Asset Trip with Allan Randall: Making Tax-Efficient Investments, Whether Traditional or Alternative

To kick it off, could you tell our readers a little bit about what you do?

I'm a tax accountant and financial advisor with a small family firm that was actually started by my father-in-law back in the mid-90s. We specialize in individual and small business tax accounting. We also have a full wealth management department as well. So it really goes hand in hand, being able to understand the tax side of the business, then being able to give clients advice on the wealth management side as well.

And how did you get involved in the financial space to start? Is it something you've always been interested in?

It really was because of the family. I married into it, and they had this family business that intrigued me. There was a wealth management side of the business that was continuing to grow with the amount of clients that we were serving. But we weren't able to consistently keep in touch with them every single year and have annual reviews with them to review their allocations and their investments, so I came on board to help with that aspect of it. Then that really led to the tax side of it as well, being able to go and get my enrolled agent on the tax side so I can represent taxpayers in front of the IRS. So, it really leans into one another, when you're both on the tax side and the wealth side.

And what do your typical clients look like in terms of where they're at financially in their lives?

We have a range. A lot of the clients that I work with are probably mid-30s, early 40s, with growing families. [They] have stable income, or they have their own small business. I tend to work with those clients that I can relate to. My father-in-law will work with clients that are, you know, mid-60s, in his age bracket. So that's really worked out great of having a diverse group of advisors that can work with different generations of clients as well.

I think a lot of our readers are kind of at a stage where they're doing all of the basics of investing. They've got their 401k, they maybe have some stocks and bonds and are starting to think about doing more with their money than just the basics. I'm curious if you have any advice for people who are at that stage in their financial life.

Yeah. So like you just touched on, the 401k and being able to maximize that employer match, (or from a tax perspective, being able to match how much you're putting in on a pre-tax basis to save yourself from your tax liability), is super helpful. Then coupling that with Roths or backdoor Roth IRAs as well, doing Roth conversions in a given year to take advantage of any non-deductible contributions is another way to set up for retirement. Then, like you said, having, having an allocation where you have access to liquid funds as needed. Then also looking at, depending on what stage you're at, family planning, being able to save for college or save for other accounts [that] provide some wealth for your kids in the future.

For us, it always comes down to those priorities for the client themselves. Is their priority looking at maximizing and securing their financial future? Or is it, 'Hey, I want to be able to do what I need to do to at least get the ball rolling on my own retirement planning, but I really want to be able to make sure that my kid is taken care of with college,' things like that. Our process always starts with sitting down with the client and determining what their goals and dreams are and then being able to build out that plan specifically for them

Do you find that your clients skew more towards traditional investing, aka stocks and bonds? Do you have clients who are interested in alternative assets, like real estate, lending, crypto, things like that?

Mostly traditional. We do have clients that are in the real estate space through real estate investment trusts (REITs). But even those, I still consider more traditional because they're still overseen by the SEC. So they may be traded REITs, or they could be considered a non-traded REIT that is still not from an institutional level where you need to have, you know, a million dollars [and] you don't need to be an accredited investor. But mostly it's traditional stocks, bonds, mutual funds, ETFs, and then some alternatives, mostly in the real estate investment trust space. Then we have plenty of clients that also do their own real estate management as well. I found a lot of engineers that will buy and pull properties or flip properties as well. So a lot of our clients also end up doing real estate management, just for the sweat equity that they're able to put in and get the return off of themselves as well.

Do you find that branching into alternatives, outside of REITs, is worth it for your typical investor in terms of the added complexity of finding the right investments, the knowledge you have to have, and also the tax implications of those kinds of investments?

Obviously one of those newer alternatives is gonna be crypto. So a lot of people are in that space as well. I don't think it's a core focus of any of our clients. It goes back to that other point that we had talked about before, of how do you diversify? So I think, yeah, having a real estate investment trust, a small piece in crypto will, in the long run, serve you better. Just like our parents' generation, when they were investing in gold and silver, right? That was their diversification strategy. I think with us, and with this new generation, it's gonna be that crypto will be that space of diversification.

So I think the crypto, if it's a piece [of your portfolio] is worth it. I guess I'll speak more from the tax perspective. There's not a ton of guidance right now on crypto, so we're letting our clients know, you're gonna be treating it just like a stock or bond, as just a capital gain on your tax return. The IRS is gonna be looking for that question to be answered on the tax return on whether or not you hold cryptocurrency or not. If the answer is yes, but they don't see any types of sales, it could potentially raise a red flag. So you just wanna make sure you're reporting the gains that you are earning.

Then from a real estate trust investment piece, with either traded or non-traded, we definitely see the value in it. Because of the way the depreciation works and the tax laws are set up, you're able to take advantage of not needing to pay income tax on the full dividend that you might be receiving as well. And that's the same thing with when you manage your own real estate, it's considered passive income. So ultimately, yes. I think that even though there are extra complexities, the return or the value that you get [with these alternatives] is worth it.

Speaking of taxes, what are some things people should take into consideration to make sure that their investments are tax-efficient?

One, knowing what your tax bracket is. So if you have an understanding of the next group of income that you're going to receive—either a new job, a secondary source of income, capital gains, or just ordinary gains—knowing what that tax rate is will really determine how you should be structuring that investment. I mean, if you're in a 12%, 22% or 24% tax bracket, that's one thing to say, 'Hey, I'll just keep sticking with this investment in whatever dividend paying stock, because I know I'm paying X amount of dollars on that dividend.' But if all of a sudden you're in a 32%, 34%, 37% tax bracket, well, that's a much different story.

