Most business owners build incredible companies. But when it is time to look at the retirement side of the picture, the account balance rarely reflects the success of the business.

That gap is not an accident. It is a byproduct of planning tools that were never designed for business owners in the first place.

In this video, Mark and Ro sit down to share a real client story. A husband and wife in healthcare consulting, earning around $800,000 a year, had written six-figure checks to the IRS every single year for two decades. Three years after working with The Owner's Asset, they owed very little to the IRS, held tax-free assets, and had something harder to put a number on.

Permission to actually enjoy what they built.

The conversation covers the secondary retirement system most high-income business owners never hear about, how life insurance purchased with pre-tax dollars becomes a zero volatility asset at roughly half the cost, and what the transformation looked like when Mark and Ro sat down with this couple recently.

Watch the full video to learn more, then book a deduction call to find out if your situation qualifies.

Educational purposes only. Not tax, legal, or financial advice.

Video Transcript

Mark Switaj (00:02) A real client story. How 20 years of tax liabilities turned into tax free assets. How we met a wonderful husband and wife couple and their transformation.

Rohit Punyani (00:18) Yeah, last week was a big week for us and Mark encouraged me to flip on the video to talk about it. We met with one of our clients who sold us exactly what we wanted to hear. We're having an impact on them. They had persistent tax liabilities for 20 years. We've gotten them to a place where they owe very little to the IRS and actually none this past year and created tax free assets.

Mark Switaj (00:38) I'm Mark Switaj, two-time founder and CEO of The Owner's Asset.

Rohit Punyani (00:45) I'm Rohit Punyani, former Chief Investment Officer and co-founder of The Owner's Asset.

Mark Switaj (00:50) All right, Ro, so we're driving up north from Philadelphia. There's what, two feet of snow on the ground, slash ice. And we get together with one of our current clients, as I mentioned, an absolutely lovely husband and wife couple. Tell us their story.

Rohit Punyani (01:12) Wildly successful small business owner in the consulting space, specifically in the healthcare consulting space, and had done well enough to have persistent tax liabilities, writing these six figure checks to the government each year. We had met with them and actually this couple we had partnered with their financial advisor, given our expertise in cash balance. I said, have you ever thought about this? And it turns out that after some education and working with them...

Mark Switaj (01:36) You just used letters and numbers and numbers and letters that I'm not familiar with. I've heard of the 401(k).

Rohit Punyani (01:38) They were right in the sweet spot to use the retirement system. And not the traditional retirement system, the 401(k) SEP system. The broader system. The cash balance section 401(a) part of the tax code where they could put away several hundred thousand dollars a year. Mark, that's where it started.

Mark Switaj (02:06) Less so familiar with the 401(a).

Rohit Punyani (02:09) The beloved 401(k), and it's great for most people. We don't have anything we view as structurally broken with it. You do trap some of your money, but what's interesting about it is if you're a small business owner, the tax code is written for you. Tom Wheelwright, famous CPA, says the tax code is a treasure map where the IRS can lead you to getting what you want. If you understand it. If you're a small business owner, just know that there is an entire secondary retirement system built in the tax code for you.

Mark Switaj (02:34) Tell me more. So like what's the difference between a 401(k) and a 401(a)?

Rohit Punyani (02:46) Okay. That's an interesting dialogue. I think the best way to explain what a 401(a) is, is to compare and contrast it to a 401(k). So let's start with how they're the same. They're actually about 96% the same. Now there's some nuance here and I want to give this, I'm not presenting to a room full of pension experts. This is for the small business owners. So I'm going to use some regular everyday language, Mark, not play tax hopscotch.

Is a 401(a) a pre-tax deduction? So is a 401(k). Congratulations. When you close a 401(k), does it roll into an IRA? Congratulations. You now know how to unwind a 401(a). They are the same on the way in. They are the same on the way out. You now have 96% understanding of what this section of the tax code does. This is where Mark's going to say, what are the four major differences?

Mark Switaj (03:18) What are the major differences?

Rohit Punyani (03:44) Great question, Mark. The first major difference is what we alluded to, the sheer volume of capital that you can put in. So in a K, it's $23,500 this year plus some catch-up provisions if you're above a certain age. In an A, that number is generated by your age and income and can be as high as $350,000 worth of deductions. So that's the first major difference. Size is an important consideration in the K versus A world.

The second major difference is something that I find really interesting as well, the asset allocation. It's the stuff you're allowed to buy. In a K, you log into your provider's website, you have a list of mutual funds, stock funds, bond funds, some money market, maybe some emerging markets. In a 401(a), you can have all of that and two assets that we think are critically important for proper retirement planning. One is annuities and the second is dividend paying whole life insurance, what we call the golden asset. It's a unique section of the tax code that allows you to buy life insurance with pre-tax dollars. That Mark, that's going to be relevant when we come back to this couple.

Mark Switaj (05:13) Is this the strategy that this couple used?

Rohit Punyani (05:17) Yeah, it was a big part of their strategy. Let's say hypothetically you were doing either some estate planning or just proper retirement planning. And by the way, proper retirement planning has something in your portfolio that never goes down. Ernst and Young has done a huge longitudinal study on it. Wade Pfau, retirement researcher and thought leader. One of my favorite books is called The Fifth Option. There is literature abound that says you have to have something that never goes down. That way you don't run out of money before you run out of life.

