Tax-Free Millionaires-Podcast 6 transcript
Reed: [00:00:00] Welcome to the sixth episode of the tax-free millionaires podcast. I'm your host read Scott. And in today's episode, I'll be covering two very important topics. First, if you've ever wondered whether it makes sense to convert some or all of your traditional tax deferred retirement accounts to a Roth account. I'm going to show you a much more powerful way to convert a taxable IRA. And to tax-free money. That doesn't cost a dime more than a Roth conversion. But can create up to three times more tax free wealth. And gives you much more flexibility than an ordinary Roth account. And finally, I'm going to share with you my stock pick of the week.
So be sure to stick around, you're going to want to hear about an exciting FinTech stock that is poised to take advantage of the better interest rate market. We are headed into in 2025.
So welcome everyone. This is Reed Scott again, and in this episode, I'm going to introduce you to a powerful tax planning strategy that I call the family super Roth.
Now be aware. That's my name for it. If you went [00:01:00] in and talked to someone else about a family, super auth, they wouldn't know what you're talking about. But I call it a family super Roth, because so much more powerful than an ordinary Roth. And I'm going to show you how it beats a normal Roth conversion by up to three times in terms of creating tax free wealth. Before I do that.
However, I do have to make a distinction. In episode two of this podcast, I talk about a super Roth. And today I'm talking about a family super Roth. So what's the difference. Well, the differences in episode two, the ordinary super Roth is, uh, using bank financing. To leverage the amount of money you need to put in to the account. Today, we're not talking about bank financing.
We're talking about just using your. Uh, already existing, either traditional IRA or 401k. And converting into the family super Roth. So this episode today is for people who already have at least. $250,000 in a tax deferred retirement account. So. If you don't have [00:02:00] that amount, that this may not be of that much interest to you, and you might be more interested in the super Roth in episode two, because that allows you to use other people's money to finance your tax-free retirement account. So that's the distinction. , there's no bank financing here. The super auth discussed in episode two was probably more for someone younger. Maybe 30 are in their forties and they are, don't have all, all the tax deferred money built up in a. A traditional IRA, 401k. So they're going to be able to use. Bank financing like a mortgage to be able to build up. Their tax free retirement account. And in episode two, the super Roth, I usually suggest you have at least a 15 year planning horizon.
So. If you're over 55. The super Roth. I talked about episode two might not be for you because you wouldn't have that 15 years to pay off the bank financing. Now today's episode. There is really no age requirement. You could be. 35, as long as you have at least [00:03:00] $250,000. In a traditional tax deferred retirement account. And you'd like to convert it to tax free money. , but I use the $250,000 as a minimum. Now, obviously, if you have more than $250,000, this, strategy I'm going to talk about today is even more powerful. In fact, I just helped one of my clients convert. Almost $6 million in his traditional IRA. To a family super Roth that I'm talking about today, and he's going to be saving millions of dollars in taxes. For himself and his family. So obviously the more money you have in a traditional tax deferred account, like a traditional IRA or 401k, the better. But I would suggest again, you lead it need at least 250,000 to make sense. Now, some of you might be saying read, you just said ages and a factor.
As long as I have at least 250,000, but what if I'm 40? I have $250,000 in a traditional IRA or 401k. And. I I'm aware, read that there's a penalty. If I take money out of my tax deferred account before I'm 59 and a half. [00:04:00] Well, here's the good news. There is an exception to that 10% penalty. And we always use that when we're going to do a conversion for our clients. And that's called the substantially equal distributions exception.
So in other words, if you're 40 and you want to convert to the type of strategy I'm talking about today, On, uh, on, uh, either 401k or traditional IRA to the tax-free account. The family super wealth I'm talking about today. We would structure the conversion so that you did substantially equal distributions out over say five or so, where many years.
And if you do that, you're not subject to the 10% early withdrawal penalty. So you should just be aware of that. So again, It's not age. It's the amount of money you have in your traditional retirement account. A couple other things I would make clear people say, read, I don't have a, an IRA. I have a 401k.
