Bogleheads University 101 2024 The Tax Efficient Waterfall with SC Gutierrez

00:00:00.000 | (audience applauding)

00:00:03.160 | What happens when you don't pay your taxes?

00:00:08.480 | I mean, you can go to jail,

00:00:11.280 | but like if you don't pay them for like,

00:00:13.440 | if you don't pay enough taxes,

00:00:15.400 | you get a penalty, like a fine.

00:00:20.320 | They also kind of can charge interest, right?

00:00:23.400 | So I'm actually not a tax professional.

00:00:26.480 | I'm actually like not that good at taxes,

00:00:28.800 | but I am good at seeing a great investment opportunity

00:00:31.880 | and here is one I've got for you.

00:00:34.240 | What if I told you,

00:00:36.520 | you could not pay taxes on some of your money

00:00:41.520 | and literally not pay those taxes for decades

00:00:48.080 | and not only will you not pay a penalty,

00:00:51.400 | you will also not be charged interest.

00:00:54.440 | It's like an interest-free loan from the federal government.

00:00:57.640 | When's it due?

00:00:58.720 | I don't know.

00:00:59.560 | Sometime in your distant, distant future.

00:01:02.120 | Sounds like a really sexy, sexy idea, right?

00:01:07.120 | Exciting.

00:01:08.880 | Do y'all wanna hear what this is?

00:01:10.560 | I'm gonna give it to you.

00:01:12.880 | A 401k.

00:01:17.080 | What?

00:01:19.600 | Yes, it's called a 401k.

00:01:22.560 | That's what's happening.

00:01:23.400 | You put a dollar in there,

00:01:24.500 | you don't pay taxes on that dollar

00:01:27.520 | and then you pay back your taxes decades later.

00:01:30.560 | No penalty.

00:01:32.120 | So you're using the government's money.

00:01:33.600 | That money would have come out of your pocket.

00:01:36.720 | So it's in your pocket now.

00:01:40.440 | You get to invest that in stocks and bonds

00:01:42.720 | and then you pay it back later.

00:01:44.480 | Whoa.

00:01:46.440 | So we have this thing,

00:01:49.860 | this deferred taxation bucket

00:01:55.340 | and the guy that created this bucket

00:01:58.500 | literally names it after a line in the tax code

00:02:01.440 | and we wonder why these things are not more popular.

00:02:05.620 | So what we're gonna do today

00:02:06.860 | is we're gonna get super excited about these buckets

00:02:11.320 | because here's what's going on.

00:02:12.980 | I told you already,

00:02:14.520 | we gotta figure out how much to save for our future, right?

00:02:17.680 | We've got to.

00:02:18.520 | This is kind of a non-negotiable.

00:02:20.320 | We've got to get our savings rate right

00:02:24.340 | but where people get hung up

00:02:27.140 | is they don't know where to put that money.

00:02:30.120 | So that's what we're gonna do here

00:02:31.700 | is we are going to do the tax-efficient waterfall

00:02:35.060 | and figure out exactly,

00:02:36.700 | once you have that pile of money figured out,

00:02:40.300 | allocate it to the different buckets

00:02:42.880 | that are gonna give you the most bang for your bucket.

00:02:47.880 | Okay, here it is.

00:02:50.500 | So we're gonna go one by one through each of these.

00:02:54.500 | So if you remember the previous example

00:02:58.220 | where we, I think, had to put aside $22,500,

00:03:03.220 | I think was our amount.

00:03:05.060 | You've done your calculation.

00:03:06.780 | You take your gross pay, you multiply it,

00:03:09.440 | in your case, by 5%.

00:03:12.300 | Maybe yours is 10%, maybe yours is 20%.

00:03:15.260 | So just take your calculator out

00:03:18.940 | and then do the math and there's your dollar amount

00:03:22.320 | that you need to allocate to your different buckets.

00:03:25.500 | And here's what I've done for you.

00:03:27.480 | I've just prioritized your buckets, okay?

00:03:30.700 | So for the most part, they are prioritized

00:03:33.860 | by how much tax efficiency

00:03:37.060 | that I just described to you, the phenomenon,

00:03:39.900 | why tax efficiency is such a big deal.

00:03:42.820 | But there's also a few other elements that are at play.

00:03:46.980 | So Kyle here asked me a great question at the break.

00:03:51.060 | Raise your hand, Kyle.

00:03:52.780 | And he said something I kind of overlooked.