But why would you pay retail pricing when there's a way to buy it wholesale? If part of your plan was to acquire life insurance and the premium you were going to pay was $100,000 a year. If you were to buy it with after tax dollars, it's going to cost you about $140,000 worth of gross income because of the 37% state and federal taxes. If you buy it inside of a 401(a), you're going to get a tax deduction. It's going to cost you about $62,500 for the same exact planning tool, the same exact banking tool, the same exact retirement tool, the same exact estate tool, the same exact creditor protection. That Mark is what we were talking about in terms of, was this applicable to this client? As part of their plan, there was a need for a zero volatility asset and some estate planning. We got them a huge tax deduction to get it.

Mark Switaj (07:01) What do you mean by zero volatility?

Rohit Punyani (07:10) Life insurance is contractually obligated to never go down. I could keep talking about why in section 7702 and non-forfeiture rates, but I think the English version is it doesn't go down in value. At The Owner's Asset we love things that work. We love things that have a 200 year history of working. We just ask you to add that into the mix to make sure you get to where you want to get to.

Mark Switaj (07:35) So for this couple, higher income earners, they were pulling in around $800k a year, somewhere in that neighborhood. Significant tax headwinds. Like most, probably feeling ill or underprepared for retirement. The deductions were kind of a big challenge. How do we get more deductions? These taxes are killing us. And nothing sweeter than getting a deduction and also something for it, namely these incredible lifetime benefits through life insurance. Maybe talk a little bit about what you witnessed in terms of the transformation for this couple.

Rohit Punyani (08:34) Yeah. I've known them for years and I'll talk about the transformation. I'm going to weave it into point three. So remember point one was the size. You can put significantly more, six figures. Point two was the stuff you could buy. And that's what we're talking about. Now you can actually buy this tax free asset with pre-tax dollars.

The transformation for them in this case was, despite being high income earners, and we see this with everybody Mark, this is what's so fascinating about the work that you and I do together, you can be a high income earner, middle income, you could be young or old. Retirees don't feel like they have permission to spend. They're all either worried about a bear market and running out of money. So we got to say to them, you can continue with your 4% or even a 5% sustainable spend rate, potentially even 6%, depending on your allocation, and not run out. And not have to worry about keeping money rather for the kids and the grandkids because the life insurance we picked up will auto complete. It will guarantee this tax free terminal cash flow. They then, visibly, dropped their shoulders. We can spend more and not have to worry about it because everyone that we love is going to be taken care of in some way or form. So Mark, that was the transformation.

Mark Switaj (09:48) What was cool is, they were asked, are you looking to optimize for estate benefits or benefits for legacy or the kids, or are you looking to spend more of your money, enjoy more of your money in retirement? And it was like, yeah, we don't want this to come across wrong, we love our kids and all, we want to enjoy our life.

Rohit Punyani (10:23) Yeah, that goes back to the permission slip because Mark, you nailed it. When you have a portfolio that's all either stocks or real estate, you do that thing called Monte Carlo, you stress test it, you can spend 4%. Well it turns out with insurance you can spend 5 or 6. And that's not even the cool part. So not only do you get 50% more income, you get way more cash flow. When you pull money out of an IRA or you pull money from a stock account, you sell some of the corpus, some of the actual shares, that's a taxable event. When you pull money against or from life insurance, that's a tax free event. So you not only get to spend more, you get to keep more. So that was the last part of the transformation that we went over with them. They felt as if they don't spend it all, their kids are taken care of, but they got permission to spend it all because there's more of it that they have access to.

Mark Switaj (11:13) The funny thing is, the husband came in, who I would say is the primary earner, he's early 70s, vibrant with a capital V. And the conversation of, are you looking forward to retirement? And he's like, no, I want to keep working. I want to work for another 20 years. And I was like, wow, that's awesome. I aspire to be that kind of motivated.

Rohit Punyani (11:45) He is one of our most inspirational clients. And I'll also tell you that I love our clients because our clients are entrepreneurs like us. But that's a nice segue. I think Mark, to the third point. So remember the first was size. The second was the stuff you can buy. The third is, and potentially some people view this as a con, it is about a three year commitment. You can freeze a plan like during COVID. But it's not like a 401(k) where you turn it on and off. When you commit to a pension or a hybrid plan, like a cash balance, it's a three year commitment. And so we did have dialogues with him. He said no, I'm going to keep working. I love this. It keeps me young. And so we got to meet that criteria on the third of the four that we're working towards here. Size, asset allocation, the stuff you can buy, and the three year commitment.

And just since we're on that arc of the story, the fourth major difference between an A and a K is there's a unique way to get some of the assets out of the 401(a) system. Savvy entrepreneurs like the deductions. They like the security that comes on the backend, but they don't like to keep their money trapped forever. Well, what's interesting about the 401(a) system is there's an elegant exit with some of the capital. And so once you kind of walk through that with the client, we had a wonderful dialogue and solved a very complex and vexing challenge of persistent tax liability. Uncle Sam was in his pocket and less so now.

Mark Switaj (13:28) To bring us home, Ro. What I saw was a couple that came in with a sense of joy. One that probably they didn't feel three years ago when they were probably paying 40% in taxes on their earnings. And here we are three years later, having saved them a million plus via deductions. But really getting them retirement assets that allowed for them to live the life they wanted to live. That means the permission slip, like you said, to spend their cash and also have cash for the kids. Even if the kids don't need it, there's still money there for legacy. What a transformation.

Rohit Punyani (14:18) Yeah, you said it well. I have nothing to add. It was great to have that impact.

Mark Switaj (14:23) I'm Mark Switaj with The Owner's Asset.

Rohit Punyani (14:26) I'm Ro Punyani, Owner's Asset as well. Thanks for listening.