So this doesn't apply to me. Well, here's what you should know. When you die, your 401k, if you still have it and a 401k, when you die automatically. Converts for your heirs and to a inherited IRA. [00:05:00] So even if you have a 401k, when you die, it goes to an inherited IRA. Now, if you're leaving your money to a spouse, What I'm talking about, the day's not gonna apply because they're able to inherit your retirement account and it will be treated. Uh, as their account.
So there'll be able to, if they're not. Of the required minimum distribution age, they can defer it until they are. And if they are, there'll be able to use their age to calculate their RMDs. What I'm going to talk about today applies to what happens to your traditional 401k or IRA. After your spouses died.
If you have one or if you don't have a spouse. What happens to it, if it goes to announced spouse beneficiary. We're talking about what happens to your tax deferred retirement accounts? When it goes to a non-spouse beneficiary and that could be children or anyone else. So the first thing you should know, there's if you have eight traditional tax deferred retirement account, either an IRA or 401k. The laws have changed as to how that is taxed at your death. In 2021 Congress passed what was called the secure [00:06:00] act, which eliminated the ability of your beneficiaries to stretch that inherited money out over their lifetime. It used to be, they could. Let's say you were leaving the money to an adult child. And they were 40.
Well, they could defer paying taxes on that. Over the rip remaining. Uh, amount of their life expectancy actually was 85. So they had 45 years. If they inherited it at 42, take out requirements. And since they were younger, that it was going to be very small, so more money could stay in there and grow tax deferred. And I was a tax attorney prior to 2021. I used to help my clients. I do even better than that, because I would create what are called. Generation skipping grandchildren's trust. So if you had grandchildren and you have one to 250 K in a retirement account, We could skip the children in terms of the measuring life for determining how much money needed to be taken out every year. And use the grandchild's measure in life, but because it was going through a trust. You can make your adult child in charge of the money. [00:07:00] It's for the benefit of the grandchildren, but the IRS was going to have to use the grandchild's measuring life. This allowed us to create. Three to five times more tax deferred wealth by skipping a generation.
And it was the best of both worlds because you could still have your children in charge of that money as a family pot of money. But you could use the measuring life of a younger beneficiary. Well, Congress said no more. You can't do that. Even though Congress had told us for years that you could do this and encourage people to put as much money into a tax deferred account as possible. Now they said, you know what?
We need money. And by the way, both parties of Congress. Overwhelmingly voted for the secure act. They told everybody it was for your benefit because they were going to let you defer taking your required minimum distributions. From age 72 to 73 or 74. But considering the billions of dollars they picked up on the backend.
That was pretty small. Why didn't they tell us about the real reason they were doing this? But that's another podcast. So Congress plays a lot of rules with retirement accounts, because most people [00:08:00] aren't aware of how our retirement that works. For instance, most people aren't aware. That under the current law, you don't have to empty your retirement account out until you're 117 and a half.
Now this is a tax deferred account, either an IRA or a 401k obviously, or the Roth. You don't have to empty it out at all. But. With a traditional retirement account tax deferred. You haven't told 117. Now most clients aren't aware of that. So they think, oh, it's going to. When I start taking RMDs, it's probably not going to last that long.
It'll be empty by the time I'm 95. Cause that used to be what the age was. So there won't be that much money in it when I die. I'd say 85 or 87 or whatever. Well, since the average life expectancy in the United States is 78. And the time at which you had to Take all the money out of your tax deferred retirement account is one 17. Guess what. That means that a huge amount of money is being left in these taxable counsel for the IRS.
When people die. Because if you live to 80 or 85 and you don't have to take it all out to your [00:09:00] 117 and a half. Most people will not take out more than your required minimums because they don't want to have to pay the tax. And they think they're leaving a huge legacy to their family by deferring and leaving more money in there. And they also think it's a great way to have money for an emergency. Well, In my experience, it's been the worst possible way to leave money in an account for an emergency.
Because when you take money out of a tax deferred account for an emergency, you got to take out more money to pay the taxes. And as far as leaning his legacy. What you're really doing is leaving a legacy for the IRS, because if you left a $250,000 account at your death, To your children. And it all gets added to their highest marginal income tax rates every year. , it could get taxed up to 40 or 50%. So instead of leading two 50 to your children, you're leaving 120 or 130,000 to your children and 125,000 to the IRS.
