I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab.

I talk a lot about how investing can help you grow your wealth.

But do you know how to keep your wealth? Taxes. I know. I'm sorry. We have an aversion to tax talk. Even I do. I'll admit it. But the more we can bring ourselves to face it head-on, the more money we can keep in our pocket. Today, Today, I'm talking taxes with Bill Harris, who has had senior leadership positions in all the big fintech companies. Seriously, PayPal, Intuit, TurboTax, Nervana Money, One, and now Evergreen Money, which we'll hear more about in this episode. Today, we talk about tax tips and tricks that the rich use and you should, too. Bill Harris, welcome to Money Rehab.

Hey, it's a pleasure to be here. Thank you. No, thank you.

You are like the fintech king, and I am honored, as always, to have financial royalty on this show. You have held leadership roles at, count them, 11 major fintech companies. All of them aim to address some problem with the financial system, which I love. But also I have to ask, who hurt you? Did you have some problem, some personal experience with the financial system that made you feel like it's so broken?

Well, I'll tell you what, I will talk about the problem that is most on my mind, which is taxes. But first, I'll just tell you the secret to this type of success. Start in the right place at the right time, and I happen to be lucky enough to do that, and then get old. Because I've been watching this, Mary, go around for so darn long. It's now been, oh, gosh, four decades. And so with enough time, you get enough at-bats that some of them are bound to work.

And you say a merry-go-round. Have you seen trends come and go?

From the point of view of the business, running a business, yes. It goes back and forth in the tech business between growth and profits. And it always goes, the pendulum swings way too far one way and then way too far the other. But that's in terms of the business of creating a tech company. In terms of what people need, both investors and families, in terms of what they need, there has been the yin and yang of some tremendous functionality, some tremendous point products. Paypal is one that does a specific thing extremely well. And that's all come as a result of applying technology technology to the financial sector. The downside is that we've taken something that was already somewhat fragmented, and we've fragmented it even more. So most people, the average American family, I think, has in excess of 20 financial accounts, and so their money is scattered all over the place, and you just can't keep track of it all. If you can't keep track of it, you won't understand your money, therefore, you can't plan and make it better.

You mentioned PayPal. You were co-founding CEO of PayPal. So many entrepreneurial heavyweights came out of that era at PayPal. It's been called the PayPal Mafia, of course, Elon and Peter Thiel. What was it about PayPal that drew all these smart dudes together?

Well, first of all, let me just say I'm smart, but I'm not as smart as they are. I'm not in their league. But what it was is a volatile mix. And if you're doing startups, and particularly in the very early days of the Internet, I mean, this was 1999, you have to be willing to take big risks. So Elon is an incredible risk taker, extremely bold, Peter as well, Max as well. But here we were. This was the first time you could skittle money across the globe instantly and with a Push of a button. But even though we were purchased by eBay a couple of years after we started, we actually, in some way, created eBay because it was before we started working with eBay, They were effectively a hobby site, and there was no way you could buy anything except by sending a paper check by mail. With PayPal, all of a sudden, they had the instancy that they could essentially turn themselves into the e-commerce giant that they are today.

But then PayPal spun off again, right? What happened?

Well, there are many pieces to that tale, but I'll just give you one high-level thing. When we were PayPal, we had of our business with eBay. We were just about then to go beyond that and try to become the electronic payment mechanism for the entire web. We could have done that. We could have gotten there before credit cards really made their way onto the web. When eBay purchased PayPal, they turned inward, and they looked at PayPal as being the second revenue source when they did a transaction on eBay, as opposed to thinking about the entire web and say, Okay, now I want to be the way people pay online everywhere you go. And so there was a couple of years of missed opportunity in that way. Ultimately, a very good job was done. But at a certain point, the eBay business was such a small portion of the PayPal business that it just made sense to move those two things apart.

And there's so many payments companies now. I'm sure you guys could not have ever imagined every company a payment company.

Yes, but that's another example. It's another example of the fragmentation that everybody's facing. You've got a PayPal account, you've got a Venmo account, you've got a Cash App and Zelle and who knows what. Now, with the NPL, you've also got an Affirm account and a Klarne account, and the list goes on. You've got all these little pieces of money floating all over the landscape. How can anyone keep track?

