ATHLLC1718402058

00:00:00.000 | (upbeat music)

00:00:02.200 | - Hello, and welcome to another episode of All The Hacks,

00:00:05.400 | a show about upgrading your life, money, and travel.

00:00:08.240 | I'm your host, Chris Hutchins,

00:00:09.440 | and I love sharing whatever knowledge I have

00:00:11.760 | to help people earn and save more,

00:00:13.960 | and leveraging your tax advantaged accounts

00:00:16.360 | is one of the ways you can do that.

00:00:18.320 | And who better to have this conversation with

00:00:20.880 | than my good friend and host

00:00:22.640 | of the Money With Katie podcast, Katie Gaddy Tassin.

00:00:26.120 | She and I will cover everything,

00:00:28.120 | including IRAs, 401(k)s, Roth conversion ladders,

00:00:31.760 | which might help you completely avoid taxes

00:00:34.120 | when you take money out of your 401(k) in the future.

00:00:36.540 | We'll cover backdoor contributions, HSAs,

00:00:39.200 | donor advised funds, and a lot more.

00:00:41.640 | So let's jump into it right after this.

00:00:44.140 | Did you know that someone new gets impacted

00:00:47.240 | by identity theft every two seconds?

00:00:49.960 | It makes sense when there's so much

00:00:51.800 | of our personal information getting shared online

00:00:54.400 | without our consent.

00:00:55.920 | I found a listing for my dad on a site

00:00:58.240 | called Family Tree Now that had his name,

00:01:00.880 | age, address, phone number, email,

00:01:03.800 | past addresses, and the names of his relatives.

00:01:06.640 | And that was just one of the 69 listings

00:01:09.720 | that had his info.

00:01:11.200 | Fortunately, instead of spending hours

00:01:13.360 | finding all the sites with his info

00:01:15.160 | and submitting the request to take it down,

00:01:17.320 | I got it all done in minutes with Delete.me from Abine,

00:01:20.560 | and I am so excited to be partnering

00:01:22.520 | with them for this episode.

00:01:23.840 | Delete.me is an amazing service

00:01:25.620 | that will not just find and remove

00:01:27.400 | your personal information from over 500

00:01:30.280 | data broker websites, but they'll continuously scan

00:01:33.360 | for new data that shows up and get that removed as well.

00:01:36.480 | On average, Delete.me finds and removes

00:01:38.440 | over 2,000 pieces of data for a customer

00:01:40.800 | in their first two years, and to date,

00:01:43.040 | they've removed over 35 million pieces

00:01:45.760 | of data for their customers.

00:01:47.120 | So if you wanna get your personal information

00:01:49.200 | removed from all these listings on the internet,

00:01:51.680 | go to allthehacks.com/deleteme

00:01:54.700 | and get 20% off a plan for you or your entire family.

00:01:59.220 | Again, that's allthehacks.com/deleteme.

00:02:03.200 | (upbeat music)

00:02:05.500 | I want you to know that neither Katie nor I

00:02:07.660 | are CPAs or tax advisors, so I will always recommend

00:02:10.980 | that you seek the advice of a professional

00:02:12.860 | when it comes to taxes.

00:02:14.140 | I've used a few different tax professionals over the years.

00:02:16.700 | I've even tried to do it myself back in the day,

00:02:19.160 | but now I'm working with Gelt,

00:02:20.580 | and I finally feel like I found a partner I can trust

00:02:23.220 | to handle everything business and personal.

00:02:25.980 | When I first started working with them,

00:02:27.400 | they reviewed our past returns,

00:02:29.180 | which is something I recommend everyone

00:02:30.860 | ask a new tax advisor to do,

00:02:32.860 | and they found a huge mistake our prior CPA had made,

00:02:36.540 | but we were able to refile and get back all that money.

00:02:39.900 | And after having such a great experience with them,

00:02:42.380 | I asked if they'd be interested in partnering

00:02:44.320 | with All The Hacks, and they were,

00:02:46.200 | so I'm excited to be partnering with them today.

00:02:48.480 | So if you're a business owner, investor,

00:02:50.220 | or just ready for a more premium and proactive tax strategy

00:02:54.180 | to optimize and file your taxes,

00:02:56.400 | you should check out Gelt.

00:02:57.940 | And as an All The Hacks listener,

00:02:59.380 | you can get priority on their wait list.

00:03:01.380 | Just head to allthehacks.com/Gelt, G-E-L-T.

00:03:06.020 | Again, that's allthehacks.com/G-E-L-T.

00:03:10.980 | Katie, thank you for joining me.

00:03:12.580 | This is a long time coming.

00:03:13.980 | Chris, it's a pleasure to be here.

00:03:16.020 | Thanks for having me on.

00:03:17.340 | I've always wanted to break down retirement accounts,

00:03:20.100 | and I was looking on the internet.

00:03:21.820 | I was like, who do I know that's great at this stuff?

00:03:24.060 | And not just retirement, but all tax-advantaged accounts.

00:03:27.180 | You've called yourself a freak for tax loopholes,

00:03:29.820 | so I thought you would be a great person to come on.

00:03:32.880 | You've done a ton of episodes on your show about this topic.

00:03:36.120 | What do you say we just break it all down

00:03:37.660 | and go through all the different ways

00:03:39.380 | to use these different investment accounts

00:03:41.020 | to make the tax code work for you?

00:03:43.220 | I love it, let's do it.

00:03:44.220 | My caveat to all of this is,

00:03:45.740 | I don't think that we shouldn't pay taxes, right?

00:03:47.960 | I think taxes are important.

00:03:49.260 | They make the country function,

00:03:50.540 | but there's just a big knowledge gap

00:03:52.460 | between people that really dial this in

00:03:54.780 | and understand it all and the rest of us.

00:03:57.420 | And I think the tax code,

00:03:58.740 | last I remember reading somewhere,

00:04:00.180 | grows by like 150,000 words a year.

00:04:02.980 | And so I feel like most people don't know this.

00:04:05.100 | So I just wanna be, this is not a,

00:04:06.700 | how do we get out of paying all the taxes

00:04:08.740 | and let other people pick up the tab,

00:04:10.340 | but there are very specific rules out there

00:04:12.300 | set for helping people save money, mostly for retirement.

00:04:15.380 | And if they're out there,

00:04:16.540 | people should all have access to them

00:04:18.320 | and information should not be the reason

00:04:20.020 | they aren't being used.

00:04:20.860 | A hundred percent.

00:04:21.860 | And I would add that the idea that someone

00:04:24.940 | who is gonna contribute to a pre-tax account

00:04:28.180 | and therefore save a little bit of their money

00:04:30.540 | on their taxes and is gonna be taking advantage

00:04:32.940 | of something that's out there

00:04:33.940 | that the IRS and the federal government

00:04:35.900 | fully intends for them to use,

00:04:38.020 | that person taking advantage of that

00:04:40.340 | and not paying, let's say four to five grand a year

00:04:43.220 | in those taxes,

00:04:44.060 | that's not gonna make or break the national budget, right?

00:04:47.020 | I think it's a little bit like someone

00:04:48.700 | who is flying commercial being like,

00:04:50.900 | I should only bring one suitcase instead of two

00:04:53.340 | 'cause fuel efficiency while like a billionaire

00:04:55.940 | is flying across the country in a private jet,

00:04:58.620 | not worried about it.

00:04:59.620 | So I always too feel like it's kind of important

00:05:02.260 | to say that these rules exist for a reason.

00:05:05.700 | The IRS and the federal government

00:05:07.660 | want you to know about them and use them.

00:05:10.100 | You're fully within your rights to do so.

00:05:12.260 | And everything that we're talking about,

00:05:13.980 | I remember when I first learned about this stuff,

00:05:15.660 | I was like, how is this legal?

00:05:16.980 | This is crazy.

00:05:17.900 | I'm about to save, I think like 20 grand in taxes

00:05:20.940 | because I just am putting money

00:05:22.580 | in the right quote unquote buckets.

00:05:24.380 | Like that's unbelievable to me,

00:05:26.020 | but it exists and to your point,

00:05:27.460 | you don't want a lack of knowledge or information

00:05:29.740 | to be the reason that someone is overpaying.

00:05:32.380 | - So maybe we'll start with the fundamentals

00:05:34.860 | of tax advantaged investing accounts.

00:05:36.780 | We'll start with 401ks, go into IRAs.

00:05:39.140 | I know there are a lot of them.

00:05:40.220 | You know way more about some of the obscure ones than I do.

00:05:42.900 | It probably doesn't make sense to go

00:05:44.340 | into every possible random account that you could get

00:05:46.900 | if you work for the government or work for a school teacher.

00:05:49.060 | A lot of them function similarly.

00:05:50.940 | Is there any high level overview you want to give

00:05:52.980 | to some of the more obscure ones?

00:05:54.740 | - So I kind of think about them in categories.

00:05:58.060 | So the first big one that I'll talk about

00:06:00.660 | is the, what I would call 401k category.

00:06:03.140 | This includes the 403Bs, the 457Bs, the TSPs,

00:06:08.020 | the simple IRAs, things of that nature

00:06:10.220 | that you're going to get through an employer.

00:06:11.780 | And depending on what type of employer you work for,

00:06:14.620 | it might look a little bit different

00:06:15.900 | and your options might be a little bit different,

00:06:17.660 | the plan provider, the fees, et cetera.

00:06:19.460 | But generally speaking,

00:06:20.660 | it's like the employer-sponsored account

00:06:23.100 | that you may or may not have access to

00:06:25.180 | that is likely going to have a contribution limit

00:06:28.580 | somewhere in the ballpark of around 22,500 per year,

00:06:32.900 | at least in 2023.

00:06:34.340 | It should be somewhere in the ballpark in 2024

00:06:36.860 | of around 23,000, though, to your point,

00:06:39.740 | because of some obscurities,

00:06:41.020 | some of these accounts have different rules.

00:06:42.660 | But the point is, it's the one that you're probably

00:06:44.580 | going to get from an employer.

00:06:45.900 | And if you don't get it from an employer

00:06:47.620 | and you're a W-2 employee with no other sources of income,

00:06:50.780 | you're kind of SOL on this one.

00:06:53.060 | You're going to have to go look elsewhere.

00:06:54.700 | That's bucket one for me.

00:06:56.540 | Then I would think about things like the standard Roth IRA,

00:07:00.620 | traditional IRA bucket,

00:07:02.740 | which I believe is going up to 7,000 in 2024

00:07:05.940 | as a contribution limit.

00:07:07.100 | And there are all sorts of smaller limits and penalties

00:07:11.260 | to be aware of as far as the income that you need to have

00:07:14.060 | in order to contribute to one.

00:07:15.220 | And there are ways to get around that.

00:07:16.660 | But that is kind of the bucket that's the most freewheeling

00:07:20.260 | in the sense that anyone that has earned income

00:07:22.460 | can go open one.

00:07:23.340 | You don't have to get it from an employer.

00:07:25.100 | You don't have to have, say,

00:07:26.300 | a specific healthcare plan to get one,

00:07:28.540 | things of that nature.

00:07:29.380 | The qualifications, we'll say, are fewer.

00:07:31.220 | And then we'll say small business pre-tax accounts.

00:07:34.140 | So generally speaking, in my mind,

00:07:36.340 | this is going to mean the solo 401(k) or the SEP IRA.