Now, remember, this is also going to get taxed for federal and state taxes. So if your children live in. And I stayed with income tax. They're going to have that as well. [00:10:00] Plus if they live in one of the 21 states, With an inheritance tax that could also reduce the size . I was well. In fact. I've seen some retirement accounts be reduced by as much as 70% and the beneficiaries all get 30 after the federal and state governments were paid.. That is the background of why you would not want to leave a lot of money in a traditional tax deferred account. Up to 50% or more of that money could end up going to the IRS and the state taxing agencies. And of course the tax rates could be much higher by the time you die. Because Congress is going to be desperate for taxes.
Our budget deficit in relation to GDP is the highest it's ever been on a nation's history. The tax rate. Is the lowest it's been in the last seven years. In fact in 1973, , you would pay highest marginal rate federal tax rate of 70% today. The federal tax rate, the highest rate is 37. Now a lot of people have said to me, I read, but you've got to think about inflation and margin creep. , I have thought about that. [00:11:00] In 1973. If you made $6,000 in income. You would pay a taxable federal weight of 24%. In 2024. If you made the equivalent amount of money to $6,000, which today would be 43,000. You would be half that you would pay 12% in federal taxes. So as you can see, we have the highest budget deficit in the history of the United States and the lowest. A marginal tax rate in the last 70 years. So even if you think for the next four years, we're not going to have a tax increase. What do you think is going to happen in the next two decades? , if history is any guide. Congress is going to have to raise those rates. Even if they're able to cut budget spending. I'm going to show you a way today. That's going to benefit you and not just your family. When Congress changed the rules in 2021, a lot of financial advisors were contacting their clients and said, Hey, this is a great time to do a Roth conversion.
Right. And. Instead of taking all that money out of all, once we'll take it out over four or [00:12:00] five or six years. And for instance, today's example. Let's assume that a financial advisor was telling their client to convert $250,000 of their traditional. Tax deferred retirement account. And they're going to say, instead of taking two 50 out in one year, Let's stretch it out of five years, take out $50,000 a year. , maybe you can pay the income tax from other sources if you're still working.
So that $50,000 is going to go right into a Roth conversion. And over five years, you'll have two 50 in a Roth and I can grow tax-free for the rest of your life. And then it'll go to your heirs tax rate. And I think that's a pretty good deal, except I think you can do a lot better. Because we're going to use the same structure.
We're going to take out $50,000 a year. Over five years and convert it. To something else besides a Roth, we're going to convert it to a, also a tax-free account. But we're going to convert it to a tax-free account. That grows tax-free. And you can take the money out [00:13:00] tax-free and something even better than a Roth. It guaranteed.
You can't lose money. So if you took your money out and converted to a Roth and invested in the stock market in a Roth. And the market went down by 20%. So would your portfolio in 2008, I had a lot of financial advisors bring your clients in panicking, . My account went down by 40%. Should I take it out of the stock market now while I can, or should I let it stay in there and go back up? Most of the clients learned, stay in and go back up.
But you know, it took several years, three to four to five years to get back to even where they were before the crash. So you don't want that to happen to, Hey, retirement account. Right when you're either before retirement or in retirement, really? Anytime. I don't think that's a good idea. So what if I were going to introduce you to way. That you could do a , conversion, not to a Roth, but to a tax-free account that grows tax-free and you can still invest in the stock market. All that growth would be invest in the stock market.
It would grow tax-free you could take the [00:14:00] money out tax free and you were guaranteed. You could lose money. I think that's a better idea. And I got it even better. Way. What if you didn't have to take the money out at all. Well, if you did the conversion to a Roth account and you wanted to take money out, you'd have to take it out.
It would reduce your account balance. But what if I said, I have a way. That you don't have to take money out at all. You can borrow against your own account. So if you have. 500,000 in there and you need. 60,000 for whatever purpose. Leave the 500,000 in borrow against a balance borrow at a lower rate than what you're earning on the account. And guess what?
You've just created more tax free. Wealth is called arbitrage. And this is the incredible benefit of the family. Super broth. It's a way to create a tax recount. I guarantee you can't lose money and be able to take money out tax-free without actually reducing the account balance. So, this is what I found , when Congress passed the secure act [00:15:00] and created this huge tax problem.