00:03:55.020 | He said, what if I have a retirement plan

00:03:58.260 | and they match into my retirement plan?

00:04:01.820 | Does the company's dollars factor into my savings rate?

00:04:06.820 | So let's say you have 100% match up to 5%.

00:04:10.860 | You put in 5%, the company puts in 5%.

00:04:14.380 | Does that mean you're saving 10?

00:04:16.820 | And the answer is actually not in my equation.

00:04:20.620 | In my equation, it is only factoring in

00:04:24.300 | how much you are putting in.

00:04:26.660 | Because there's two important things

00:04:28.460 | happening when you save.

00:04:30.300 | First of all, you're actually putting physical dollars

00:04:33.220 | for your future.

00:04:34.700 | But actually more importantly,

00:04:36.500 | you're lowering your lifestyle by that amount.

00:04:39.820 | Your ability to stop working on your own terms one day

00:04:43.340 | is can you keep your lifestyle going, right?

00:04:46.980 | And so if you're bringing down your lifestyle,

00:04:50.460 | then the chances are higher that the amount of money

00:04:53.740 | you have is going to last longer

00:04:56.540 | funding the lifestyle that you have.

00:04:59.040 | So that's why I do not include a company match

00:05:02.540 | in that percentage.

00:05:04.320 | Now there are exceptions.

00:05:05.640 | I mean, there are some pretty crazy matches out there,

00:05:08.100 | in which case you can maybe put some of that

00:05:12.100 | into your savings rate.

00:05:13.620 | But for the most part, I say just make that gravy.

00:05:16.580 | Make it gravy.

00:05:17.520 | Also, do y'all know what vesting is?

00:05:21.700 | I mean, a lot of people leave their jobs after two years.

00:05:27.820 | And many of these employer plans,

00:05:31.540 | you're not even vested for six years.

00:05:34.700 | So whatever the company is putting in,

00:05:36.240 | you don't even take it anyway.

00:05:38.060 | So company employer matches are really tricky.

00:05:41.620 | And so I say go for them,

00:05:44.300 | but don't include them

00:05:45.220 | in your core savings rate calculation.

00:05:48.660 | Okay, so what we're gonna do

00:05:49.780 | is we're gonna go through these buckets.

00:05:51.660 | Do y'all understand what I'm saying here?

00:05:54.260 | When we are allocating your pile of money

00:05:58.260 | into a hierarchy of where you're gonna get

00:06:02.580 | the most advantages to that money,

00:06:07.580 | not talking about investments themselves,

00:06:10.360 | but the actual structure of the bucket.

00:06:12.140 | Are we all on the same page here?

00:06:14.340 | Okay, let's go through the buckets.

00:06:16.100 | This is a resource slide so you can know

00:06:20.020 | if you're making these calculations,

00:06:21.540 | if you wanna work on it over the course of this weekend.

00:06:24.740 | I'll be around if you wanna have me look at 'em.

00:06:27.100 | This can kinda help you figure out

00:06:29.220 | how much can go into your buckets.

00:06:31.400 | Okay, so we wanna start with our first bucket,

00:06:35.420 | which is get your free money.

00:06:36.820 | Always go get your free money.

00:06:38.540 | So if the company is matching 100% up to 5%,

00:06:42.720 | get your free money, right?

00:06:44.820 | So at least put 5% of your money into that bucket.

00:06:49.500 | We've seen some organizations that match 100% up to 10%.

00:06:54.500 | Some people put all of their money in this first bucket.

00:06:57.820 | How convenient, right?

00:06:59.180 | That's really setting people up for success,

00:07:01.020 | being able to do that.

00:07:02.700 | So always prioritize the buckets

00:07:05.540 | where you can get free money.

00:07:07.080 | That's usually gonna be in a 401(k), a 403(b),

00:07:11.340 | or if you work for a governmental entity, a 457 plan.

00:07:15.020 | They all work essentially the same way.

00:07:17.180 | Okay, now let's pay off that student loan debt.

00:07:21.780 | If you work in public service and you have student loans,

00:07:27.540 | you should be writing a check for whatever amount

00:07:30.920 | the government tells you to write.

00:07:33.360 | We have had doctors who just kinda forget about this

00:07:36.300 | and they're like, oh, it's a low-interest student loan debt

00:07:39.980 | and then I go and see that they've got $300,000

00:07:42.820 | in student loan debt.

00:07:44.180 | They've been working for a hospital for 15 years

00:07:47.300 | and we go get $300,000 forgiven.

