Do you know of anyone, who has voluntarily paid more tax than they were required to pay? I can't think of any. Even people like Warren Buffett, who have famously said they should pay more, haven't publicly said, "and that's why I voluntarily pay the IRS more than I have to." So, if we all pay, at most, what we're obligated to pay, then is it fraudulent to use financial tools, like Roth IRAs, traditional IRAs, or tax deductions to reduce financial liabilities? Can you imagine anyone saying yes? I can. Dave Ramsey.
I know you don't believe me, but that's the beauty of the printed word. It says what it says. To prove this to you, we mosey on over to Dave Ramsey's Dave Says column titled "You don't fake poor," published on June 10.
(Related: What Samuel Adams Knows)
It starts normally, like every other Dave Says column with the salutation, "Dear Dave." Jeanette tells Dave that a couple of her friends "were advised by their financial planners not to open college savings accounts for their kids," but instead save for college using their own retirement accounts, because college savings accounts (presumably 529 plans) reduce college financial aid.
Aid Planning Ethics
But, Jeanette's confused, because she thought parental assets also reduce financial aid. So, she asks Dave to "shed some light" as to whether it would make a difference to save within a retirement account rather than a college savings account.
Now, this is a simple answer. A parent's retirement account balance is not factored into college financial aid, but a 529 plan balance in excess of the asset protection allowance is. The income from the retirement account will reduce future aid but there's an easy way to avoid this, which I'll explain later. Therefore, the planner's advice was correct. Yet, this wasn't Dave's take. Here's what he had to say.
Instead of directly answering Jeanette, Dave says, "…if a financial planner told you not to get a job because then you can apply for welfare, are you going to listen…?" No, but if a planner told you to invest in something which will yield a greater tax benefit, or greater financial benefits, then would you listen? He follows this with, "What kind of moron gives financial advice like this?" And finishes by saying, "You don't tell people not to save money for something, just so they can pretend they're poor!"
I've got to stop here. I hate when people don't answer the question. Reading Dave's answer frustrates me about as much as watching a presidential debate (and no that's not political because I felt that way watching the Republican debates too). Didn't Jeanette, albeit indirectly, ask what account would be most advantageous to utilize in order to maximize college financial aid?
Jeanette's question specifically states that her friends are saving. Thus, why did Ramsey say, "You don't tell people not to save…?" Did he not understand her question? Did he not have enough time to respond, thoughtfully, thoroughly, rather than directly off the cuff? As a consultant, would responding in a similar way be appropriate?
The bigger question is, does Dave Ramsey really believe it's fraudulent to use financial tools to increase personal financial benefits or to decrease personal financial liabilities? Regrettably, he does, or at least he says he does.
Dave says, "I'm not going to pose as broke—fraudulently—to get financial aid for my kid." Wait, how are Jeanette's friends posing broke? Let alone, how are they doing so fraudulently? If they follow their planner's advice, then they're saving and investing within their own retirement accounts whose balances are excluded from financial aid calculations. Is this lying? Is this deceptive? Isn't this using a simple rule, available to everyone? Is it okay to use a rule to lower financial burdens?
As an advisor, you already do this.
When your client loses her spouse, she becomes a qualifying widow for one year. Do you not discuss tax strategies now, while she has a favorable tax status? If you help her recognize more income in her current tax bracket and it's lower than what it will be in the future, then doesn't this lessen her future financial burdens? As a consultant, isn't this expected of you? Isn't this what you're compensated for? Is this fraudulent?
What about when your client, a small-business owner, has a bad year, and is temporarily in a lower tax bracket. Isn't it your duty, your responsibility, to discuss ways to benefit from this temporary change? If you choose to recognize income now, at a lower rate, then aren't using reducing his or her future financial burden? Is this fraudulent?
What about every time Dave Ramsey recommends investing in a Roth IRA instead of a traditional IRA? Isn't he recommending a Roth IRA, because he believes, over time, the tax-free growth will be superior to tax-deferred growth? Doesn't this simply mean, he believes it'll have a lower taxable liability and as such lower the listeners' future financial burden?
If saving for college within an investment vehicle that isn't factored into college aid is fraudulently appearing broke, then wouldn't saving for retirement within an investment vehicle that isn't factored into the formulas for both Medicare premiums and taxation of Social Security benefits also be fraudulent? Since Roth IRA income is excluded from the Medicare premium and taxation of Social Security benefits calculations, doesn't this, from a tax perspective, make the Roth IRA beneficiary appear to be less wealthy than a traditional IRA beneficiary? Or said in Ramsey language, pose them as broke to increase financial benefits?