I was looking for a better way and I found it. A much better way. In fact, better than a stretch IRA and much, much better than a Roth conversion. In fact, the only beneficiary that's going to get less money under the method I've discovered is the IRS. So, what is it? Well, I call it a family super raw. I call it a family super Roth, because it's not just for your family.
It's for you. It's superior to a Roth because we can create all this additional tax free wealth. , with that said, let me give you an example of exactly what would happen. Let's use $250,000 traditional retirement account. We're going to take out $50,000 a year for five years and pay the taxes out of other income.
Just like if you were going to do a Roth conversion. , and the example I talked about earlier, And I think that's a great idea, stretch the money out. And by the way, you can do more than 50,000. We're going to use that as a minimum., But instead of converting to, to a regular water, we're gonna convert it to what is known as a max accumulation. Index universal life [00:16:00] insurance policy. , this is not an ordinary insurance. This is a specially designed. Max accumulation, super funded policy. The reason that more people don't know about it is this option is because when you hear the words, insurance, their eyes glaze over and they think of death benefit.
That's not an investment. But this minimizes the death minute under the. Tax and miscellaneous revenue act of 1988. Congress allowed you to create these index universal life policy you could choose to use it as a death policy. To pay out a death benefit or your death, or you could use it as an investment account for max accumulation. So if we design this and be aware, don't run out and just think you can do this will all insurance is especially design max accumulation, super funded. Um, index universal life policy. And by doing it this way, your, your premiums go mostly for stock market indexes that grow tax-free. And very little for death benefit. So most people, again are not, [00:17:00] we're aware that you can design a policy under federal law. To minimize the death benefits and maximize the amount of tax regrowth. The ability to fond a Mexican emotion investment policy again was created in 1988 under the technical miscellaneous revenue act or Tamra. The reason this was created. Is before the 1988 law Tamra. The people were taking money out of their ordinary tax, deferred retirement accounts and dumping. The names of these policies, because they said, well, gee, if I can get stock market growth, I've protected from downside risk and I can take the money out tax free.
Why do I need a tax deferred retirement account? Well guess what? Financial institutions, financial advisors were pretty upset about this. They didn't want their clients taking money. From assets under management, that they get charged a fee on every year and putting it into an account where there was just one fee when they bought it.
And after that it grows tax-free. So they lobbied Congress to change the law. And created the Tamarack. So you might be saying, well, if they lobby Congress, , limit this ability to do this. Why are you talking about. [00:18:00] Well, there's an exception to the wall and the exception is you can still design a Mexican simulation, super funded policy. And if you fund it over a period of years, you can maximize how your premiums are going to grow.
Tax-free inside a policy. So you still get that benefit. If you do it over a period of years, And any example I'm going to use, we're going to take a 50,000 a year from your traditional IRA. Again, it could be 401k. We're going to super fond at max accumulation index, universal life insurance policy. And because we're praying all the premiums in five years, you never have to make another premium after that.
So this is unlike insurance in another way. You're not going to be stuck paying premiums for 20 years. You're going to be done in five years. And that's where the super funding comes in. So now if you're thinking maybe I won't qualify for health reasons, the good news is if you have an adult child you could get the policy on them.
And as long as they. Agree to use it in the same manner you would. That could be very good idea. And even the premiums could be less because the younger beneficiary could cause, , less money to be put into a death [00:19:00] benefit. Now, under this Mexican relation, super funded policy under the law, you still have to put some of it to death minute, but we design it in such a way for our clients to minimize that requirement. So more of your premiums can go into tax-free investment growth inside the policy. Now here's an example.
What happens to your traditional tax deferred account? Under three scenarios, by the way, I'm going to just say traditional IRA for the purposes of, , Explaining this example. But again, remember this could be a 4 0 1 K as well, but I'm going to say. We're going to use a traditional IRA of 250,000. I'm going to show you three scenarios. And the difference between those three scenarios in the first scenario. You're going to do nothing.
We start at age 65, , you could do it younger. It doesn't matter. And if you do it younger, it's even better. But this example, I'm going to do a 65. And at 65, with 250,000 inside a traditional IRA. He does nothing, but he's only 6% a year. And for 10 years, he's going to, just to let it accumulate. At 6% a year. [00:20:00] Uh, when he is 75. That account will have grown to about $425,000.