00:07:50.460 | They would have just kept on paying,

00:07:52.860 | kept on paying, kept on paying.

00:07:55.220 | So if you work in public service,

00:07:57.740 | so if you work for a governmental entity

00:07:59.620 | or you work for a non-profit hospital or non-profit,

00:08:03.260 | whatever your payment is, your next priority

00:08:07.220 | is to make that payment so that your loans get forgiven.

00:08:12.220 | If you are not working for a non-profit entity

00:08:15.540 | and you have high-interest debt, credit card debt,

00:08:18.440 | again, a lot of student loan debt,

00:08:20.020 | I mean, there's some parent plus loans out there

00:08:21.740 | that are 9% plus, right?

00:08:23.840 | Let's just pay those things off.

00:08:27.340 | If I said to you, I have an investment

00:08:31.340 | and it's gonna have a 9% guaranteed rate of return

00:08:35.100 | after tax, would you believe me?

00:08:40.340 | No, but this is literally like

00:08:44.340 | a government-guaranteed rate of return

00:08:46.380 | if you pay off that debt.

00:08:47.460 | So let's pay that debt off, right?

00:08:49.540 | It's amazing to me the number of people

00:08:52.180 | who both carry credit card debt

00:08:54.620 | that'll have 25% interest

00:08:56.340 | and aggressively save into a retirement plan, right?

00:09:00.620 | So let's pay off this debt.

00:09:02.420 | Now, you might think the next bucket

00:09:05.960 | would be to go back to finish out

00:09:08.980 | what's left in your retirement plan

00:09:11.180 | 'cause you can put up to $23,000 into a retirement plan,

00:09:14.380 | more if you're over 50, but no,

00:09:17.520 | the next best retirement plan

00:09:20.980 | might be your health savings account.

00:09:23.460 | So if you have a high-deductible healthcare plan

00:09:27.820 | and it comes with an HSA,

00:09:30.500 | not to be confused with an FSA,

00:09:33.060 | a flexible spending account,

00:09:35.100 | if you have an HSA-eligible high-deductible healthcare plan

00:09:39.580 | and that was the best healthcare plan for you to choose

00:09:43.260 | that made the most sense to you,

00:09:45.700 | then I urge you to consider

00:09:48.900 | that this is one of your best retirement accounts

00:09:53.580 | that you will ever have.

00:09:55.860 | So about 10 or 12 years ago,

00:09:58.940 | I saw these things come down

00:10:00.400 | because my husband and I couldn't afford health insurance.

00:10:02.860 | We both had small businesses.

00:10:04.340 | And so we heard about this thing called an HSA.

00:10:08.140 | And I was looking at that going,

00:10:09.900 | wait a minute, I can open this thing

00:10:13.940 | and I can invest it in stocks and bonds

00:10:17.360 | and I never have to spend it?

00:10:20.940 | What's the catch here?

00:10:22.280 | So we started doing that

00:10:24.900 | and we have a sizable amount in this account

00:10:29.140 | because you can simply save into the maximum,

00:10:33.600 | invest it in stocks and bonds,

00:10:37.180 | and as long as you use it for health expenses,

00:10:42.180 | you will owe no taxes.

00:10:45.540 | Now, if you know the way an HSA works,

00:10:47.220 | it's very similar to an FSA.

00:10:49.060 | You put money in and you get an immediate tax deduction.

00:10:53.020 | So think about what's happening here.

00:10:55.480 | You don't pay taxes on the way in.

00:10:59.660 | As long as you spend your money on health expenses,

00:11:04.240 | you don't pay taxes on the back end.

00:11:07.460 | If you grow the money in stocks and bonds,

00:11:09.900 | you don't pay any taxes.

00:11:12.020 | You don't pay capital gains taxes.

00:11:13.980 | You don't pay taxes on the dividends or the interest.

00:11:16.700 | It's literally the only money

00:11:19.540 | that you will never pay taxes on

00:11:21.340 | aside from like your babysitting money in high school.

00:11:24.380 | This is an incredible opportunity.

00:11:27.140 | And some people say,

00:11:28.900 | "Well, what if I don't have health expenses in retirement?"

00:11:32.240 | Hmm, I wonder if you won't have

00:11:37.180 | any health expenses in retirement.

00:11:39.820 | Sounds like a great problem to have.

00:11:42.620 | You can use it, we call it like a little stealth IRA.