I think Elon wants to turn X into a payments fintech company. What do you think about that?

I wouldn't bet against Elon in anything he might really put his energy against, but that seems to be more like an after the fact rationale for buying X rather than what might have been the original plan.

Would you work with him again?

I don't think there's room enough in any large gymnasium for the two of us.

Okay, fair enough. Another company, Bill, that you are at the help of was Intuit, which is, of course, the home of TurboTax, Credit Karma, QuickBooks, and more. I'd love to talk more about the tax system. You mentioned that that was a big part of what your passion is and what's broken about the financial system. Here's a top-level question for you. Why the heck are taxes so complicated?

Well, it's a combination of politics and inertia. The politics, obviously, first of all, let's just say the US tax code is an abomination, and it is worse than every single developed country on this planet. Far worse. And so how did that happen? It's a series of political deals and combined with fiscal deals where individual legislators or groups are trying to fit something for a special interest. Okay, that's not always bad by itself, because a special interest can be, for instance, People who have a mortgage. And so now we have a mortgage deduction. All right, that's a special interest.

But with children.

Or with children. Exactly. So many things done with good intent, but It ends up being a cripplingly complex system. And the other thing, so it's first of all, politics, but then it's secondly, inertia. Because once you layer all this stuff in, pulling it back out is almost impossible. For instance, If we tried to get rid of the mortgage deduction, there'd be a lot of people who would be pretty angry. When I was originally at TurboTax, before we merged with Intuit, we were taking the company public. This was in the early to mid '90s, mid '90s. We were on the road at about the same time that Steve Forbes was running for President. You may not remember this, but Steve Forbes, his platform was postcard taxes. All you would do, you could file your on a postcard, you'd say, This is how much I earned, times this %, this is what I owe you, send in the postcard. And of course, it was a little nuts, but that's what everyone was talking about. And so now here I am representing TurboTax, trying to go public. And I would have all of these meetings with investors. And sure enough, somebody would raise their hand and they'd say, Well, what if Steve is elected President and we get the postcard taxes?

And I would just say, If anyone in this room honestly believes that the government of these United States is going to take a significant simplification to the United States tax code, please do not invest. And of course, everyone invest. It's too deeply enmeshed with all the other financial systems for there to be significant simplification.

I know, but I do love the postcard idea. At least a greeting card, or I'd go for a pamphlet or something. Also for a long time, Bill Turbotax worked with the IRS to provide free tax return filings for Americans, which worked out because the IRS didn't even have its own system. But then the IRS did make its own system, right? Do you think the government even has time to own this?

Well, I think it's a good thing. The government is not capable of doing sophisticated software, but there are many people who have very simple returns. For a very simple returns, the IRS can certainly handle the software in order to make that happen smoothly. I view it as something that as part of what the IRS needs to do, which has become more customer-centric. What's the first thing they should do, put enough people on the line so they can answer the phones, and then they will be able to service the people who use the software. But all that's great, and this is an opportunity for public-private partnership. The IRS can do those kinds of simple things that make sense and are good benefits for everyone. But then for sophisticated situations, for even modestly affluent families, they really need something that is a full-blown tax package built by technologists.

Have you ever tried to call the IRS?

Yes, I have. I've been successful in calling the number. I have not been successful at talking to a human.

Same.

But I tell you what, one of the questions you asked earlier was, what was the problem that motivated much of what I'm doing today? It was taxes. Because even relatively young, even single, it would take me two weekends to get my taxes done. And remember, I'm a grumpy old man. And so this was a long time ago. It was paper. Everything, your taxes, you would get paper forms. And with a pen, if you were bold, you'd go do all the math with a little calculator on these forms. And it was tedious. It was literally two weekends a year. And so this was just about the time that personal computers were becoming slightly more than a tinkertoy. So the The question was, could you use an IBM PC or a Mac or something like that to do the taxes? Turns out the answer was yes. That's when I joined a company called... Well, it was called Chipsoft. We made TurboTax. I wasn't the founder, but I was one of the very early employees, and I ran TurboTax for 10 years. It was fascinating to see it grow because it went from essentially an overblown calculator that would just You'd put your numbers in and it would do the math for you.