If he just leaves it there. Now again, of course you'll have RMDs, which we'll start reducing it. Say 73. But it'll be approximately 400 to four and $25,000 at a 6% growth rate. Now let's assume this person at age 80 has a long-term health care problem or their spouse does. And they need to take out $5,000 a month to pay for. Some type of home health care or perhaps assisted living. Now in this case because they didn't convert this to a Roth or a super Roth. They're going to have to take out more than $5,000 a month because that's what they need to pay for the benefit.
So, because it's still a taxable account. They're going to take out another $1,600 a month or $20,000 a year to pay the taxes on the 5,000 or $60,000 a year. So really they're taking out $80,000 a year. . And this example where someone at age 65 had [00:21:00] $250,000 in a traditional IRA, they didn't convert it to a Roth or the family super Roth. At age 80 when they have to start taking money out to pay this. Uh, $80,000, your cost 60,000. They took out the pay, the home health care expense, 20,000 more. To pay the taxes on that 60,000. So how long. Would they be able to pay that. Under traditional IRA. That did not convert. And the answer is 85. They're going to empty that account out to zero by the time they're 85. Now what would happen then if they did a conversion to a traditional Roth conversion, would they be better off if they had the same expense? If they did a Roth conversion starting at age 65 and they took out $50,000 a year and paid the taxes from other sources, Uh, by the time they were 75. They would also, they would have about $450,000. , now they didn't have to take out RMDs when they were 73 or 74.
So it's actually gone up a little bit because they paid the taxes from other sources. When they took the $50,000 [00:22:00] out a year. So there's a little bit more money in the account to begin with. Now, how long then would they be able to pay that? That healthcare expense now remember. They paid the taxes upfront when they did the conversion. So they don't have to take out $80,000.
, in this case, there's no taxes to be paid so they can take out just 60,000. And if that's the case with this Roth conversion, how long would this person be able to take $60,000 out a year for this? Healthcare expense before the account. Went to zero. And the answer is 93 and a half. So they got almost another eight years by converting it to a Roth. Up front that they were able to pay his expense.
That's pretty good. Right? You will look at that and say war Roth conversion in that scenario makes sense. But. You can actually do better. Instead of doing a traditional Roth conversion. We're going to convert to the family super Roth that max accumulation super funded. Index universal life policy. We're going to use the same conversion method. We did for the Roth.
In other words, [00:23:00] we start at 8 65. We convert $50,000 a year for five years. To buy a match accumulation index, universal life policy. Now I use a 6% rate of earnings in all these scenarios. So the clients are only 6%. I believe you can do better than 6% on a index, universal life policy, but I use 6% to make it equal. Why do I believe you can do better?
Because inside the index universal life, Insurance policy. You are allowed to invest in stock market indexes, like the S and P 500. The S and P 500 over the last 25 years. As averaged about 7.9%. , return every year. , but I didn't use that.
I just use 6%. So in this example, The client has about the same money as a Roth. They about $450,000 at age 75. And again, let's say you had the exact same expense at age, 80, $60,000 a year. Now the difference is huge on this family, super Roth, the max accumulation [00:24:00] index universal life, because you're not going to take money out of your account. At age 80 when this client. He has a, , An expensive $60,000 a year. You don't need to take out more than 60,000.
In fact, you're not taking out anything at all. You're going to borrow against the cash value of your policy, which by this time, age 80 is about $570,000 . So you're going to borrow against that. And you're going to pay interest at about four percent. You're going to earn. Six
. . Again, I think you can do a better margin net, but I use that to be. The same with everyone else. Now. You're paying out a lower rate of interest on the money you borrow, , then you're earning on the money inside the policy. And here's the good news. I said it's alone.
So loan proceeds are not taxable. And. Because it's a loan secured with your own money. You don't have to pay it back. If you never pay back, it'll just get deducted from the policy value at your death. You don't have to make loan payments. The outstanding [00:25:00] loan will just accrue interest inside your account. This is called arbitrage. You're bottling at a low rate of interest than what you're earning on their money. The banks and insurance companies have been doing this for decades to make money. It's probably one of the safest ways to make money.