00:11:45.500 | So you can essentially take the money out

00:11:48.060 | if you're not using it for health expenses

00:11:50.820 | after the age of 60,

00:11:52.900 | and you pay taxes on it just the way you would

00:11:56.980 | like a 401(k) or a 403(b).

00:11:59.940 | So you just, whatever you take out,

00:12:02.220 | you pay income taxes on that amount.

00:12:04.740 | It is an incredible opportunity to save for retirement.

00:12:08.460 | So then the next bucket, going down the ladder,

00:12:12.940 | is you max out into your retirement plans.

00:12:17.940 | And there are some people that have the opportunity

00:12:20.060 | to invest in two retirement plans.

00:12:22.580 | Like some people who work for hospitals, for instance,

00:12:25.740 | might have access to both a 403(b) and a 457,

00:12:29.300 | which essentially doubles the federal maximum

00:12:31.960 | for how much you can save.

00:12:34.220 | It is a great opportunity to save.

00:12:36.940 | What I love about, especially these retirement plans,

00:12:41.940 | is that they are so easy to use

00:12:46.220 | that people are more likely to save.

00:12:49.160 | So I am always, I believe simple beats complex

00:12:51.820 | every single time.

00:12:53.220 | And you literally have a human

00:12:55.140 | that's standing in front of you saying,

00:12:56.740 | "How much would you like to put into this account?

00:12:58.380 | "How much would you like to put in this account?"

00:13:00.140 | And then it's done.

00:13:01.220 | And usually, even if you don't choose the investments,

00:13:05.160 | you are defaulted into, typically now,

00:13:08.580 | especially larger plans, a target date retirement fund.

00:13:12.100 | And just like Rick was talking about,

00:13:14.180 | I mean, I run retirement plans,

00:13:17.000 | and I think one of the more common retirement plan lineups

00:13:20.420 | is now Vanguard, right?

00:13:21.860 | The Vanguard or Fidelity,

00:13:23.540 | passive target retirement date funds.

00:13:27.100 | So if you choose nothing,

00:13:28.960 | you will be put into a pretty appropriate investment.

00:13:32.720 | In like five minutes, you could have this done.

00:13:37.620 | It's pretty easy, right?

00:13:38.860 | Next, you can max out IRA, Roth IRA,

00:13:45.020 | if you're over the income limit,

00:13:50.020 | you could do a backdoor Roth IRA.

00:13:52.300 | These are accounts you can just set up on your own.

00:13:56.780 | It has never been easier to open up your own IRA,

00:14:01.380 | Roth IRA, go to the federal maximum.

00:14:04.900 | And literally, you can automate these contributions

00:14:08.920 | into these buckets.

00:14:11.980 | And then, typically, as long as you're using mutual funds,

00:14:16.580 | you can set it to auto-purchase.

00:14:18.860 | It is a really incredible, it's like setting up your own,

00:14:22.460 | you know, it's like simulating what's happening at work.

00:14:24.500 | You're just, you know, signing up for this thing.

00:14:28.160 | You're automating the contributions,

00:14:29.820 | you're automating the investments.

00:14:31.060 | It becomes just as easy as your work retirement plans.

00:14:34.280 | And then, what's interesting is a lot of people,

00:14:38.740 | this is the last bucket.

00:14:40.140 | So, and especially for higher earners,

00:14:42.980 | this is the point at which you end up

00:14:45.300 | with the taxable brokerage account.

00:14:47.260 | Now, a lot of folks are really scared, for some reason,

00:14:50.340 | about setting up a taxable brokerage account.

00:14:52.700 | But again, it has never been easier

00:14:55.900 | to open a Vanguard Fidelity Schwab account,

00:15:00.800 | just a regular old account.

00:15:03.260 | And you can set your, you know,

00:15:06.660 | if you get paid on the eighth of every month,

00:15:10.140 | you can have $500, $1,000 just auto-transferred

00:15:15.080 | into this bucket, into this account.

00:15:17.900 | Purchase your three-fund portfolio

00:15:20.980 | that we've been discussing today.

00:15:23.620 | And it is that easy.

00:15:25.060 | Rebalance maybe once a year.

00:15:27.220 | Don't be afraid to go to this bucket.

00:15:31.060 | This is a great bucket, y'all.

00:15:33.000 | So, a lot of times what I see is people will tell me,

00:15:38.000 | like I was speaking to a doctor actually just yesterday.