00:07:40.540 | This is where people will start to get thrown off

00:07:42.540 | because we're now using a lot of the same words,

00:07:45.020 | 401(k), IRA, but in the small business sphere,

00:07:47.980 | they do function a little bit differently

00:07:50.420 | than the other two categories that we just mentioned.

00:07:53.300 | So the contribution limits are higher.

00:07:55.260 | The way that contribution limits are determined are higher,

00:07:57.960 | because if you're self-employed, solopreneur,

00:08:00.320 | you are the employee and the employer.

00:08:02.700 | So now this opens up some wiggle room

00:08:04.700 | for you to get a little bit more creative.

00:08:06.540 | And a lot of people that have W-2 jobs and side hustles

00:08:09.820 | or W-2 jobs and businesses that they're operating to,

00:08:12.500 | I did that for several years,

00:08:13.940 | you can contribute to two 401(k)s.

00:08:16.180 | If you have a different source of income

00:08:17.700 | funding each of them,

00:08:18.660 | you're fully within your rights to use both.

00:08:20.780 | So I always think if you can use it, use it, right?

00:08:23.700 | Get all the benefit you can.

00:08:25.200 | So that's the tax advantaged world at a high level

00:08:28.820 | that I would point to.

00:08:30.180 | And then I kind of think about the taxable brokerage account

00:08:33.180 | as that stepsister off to the side

00:08:35.900 | where you're not getting any tax advantages up front

00:08:38.740 | by contributing to one,

00:08:40.020 | but because of the way capital gains are taxed

00:08:42.300 | in the United States,

00:08:43.140 | at least right now in this current tax code and paradigm,

00:08:47.140 | there is a pretty generous allowance of 0% capital gains.

00:08:51.940 | So even though it's not tax sheltered every year,

00:08:54.500 | and like you're buying and selling within this account,

00:08:56.500 | you're still gonna be paying capital gains

00:08:58.260 | as you're building it up.

00:08:59.540 | If your income goes to zero

00:09:01.700 | and you start withdrawing earnings

00:09:03.820 | from that account to live on,

00:09:05.180 | you can spend a lot of money

00:09:06.860 | before it starts taxing you anything on those gains.

00:09:10.140 | So kind of think of it like a poor man's Roth IRA,

00:09:12.820 | but my love of tax advantaged accounts

00:09:15.140 | extends to non-tax advantaged accounts too,

00:09:17.780 | because investments are just taxed so favorably

00:09:20.380 | in the United States,

00:09:21.220 | or gains on investments, I should say.

00:09:23.140 | So that's kind of how I conceptualize the landscape.

00:09:26.500 | - Maybe we'll put three others in this other bucket

00:09:29.620 | of tax advantaged accounts that we'll touch on at the end.

00:09:32.580 | - I'm dying to know what this other bucket is.

00:09:35.940 | - Well, we have HSAs, we've got 529s,

00:09:38.860 | and I'll throw donor advised funds in there as well.

00:09:41.300 | - I need to do some digging on the donor advised funds.

00:09:44.020 | So I'm glad that you brought that up.

00:09:45.860 | - Let's put those to the side.

00:09:46.780 | We'll come back to them.

00:09:47.620 | And I've got one more.

00:09:48.700 | I've recently been doing some digging

00:09:50.220 | on cash balance plans,

00:09:51.700 | which is like another small business type of retirement plan

00:09:55.340 | that's super interesting.

00:09:56.260 | But let's start with the employer plans.

00:09:58.620 | Anyone who's employed probably has had one

00:10:00.820 | at one point in time.

00:10:02.340 | And I guess there's a few questions.

00:10:04.420 | So one, I wanna make sure we cover,

00:10:06.980 | some companies now are starting to offer the choice

00:10:09.860 | between pre-tax and Roth, which is an interesting one,

00:10:12.500 | which will apply to IRAs as well.

00:10:14.540 | And then also is the constraints on these accounts

00:10:18.260 | or really any retirement accounts worth the trade-off

00:10:21.220 | that you don't get to access the money?

00:10:22.980 | - I'm glad you asked.

00:10:25.060 | - First off, one of the craziest things

00:10:26.700 | is that so few people are actually enrolled in these.

00:10:29.340 | And when I joined Google,

00:10:30.860 | I remember talking to someone that said

00:10:32.700 | the best way to increase the number of people

00:10:35.100 | who contribute to their 401k is to just default, turn it on,

00:10:38.100 | because so many people aren't.

00:10:39.540 | And I've heard people say that in their companies,

00:10:41.540 | even with matching, 50% of people aren't doing this.

00:10:44.260 | And so just being more aware of how it works,

00:10:46.540 | I think will just help everyone, but let's jump in.

00:10:49.140 | - What might be helpful is if I break down

00:10:51.980 | what to me is the best strategic way

00:10:55.060 | to approach this dilemma of,

00:10:57.980 | I have this investable income every year,

00:11:00.580 | I'm not sure where to put it.

00:11:02.140 | I wanna optimize where I'm putting it

00:11:04.020 | so that I'm getting the best bang for my buck, the best ROI.

00:11:06.820 | A lot of people, when they think about investing,

00:11:08.580 | they think about ROI,

00:11:09.500 | they're thinking about the underlying assets

00:11:11.580 | that they're buying.

00:11:12.540 | What am I gonna buy in these accounts

00:11:14.460 | that's gonna return the most money back to me,

00:11:16.780 | that's gonna perform the best?

00:11:18.540 | But beating the market, we know, is very hard.

00:11:21.260 | And active investing or taking a more active role

00:11:25.260 | in the choices and trying to watch things

00:11:27.180 | and sell and buy at the right times,

00:11:28.700 | I think of that a little bit as a fool's errand.

00:11:31.020 | If the people at the hedge funds

00:11:32.820 | are not consistently beating the market,

00:11:34.540 | the chances that you're gonna beat it in your spare time,

00:11:36.900 | probably unlikely.

00:11:38.500 | But what we can do is try to outsmart the tax code.

00:11:42.220 | There we have the rules spelled out to us.

00:11:44.700 | We know exactly how we can increase our returns by,

00:11:48.380 | if you're in the 24% bracket, 24% per year.

00:11:51.220 | You're in the 32% bracket,

00:11:52.620 | increase your return on that money by 32% per year.

00:11:55.060 | How? By putting it in a pre-tax account.

00:11:57.700 | Then you get 24% or 32%, whatever your marginal tax rate is,

00:12:02.220 | assuming the entire contribution

00:12:03.940 | falls into that top marginal bracket.

00:12:06.020 | That's money that now stays in your pocket.

00:12:08.460 | You are now keeping that money

00:12:09.860 | instead of paying it in taxes.

00:12:11.780 | Now we'll get to what happens later

00:12:13.380 | because people love to say,

00:12:14.340 | "Well, you're not not paying it, you're just deferring it."

00:12:16.780 | Maybe.

00:12:17.620 | With some careful tax planning, you might never be paying it.

00:12:20.140 | So we'll get into that in a little bit.

00:12:22.100 | - In advance of the new year,

00:12:24.900 | Amy and I are really getting our life organized

00:12:27.260 | and a big part of that is our digital life.

00:12:29.700 | Think everything from family to home, to travel,

00:12:32.300 | and that doesn't even include work.

00:12:34.100 | Fortunately, we fully adopted Notion as our second brain

00:12:37.260 | and I am so excited to be partnering with them

00:12:39.180 | for this episode.

00:12:40.340 | Notion combines your notes, docs, and projects

00:12:42.940 | all together in one beautiful space

00:12:45.020 | and navigating that space is easier than ever

00:12:47.940 | thanks to Notion's new feature, Q&A,

00:12:50.420 | where Notion AI can give you instant answers

00:12:53.260 | to your questions using information

00:12:55.260 | from across your wiki, projects, docs, and meeting notes.

00:12:58.740 | I've used it to find information from old notes,

00:13:00.900 | answer questions about a marketing plan,

00:13:02.860 | and even find travel details, all in seconds.

00:13:06.580 | You can also ask Q&A questions in plain English

00:13:09.020 | from anywhere in Notion so you can find exactly what you need

00:13:12.140 | without ever leaving the doc you're in.

00:13:14.100 | I love the features Notion keeps shipping

00:13:16.180 | and it just reinforces our decision to use it

00:13:18.500 | as the central place we manage our life and work.

00:13:21.820 | When you use Notion AI,

00:13:23.140 | it's even easier to do your most meaningful work.

00:13:26.420 | Try Notion AI free when you go to notion.com/allthehacks,

00:13:30.740 | that's all lowercase letters, notion.com/allthehacks,

00:13:34.940 | to try the powerful, easy-to-use Notion AI today.

00:13:38.220 | And when you use our link, you're supporting our show,

00:13:40.860 | notion.com/allthehacks.

00:13:43.660 | There are only a few brands I use almost every single day

00:13:48.580 | and Viore is one of them

00:13:50.140 | and I am so excited to be partnering with them

00:13:52.020 | for this episode.

00:13:53.100 | Viore makes performance apparel that's incredibly versatile.

00:13:56.300 | Everything is designed to work out in,

00:13:57.960 | but it doesn't look or feel like it at all

00:14:00.500 | and it is so freaking comfortable,

00:14:02.300 | you will wanna wear it all the time.

00:14:04.380 | Seriously, I'm pretty sure it's more comfortable

00:14:06.220 | than whatever you're wearing right now,

00:14:07.940 | unless it's Viore, in which case you know what I mean.

00:14:10.540 | And it's not just for men.

00:14:11.980 | My wife, Amy, is as obsessed with Viore as I am.

00:14:15.380 | My personal favorite is the Sunday Performance Joggers.

00:14:18.020 | I think I have three pairs of them

00:14:19.460 | and they're probably the most comfortable pants

00:14:20.960 | I've ever owned.

00:14:22.020 | Their products are incredibly versatile

00:14:23.820 | and can be used for just about any activity,

00:14:25.900 | whether it's running, training, yoga,

00:14:27.820 | but they're also great for lounging

00:14:29.980 | or I even wear their MetaPants out to a nice dinner.

00:14:33.260 | Honestly, I think Viore is an investment in your happiness

00:14:36.180 | and for All The Hacks listeners,

00:14:37.500 | they're offering 20% off your first purchase

00:14:39.980 | as well as free shipping and returns on any US order

00:14:42.980 | over $75.

00:14:44.540 | So definitely check them out at allthehacks.com/viore.

00:14:49.060 | Again, that's allthehacks.com/v-u-o-r-i.

00:14:54.060 | And get yourself some of the most comfortable

00:14:56.820 | and versatile clothing on the planet.

00:14:59.140 | - To your question about, is it worth the penalty, right?

00:15:01.540 | Or is it worth locking it up?

00:15:02.780 | 'Cause I think that that's a great question

00:15:04.300 | and it can be addressed with some strategy.

00:15:07.000 | But when you contribute,

00:15:08.640 | let's say I'm in the 32% tax bracket marginally

00:15:11.740 | and I'm not exactly sure

00:15:13.580 | of what that would put my income at at this point in time.

00:15:16.580 | We'll say maybe like in the 300,000 range,

00:15:18.780 | if I'm single, I honestly don't remember.