It's all. Tax-free growth. In addition to what you earn on your stock market indexes. And this is a huge secret that most people are not aware of arbitrage. The loan is not treated as a deduction. So you're continuing to earn an arbitrage premium every year. So that means by the time the regular Roth conversion has gone, gone broke at 93 and a half. In this max accumulation designed index universal life policy. You would have paid the same amount of taxes upfront when you did that 50,000, another year conversion that you did with And Roth. But while the regular wath has gone broke at age 93 and a half. This super family Roth. The index universal life policy still has $350,000 net positive cash value at 94. Now, what do I mean [00:26:00] by net positive cash value?
That's the value of the policy. If you paid the loan back, you're not going to, but that's how much real tax-free money you have at age 90. A four. When the super Roth has already gone, broke at 93 and a half. . Just to show you how powerful the tax-free. indeed universal life policy is I made it. Another assumption.
I said, you know what? After the traditional Roth has gone broke. Let's take another $20,000 a year out. Of the. Family Supercross. So we'll take a total of $80,000 a year out. At age 94 when the Roth is broke. And let's do that for another seven years. Let's assume that client lived to a hundred. What would that do to the balance of the policy?
If the client then died at 100, they could take out. , a total of $80,000 a year for another seven years until age 100. And there would still be $310,000 left in the max accumulation index, universal life policy. Not only were you able to [00:27:00] pay out an extra $20,000 a year? For a total of $80,000 a year, starting at age 94. But you were able to do that until age 100. And it still has $310,000 left tax-free.
Now you might be saying, well, gee, I'm not going to live to a hundred. Well, then there would just be that much more money in the account. Tax-free. So I'm just giving you an example of what, if you had this additional expense to show you the power. Of this family super Roth versus a traditional law. So to sum it up. The regular IRA goes broke in. About six years, five and a half years. The Roth IRA grows broke in about 14 years, but the family super often doesn't go broke at all. In fact, it's worth $350,000 when the regular Roth is already zeroed out. And then you pay. Out $80,000 a year for another seven years. And then it still has $310,000 left at age 100. So the super Roth has paid out over three quarters of a million dollars additional than a regular Roth. This is where I said, we're going to create three times [00:28:00] more money than a regular Roth conversion. And , remember , that money that you're taking out of the index universal life policy. You're not paying taxes on it.
So it's just like a Roth because loan proceeds are not taxable under the internal revenue code. 77 0 2. And so how is this possible? And it's possible by arbitrage. Because we didn't actually take a distribution like it had to do in a traditional IRA or a Roth we borrowed. And since we're earning more on our cash value, then we're paying out interest.
We've created additional tax-free wealth. This index universal life policy has another benefit versus a regular Roth. And I mentioned it earlier. In a traditional Roth or a traditional IRA account. If you invest in the stock market indexes like the S and P 500, if the market dropped by 30%, like it did in 2008. And you have your money in the market. That means your account is going to go down 30%. But in this index, universal life policy, the insurance company is guaranteeing.
Your principal will not go down. If you invest in an index and it [00:29:00] drops. Your at principal is guaranteed not to drop, even though the index you invested in, did. Now, how is that possible? Well, here's the trick. , don't feel sorry for the insurance companies. , you should know, they know how to make money and they've been doing it for decades. Or centuries, there's a trade off inside your index universal life.
Right? You have to pay for that protection. But in my opinion, the trade-off is a pretty good one. What the insurance company says is yes, you can invest in indexes like the S and P 500 or the black rock. Equity fund, whatever you like, and you can allocate the different indexes. So you can try and maximize and earn even more money. But. We're going to cap on how much money you can make. So, if you invest in the S and P 500, we're going to cap you at 10 or 12%, and they tell you this upfront.
. If you invest inside your policy and the S and P 500 index, for instance. Goes up 20%. We're going to cap you at 12%. Or 10%, again, you'll know upfront. So this year, the S and P 500 index [00:30:00] actually grew about 20%. When you get your account balance updated, the insurance company will credit your account though only 10 or 12% of that, whatever. It was inside your policy. So that's the trade off the insurance company is keeping that extra percentage of growth. Because they need that to make money.
Number one, but also because they're guaranteed you, you can't lose money. So I believe that's an excellent trade off, especially when you consider we're talking about retirement dollars, you do not want to have your retirement money subject to market risk. And this eliminates it, which I believe is a great benefit.