The big innovation was we went to the interview. And so now all we do is we ask people questions. We never show them the tax form. We never show them a calculation. We just ask people questions, and then they would push the button and we would do everything else and print out a return or electronically file it. But seeing that evolution, seeing the evolution from the simplest and most and crude mechanism, essentially a calculator approach to doing taxes, to something that, I won't call it AI, but an intelligent question and answer process to get through a relatively complex financial requirement. It was magic.

I have a feeling before then you were a pen guy.

I was.

Did you ever make a mistake on your taxes? Did you ever get audited?

I've never been audited. I was audited once, but it was not because of a mistake. It was just my year. I was up for a California audit. It wasn't actually a federal audit. However, have I made mistakes? Yes. The typical mistake that I've made is losing track of accounts. Okay, someplace there's a 1099 out there that I either missed or they didn't send it to me or who knows. And particularly a couple of decades ago, when they were not delivered electronically, it was all in the mail. So then I would underreport income because if I had missed a 1099. And I did that a couple of times, and many people did. It goes back to the point of trying to decrease the fragmentation and bring people's money together so that they really know what's going on.

Let's continue to nerd out, if you don't mind. For tax nerd after my own heart, I also can't help but notice that you live in Miami. Is that for tax purposes?

Actually, no. I came here for sunshine. It turns out that I don't run on metabolism. I run on photosynthesis. But I love it out here. It is a fabulous benefit that we have in Florida, no state taxes, as I'm sure you were referring to. But you shouldn't decide where you're going to live based on taxes. You should live where you really want to live. Then there are many ways. If you do it right, there are many ways to save on taxes.

I'm really glad you mentioned that we did a full deep dive episode on this, and there are a lot of states that get you in other ways. So they're going to get money from you somehow. It might not be in the state taxes, it might be in the sales taxes, or it might be in property or something else.

Yeah, it's called the Tax Burden. And in my book, There's a little section on tax burden by state, and it is the combination of property tax, of sales tax, of income tax, et cetera. Typically, when you look at one of the states where the income tax is zero, they get you in other ways. Yes.

I would love to double click on the tax planning that you think people are missing out on that they should do, but they don't because they don't need to do. It's not a necessity. Tax loss harvesting. Can we talk a little bit more about that? We've alluded to on the show, but it's a complicated idea. So let's review. How does tax loss harvesting work?

The concept is straightforward. The concept is if you've got a lot of equities, a lot of stocks as an example, some of them will be up and some of them will be down, and hopefully more up than down, but there will always be losers. The great thing about stocks, capital gains stocks, is that you don't have to realize the gain until you sell the stock and you have control over that. So if all you do is not sell, you're not going to pay taxes this year or next year or the year after that until you sell. And that's particularly valuable for someone who has a buy and hold type of investment philosophy. Okay, but sometimes you need to sell or you want to sell for whatever reason, and you'd prefer not to have to pay tax on those gains today. Well, if you sell a winner but also sell a loser, then they offset each other and there's no tax. It's a fabulous thing. Capital gain stocks are a fabulous vehicle because all of the gain, the timing of the gain is under your control. And you can do three things. You can offset the gain, so you can take it this year, offset it with losses.

You can simply defer the gain, don't sell this year, sell next or whenever. Or if you play your cards right, there are numerous strategies where eventually you can dispose of the asset with paying no tax at all. How? There are a number of ways. Some of them are charitable. If you set up a donor-advised fund, which is another great thing to do, you can move money into the donor-advised funds, you never pay tax on the appreciation in the securities, and you also will get a charitable deduction. There's also a stepped-up basis at death. There is also generational giving and a series of trusts, different types of strategies that you could do there. But even if all you do is defer the gain for a year or more, that's a great benefit in terms of your cash flow.

But what if somebody says, I am such a fabulous investor. I don't have any net losses to carry over to the next year. I only have gains.