00:15:20.340 | But let's say I've got my 22,500 to invest, right?

00:15:22.660 | So I'm gonna put it in my employer 401k.

00:15:24.740 | I'm gonna buy something boring inside there

00:15:26.780 | like VTSAX or a target date fund.

00:15:29.260 | I'm gonna get my money invested in the 401k.

00:15:31.300 | I'm gonna get that great employer match.

00:15:32.900 | Honestly, the employer match to me is like, yeah, cool.

00:15:35.700 | Okay, thanks for like the little extra on the side.

00:15:37.780 | The main benefit is that tax break.

00:15:40.340 | So on my 22,500 or I guess next year,

00:15:43.060 | my 23,000 that I'm putting in,

00:15:45.280 | I'm gonna get $7,360 in tax savings based on that one move.

00:15:50.280 | My tax liability is now gonna go down.

00:15:54.060 | I still have to pay FICA taxes on it.

00:15:55.660 | That's fine, that's true across the board.

00:15:57.740 | I'm gonna have to pay that payroll tax,

00:15:59.180 | whether it's traditional or Roth,

00:16:00.460 | but my federal and my state taxes

00:16:03.060 | that I would owe on that money now come back to me.

00:16:05.220 | This is partially why this stuff is so great

00:16:07.220 | for people who live in California, in New York,

00:16:09.380 | in these states where state taxes are so high,

00:16:11.380 | particularly if they plan to retire to Florida,

00:16:14.460 | where there is no state tax.

00:16:15.740 | Don't pay your state income taxes on this money now,

00:16:18.100 | pay it later when you're in Florida

00:16:19.580 | and the rate is zero, right?

00:16:20.820 | So I get my 7,360.

00:16:23.180 | I know that that's the tax break I've just unlocked.

00:16:25.540 | And in order to do this right,

00:16:26.740 | I'm multiplying the contribution by my marginal tax rate.

00:16:29.800 | There are more sophisticated ways to do this

00:16:31.420 | if you wanna be like super, super precise,

00:16:33.160 | but that's the ballpark.

00:16:34.300 | And what do you know?

00:16:35.900 | What's the Roth IRA limit next year?

00:16:38.180 | Oh, it's $7,000, cool.

00:16:40.220 | There's my Roth IRA contribution that I didn't have before

00:16:43.140 | that I can just now pop into that account.

00:16:45.180 | I got 360 leftover, but in doing so,

00:16:48.380 | in contributing to that pre-tax account,

00:16:50.460 | I just created more investable income for myself

00:16:53.260 | to go get that Roth diversity elsewhere.

00:16:55.460 | So this is my favorite approach for people

00:16:58.420 | that have access to both.

00:17:00.100 | And you may have noticed that I was like,

00:17:01.660 | oh, 300K, 32%.

00:17:03.420 | People that are familiar with income limits

00:17:05.240 | for the Roth IRA might be like, ooh,

00:17:06.900 | but Katie, there's an income limit.

00:17:08.460 | Very simple workaround.

00:17:09.780 | You've probably talked about this on the show before.

00:17:11.700 | Back to a Roth IRA, it's a very simple maneuver.

00:17:14.860 | It doesn't take long and we can get into that,

00:17:16.780 | but there is an easy way to get some money in a Roth IRA

00:17:19.940 | if you want to, even if you're over the income limit

00:17:22.020 | and that loophole is still open.

00:17:23.220 | So remains to be seen if it stays open.

00:17:25.340 | But that's my favorite way to approach this

00:17:27.620 | is to use that bigger bucket to get a good tax break

00:17:30.660 | and then take those tax savings

00:17:32.460 | and invest them somewhere else.

00:17:33.780 | I recently had a CFP come on my show

00:17:36.460 | and I went through my strategy with him

00:17:40.140 | and we basically debated it.

00:17:41.740 | And then he ended up coming to me

00:17:43.660 | with a spreadsheet that he made

00:17:44.900 | that brings in social security, RMDs, inheritance taxes,

00:17:48.460 | all the other complex, nuanced considerations

00:17:51.740 | for someone that also takes into consideration age

00:17:54.860 | and how long they're gonna work,

00:17:56.300 | who they're gonna pass the money down to.

00:17:57.980 | And we ended up coming to the conclusion on the show

00:18:00.740 | that in most cases,

00:18:02.140 | with the exception of I think the 12% bracket

00:18:04.860 | and people who end up working and earning income

00:18:07.020 | until they're like well into their 70s,

00:18:08.940 | this approach, this traditional 401k Roth IRA

00:18:12.580 | or taxable account for the tax savings

00:18:14.820 | is going to create net more income later in life,

00:18:19.100 | even if you have very little tax planning later

00:18:21.780 | because it just generates a bigger portfolio

00:18:24.860 | to draw down from.

00:18:25.940 | So that's kind of my favorite bread and butter strategy

00:18:28.940 | that I like to follow.

00:18:30.060 | - So I wanna clarify a few things.

00:18:31.700 | So you said, oh, if you're in the 32% tax bracket,

00:18:34.460 | you'll save 32% this year.

00:18:35.900 | That is true, but all of the money you put

00:18:38.300 | into your pre-tax traditional 401k,

00:18:40.660 | you're gonna pay taxes on all the contributions

00:18:43.460 | and all the gains in the future.

00:18:45.620 | Some of the optimization is,

00:18:47.260 | well, if I'm not living in California,

00:18:48.820 | I'll be at a lower tax rate.

00:18:50.060 | Some of the optimization is,

00:18:51.340 | well, if I'm not making as much money,

00:18:52.980 | I'll be in a lower tax rate.

00:18:54.340 | We don't know what will happen with the tax code.

00:18:56.060 | So who knows?

00:18:57.140 | But what is certain is that if I had taken that,

00:19:00.340 | let's call it $23,000 and I had paid taxes on it now,

00:19:04.820 | it would have been reduced to let's call it 16,000.

00:19:07.620 | So that 16,000 will only, even if I doubled my money,

00:19:11.100 | it would only go to 32,000.

00:19:12.700 | Whereas if I do it in the 401k, it stays as 23,000.

00:19:17.100 | And if I doubled my money, it would go to 46,000.

00:19:19.820 | So because you have a higher base,

00:19:21.860 | you're earning on a higher amount.

00:19:23.660 | Those earnings will be greater

00:19:25.060 | over the lifetime of the account.

00:19:26.780 | And yes, you will have to pay taxes on all of it

00:19:29.260 | when you take it out.

00:19:30.140 | But even if the tax rates were the same,

00:19:32.740 | because you have a higher base to grow, it still works out.

00:19:35.820 | - Right, and I think that that's a really good qualification

00:19:38.380 | to make because we can get into how to optimize later

00:19:41.540 | and how to pay very little, if any taxes,

00:19:44.180 | depending on your situation.

00:19:45.660 | But I always assume when people are making this decision,

00:19:49.060 | they're like, "Should I do traditional or Roth 401k?"

00:19:51.700 | But you're right.

00:19:52.540 | Most people are not even going that far.

00:19:54.660 | They're going, "I'm gonna take all my income home

00:19:56.820 | and then I'm gonna figure out how to invest it

00:19:58.860 | and what to do with it."

00:19:59.700 | And to your point, if you're doing that,

00:20:01.540 | well, now you're paying all the taxes on the money

00:20:03.940 | and it's not gonna grow tax-free.

00:20:05.740 | Usually, if you're gonna pay all the taxes on the money,

00:20:07.460 | you at least want it to end up in a Roth account

00:20:09.540 | where it's gonna compound tax-free

00:20:11.060 | for the rest of your life.

00:20:12.020 | But if you're just taking it all home

00:20:13.580 | and you're not taking advantage of that account,

00:20:15.460 | whether you choose traditional or Roth,

00:20:17.540 | depending on your situation and what's right for you,

00:20:19.980 | yeah, you're gonna be in a position

00:20:21.700 | where you may have more flexibility,

00:20:23.340 | you can access it sooner.

00:20:24.820 | And in some cases, that's desirable

00:20:26.820 | if you're gonna use it for something.

00:20:28.180 | But most Americans are under-saving for retirement.

00:20:31.300 | They're not putting enough money

00:20:32.900 | into these retirement accounts

00:20:34.180 | and they're figuring out what to do with their savings

00:20:36.540 | once it's in their checking account.

00:20:38.220 | By that point, you've already sacrificed

00:20:40.220 | a lot of the potential gains that you could have gotten

00:20:42.900 | by simply using one of these employer accounts.

00:20:45.420 | - Let's add a few things.

00:20:46.460 | One, there are some trade-offs, right?

00:20:48.180 | The liquidity is real.

00:20:49.420 | If you need to buy a home,

00:20:51.300 | I know there is an exemption to take some money out,

00:20:53.620 | penalty-free for a home,

00:20:54.780 | but it's a very small amount relative to the cost

00:20:57.300 | to buy a home in America right now.

00:20:59.820 | - And not an ideal, really, approach to be using,

00:21:03.500 | I would say.

00:21:04.540 | - So the penalty on taking the money out is high enough

00:21:07.900 | that I don't think it's worth putting the money in

00:21:10.340 | if there's any chance

00:21:11.380 | you're gonna have to take it out early.

00:21:13.140 | You should always be not putting money

00:21:15.540 | into these retirement accounts

00:21:16.820 | if you happen to know that you need money to pay a tax bill,

00:21:20.940 | make an investment, buy a home, any of these things.

00:21:23.500 | So I think it's really important to make sure

00:21:25.540 | you max out your emergency fund

00:21:27.220 | before you invest in your retirement accounts

00:21:29.180 | and all those things.

00:21:30.020 | With the exception, if your employer offers a match,

00:21:32.980 | I know you kind of brushed over it briefly,

00:21:35.060 | but at Google, I can't remember the match,

00:21:37.020 | it was something like 50% up to the full amount.

00:21:39.700 | Whatever the amount was, I think I got $8,000 free.

00:21:42.260 | And so getting $8,000 free and truly at no cost to you

00:21:47.260 | other than contributing to your 401(k)

00:21:49.620 | would actually even be worth it

00:21:51.540 | if you had to pay the penalty next year

00:21:53.740 | to withdraw the money out of the account.

00:21:55.340 | - Interesting, I know I'm now thinking

00:21:57.060 | through the back of the napkin math of like,

00:21:58.620 | well, the penalty is 10% plus the tax on the contribution,

00:22:02.500 | but to your point, unless there is some rule

00:22:05.700 | in the account that the match goes away,

00:22:06.980 | I don't think the match would go away.

00:22:08.260 | I think it's locked.

00:22:09.420 | I think it's locked once you get it.

00:22:10.940 | So like, yes, in a following year,

00:22:12.660 | if you were to have to withdraw the money

00:22:14.780 | and it wasn't protected by any of the 401(k)

00:22:17.300 | loan requirements or the hardship

00:22:20.220 | that there's some withdrawals

00:22:21.700 | where if you're in a really hard up position,

00:22:23.540 | they'll let you withdraw money.

00:22:24.980 | I would agree that depending on the amount

00:22:26.860 | that the match is gonna generate for you,

00:22:28.260 | then yeah, it might be a worthwhile trade-off.

00:22:31.340 | - Yeah, I mean, if the match is 5%,

00:22:33.340 | then it's not gonna outweigh the fee.