Also remember that if you're talking about eight, nine, or 10% returns inside a tax-free account, That's equivalent to taxable account returns of 12 or 13%. It's a really, in my opinion, excellent way. To not only get a market rate of returns, but also protect yourself from any market downturns. So that's the trade-off and again, I think it's an excellent trade off, especially when you consider the fact that you can't lose money.
So when you're [00:31:00] comparing it again to a taxable retirement account, you'd have to earn. 12 or 13 or 14% in a traditional IRA to get the same type of return. And you're protected from the downside market risk. If you had a regular Roth, recount, even though you could get 20% this year where the market indexes are, are up. When the market goes down, it averages six or 7% over time.
So that's all you're going to get. It's not guaranteed. And if that downturn happened, when you're in retirement right before it's going to take a years to catch up. Well, now we don't have to worry about that. So the max accumulation index, universal life policy does three big things that regular auth can't do.
It protects you from market downturns in retirement. It allows you to get money out of the account without reducing the value of the account. And allowing that value to still grow. Tax-free. It allows you even more tax-free growth with the ability to create money through arbitrage. And here's the kicker.
It does it for the exact same cost in terms of conversion. You don't pay a dime more to get all these additional benefits provided by the family super Roth. Then you would pay to [00:32:00] do an ordinary Roth conversion.
I believe we want to eliminate risk. And create tax-free wool. So that's what the index universal life. , max accumulation, super funded policy does. , It's such a mouthful. That's why I shortened it to the family. Super-well it grows tax free. And it's leveraged and creates additional smart money. , and by the way, if you think arbitrage sounds new and risky, remember this is how banks insurance companies make money every year, year in, year out.
They've been doing it for centuries. And now you could do it yourself for you and your own family. You're creating really what I call I tax-free bank it's tax-free bank. Because it can be used for anything. You could use it for education for your grandchildren. Or children. You could use it if they don't use it for education, you can use it for. A long-term care. And unlike the restrictions you have around that 5 29 plan for instance, or, , a long-term care policy where you have to use it specifically for those purposes. With the family tax rate, you say, and we bank, you don't have any restrictions.
You can use it for whatever you want. So if it's not used for [00:33:00] education or not use for home healthcare, you can buy luxury trips around the world. You can invest in real estate. You can just have more money tax-free to do whatever you want to with.
I believe this is an incredible benefit that I was able to find after Congress tried to get more money from my clients under the screw act, we found a way. To get around that.
Because it actually creates more tax-free wealth than a Roth conversion. And you're not only eliminating taxes, you're creating more money for you while you're alive to enjoy it. And the example, I used to conversion amount of $50,000 a year for the premiums. But again, you could do more if you want.
It's just an example. One thing I would say about the family, super author, the index universal life policy. , your planning horizon should be more than five years. So if you don't have more than five years, You shouldn't think about doing the family super Roth conversion. , because that's how long it takes the policy to build up value.
Tax-free. So just to sum up again, when you compare converting money in a traditional IRA to a family, super Roth versus regular auth. [00:34:00] When you convert the same amount of money you're going to pay the same amount of taxes. The difference is. And the regular Roth you ran out of money at age 93 and a half.
And the family super Roth or the index universal life policy. You were able to pay out an additional $480,000 with benefits. And still have $310,000 left. Over three quarters of a million dollars. When we started with the same two 50. There's a famous Supreme court justice learned hand who said in America, there are two tax systems. One for the informed and one for the uninformed, both are illegal, but which system do you want for you and your family?
So that's it for the family super Roth or the index universal life policy and why it beats, In my opinion. Traditional Roth conversion. Now it's time to talk about making money and the stock market. So as my regular listeners know, on every episode of my podcast, I give a breakdown of a stock. I like. And why I like it. But first I need to give you the following.
Disclaimer. The stocks I discussed on this podcast are for [00:35:00] entertainment and educational purposes only. And I am not making a recommendation for you to buy herself. You should do your own research before purchasing or selling any stock or options. And you should never rely on anyone else's opinion, including mine. Any losses you may incur if you purchase ourselves stocks or options. That are discussing on this program, are your responsibility alone? And neither I read Scott tax-free billionaires, Scott wealth advisors, or anyone affiliated with me or this program. We'll be liable for your losses, if any. I very often own the investments I just got on a program and I could personally benefit if the market price of the stock increases. However, I'm not paid by anyone for mentioning a stock or a company, and I'm not being paid a commission or endorsement fee for discussing any stocks on this program. Okay.