Well, show me that investor. Yeah, fair. You make a really good point because if you think about how there are two different modalities for people to invest. One is, I'm going to pick my stocks so I can beat the market. And whether you're doing it yourself or whether you're hiring a stock broker or a money manager or a mutual fund that is actively trying to beat the market. That's one modality. The other modality is an indexed approach, where really what you're trying to do is get full diversification, low fees, and that's very much the camp that I am in. If you go to something like Robin hood or one of the other retail trading apps, what you're going to do is, first of all, have more volatility. Then you're increasing the volatility without increasing the expected return. And that's called uncompensated risk. That means you're gambling a whole bunch, which you're going to add on average. At the end of the day, you're going to end up at about the same place you would have had with more diversified set of stocks, but you're going to have higher volatility, which is the definition of risk.

So first of all, you're taking unnecessary risk. Second, if you're trading a lot, it's all short term. And short term capital gain from a tax point of view. And now all of a sudden, rather than being in the lower capital gain tax brackets, which top out at 20 % federal, You are now in ordinary income tax brackets, which top out at 37 % federal. And in addition, you not only pay higher tax on any gains realized today, but you also cannot defer and you cannot eliminate. Really what you take, even if you are lucky enough to beat the market, and academic studies say nobody can on a statistically reliable basis, even if you happen to the market, you're probably going to suffer in the tax side, so it doesn't make any difference anyway.

You're alluding to something that you educate investors on, which I appreciate, the reality that ETFs are usually more tax savvy than mutual funds. Can you explain that? Mutual funds are basically trying to outperform their index, so they're getting into a bunch of trades that give you short term cap gains problems. If somebody is using a robo-advisor, you mentioned Robin hood, there are others. Should they Are you really nervous about running into the same short term cap gains problem?

Yeah, let's take one at a time, Mutual Fund ETF, robo, and somebody like a trading app like Robin hood.

Hold on to your wallet. Money Rehab will be right back. And now for some more money rehab.

Yeah, let's take one at a time, Mutual Fund ETF, Robo, and somebody like a trading app like Robin hood. Mutual funds, yes, they trade frequently. Not as frequently as people on Robin hood, but they trade frequently, and therefore, they're generating short term capital gains. They don't care because they are not measured on their after-tax performance. They are only measured on their pre-tax performance, and there are all sorts of reasons they'll trade. But what they're doing is passing to their investors a significant amount of short term gain. Short term gain that the investor has no ability to time. So yes, it's tax inefficient. Etfs are better. I wouldn't say they're tax-advantaged because you're not doing tax loss harvesting and other techniques with a simple ETF, but they're at least tax-neutral. Ultimately, what you'd want to be doing, although it's complicated to actually implement, ultimately, you want to take a full diversified portfolio of stocks that would perhaps mimic an ETF, but own the stocks individually so that then you could tax loss harvest, defer, offset, and eliminate.

So buy 500 of the S&P 500 individual stocks?

Well, obviously, that's impractical for anyone but an institutional investor today. But that is actually what I'm building at Evergreen, an automated ability for anyone to take, for instance, the S&P 500 and buy all of those stocks instead of a single ETF and then have a significant tax advantage. It's the same, the pre-tax return, but a significantly better after-tax return.

I want to dig more into Evergreen in a moment, but you mentioned this hot take that you have that investors should focus almost exclusively on after-tax returns and not pre-tax returns. Can you explain why this is an issue? And Can you also define what after-tax returns would be comparatively? Sure.

Well, first of all, it's easy. Pre-tax returns means what you make before the government takes their share. After-tax returns is how much is left after you pay your taxes. Why should people care about after-tax returns? Because that's the only thing that goes into their pocket. And so that's the objective. I mean, you don't really care about anything else. We care about net at the end of the day, how much money do I have to live my life? The financial services world does not ever talk about that. All they talk about is pre-tax return. First of all, they don't have the products, they don't have the technology or the products to really address each individual person's tax situation, and it is idiosyncratic, and they don't have the knowledge of how to operate a tax-aware portfolio. So Nobody out there is talking about tax. That's why I think it's so important. In fact, I would argue that tax is the single most important driver of investment performance outside of the market itself.

