey, guys, Toby Mathis here.
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And today, we're going to talk about
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the top five tax-free investments.
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It's not what you think, it's going to be
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a little bit different
than what a lot of folks
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are out there talking because,
well, I'm a tax attorney
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and I look at things differently.
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So number one, let's just say
that we're going to do five.
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We're going to do number
one is, the easiest way
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to have a tax-free
investment is never to sell.
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And the reason I say that
is because you are not taxed
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on most investments, for
example, on individual stocks,
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if you buy real estate,
you're not taxed on it
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until you actually sell
it or if you buy options,
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until there's an expiration
or until it's called
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or until something is done with it.
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So that's what you'll
always look at is like,
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what is a tax-free investment number one?
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And I'll use the example of
Elon Musk and his billions
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of dollars in Tesla,
SpaceX, everything else.
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He just doesn't sell it,
so he borrows against it.
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So when they look at his tax return,
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they say he's a billionaire
and he doesn't pay any taxes,
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it's 'cause there's no
taxable transaction.
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Beware because most
brokers want you to churn,
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the whole thing about, like, for example,
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in the stock market is they
want you to be active, right?
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"Hey, let's buy and sell.
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Let's buy this, hey, it
dipped, let's buy it.
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And then when it comes
back up, let's sell it."
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To resist that temptation
because that's a tax nightmare.
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If you want tax-free
investments in the stock market,
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just buy companies and hold onto them.
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There is one exception, which is companies
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that are paying dividends.
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That income, dividends are
just they're paying you
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a portion of the profit.
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That dividend's going
to be paid out to you
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and it's going to be paid out at something
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called long-term capital gains rates.
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So if you're an ordinary
American, chances are you're
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in the 0% tax category.
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If you're married, filing
jointly, and you're below 80,000,
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for example, the average American year,
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you're actually a little bit
above the average American.
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You are going to not pay
any tax on that anyway,
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which is great, again,
tax-free investment.
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Worst case scenario is tax
as long-term capital gains,
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which is 15 or 20%, depending
on how much money you make.
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If you over 500,000, I
believe you're going to be
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in the 20% plus.
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Now, how do we combat
that is option number two,
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here's the next tax-free investment,
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which is exempt entities.
And this is a broad category.
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When I say exempt entities,
which means they do not pay tax.
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Now, they may never pay tax.
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And an example of that, of an entity that
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if you buy investments
inside of it and pay it out
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to yourself, you'll never
pay tax, is like a Roth IRA.
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That's your prime example.
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So if taxpayer A is a 21-year-old
going through college,
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who's paying zero in tax, makes $10,000
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and they put 5 of it into the Roth IRA.
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They didn't pay any tax on that,
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federal income tax at least.
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And so it goes in, you know,
so that money goes in there,
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and then if you take that
$5,000 and you invest
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in any number of companies investments,
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whether it be ETFs, mutual
funds, which I do not like,
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but you invest in those types of things.
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Then as they grow, and
even if they're kicking off
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dividends, there's no tax, and
when it pays it out to you,
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you never pay a tax.
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A traditional IRA is where
you get a tax deduction
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to put it in.
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So, you know, so not only is it tax free,
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the growth inside that thing,
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but I'm getting a deduction
in the very beginning.
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Now the problem with a traditional IRA is
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that it's tax deferred, so
you're going to pay tax on it
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when you get over 72, for example,
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they force you to take out
what's essentially about three
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or 4% a year as a required
minimum distribution
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and you'll pay tax then.
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But in the meantime,
you get all this growth,
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you can have 40, 50
years tax-free investing.
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Now the business side
of a traditional IRA,
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a business sponsored
account is called a 401k.
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And that's where a
business is sponsoring it,
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put money into the 401k.
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You're deferring again,
taking a tax deduction
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for the most part, into
a traditional 401k.
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There is a Roth 401k
component where you can put
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tax-free up to, they would be
$19,500 if you are under 50,
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if you're over, you get another
chunk of a make-up amount
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a think, of 6,500.
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So you can put like 26,000 in there.
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You don't get a tax deduction for it,
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but you'll never pay
tax on that money again.
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Last area is an HSA,
Health Savings Account,
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where you get a tax deduction
to put money into the HSA,
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and then you can just let it grow.
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And that money is being
used for medical expenses
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until you reach a threshold
age where then you could
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just take it out for any purpose,
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but the growth is going to be tax free.
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You get a tax deduction to go in there.
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You won't pay tax if it's
used for health accounts,
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so that's a great tax-free vehicle.
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Now, a little bit easier, one number three
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is actual tax-free funds.
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And I'm going to say ETF,
so there are mutual funds.
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And what it is, is investing
in a specific type of bond
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or an investment that is tax-free.