Without other way, that was a mouthful, but with it out of the way, I want to discuss an interesting stock. And what I believe will be one of the next big growth areas of the market. And that growth area is in the FinTech sector. As you know, the fed has already started cutting interest rates and whether they do it slowly [00:36:00] or quickly, the financial sector stocks are already starting to see improvements just because of the direction of interest rates.
And a number of financial stocks that utilize technology are also benefiting. The FinTech stock. I'm going to be focused on today is called upstart. You may already be familiar with that. It has a stock market symbol. Of U P S T. Now Upstart's been around since 2020, and actually it was going great guns before the COVID. Pandemic. And 2020, the one he has stock prices high as $410 a share.
Now they're trading at around $70 a share. Uh, as of December 20, 24. Now what makes upstart unique is that , they were using artificial intelligence long before it was a darling. While most banks have used what I consider an outdated method, the fair Isaac's phyco credit scoring system. To determine the credit worthiness of borrows upstart has developed a sophisticated. Artificial intelligence scoring model that not only is more effective. But it's almost [00:37:00] instantaneous and approving or denying borrowers. Upstarts newest release uses an AI algorithm that analyzes 1600 different metrics. For a potential borrower to gain a better understanding of their ability to repay loan and help determine the interest rate they should be charged.
It performs its analysis instantly. Whereas it might take a human a process or days, or even weeks. This software also allows upstart automate a staggering 91% of loan decisions with no human intervention. When it comes to risk upstarts, latest AI model called model 18. Makes 1 million predictions for every applicant to arrive at the appropriate interest rate. Which is six times the number of predictions its previous model could make. The end result is a fair and more accurate outcome for the borrow. And the lending institution. Imagine the implications of this. Uh, bank using a traditional FICO scoring model can be accused of prejudice and racism and its lending decisions. But the upstart model is not only more accurate and therefore more profitable to the financial institution. [00:38:00] But how could you accuse a financial institution of using racism? If they're using upstart system, which is purely metric based. It's not only more profitable in its lending, but it could also never be accused of discrimination. Or at least not with much success. Upstart says its AI based approach allows it to approve double the number of loans compared to traditional assessment models and an interest rate that is around 38% cheaper on average.
In other words, by analyzing so much data. It's likely that upstart is capturing thousands of high quality deals that traditional lending institutions are overlooking. Unsecured personal loans were upstarts original market, but now it has a growing presence in the secured car lending. And home equity line of credit.
He locked. The band is picking up now, as the interest rates are dropping in all three of, upstarts, markets. And I believe that upstart has a lot of room for upward price movement over the next two years. Now am I suggesting you run out and buy it? No, but [00:39:00] I suggest you do your own research.
Put it on your watch list because as consumer lending improves. Upstart is going to be. Taking advantage of that. Now again, that doesn't mean there won't be lots of ups and downs for the stock for the next six months to a year because the stock has been all over the place in the last year. And there may be another shakeout before it takes off.
So by with caution and always you use good risk management. To protect your capital. But I do believe the stock price on upstart could double or triple over the next two years, barring a recession, world war or some other setback and consumer spending. It is possible. You may kick yourself for not buying on the dip. But whether you buy upstart or any other stock always protect again, your positions using stop losses or protective put. Okay. That's it for this episode, we covered a lot of ground.
We talked about a non traditional way to create a tax-free. Conversion that in my opinion, beats a Roth conversion by quiet. A few factors. And we talked about the stock pick of the [00:40:00] week. Be sure to join the. Next week for my next episode, we're all discussed more techniques to leverage your portfolio returns and I'll be giving you another stock pick of the week. Be sure to catch it. And if you want to make sure you get on the podcast schedule. And you're on the wait list for my new book.
Tax-free millionaires, then be sure to join my Facebook [email protected] forward slash groups. Forward slash tax-free millionaires. Thanks for listening and have a great week.