If you're an investor and you're looking at mutual fund, ticker symbol, let's say MNN. And MNN trades 50 times a year, but you are in the top tax bracket and you don't sell for 50 more years compared to another person who might sell the very next year and might be in a different tax bracket. It's really hard to quantify that because of all of those individual circumstances. So how should somebody think about taxes when there's not the mechanism to tell you exactly how much you're going to get based on after-tax returns because you're only seeing pre-tax stats to account for what you'll actually get net net?

Yeah. Well, it's a very good question. And once Again, I'll say that's a question that I'm attempting to solve at Evergreen. However, what could you do today? I think it's not a bad strategy today to go in highly diversified, low-cost ETFs. At least that keeps you diversified and safe with low fees. In terms of tax optimization, you'd end up perhaps taking a look at the end of the year and seeing in December and seeing whether there are any losses to be harvested at that point. That's not a terribly a thorough approach, but at least it would get you a couple of big chunks at the end of the year. But even if all you've got is ETFs, you can be relatively smart in terms of what funds you put in your taxable accounts and what you put in your tax deferred accounts.

That's what I also want to ask you about because you have this other hot take bill. You say that many people think that because retirement accounts have a long time horizon, they should put their longer term stocks in 401(k)s or IRAs, and their shorter term savings like or bonds in taxable accounts. You say that this whole thing is backward. Why?

Yes. Well, for tax reasons. Because first of all, things like cash or bonds, anything fixed income, They generate interest. Interest is taxed at the highest ordinary income rates. Dividends and long term capital gains are at capital gains rates. So that's the starting point. And then in addition, with the capital gain, you can decide when to sell it and when to realize the gain. What does that mean? Those which have the smaller taxes, those assets should go in the taxable account because you're going to pay... That's where you have to pay the tax. On the fixed income side, and this applies to any cash or interest-bearing asset you've got, including your bank account, those are going to be taxed at the highest rate. So put that into your tax-deferred or tax-exempt accounts.

So when somebody is signing up for a 401(k) and the options are through their employer, they should look for more fixed income-heavy options, or if they have an IRA that they're doing self-directed.

Yes. I would say that if they have their own investment someplace else, if the 401(k) is the only thing you've got, then by all means have a balanced portfolio of stocks and bonds in the 401(k). However, if you've got significant assets in a taxable brokerage account and you have the 401k, yes, put the fixed income in the 401k and the capital gain assets in the brokerage account.

That makes sense, except for the idea that CDs are typically bank products. So these would be like brokered CDs or something that you could trade?

No, this would be in a 401k. It's going to typically be a money market fund or a bond ETF.

Okay, makes sense. So after all of this, all these major fintechs, Bill, why did you decide to start your own new venture Evergreen.

It's an opportunity for me to pull together things that I've done over the course of my career, starting with taxes at TurboTax and other places, also personal capital. I started a digital wealth management firm that we went from zero to $23 billion of assets. We were the ninth largest RIA, Registered Investment Advisor in the country. So I've got the investment piece, the tax piece. I also started a NEO bank, something along the lines of CHIME, which We eventually sold to Walmart, and it now has millions of customers. So the banking side, the investing side, and the tax side, at Evergreen, we're trying to merge them all together. So it's one place you can keep all of your money and then optimize it automatically. Be it short-term money, mid-term money, long-term money, optimized across all of those, the banking and the investment landscape, and everything optimized from a tax point of view. I can tell you about the initial product. The initial product is something I'm pretty excited about. What we're doing is building a thing called Liquid Treasuries. And what is Liquid Treasuries? It's just a checking account. And there has been zero innovation in checking accounts for decades.

All we do is we take the balance every day and we invest it in treasury bills. Now, all of a sudden, what you have is a checking account that is now not earning 0.01%, which is what you'll get at Chase or Wells Fargo, 0.01%. Now, all of a sudden, you're getting treasury bill yields, which currently are about 5.3%, so a huge increase in the interest income. In addition, because they are treasury bills, if you are a high-income taxpayer in a high-tax state, like California, where the top rate is 13.3%..