00:22:34.820 | But if your employer is matching 25, 50, or even 100%,

00:22:38.540 | I would make the case,

00:22:39.780 | maybe it's not worth it for the hassle

00:22:41.620 | if you don't even have one month of emergency savings.

00:22:44.380 | But if you've got two, three months of emergency savings,

00:22:47.300 | my personal belief is max out your 401(k)

00:22:50.140 | to the match no matter what.

00:22:52.020 | Then consider whether you have any liquidity issues

00:22:55.660 | that you will need to resolve,

00:22:57.060 | whether that's resolved because you owe money to someone

00:22:59.700 | or resolve you wanna buy a home,

00:23:01.820 | then I would say you don't necessarily wanna put that.

00:23:03.940 | And then everything else is fair game

00:23:06.180 | for tax-advantaged accounts.

00:23:07.660 | - I think it also, I would add too,

00:23:09.340 | a lot of people will not even think about the 401(k)

00:23:11.500 | until they're out of debt, even credit card debt,

00:23:13.460 | because they're like, "Well, the interest rate's so high."

00:23:15.060 | But to your point, if they're matching 5% of your salary,

00:23:17.940 | if you put in 5%, they'll put in 5%,

00:23:20.100 | that is a 100% interest rate on your money

00:23:22.980 | 'cause they're matching it.

00:23:24.220 | So that should also probably be a top priority

00:23:27.060 | even if you're in a position where you're like,

00:23:28.660 | "Ooh, but I'm still in debt,

00:23:29.700 | so investing is not a super high priority for me right now."

00:23:32.740 | I would still put that 401(k) match.

00:23:34.500 | I think I kind of write it off

00:23:35.820 | because I hear people say, "I don't get a 401(k) match,

00:23:38.580 | so I'm not gonna use the 401(k)."

00:23:40.140 | And I'm like, "Oh, no, no, no,

00:23:41.540 | that's not even the primary reason

00:23:43.340 | you should be using the 401(k).

00:23:44.660 | That's great if you have one."

00:23:46.180 | Especially if you're earning a lot of money,

00:23:47.780 | a 4% to 5% match on your salary could be significant.

00:23:51.220 | It could be another 10 or 20 grand a year,

00:23:53.980 | depending on how the matching is structured.

00:23:56.500 | So it's not that it's insignificant,

00:23:58.140 | it's just that if you don't have one,

00:24:00.140 | I don't think that that's a reason not to use it

00:24:02.100 | because to me, the primary benefit is the tax break up front

00:24:06.020 | that's gonna create more investable income for you,

00:24:08.100 | and then the years and years and years

00:24:10.580 | of tax-sheltered compounding,

00:24:12.660 | which we'll have to pay taxes on later

00:24:15.300 | in some way, shape, or form.

00:24:16.580 | But that is a huge benefit,

00:24:18.620 | especially as your network starts to get bigger.

00:24:20.900 | A couple percentage points or dividend taxes

00:24:23.580 | on your taxable account may not feel like that big of a deal

00:24:25.780 | when it's worth $100,000,

00:24:27.540 | but when it's $2 million,

00:24:29.180 | well now with 3% dividend yield,

00:24:30.740 | you're starting to pay taxes.

00:24:31.660 | It catches up to you,

00:24:32.860 | and I think just kind of being smart about tax planning

00:24:35.580 | is important for that reason.

00:24:37.140 | - Totally agree.

00:24:37.980 | So the last two things.

00:24:38.820 | One is fees.

00:24:39.740 | I have worked at some companies

00:24:41.740 | where the 401(k)s are pretty terrible.

00:24:43.820 | The investment options are actively managed mutual funds

00:24:47.260 | with high fees.

00:24:48.420 | And then I've worked at a company like Google

00:24:49.860 | where it was like the lowest cost Vanguard Admiral Fund,

00:24:53.500 | tiny expense ratio funds,

00:24:55.540 | no cost to manage the 401(k) to the employees.

00:24:58.260 | So I found this data point,

00:25:00.060 | which was that if you assume a portfolio return of 6%,

00:25:03.300 | I believe that the underperformance

00:25:06.300 | where a 401(k) stops mattering

00:25:09.060 | and the tax benefit stops mattering

00:25:10.860 | is about 2.1%.

00:25:12.900 | - In fees?

00:25:13.780 | - No, no, no.

00:25:14.620 | I'm saying like,

00:25:15.460 | if you're going to get 2.1% less performance,

00:25:18.060 | the tax advantage kind of goes away.

00:25:19.860 | So if you have funds where the only options

00:25:22.660 | are actively managed funds with really high expense ratios,

00:25:25.820 | I could make a case that it doesn't work

00:25:28.180 | with maybe an exception.

00:25:29.540 | If you can roll it out into a Roth IRA or something later,

00:25:33.140 | great.

00:25:33.980 | But if you're at an employer with really high fee.

00:25:36.740 | - If you're like,

00:25:37.580 | you know you're not going to be there for a long time,

00:25:39.060 | but you're making a lot of money right now

00:25:40.780 | and you just really need the tax break.

00:25:42.700 | Because I think what happens is those fees compound, right?

00:25:45.620 | So it's like one year of having the fees

00:25:47.780 | or having shitty investment options.

00:25:49.540 | You might be able to just keep it in cash

00:25:51.420 | and not invest it in anything

00:25:52.780 | if the investment options are truly terrible,

00:25:54.740 | but get your tax break.

00:25:56.420 | And then if you know you're going to leave

00:25:57.860 | in a year or two,

00:25:58.940 | you just roll it out and put it in an IRA and self-manage it.

00:26:01.660 | I generally agree that the fees,

00:26:03.540 | you should be very wary of them.

00:26:04.900 | And there are absolutely terrible 401k providers.

00:26:07.620 | There are even more terrible 403b providers.

00:26:10.180 | There is like a very well-known,

00:26:11.620 | maybe not as well-known as it should be,

00:26:12.980 | scam that has kind of been quietly perpetrated

00:26:16.060 | on public school teachers over the last few years

00:26:19.140 | where these annuity salespeople will go and sell teachers

00:26:22.500 | these very expensive annuities within their 403b's

00:26:25.620 | that are vastly underperforming and have crazy fees,

00:26:29.620 | like three to 5% per year.

00:26:31.100 | It's just like unbelievable.

00:26:32.220 | The SEC is actually suing this company

00:26:33.980 | like $50 million for misleading investors.

00:26:36.580 | So those things are out there

00:26:38.140 | and it is 100% possible for the fees

00:26:40.980 | or the plan structure or the investment options

00:26:43.420 | to ultimately negate any benefit you would be getting.

00:26:46.660 | So I'm glad you brought that up.

00:26:47.980 | The general position or orientation that people should take

00:26:52.300 | is assume it's probably gonna be okay,

00:26:54.980 | look into it to double check,

00:26:56.660 | but don't let the fear that there might be fees

00:26:59.780 | keep you from even going down that path in the first place

00:27:02.380 | or looking into it.

00:27:03.220 | And you can always email someone at HR

00:27:05.140 | or a plan administrator if you're not sure.

00:27:07.260 | Usually it's in the paperwork,

00:27:08.420 | but sometimes the paperwork is a little bit confusing.

00:27:11.220 | - There's actually websites.

00:27:12.180 | I wanna say, if you search 401k fees,

00:27:15.500 | I don't know one off the top of my head,

00:27:17.020 | but there are websites where you like type in your employer

00:27:19.340 | and they've already like read the plan docs

00:27:21.700 | and will tell you, hey, your 401k sucks.

00:27:24.740 | It has really high fees.

00:27:25.940 | - Man, I love that.

00:27:27.220 | - And most of the reason they do this

00:27:28.780 | is around what you can do with your money

00:27:30.900 | after you leave your employer.

00:27:32.380 | You can take your money from a 401k

00:27:34.220 | and one, you can roll it into your new employer's 401k.

00:27:37.940 | So I remember I had a 401k and my wife had a 401k

00:27:41.100 | at old companies that actually were pretty terrible,

00:27:43.420 | but then we joined companies that had great 401ks

00:27:45.940 | and by great, I mean just low fee

00:27:48.260 | and we could roll those 401ks into our new 401ks.

00:27:52.700 | You can also roll it over into a rollover IRA

00:27:55.740 | and we'll get into some of the rollover stuff

00:27:57.380 | in a little bit, but know that yes,

00:27:59.060 | you're not stuck in this terrible 401k forever.

00:28:02.020 | And if you have old 401ks just lying around,

00:28:05.380 | but you like your current 401k,

00:28:07.100 | then you can also roll those all in

00:28:08.740 | and put them all together and stop managing them separately.

00:28:11.340 | But not every company has this option.

00:28:13.500 | I know I did when I was at Google

00:28:14.740 | and I know it's being more popular.

00:28:16.500 | - This holiday season, I wanna give gifts to my loved ones

00:28:20.940 | that make them feel special and unique,

00:28:22.900 | just like the relationships we share.

00:28:25.260 | If you feel the same way,

00:28:26.500 | you should be giving them StoryWorth,

00:28:28.220 | which is an incredible gift

00:28:29.700 | I've given to the people I care about

00:28:31.460 | and I'm excited to be partnering with them today.

00:28:33.780 | StoryWorth is an online service

00:28:35.580 | that helps you and your loved ones

00:28:36.900 | preserve precious memories and stories for years to come.

00:28:40.340 | It's a thoughtful and meaningful gift

00:28:42.260 | that connects you to those who matter most.

00:28:44.580 | Each week, StoryWorth emails your relative or friend

00:28:47.340 | a thought-provoking question of your choice

00:28:49.580 | from a vast pool of options.

00:28:51.620 | Each unique prompt asks a question

00:28:53.420 | you've never thought about,

00:28:54.700 | like what's the bravest thing you've ever done,

00:28:56.740 | or if you could see into the future,

00:28:58.540 | what would you want to find out?

00:29:00.580 | After a year, StoryWorth will compile

00:29:02.740 | all of your loved one's stories,

00:29:04.380 | including photos, into a beautiful keepsake book

00:29:07.420 | that you'll be able to share

00:29:08.500 | and revisit for generations to come,

00:29:10.660 | which now that we have kids,

00:29:12.100 | I couldn't be more excited

00:29:13.460 | to start collecting these books to share with them.

00:29:16.140 | Reading the weekly stories helps connect you

00:29:18.140 | with loved ones no matter how near or far apart you are,

00:29:21.500 | and you'll be surprised at the things you learn,

00:29:23.860 | like how my dad might have gotten into trouble

00:29:26.420 | for landing a helicopter at Denny's

00:29:28.140 | back when he was in the military.

00:29:29.940 | With StoryWorth, I'm giving those I love most

00:29:32.500 | a thoughtful, personal gift from the heart

00:29:34.540 | and preserving their memories and stories for years to come.

00:29:37.940 | Go to allthehacks.com/storyworth

00:29:41.100 | to save $10 on your first purchase.

00:29:43.460 | That's allthehacks.com/storyworth

00:29:47.660 | to save $10 on your first purchase.

00:29:50.020 | I'm sure you all know about Black Friday and Cyber Monday,

00:29:55.060 | but did you know that next Tuesday is Giving Tuesday?

00:29:57.900 | It's a global generosity movement

00:29:59.820 | surrounding a time I know we all have gratitude on our mind.