I think it always starts with knowing what your tax bracket is so that you can make those informed decisions on whether or not we should be allocating to that brokerage account. Should we be allocating to a tax-efficient strategy that is less likely to kick off interest dividends or capital gains in the year, so that we can have a more tax-efficient strategy overall? So short answer, yes. I always believe it's an important piece to know what your return is gonna be after you pay income tax on it. But then that always starts with really understanding what your tax bracket is, so that you can make that informed decision as well.

When people are looking at how to allocate their assets and diversify, what are some main considerations to take into account?

When we work with our clients, we're focused on that time horizon and also the risk tolerance, because we don't wanna sit down with a client and say, 'Hey, since you're 34 years old and you have a stable income, you should be invested at an aggressive risk tolerance", because another 34 year old might be conservative, right? Every single individual is different. Just like you then get a retiree, and one retiree is more conservative or a moderate investor, and another is super aggressive because they understand market cycles. So for us, it always starts with that risk tolerance so that we can build out a whole entire portfolio that is diversified across those different asset classes that we've talked about: stocks, bonds, mutual funds, ETFs, alternatives, REITs, crypto, whatever it might be.

Then we also couple that on an account level perspective with what does that time horizon look like? If all of a sudden you're saying, 'Hey, we sold a house. We plan on renting for two or three years before we go buy a new house, but we might actually find a house that we wanna buy sooner rather than later.' Well, that's gonna have more than likely a different risk tolerance on it, because maybe we need to add on a hedging mechanism or be able to do a stop loss on a stock so that we don't incur a ton of risk for a shorter-term investment, versus an account that I don't wanna look at until I hit my retirement age. Or this is an account for my kid that I want to be able to leave behind. So time horizon and risk tolerance are the two biggest factors that we look at. And then we'll also look at the taxability of that account if it's a non-retirement account.

I'm curious if you think it is worth investing money that people are gonna need within the next five or so years. I think a lot of people right now, what with low interest rates and concerns about inflation, have this money sitting around they feel is losing value, but they know they're gonna need it in a few years.

I think that five-year timeframe is worthwhile. We even look at some three-year investments as well. I think when you're looking at maybe a year to 18 months, those are when market cycles really can change and have a negative impact on that investment. A three to five-year period is well suited for a traditional investment in the market. It's just realigning that risk so that you take less risk, but are able to still potentially generate a higher return than what you're getting inside the bank.

Going into the new year, I know people are probably going to be doing some financial housekeeping. Do you have any major tips or advice for that?

Just understand what your total portfolio looks like. I know a lot of people over the last couple years might have left jobs. Their jobs may have changed. Their benefits might have changed. So if you're at a current employer, making sure you understand what your benefits are so that you can make sure you're maximizing whatever you would receive as an employer match on your 401k. Going back to the tax piece, understanding what your projected income's going to be to see if it makes sense to consistently save into a traditional 401k versus a Roth or doing a traditional IRA versus a Roth IRA. Look at those tax consequences to make sure you understand the ramifications of that as well.

Then also just take a look at your whole entire portfolio. From our perspective, we have so many clients that come to us and say, 'We have an old 401k over here. We have an old 401k over here. We have our current 401k.' For me, it's like, do I really want to be consistently checking these like three or four different sources of retirement funds, as opposed to just consolidating them down? You'd be surprised by how many times people come in and they have like four different retirement statements and it's all over the place.

I'm gonna switch gears a little bit and ask you a few questions about your own personal investing journey. Do you happen to remember what your very first investment was and how old you were?

Right after I graduated high school, I was working full-time at Best Buy while I was going to school. So I started a 401k there. They also had an employee stock purchase plan that I invested in. So I guess technically my first investment was Best Buy stock back in like 2005 or 2006.

Can you talk a little bit about what your investing style is and how you allocate your assets accordingly?

I start by looking at that tax piece. We have four kids in this household, so being able to take advantage of child tax credits on the tax return lowers your effective tax rate. More recently, as we've continued to add more kids to the mix, I've leaned more heavily into the Roth. Being able to take advantage of effectively lower taxes, and then as some of those credits phase out, income goes up, I'll probably be structuring back to save money on taxes through a traditional IRA. So I always look at the Roth versus a traditional first. And then for me, over these last couple of years, I've overweighted S&P index funds. I've used a little bit of target-date funds, and then I'll also have some specific real estate investment trusts. I have a small allocation into bonds, but they are more high yield bonds, short-term bonds as well, that can take advantage of some increased interest rates.

If you could hop in a time machine and go back and give your 18-year-old self one piece of investing advice, what would it be?

Invest more early, right? Don't buy as many CDs and DVDs from Best Buy on Tuesdays. <Laughs> I don't need to go out every single night. So, just saving more. And then taking that savings and investing it. I wish I would've saved more in, you know, pick any stock, any of these tech companies that were just starting to grow and develop through the financial crisis.

For our last question, I like to ask: can you name your biggest investing win and your biggest investing loss?

So biggest investing win <laugh> actually was, well, the most recent one was I ended up dollar-cost averaging into Penn National Gaming, the Hollywood casinos that ended up buying Barstool sports during the pandemic, and rode that wave up and then sold.

Biggest loss. I don't know about the biggest loss, but coming out of the pandemic and selling too soon. l became a lot more aggressive investing in companies, just like the majority of the world was in March of 2020, when everything bottomed out, but then started selling off in probably July or August. And obviously, I should have held onto probably each one of those companies. AMD was one of them that I sold too early, and Facebook. So I don't know about a specific investing loss as much as just not thinking the run was gonna continue to happen and it did. The one that comes to mind was I think I dollar cost averaged Penn down to like $4 a share as, or $7 a share, and then I ended up selling at like $60 something, and it just kept going all the way up to like $140, and then it crashed back and came back down to like 45.

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