00:15:40.040 | He was like, "Oh, I max everything out.

00:15:41.560 | "I max everything out."

00:15:42.800 | Okay, so he maxes his 403(b) and his 457.

00:15:48.880 | I can tell you, I don't know his personal details,

00:15:52.920 | I don't know his income,

00:15:54.160 | but I can tell you he's under-saving.

00:15:56.720 | So, it sounds great, right?

00:15:58.000 | I'm maxing out, I'm maxing out.

00:16:01.000 | But if those are the only two accounts he has,

00:16:03.520 | I can do some pretty quick math to know

00:16:06.280 | we're not ready for retirement.

00:16:08.400 | And so, that's why we can't be afraid

00:16:10.640 | of this taxable brokerage account,

00:16:12.080 | especially if you're a high earner.

00:16:13.480 | You've gotta get here.

00:16:15.380 | And I'm just telling you,

00:16:17.020 | it is not nearly as scary as you think.

00:16:20.800 | Now, a lot of people ask, where does crypto fit in, right?

00:16:24.440 | I like really have to scratch that itch, okay?

00:16:28.000 | And I say don't, but then if you're gonna do it,

00:16:30.920 | do it this way.

00:16:31.920 | If you have gotten your savings rate

00:16:35.920 | into those prior buckets,

00:16:38.320 | and you just really hate spending money

00:16:41.480 | on yourself in the present,

00:16:42.640 | like my husband hates it, like it physically pains him.

00:16:45.800 | So then, if that's the case,

00:16:48.360 | you know, you've got some extra money,

00:16:50.660 | this is where it can go.

00:16:51.940 | Venture capital, angel investing.

00:16:54.320 | A friend just invested in a sister's brother-in-law's

00:17:00.400 | barbecue joint, I don't know.

00:17:02.760 | Cattle ranch, we love cattle ranches, right?

00:17:05.040 | Like, we think we're Yellowstone Cowboys.

00:17:07.360 | Go buy one with your extra money.

00:17:09.540 | Don't come, oh, don't, okay, don't go to Montana.

00:17:14.980 | Do, are a lot of people trying to move to Montana

00:17:17.360 | after that show?

00:17:18.660 | And I know how they do justice over there.

00:17:25.640 | (audience laughing)

00:17:27.760 | Okay, hey, come to Arkansas, everyone.

00:17:31.360 | Come to Arkansas.

00:17:33.400 | We've got five direct flights, folks.

00:17:35.740 | Okay, and then, if you've got, you know,

00:17:42.840 | one of those low-interest mortgages,

00:17:45.200 | pay off your house, that's fine.

00:17:47.520 | Just pay it off, that's okay.

00:17:49.360 | But don't make your house the first thing you pay off.

00:17:52.040 | This is where I'm gonna talk to the women a second.

00:17:53.800 | We're just gonna sidebar over here.

00:17:56.280 | We really, really, really feel like we need

00:18:01.120 | to have perfect information.

00:18:03.120 | I get that.

00:18:03.960 | We have to be sure of things.

00:18:05.320 | And all those other buckets feel very uncertain.

00:18:09.840 | So a lot of us say, well, I'll just pay off my house.

00:18:12.480 | Oh, there's a high-yield savings account.

00:18:15.560 | I'll put it all there.

00:18:16.780 | Ladies, we have to take risk.

00:18:20.080 | We have to.

00:18:21.560 | This is where we have to trust in the bucket system.

00:18:25.220 | I want you to put that money in the bucket system.

00:18:27.760 | You can default yourself into one of those

00:18:29.320 | target date funds, and you can look at it once a year,

00:18:32.160 | but I want you to do it.

00:18:33.720 | I want you to do it.

00:18:35.000 | Pay off the house after all of this is done.

00:18:37.200 | Okay, so, I have a question.

00:18:42.580 | What is our first bucket?

00:18:46.160 | Match, very good.

00:18:51.480 | Kyle, good job.

00:18:52.880 | Kyle, you're gonna get a copy of my book, well done.

00:18:55.180 | Well done.

00:18:56.020 | I did like the pay yourself first.

00:18:57.420 | That is my favorite thing to say.

00:19:00.380 | So I think we're actually a little ahead of time.

00:19:03.580 | That's okay?

00:19:04.800 | No, we're done.

00:19:06.140 | (faintly speaking)

00:19:09.060 | you

Bogleheads University 101 2024 The Tax Efficient Waterfall with SC Gutierrez

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