Don't remind me.

Well, all right. Sorry. We feel for you. Thanks. Because treasury bills are exempt from state and local taxes, in this case that we just talked about, your tax equivalent yield on 5.3%, you would be earning more like 6.5% to the equivalent of six and a half % in a regular bank account. And so it's just a huge... The combination of being able to get the higher rate and then get the tax savings and put that all in a checking account with a debit card and with ACH and wires and the whole thing, it's a huge thing we're doing for people. And let me just tell you how big the problem is. Americans today are losing 283 million a day in their checking accounts. And that's because they're currently getting next to nothing. Rates today are about 5%, give or take. If all the money in a checking in every checking account in the country, was making 5%, that would be $283 million a day or $1.03 billion a year of additional income for people just in their checking account, just in their bank account.

So there's nearly a $300 million opportunity cost daily?

Every day. Every day. And the average checking account has about $16,000 in it. People who are more affluent, they typically have higher balances. And so what you're talking about is potentially thousands of dollars of additional income just in your checking account alone.

And how the advantage compared to a high yield savings account would be the tax component?

Well, Well, no more than that. So first of all, yes, if you're smart today, what you've got is you've got your money at Wells in a checking, and then you're putting some of it into online high yield savings at, let's say, Marcus. All right, well, first of all, Marcus is giving you 4.4%. Treasury bills are at 5.3. Marcus is 100% taxable. Treasury bills are tax exempt at the state level. And then in addition, and the thing people don't think about, I've got my money sitting in a high-yield savings account, a Marcus, whatever it is. I'm making 4.4%. That's great. Oops, you've got half your money still sitting over in the checking account, and you need it over there in order to pay the bills. And so you're not really making 4.4, you're making 2.2 on your cash. So here's a way to make not 2.2, but I'd rather 5.3, and depending upon your tax situation, as much as 6.5..

Very cool. And why do you think all of these fintech companies, something that you've worked with, others that you haven't, have not been as tax-optimized as you're now making evergreen? Is it because it's, as we started, too complicated?

Well, it's, first of all, conceptualization, and it's very hard to take It reconceptualize a commodity product that has been around for a long time. Then secondly, yes, this is some complex technology to build, but we've got the team and we built it.

Just to be clear, stepping back, you don't suggest for people to make, you've alluded to it with the state you live in, to make decisions based on what's most tax advantageous. I often say when people are thinking about buying a house and they're like, Oh, you can get a deduction. And I say, Don't let the tax tail wag the house dog, or whatever the metaphor is. I think a lot of people don't think about taxes on one end of the spectrum, and on the other and they make huge decisions, capital-intensive decisions, because of a tax advantage? That makes no sense either.

I agree absolutely, and in both ends of the spectrum. Would you You want to make, and most people don't, you want to make your financial decisions fully informed by the tax impact. You want to make your life decisions based on how you want to live. And don't let money get in the way of deciding that. Do you want a family? Do you want to live in a city or in the country? Those kinds of things. Do you want to live with your family? Do you want to be away from your family? Those kinds of things should drive how you live your life.

And then get a really smart tax person.

Yes. And then I volunteer to help you with the taxes.

Listen, don't make promises you can't keep, Bill, because we're going to have a lot of listeners giving you a call. Bill, to close, we ask all of our guests for one tip listeners can take straight to the bank. It could be anything, a tip on budgeting, saving, investing, tax management, anything we didn't talk about yet today. What's yours?

Well, I'll go back to what I said before. If you want a tip that you can take straight to the bank, why don't you start at the bank? Take a look at the cash sitting in your bank account. You are paying. If you are a high income taxpayer in a high-tax state, you are paying 50% or more in taxes. And nobody gets that. They don't think they're paying taxes on the money they're earning in the bank account because rates have been so low for so long that you just never see it. But in fact, now that rates are high and you've got a bunch of cash sitting in a bank account, pay attention to that one. You're making nothing today and you could walk away with $1,000, $2,000, $3,000 of, in fact, free money.

Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan LaVoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all So email us your moneyquestions, moneyrehab@moneynewsnetwork. Com, to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make..