00:30:03.380 | Whether it's your time or money,

00:30:04.940 | it's a great opportunity to consider giving.

00:30:07.700 | And in the spirit of this episode

00:30:09.220 | on tax-advantaged accounts,

00:30:10.820 | if you plan to give money, stocks, or even crypto,

00:30:14.060 | you should definitely check out Daffy,

00:30:15.940 | who I'm excited to partner with today.

00:30:18.100 | Daffy actually came up organically in this episode,

00:30:20.820 | so you'll hear a lot more about it later.

00:30:22.980 | But if you're not familiar, it's a platform and app

00:30:25.980 | that makes it so easy and efficient

00:30:27.860 | to manage giving to the charities you care about.

00:30:30.700 | So if you're planning to give or raise funds

00:30:33.180 | for any charities, schools, or faith-based organizations

00:30:36.140 | this holiday season, and you wanna do it

00:30:38.220 | in the simplest and most tax-efficient way,

00:30:40.820 | check out Daffy for all your giving needs.

00:30:43.460 | Head on over to allthehacks.com/daffy

00:30:46.820 | where you can get a free $25

00:30:48.740 | to give to the charity of your choice.

00:30:50.740 | Again, that's allthehacks.com/daffy

00:30:55.180 | for a better way to give.

00:30:56.780 | I just wanna thank you quick for listening to

00:31:00.460 | and supporting the show.

00:31:01.940 | Your support is what keeps this show going.

00:31:04.780 | To get all of the URLs, codes, deals,

00:31:07.500 | and discounts from our partners,

00:31:09.260 | you can go to allthehacks.com/deals.

00:31:12.820 | So please consider supporting those who support us.

00:31:15.940 | How do you think about the option

00:31:17.500 | if your company says traditional versus Roth 401(k)?

00:31:20.700 | Traditional 401(k) is my preference

00:31:23.660 | for the reasons that I highlighted.

00:31:25.460 | The additional piece in what I thought you were gonna say

00:31:27.980 | with Google is that after-tax option.

00:31:30.580 | Oh yeah, so I wanna get to that also.

00:31:32.180 | But is there ever a case, let's say right now

00:31:34.540 | you're living in Florida and you have no state tax

00:31:37.460 | and you're not making that much,

00:31:39.340 | is there a case to pick the Roth 401(k) option?

00:31:42.740 | Here's who I would say Roth 401(k) is best for.

00:31:45.180 | 12% tax bracket or below.

00:31:46.860 | Because the jump from 12 to 22,

00:31:49.220 | that's a pretty big increase.

00:31:51.260 | 22 to 24, okay, we're talking two incremental

00:31:54.500 | percentage points.

00:31:55.340 | But 12% marginal tax bracket,

00:31:57.260 | if after your standard deduction and other deductions,

00:32:00.940 | you are in the 12% bracket

00:32:02.700 | and your 401(k) contributions will be taxed at 12% rather,

00:32:06.140 | Roth 401(k), it's gonna be hard to do better than that.

00:32:08.860 | The other people who would be a good candidate

00:32:11.300 | for Roth 401(k) are those who expect to work

00:32:14.260 | for a very long time.

00:32:15.620 | If for some reason you're like,

00:32:16.580 | oh, I know I'm gonna have earned income into my 70s.

00:32:20.100 | Or like I have rental properties

00:32:21.820 | that are gonna create taxable income later.

00:32:23.900 | Or I have a business that I'm gonna retain

00:32:25.700 | partial ownership of and I expect to be taking money

00:32:28.380 | out of that business even after I'm retired

00:32:30.700 | and no longer working there.

00:32:31.940 | If there's a lot of other sources of income

00:32:34.180 | that you expect to have in retirement

00:32:35.980 | after you stop quote unquote earning income,

00:32:38.860 | then the Roth 401(k) probably makes more sense.

00:32:41.180 | Now, the reason that I always prefer traditional

00:32:43.860 | for myself and people who are like me,

00:32:46.580 | in that I mean, you are earning a really healthy income now,

00:32:50.340 | you have a high marginal tax rate now,

00:32:52.540 | you intend to retire probably in your 50s

00:32:55.340 | and you don't have a bunch of other sources of income

00:32:58.260 | that are gonna be coming in

00:32:59.300 | and jacking up your tax rate in retirement unnecessarily

00:33:03.500 | or unwantingly, we'll say.

00:33:05.140 | I tend to think that traditional makes more sense,

00:33:07.060 | but there are 100% use cases for Roth 401(k).

00:33:09.860 | I would just say that the expectation

00:33:11.940 | that a lot of people have that,

00:33:13.460 | oh, well, this question is often positioned to people as,

00:33:16.540 | do you think you're gonna earn more now or earn more later?

00:33:19.620 | Most people hear that and they go,

00:33:21.580 | huh, well, I'm making $100,000 a year now.

00:33:25.420 | Am I gonna earn more when I'm 55 or 58, you know, whatever?

00:33:28.860 | Yeah, like I'm a trajectory that's going up.

00:33:31.060 | My career is gonna keep getting better.

00:33:32.540 | I'm gonna keep earning more money,

00:33:33.700 | but you're not taxed on your traditional 401(k) withdrawals

00:33:36.780 | in retirement based on your last working salary.

00:33:39.260 | You're taxed on the amount that you're taking

00:33:41.220 | as earned income in retirement,

00:33:42.900 | which for most people,

00:33:44.420 | just by nature of how these things work,

00:33:46.420 | even with social security, once you turn,

00:33:48.980 | I guess you can delay it after you're 62,

00:33:50.940 | but you could start taking it when you're 62.

00:33:53.020 | Even with social security,

00:33:54.500 | most people are not able to create more earned income

00:33:58.340 | for themselves in retirement

00:34:00.260 | than they are as employees that are earning salaries

00:34:03.820 | and focused on increasing their compensation.

00:34:05.820 | It's weirdly hard to do for most individuals.

00:34:08.940 | Now, if you have a $15 million nest egg

00:34:11.860 | and you're like, my safe withdrawal rate

00:34:13.660 | is 500,000 or a million dollars a year.

00:34:16.580 | Okay, well now you might be making more in retirement,

00:34:19.860 | but maybe not, because how did you get

00:34:21.620 | that $15 million nest egg in the first place?

00:34:23.740 | Well, you're probably making a lot of money.

00:34:25.580 | You're probably making more than 500

00:34:27.380 | or a million dollars a year.

00:34:28.940 | So I think it's kind of that like,

00:34:30.180 | in order to be in a higher tax rate in retirement,

00:34:32.500 | to have enough money in retirement

00:34:34.340 | that you can be living so large

00:34:36.220 | that you're pushing yourself

00:34:37.180 | into a higher marginal tax bracket,

00:34:39.020 | you have to be making a lot of money now

00:34:40.700 | and investing a lot of money now.

00:34:42.020 | So probably gonna be hard to out-earn.

00:34:43.700 | And it's not that that's impossible,

00:34:45.260 | it's just that we choose Roth 401k for certainty

00:34:48.340 | without often looking at like,

00:34:49.820 | okay, but what is the lifetime tax bill

00:34:51.940 | that I'm paying by taking this approach?

00:34:53.980 | Am I inadvertently paying more money

00:34:56.340 | than I would need to be on these contributions

00:34:58.660 | when I could be a little bit savvier about this decision

00:35:01.420 | and create more net investable income

00:35:03.540 | by using pre-tax and then investing the tax savings?

00:35:06.260 | The other person that should not do this

00:35:07.780 | is the person who's not gonna invest the tax savings.

00:35:09.900 | If you just invest in your traditional 401k

00:35:12.060 | and then spend the tax savings,

00:35:13.860 | well, congratulations, you should have used Roth

00:35:15.820 | because you kind of defeated the purpose of the strategy.

00:35:18.500 | That's a great thing, you know,

00:35:19.620 | like do what you're actually gonna do.

00:35:21.260 | If you know yourself and you're like,

00:35:22.940 | "Yeah, there is no fricking chance

00:35:24.980 | that I'm gonna actually end up investing that money,"

00:35:27.100 | it can be a forced savings device.

00:35:28.660 | Just pay the taxes now and use Roth

00:35:30.340 | and like forget about the optimization and the math.

00:35:32.780 | But I guess I would assume

00:35:33.820 | that the people who listen to this show

00:35:35.060 | are probably not the people who would be like,

00:35:38.100 | "Yeah, no, I'm not gonna invest that money."

00:35:39.780 | I think your audience is probably pretty interested

00:35:42.500 | in optimizing their financial situation.

00:35:45.460 | So of course there are scenarios,

00:35:47.220 | there are just fewer and farther between

00:35:49.300 | than most people would probably think.

00:35:50.740 | - The overarching theme is no matter what tax advantage

00:35:54.020 | to count you're choosing,

00:35:55.100 | it probably shouldn't affect

00:35:56.220 | how much you've spent in a given year, right?

00:35:57.860 | For me, I know there are people who think,

00:36:00.140 | "Oh, I spend whatever's left over."

00:36:02.660 | I'm typically the person that's like,

00:36:04.340 | "I'm not gonna change my spending

00:36:05.900 | based on how much I contribute to an account.

00:36:08.380 | I'm just gonna spend independently of that thing."

00:36:10.820 | - The way that it works for most people

00:36:12.100 | is they maybe make the switch, right?

00:36:14.180 | They go from Roth 401k to traditional 401k.

00:36:16.580 | They're contributing the same amount of money

00:36:18.380 | to that 401k, but now their paychecks are higher

00:36:20.980 | because of the tax break.

00:36:22.180 | So they're like, "Ah, cool, extra money.

00:36:24.060 | I'm gonna spend it."

00:36:24.940 | I tend to agree with you that I try to make

00:36:27.380 | my spending decisions independent of like

00:36:29.940 | what number is actually in my checking account.

00:36:32.300 | That is, I try to plan that type of thing ahead of time

00:36:35.260 | so that my investments don't wobble, we'll say,

00:36:38.180 | based on tax breaks that I may or may not be generating.

00:36:40.860 | - Last little thing is, it's interesting,

00:36:42.900 | the contribution limit for a 401k,

00:36:45.740 | we talked about it next year being 23,000,

00:36:48.140 | but that's not quite true.

00:36:49.980 | The total contribution limit will be 68,000.

00:36:53.700 | And by the way, if you're over 50,

00:36:55.300 | both those numbers go up by $7,500 in 2024.

00:36:59.060 | But that $23,000 is the cap

00:37:01.380 | for the pre-tax employee contribution.

00:37:05.020 | And so this is where I wanna get kind of ninja style

00:37:08.340 | and go a little deeper and commonly called

00:37:10.700 | the mega backdoor 401k, a really Roth contribution.

00:37:15.020 | I was fortunate that Google's 401k allowed it.

00:37:17.780 | - Yes, a lot of tech companies do this.

00:37:19.540 | Microsoft, Google, Facebook, Apple, Meta, I should say.

00:37:22.860 | They all, for whatever reason, I think Dell too.

00:37:26.140 | I've worked at a couple that have done this

00:37:27.900 | and it seems to be a commonality between tech companies

00:37:30.460 | if they all are in the know about this.