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So for example, and
this will be number four
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is municipal bonds that are
tax-free, tax-free muni bonds,
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and ETF might buy a whole bunch of those.
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And so you could just buy a tax-free ETF,
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or you could just drop down and say,
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"Hey, there's an individual muni bond,
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I just want to buy those
directly" and their tax-free,
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which means it's basically a
loan to a government entity.
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I mean, it's valid and
it's paying you back
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and you don't have to pay tax on that.
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That's how they're
incentivizing you to do it.
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They're not the greatest
payouts, but they are tax-free.
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So if you're in retirement
and you don't want to mess
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with your income level,
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because it could make
social security taxable,
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you might do tax-free muni bonds.
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A lot of people do that and say,
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"Hey, if we're going to do anything,
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let's do it to where it won't
harm us in any other way."
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The last area where that
is tax-free number five,
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is Indexed Universal Life, it's insurance.
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And it's life insurance
that has a cash value.
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And the reason that this is important
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because the cash value is
tax-free under section 7702
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of the internal revenue code.
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So it goes like this.
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I put a thousand dollars
into my insurance policy.
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Let's say a hundred of that
is going to cover the cost
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of the actual insurance. So
it's called death benefit.
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So let's say a hundred of
it's going to cover the cost
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of the insurance and $900,
so I put a thousand dollars
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and $900, and it's going
into this tax-free account
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that can invest in the market.
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Usually they're buying
options on the market,
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and here's what's cool
about index universal life.
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You can have a policy where
you can't lose money in
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that cash value. In other
words, it's investing
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in the market, but if
the market drops 30%,
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you lose zero, it's because
they buy options on it,
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so there's a cost of the option.
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But on the same token, you're capped.
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So if the market goes up
20%, you may only get 13%.
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Like there may be a cap
or 11% or whatever it is.
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So you're in the market, it's
tax-free, you never pay tax
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on it, and then the obvious question is,
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well, how do I get money out?
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They do what's called a
loan out of the policy.
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So you do a policy loan
out of my cash value.
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This is very, very common, especially
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in executive compensation plans.
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In fact, I think Jim Harbaugh has got one
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of the largest ones as
the coach of Michigan,
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just this massive tens
of millions of dollars
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in this IUL that they're
putting in there for him,
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so that he can access that money
tax-free when he's retired.
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'Cause it doesn't matter if I'm making
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a million dollars a year.
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If I borrow a million dollars
out of my policy is tax-free.
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So it's absolutely effective tool.
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People call it infinite
banking or bank on yourself
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and all this stuff, I
just call it section 7702,
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because that's the internal
revenue code provision
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that says these types of
policies can have a big chunk
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of that going into cash.
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And then if you abuse it, like
you put too much into cash,
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I put a dollar into
insurance and 99% of it goes
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into cash value, then it's called a MAC
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and it makes it taxable.
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I'm not going to get into all that.
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But what it is, if you follow the rules,
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there's a good chunk of money
there for you if you need it,
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'cause you don't have
to take the money out,
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you don't have to borrow it.
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If you need it.
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And this is great for folks,
when I think of elder folks
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that are dealing with long-term care,
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a loved one with dementia, whatever,
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you're able to borrow from
that policy, if needed,
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you don't have a taxable transaction,
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doesn't make your social security taxable,
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doesn't push you into a higher bracket.
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It's tax-free, whether, you
know, if you need it or not.
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And then you say, what
about the interest rate?
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It's usually a WASH or
it's a really low amount.
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You could have a WASH loan where,
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"Hey, I just don't get
any growth on that money,
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but I borrowed it, I
don't pay any interest."
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Or you could have it
where it loans it to you
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at a lower rate, like,
hey, let's say right now
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it's maybe three or 4% and
the market's going up at 13.
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You actually still make money on the money
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that you borrowed, is kind of weird,
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but it's 'cause the investment
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versus the loan are two different things.
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So those are your five.
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I'll just repeat them
just to be redundant.
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Number one is, do not
sell, if you do not sell,
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your securities, your
real estate or whatever,
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you do not pay tax on it.
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Number two is use an exempt
entity like again, 401k,
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an IRA, HSA, you can even
throw a 501(c)(3) in there.
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Number three is an exempt ETF.
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I'm going to ignore mutual funds
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'cause I don't like the cost on them,
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but exempt ETF, super cheap.
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And it's basically a big,
big basket of tax-free,
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like muni bonds.
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Number four is the actual muni bond.
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"Hey, I want to buy a
specific one, that's great."
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Or a couple or whatever it is
versus a big basket of them.
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And then number five is
IULs, Index Universal Life.
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And that's your five top
tax-free investments.
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