00:37:32.060 | - The trick here is you can make more than 23,000 next year,

00:37:36.100 | whatever the limit is, in contributions,

00:37:37.980 | but they are non-deductible post-tax contributions

00:37:41.980 | into your pre-tax 401k.

00:37:44.180 | And on the whole, that is a horrible thing to do.

00:37:46.460 | It doesn't make any sense to contribute post-tax money

00:37:49.660 | into a retirement account that you can't take money out of

00:37:52.180 | for many years and have to pay penalties,

00:37:53.980 | except when you are allowed to take those

00:37:56.620 | after-tax contributions to your 401k

00:37:58.660 | and roll them over to a Roth 401k.

00:38:01.380 | And so that lets you take money beyond the next year,

00:38:05.140 | $7,000 you could get into a Roth IRA

00:38:07.700 | and put a lot more money into a Roth investment vehicle,

00:38:10.900 | which then, like we've kind of mentioned,

00:38:12.860 | you aren't gonna pay taxes

00:38:14.380 | when you make contributions to a Roth account,

00:38:16.180 | whether it's an IRA or a Roth 401k,

00:38:17.780 | you don't pay taxes on any of the gains

00:38:19.940 | or any of the money you take out.

00:38:21.260 | So I loved that strategy when I had it available to me,

00:38:24.500 | but when I worked at Wealthfront, it wasn't an option.

00:38:27.060 | - You know what's interesting is

00:38:28.940 | I took screenshots of the language

00:38:32.180 | in my old Fidelity account with,

00:38:34.860 | I believe it was with Dell, the 401k.

00:38:37.100 | I think I might have screenshots from Facebook too,

00:38:39.220 | where I wanted to see how they were referring to this.

00:38:42.020 | Here it is, with the mega backdoor Roth IRA,

00:38:44.540 | how it came up on the screen

00:38:46.020 | when I was like reviewing elections.

00:38:47.900 | The way that you determine this

00:38:49.700 | is there will be your contributions per pay period.

00:38:52.540 | So it'll say, okay, pre-tax, Roth, after-tax,

00:38:55.900 | and usually there will be like bonus elections

00:38:58.420 | and things like that.

00:38:59.260 | But what you're looking for is that after-tax option,

00:39:02.620 | which is again, different than Roth, right?

00:39:05.020 | It's not a Roth contribution to that elective deferral,

00:39:08.140 | that 23,000, that after-tax option

00:39:11.420 | is referring to how much of your salary

00:39:14.180 | you want deferred into that difference

00:39:16.940 | between the $68,000 limit and the 23,000 elective deferral.

00:39:21.420 | So it's about $45,000 total that you could put in, in 2024.

00:39:25.740 | And so you would choose your percentage, right?

00:39:27.580 | You could do up to 45K.

00:39:28.820 | And then there's often gonna be,

00:39:30.460 | in both plans that I had, this was the case.

00:39:32.300 | So I'm not gonna blanket statement say

00:39:33.780 | it's gonna be in everyone,

00:39:34.620 | but typically it's these in-plan conversions

00:39:37.980 | that you're looking for.

00:39:39.060 | In the case of Fidelity,

00:39:40.380 | it was the daily Roth in-plan conversion.

00:39:43.260 | Do you want to convert your after-tax contributions to Roth?

00:39:46.900 | And you basically just have to select,

00:39:48.660 | yes, that is what I want you to do

00:39:50.420 | with these after-tax conversions.

00:39:51.700 | I want you, plan administrator,

00:39:53.380 | to every day, anything that's going in,

00:39:55.380 | check and then convert it to Roth right away.

00:39:57.380 | So that you're really not even having to do anything

00:39:59.300 | beyond checking the button

00:40:00.380 | when you're making those contributions.

00:40:01.900 | But I think every plan kind of does it differently.

00:40:03.900 | It's just that keyword.

00:40:04.980 | When you're filling this out, it's not gonna say,

00:40:06.860 | do you wanna do a mega backdoor Roth IRA?

00:40:09.100 | It's gonna go, do you wanna make

00:40:10.700 | after-tax contributions to this account?

00:40:13.340 | And that's kind of the buzzword.

00:40:15.260 | And then do in-plan Roth conversions.

00:40:17.700 | - Yeah, and then do in-plan conversions,

00:40:20.980 | which at Google, you had to do manually one-off.

00:40:23.620 | You couldn't automate it.

00:40:24.700 | - Oh, that's annoying.

00:40:25.700 | Tell me more about that.

00:40:26.660 | Did you have to physically roll over the funds every year

00:40:29.780 | to get them into a Roth IRA?

00:40:31.860 | - I mean, it's been almost a decade, so.

00:40:34.140 | - They probably fixed it.

00:40:35.060 | They probably got a better plan now. (laughs)

00:40:37.300 | - But the only other thing

00:40:38.660 | that is really very, very important

00:40:40.780 | is that you can put in $68,000 next year

00:40:44.940 | into after-tax contributions.

00:40:46.620 | Your 401(k) will let you do that

00:40:48.260 | before you put in your pre-tax.

00:40:50.700 | So it is important to make sure

00:40:52.780 | that you don't set up, put 100% in both,

00:40:55.860 | because sometimes your plan will put money

00:40:58.180 | in the wrong thing.

00:40:59.180 | This is especially true,

00:41:00.820 | at Google, one person had this problem.

00:41:02.220 | First, at the beginning of the year, they said,

00:41:03.860 | let's max out my pre-tax.

00:41:05.460 | And then they switched and said pre-tax down to 0%

00:41:08.580 | and after-tax to 100.

00:41:09.940 | And then next year, they left it at that.

00:41:12.420 | And in their early, the next year,

00:41:14.260 | they've maxed out the entire,

00:41:16.180 | it was probably wasn't 68,000 back then,

00:41:18.140 | amount into after-tax,

00:41:19.340 | and they were no longer eligible

00:41:20.780 | to put anything in pre-tax,

00:41:22.620 | which also included the match.

00:41:24.260 | And so I would just say,

00:41:25.420 | make sure you're maxing out your pre-tax,

00:41:27.660 | maxing out your match

00:41:28.900 | before you do the after-tax contributions.

00:41:31.140 | - Love that note.

00:41:31.980 | I think that's amazing.

00:41:32.940 | In the screenshot that I was just looking at,

00:41:34.660 | I think I had put like 17% in pre-tax and then another.

00:41:38.420 | They were both weird percentages,

00:41:40.260 | but I had sat there and calculated like,

00:41:42.380 | what is 23,000 worth of my salary?

00:41:45.060 | And then what is the 45?

00:41:46.540 | Or I think at the time it would have been 42,

00:41:48.940 | to make sure that the percentages were like,

00:41:50.820 | taking the correct numbers simultaneously

00:41:52.980 | versus going, I'm gonna do all of this first

00:41:55.020 | and all of this second.

00:41:56.060 | 'Cause you're right,

00:41:56.900 | I think you can get into hot water with that.

00:41:58.460 | That's a really good example.

00:41:59.780 | You know, and that person's not gonna be sad

00:42:01.460 | if they have 60 something thousand dollars

00:42:03.740 | of Roth money later,

00:42:05.020 | but it is kind of a bummer 'cause it's like,

00:42:06.500 | oh, well man, now I'm not really getting

00:42:08.220 | my juicy tax break that I wanted.

00:42:10.260 | I also think it's worth noting that like,

00:42:11.900 | we keep talking about not being able to access the money.

00:42:14.580 | And I feel just this little like footnote

00:42:17.180 | trying to climb out of me that's like,

00:42:18.860 | except for your Roth IRA cost basis,

00:42:21.460 | that your contributions to Roth IRAs,

00:42:23.860 | you technically could access.

00:42:26.580 | - So I think we exhausted the non-self-employed,

00:42:29.660 | non-company owner retirement plans.

00:42:31.860 | Let's talk quickly about the IRAs.

00:42:34.580 | Downside being much lower limits,

00:42:36.500 | upside being available to anyone.

00:42:38.500 | Where do we go?

00:42:39.340 | - Okay, so to me, the IRA kind of flashing headline

00:42:43.780 | is that if you don't have

00:42:45.900 | an employer-sponsored retirement plan,

00:42:48.340 | you are a W-2 employee who only has W-2 income

00:42:51.100 | and you have no employer-sponsored retirement plan

00:42:53.620 | for whatever reason, and you still want a tax break,

00:42:56.300 | you can contribute to a traditional IRA,

00:42:58.700 | pretty confident regardless of your income

00:43:00.700 | and get that deduction.

00:43:01.900 | It's a much smaller deduction,

00:43:03.180 | but if you're really hungry for a deduction,

00:43:04.900 | you can get it.

00:43:05.740 | Everyone else is probably gonna be better off

00:43:08.580 | with the Roth IRA.

00:43:09.620 | Both because at this point,

00:43:11.180 | if you do have the employer-sponsored plan,

00:43:13.420 | you cannot then also get a deduction

00:43:15.140 | in this traditional IRA unless your income is below,

00:43:17.740 | I wanna say it's in the 70,000 range next year,

00:43:20.340 | but like most people earning 70K

00:43:22.300 | are not gonna be able to max out all these accounts

00:43:24.220 | and still be able to support themselves

00:43:26.060 | with the remaining income that's left over.

00:43:28.180 | So for most people, it's gonna be Roth IRA.

00:43:31.660 | Again, with that $7,000 limit.

00:43:33.260 | And there are income limits with the Roth IRA

00:43:36.020 | where I believe in 2024.

00:43:39.380 | - Yeah, I pulled it up.

00:43:40.220 | It's somewhere around the 150, 160,000

00:43:43.260 | if you're filing single

00:43:44.460 | and 220, 240,000 filing jointly.

00:43:47.620 | - Great, and there's that phase out in there.

00:43:49.620 | So that's where the ranges come in.

00:43:51.460 | - But if you're anywhere close to those,

00:43:53.540 | just backdoor, don't worry about it.

00:43:55.300 | - Exactly.

00:43:56.140 | And so the backdoor Roth IRA is a pretty simple maneuver

00:43:59.100 | just in case this is not something

00:44:01.160 | that a listener has heard of before

00:44:03.100 | or is not super clear on.

00:44:04.220 | It's pretty simple.

00:44:05.100 | You basically just make a contribution to a traditional IRA,

00:44:08.740 | but you make it non-deductible.

00:44:10.260 | So it's been a while since I've done this.

00:44:11.940 | So I can't exactly remember if you clarify

00:44:14.140 | when you're making the contribution that it's non-deductible.

00:44:16.540 | I think it's on your taxes, right?

00:44:18.580 | Where it's like, oh, great.

00:44:19.420 | Yeah, you're like filling out your taxes

00:44:20.820 | and it'll ask you, did you make deductible IRA contributions?

00:44:23.660 | You don't claim the deduction for that.

00:44:25.620 | You just put the funds in a traditional IRA,

00:44:27.920 | allow them to settle, convert them to Roth.

00:44:30.620 | There's gonna be a button that probably says

00:44:32.740 | convert to Roth in most major brokerage firms.

00:44:35.260 | And then once it's in a Roth IRA,

00:44:37.340 | which you'll have to have a Roth IRA opened

00:44:39.460 | in order to be the receptacle of that conversion,

00:44:41.780 | then you'll invest it once it's in the Roth IRA.

00:44:43.780 | And yeah, for whatever reason,

00:44:45.460 | they have not closed this tax loophole.

00:44:47.100 | So it sounds like you just did this.

00:44:48.460 | Any updates?

00:44:49.880 | - There's a form 8606 you have to file

00:44:52.500 | in your tax return that's for non-deductible IRAs.

00:44:54.900 | I would say they've gone even further than not closed it.

00:44:57.460 | I believe there was a letter somewhere like five,

00:44:59.740 | 10 years ago that the IRS put out

00:45:01.740 | that more or less endorsed that this is a legitimate thing.

00:45:05.360 | They didn't go as far as say, which is silly,

00:45:07.180 | that if they're like, we think it's okay

00:45:08.900 | that anyone of any limit can do this thing,

00:45:10.740 | but we're not gonna just change the tax code to make it easy.

00:45:13.500 | - I know, it's so strange.

00:45:14.720 | Okay, good to know.

00:45:15.560 | I was gonna say, I think I just saw

00:45:16.840 | that 8606 is ringing a bell because I use Tax Act to file.

00:45:21.200 | I just like their software.

00:45:22.700 | And I was helping a friend file on Tax Act

00:45:25.260 | who had to do this.

00:45:26.220 | And I remember Tax Act prompting her with form 8606

00:45:30.180 | at some point because she had answered some question

00:45:32.220 | a certain way.

00:45:33.060 | So it was like, oh, you need this form.

00:45:34.620 | So it's not like you even have to go hunting this down

00:45:37.060 | if you're using a CPA or a sophisticated tax software

00:45:40.380 | like Tax Act, it's probably going to serve you that form

00:45:44.300 | if you're answering questions accurately too.

00:45:46.340 | - By the way, we didn't mention this.

00:45:47.460 | Your 401k contributions are things you have

00:45:50.180 | to elect during the year.

00:45:51.620 | They have to come out of your employer income.

00:45:53.740 | You can't do it on your own.

00:45:55.040 | The IRA, you can do on your own,

00:45:56.940 | not only during the year of the tax year,

00:45:59.220 | but up until your filing deadline.

00:46:01.260 | So I don't know what day this will come out.

00:46:03.400 | It's possible this has come out before November 15th

00:46:06.260 | or whatever the new tax deadline is

00:46:08.260 | for all but two counties in California for 2022.

00:46:12.180 | So we're recording this in October.

00:46:14.140 | I made my 2022 IRA contributions for non-deductible,

00:46:18.940 | converted it to Roth for 2022 just a few weeks ago

00:46:22.460 | because California extended the filing deadline

00:46:25.880 | all the way until October and then again to November.

00:46:28.520 | So if you're listening to this,

00:46:29.480 | you could do it for this year.

00:46:30.720 | You probably, by the time this comes out,

00:46:32.280 | won't be able to do it for last year.

00:46:33.800 | But even if you wait until March or April

00:46:36.500 | when you're filing your taxes,

00:46:37.400 | you can still do it for the year prior.

00:46:38.880 | I believe if you're filing taxes on your own,

00:46:41.440 | I seem to remember from a while ago

00:46:43.100 | that it's like 20% more complicated

00:46:45.320 | if you do it in the next year

00:46:47.040 | than it is if you just do it in the calendar year

00:46:49.260 | in terms of what form you have to file.

00:46:51.380 | I don't know if that's true.

00:46:52.240 | I'm not a CPA, but I would say if you want to do it

00:46:54.660 | and you can do it in the calendar year,

00:46:56.160 | it's probably better.

00:46:57.000 | So back to a Roth IRA, amazing.

00:46:59.280 | Obvious benefits of Roth IRA,

00:47:01.120 | you don't get that tax deduction up front.

00:47:02.840 | You don't lower your taxable income,

00:47:04.380 | but that money can grow tax-free forever

00:47:06.440 | and you can take it out as soon as you're 59 and a half,

00:47:09.640 | but you can take it out before, right?

00:47:11.200 | - Well, you can access your cost basis before.

00:47:13.600 | So that is kind of the big footnote

00:47:15.560 | on these tax-advantaged accounts is I believe,

00:47:19.040 | well, HSA and 529 put a pin in those,

00:47:21.760 | but I believe as far as the major players,

00:47:24.300 | the Roth IRA is the only one

00:47:27.000 | where you can access your cost basis.

00:47:29.760 | So that means the contributions that you put in

00:47:32.980 | at any time for any reason.

00:47:35.280 | So if I invested 6K this year in a Roth IRA

00:47:37.800 | and the next year I was like,

00:47:38.720 | "Oop, I need to get some of that contribution back."

00:47:41.080 | I could go in and take it out.

00:47:42.400 | I can't access the growth, right?

00:47:44.040 | Like I can't touch that,

00:47:45.160 | but I can go in and remove cost basis if I needed it.

00:47:48.080 | Now that's not recommended obviously,

00:47:49.840 | but it is a footnote worth knowing,

00:47:51.760 | particularly for people who may be starting this journey

00:47:54.860 | and a little bit on the fence

00:47:56.280 | or like mentally a little bit feeling funky

00:47:58.640 | about quote unquote locking up their money.

00:48:00.560 | Sometimes the Roth IRA is like a good baby step

00:48:02.840 | 'cause it's like, well, it's not really locked up.

00:48:04.540 | Like you could technically get it back,

00:48:06.100 | but you're just not gonna be able to touch the growth.

00:48:08.200 | And obviously you're not gonna be wanting

00:48:10.280 | to be removing it from the account

00:48:11.800 | 'cause there's no like putting that back in.

00:48:13.720 | You can't be like, "Oh, I took out 5,000

00:48:15.920 | "of my $6,000 contribution.

00:48:17.580 | "I wanna go replace it."

00:48:18.680 | The ship has sailed.

00:48:19.600 | You cannot go and replace that contribution.

00:48:21.720 | So it's definitely not advisable, but it is possible.

00:48:24.680 | And that little weird oddity about the Roth IRA

00:48:28.560 | that you can access cost basis

00:48:30.460 | is partially what makes more complicated

00:48:33.640 | withdrawal strategies later in life possible.

00:48:36.840 | So if you've heard of like the Roth IRA conversion ladder,

00:48:39.480 | that cost basis little hack

00:48:41.640 | is what really makes that possible.

00:48:44.120 | - It's funny 'cause I was Googling around

00:48:45.720 | trying to find someone explaining

00:48:47.480 | the Roth withdrawal cost basis contributions, et cetera.

00:48:50.880 | And it's funny, it's so obvious

00:48:52.640 | that no one's actually written an article about this,

00:48:54.960 | at least that I could find.

00:48:56.120 | But it's as simple as if you have contributed $5,000

00:49:00.080 | for four years and your account is now at $23,000,

00:49:04.000 | but you've put in 20, you can take the 20 out.

00:49:06.640 | You can leave the three in,

00:49:08.360 | let the three continue to grow

00:49:10.200 | and take that out tax-free in retirement,

00:49:12.240 | but you can take the 20 out.

00:49:13.640 | And to me, I was like, "Well, how do you determine how much?

00:49:16.280 | "What if the account went down?

00:49:18.140 | "Which piece of the money do you take out?"

00:49:20.120 | And it's not that complicated.

00:49:21.520 | It's just, you do have to keep track of it.

00:49:23.600 | I've found that if you've moved your Roth IRA

00:49:26.200 | from multiple institutions over time,

00:49:28.720 | they don't necessarily always,

00:49:30.160 | at least I couldn't find the historical contributions.

00:49:33.880 | So I would say, I don't know,

00:49:35.840 | create a Google sheet that logs all of your contributions

00:49:38.480 | so that you don't forget it and kind of go back in time,

00:49:40.580 | especially if you've done a lot of rollovers,

00:49:42.520 | it can be a little confusing.

00:49:44.160 | But all of that, I think is a great strategy.

00:49:46.240 | We did forget to clarify one thing.

00:49:47.560 | When you do a backdoor Roth,

00:49:49.040 | when you go to convert

00:49:50.400 | your non-deductible traditional IRA contributions

00:49:53.280 | into your Roth IRA,

00:49:54.720 | there is this pro rata rule in the IRS

00:49:57.160 | that requires you to convert an equal

00:50:00.200 | or a proportionate share of your pre-tax traditional IRA

00:50:04.800 | and after-tax IRA contributions.

00:50:07.040 | So the general strategy is

00:50:08.960 | never have pre-tax traditional IRA.

00:50:11.560 | And the way to avoid that is

00:50:13.080 | never contribute in the first place,

00:50:14.560 | which if you don't make enough money

00:50:15.960 | or you have an employer plan is probably already the case.

00:50:18.640 | Or even if you have traditional IRA contributions already,

00:50:22.280 | you can usually roll them into your pre-tax 401k,

00:50:26.080 | clear out all of your traditional IRA basis, everything,

00:50:29.920 | and then do the backdoor strategy.

00:50:31.720 | So I would say,

00:50:32.560 | if you have traditional IRA contributions today,

00:50:35.400 | and I believe that includes rollover IRAs.

00:50:38.480 | - It does, unfortunately.

00:50:40.040 | And this is why I haven't done a backdoor Roth IRA

00:50:42.240 | in a while, 'cause I've been lazy

00:50:43.680 | and I have a big rollover IRA

00:50:45.840 | that I'm sitting on, but yes, so you're right.

00:50:48.400 | This is an amazing call-out because it trips people up,

00:50:51.360 | but yes, you basically don't want any money

00:50:53.960 | in traditional IRAs if you're going to do this.

00:50:57.160 | So that could be a regular shmegular traditional IRA.

00:51:00.280 | It could be a SEP IRA,

00:51:02.000 | which we haven't even talked about yet.

00:51:03.640 | It could be a rollover IRA from an old 401k plan,

00:51:07.040 | but any IRA that has pre-tax dollars in it

00:51:10.920 | will foul up a backdoor Roth IRA.

00:51:13.440 | And the workaround is, as you highlighted, very simple.

00:51:16.360 | It's either roll it into a 401k plan through your job,

00:51:19.880 | or if you're self-employed too,

00:51:21.480 | get a solo 401k and roll it into that.

00:51:24.040 | It's kind of funny and annoying

00:51:25.680 | that the type of account

00:51:27.560 | really makes that big of a difference,

00:51:29.280 | but this is definitely a dependency to be aware of,

00:51:32.520 | 'cause that pro rata rule is, it's a little complicated,

00:51:35.400 | but yeah, the TLDR is that you don't wanna be doing this

00:51:38.560 | if you have pre-tax funds,

00:51:40.840 | or maybe if you have like 50 bucks,

00:51:43.360 | the Roth conversion ladder and all the tactics there.

00:51:45.840 | That's one thing that I've always known

00:51:47.680 | is a thing that people talk about,

00:51:49.120 | and I've never really been able to dial it in in my head.

00:51:51.720 | - Yeah, okay, so this is one of my favorite,

00:51:53.760 | and I'm gonna try to explain this as simply

00:51:56.280 | and as clearly as I can,

00:51:57.480 | because it is a little complicated.

00:51:59.160 | So this is something really blew my mind

00:52:01.880 | and was like when I fell in love with tax strategies,

00:52:04.840 | because I was like, holy smokes,

00:52:06.840 | like by literally using the right bucket later in life

00:52:10.840 | and being a little creative with your account conversions

00:52:14.280 | and withdrawals and where you're physically taking money

00:52:17.080 | from, you can avoid taxes altogether.

00:52:19.520 | I think with the exception maybe of like state income tax,

00:52:22.080 | but we'll, you know, we can come back to that.

00:52:23.320 | So, and like state capital gains tax.

00:52:24.960 | It relies on a few key priors that we'll establish first.

00:52:29.240 | The first prior that's important to know

00:52:31.520 | is that for the year 2024,

00:52:33.480 | you will pay 0% capital gains on capital gains tax rather,

00:52:38.640 | on long-term capital gains with a taxable income

00:52:41.680 | of filing single up to $47,025.

00:52:45.260 | And if you're married, $94,050,

00:52:48.040 | which means if I have no other income,

00:52:50.240 | my husband has no other earned income,

00:52:52.080 | we're just, you know, fly in an early retirement,

00:52:54.300 | not making any money that if we had a taxable account

00:52:57.760 | that we wanted to withdraw $94,000 of gains from,

00:53:01.200 | the tax bill on that money would be zero,

00:53:03.560 | despite it coming out of a taxable account.

00:53:05.360 | So that's prior number one.

00:53:06.600 | Prior number two is that the standard deduction

00:53:09.440 | is in 2024, it's gonna be like 14,600 for singles,

00:53:14.240 | call it 29,200-ish for married filing jointly.

00:53:18.080 | The standard deduction is basically

00:53:19.680 | if you're not itemizing your deductions,

00:53:21.520 | I believe like 90% of Americans take the standard.

00:53:24.200 | So this should be most people.

00:53:25.660 | That is money, but the IRS basically says that's a freebie.

00:53:28.200 | We'll give you that one.

00:53:29.120 | So you can look at these two pieces of the tax code

00:53:32.080 | that tell you, okay, I'm gonna get

00:53:34.080 | between 14 and $29,000, quote unquote,

00:53:36.800 | as a freebie from the IRS on my earned income.

00:53:39.120 | And I also have this amazing like 47 to $94,000,

00:53:42.840 | zero, you know, to single or married filing jointly,

00:53:45.040 | 0% capital gains tax bracket.

00:53:46.760 | So using those priors and then using what we know

00:53:49.480 | about how Roth IRAs work,

00:53:51.360 | which is that conversions that you make

00:53:53.440 | from pre-tax dollars to Roth dollars

00:53:56.160 | become the cost basis in that Roth IRA.

00:53:59.600 | We can combine these three things

00:54:01.560 | and create a tax-free retirement income strategy.

00:54:05.240 | The caveats that I will mention quickly

00:54:07.160 | before I kind of break this down and walk through it

00:54:09.680 | is that if you are a married couple

00:54:12.080 | that intends to spend more than,

00:54:14.720 | let's say 9405 plus, fast math, 29 to,

00:54:19.600 | if you're a married couple that intends to spend

00:54:22.360 | more than around $123,000 per year in today's dollars,

00:54:27.360 | so that's like what, over 10,000 a month.

00:54:29.960 | If your retirement spending goals

00:54:32.040 | in today's purchasing power is more than 10,000 a month,

00:54:34.880 | you're gonna end up with a tax bill.

00:54:36.680 | But if it's under that, you could be totally tax-free.

00:54:39.640 | The other thing that I would note is

00:54:41.720 | it does take some fancy footwork.

00:54:43.480 | You're gonna have to be a little strategic here,

00:54:45.160 | but in any case, basically what we would do

00:54:47.200 | if we wanted to do this Roth IRA conversion ladder

00:54:49.440 | and pay no taxes on it is we would take our 401(k)

00:54:52.680 | or 401(k)s, if there are two of us, two earners,

00:54:55.360 | and they're all in, you know, traditional, right?

00:54:57.440 | If we've followed this broader strategy, this optimization,

00:55:00.680 | we'll take our traditional 401(k)s,

00:55:02.200 | we'll roll them over when we leave the workforce

00:55:04.400 | into traditional IRAs.

00:55:06.200 | They just basically become rollover IRAs

00:55:07.920 | that we now control.

00:55:08.960 | Now that they're in that rollover IRA status,

00:55:11.520 | we can do Roth conversions with them.

00:55:13.520 | So we're gonna look at our standard deduction,

00:55:15.720 | we're gonna say, all right, what is the amount

00:55:17.680 | that the IRS is gonna give us as a freebie this year

00:55:20.040 | as a married couple?

00:55:20.880 | Well, it's 14,600 each or 29,200 together,

00:55:24.440 | so maybe we wanna use just one 401(k)

00:55:27.200 | or maybe we're combining all the funds into,

00:55:29.200 | I guess that wouldn't work,

00:55:30.040 | you'd have to have two separate rollover IRAs,

00:55:31.840 | but in any case, you're gonna convert

00:55:33.520 | a standard deduction size chunk to Roth

00:55:35.960 | in much the same way that we just talked about

00:55:37.800 | converting your non-deductible chunk to Roth

00:55:40.680 | for a back-to-a-Roth IRA.

00:55:41.920 | Same principle, you're converting a chunk to Roth.

00:55:44.360 | Now, once it's been converted to Roth,

00:55:46.920 | it's gonna be sitting there in that Roth IRA.

00:55:49.360 | The hack or the trick here is that because of,

00:55:52.600 | I would call it like the five-year rule,

00:55:54.560 | I don't know the true IRS terminology for this,

00:55:57.520 | but there is a five-year rule

00:55:58.920 | that once you take pre-tax funds

00:56:00.600 | and you convert them to Roth,

00:56:02.000 | that whole amount, even if it was all gains in your 401(k),

00:56:05.560 | even if it represented capital gains or earnings

00:56:08.000 | in the 401(k), not contributions,

00:56:09.640 | it becomes the cost basis of that new Roth IRA,

00:56:12.760 | which means, what do we know about the cost basis?

00:56:14.820 | You can access it.

00:56:15.780 | You don't have to be 59 1/2, you can touch it at any time.

00:56:18.320 | A 35-year-old could do this,

00:56:19.720 | but you have to wait five years.

00:56:21.800 | So you begin your Roth IRA conversion ladder

00:56:24.280 | in year one of retirement, early retirement,

00:56:26.800 | 'cause if you're already retired,

00:56:28.260 | if you're 59 1/2 or older, you don't need this

00:56:30.840 | because you can just access the money straight away.

00:56:33.360 | You're above the age limit.

00:56:34.600 | But let's say you're 40.

00:56:35.540 | You start in year one,

00:56:36.600 | you convert your first standard deduction size chunk.

00:56:38.900 | You let it sit.

00:56:39.740 | You can use a Google Sheet to track this stuff too

00:56:41.520 | if you're like, I don't wanna lose track of my conversion.

00:56:43.720 | Year two, you do the same thing.

00:56:45.200 | Year three, you do the same thing.

00:56:46.620 | This is why they call it a ladder

00:56:47.920 | because you're doing that standard deduction size chunk

00:56:50.400 | every single year, and you're basically getting

00:56:52.620 | a 0% tax rate on your Roth conversion of that money

00:56:56.480 | that you have never paid taxes on to begin with,

00:56:58.800 | and it's probably all gains

00:57:00.120 | from sitting there and compounding.

00:57:01.640 | - This assumes that you don't have any other income, right?

00:57:04.840 | - Yes.

00:57:05.720 | So we'll talk about where your income

00:57:07.240 | is coming from at this point,

00:57:08.160 | 'cause obviously you have to live on something, right?

00:57:10.000 | So basically then, the moral of the story is by year six,

00:57:13.200 | the funds from year one are now "touchable."

00:57:15.960 | By year seven, your funds from year two are now touchable,

00:57:18.580 | so on and so forth.

00:57:19.660 | You can access them.

00:57:20.520 | They are now Roth dollars that you can use.

00:57:22.760 | So in those first five years, though, too,

00:57:24.720 | like you need money to live on, right?

00:57:26.600 | So that's where your, I'll call it, original Roth IRA

00:57:30.080 | and/or primarily and preferably

00:57:32.920 | your taxable brokerage account

00:57:34.720 | that has that super high capital gains

00:57:37.300 | tax rate of zero comes in.

00:57:38.800 | So I could theoretically, if I'm doing this this year,

00:57:41.640 | if I'm in early retirement, I have no other earned income,

00:57:44.080 | I don't have a job anymore,

00:57:45.400 | I'm not earning money from anything else,

00:57:47.280 | I could take my husband and I's standard deduction

00:57:50.180 | in 2024 of 29K, do that Roth conversion, let it sit,

00:57:53.520 | and then we could take 94K from our capital gains,

00:57:56.980 | you know, that 0% tax bracket,

00:57:58.700 | we could take that out of a taxable account

00:58:00.200 | and live on it tax-free.

00:58:01.900 | And then starting in year six, you can combine them

00:58:04.420 | and get your full 0% cap gains bracket,

00:58:06.820 | your standard deduction-sized Roth chunk

00:58:08.900 | from the pre-tax conversion that you did five years prior,

00:58:11.380 | and then if you have Roth IRA,

00:58:13.460 | money that you wanna use, too.

00:58:14.660 | Obviously, Roth is like the playground

00:58:16.420 | where you can use as little or as much of it as you want,

00:58:19.020 | it doesn't impact your tax rate.

00:58:20.500 | So lots of fancy footwork,

00:58:21.900 | obviously that's not gonna be the right move for everybody,

00:58:25.260 | and there are plenty of people listening to this

00:58:27.460 | that will probably continue to have royalty income

00:58:29.940 | or business income or income from real estate

00:58:32.060 | or other deals they're doing

00:58:33.180 | even when they're not earning money,

00:58:34.460 | but if you can structure your financial life

00:58:38.500 | such that you don't have earned income

00:58:40.320 | when you start doing this,

00:58:41.400 | you can basically not pay any taxes,

00:58:43.860 | at least federally, on the investment income.

00:58:46.260 | One other important thing

00:58:47.500 | is that if you have that taxable account,

00:58:49.220 | yes, the capital gains have that treatment,

00:58:51.240 | but the dividends might not.

00:58:53.220 | So if they're qualified dividends,

00:58:55.220 | then again, they're treated kind of similarly

00:58:56.980 | to the way of capital gains,

00:58:58.060 | but if they are non-qualified dividends,

00:59:00.060 | they will count as earned income.

00:59:01.640 | I just quickly looked at my brokerage account,

00:59:03.980 | my 1099 for last year.

00:59:05.540 | It looks like about 80% of the dividends I have

00:59:08.780 | in my Wealthfront account are qualified,

00:59:10.420 | and the dividend rate is somewhere, I don't know,

00:59:13.180 | let's say on average 2.8, 3%, let's call it 3%.

00:59:16.460 | So 3% times 0.8, 2.4,

00:59:20.500 | so about 0.6% of my account balance

00:59:24.140 | ends up being earned income.

00:59:25.460 | So you will have some earned income

00:59:27.460 | from your brokerage account,

00:59:28.820 | but less than 1% likely.

00:59:31.220 | Obviously, I don't know if you're a dividend

00:59:32.760 | stock portfolio, it'll be very different.

00:59:34.420 | Right, yes, if you're trying to invest in dividend,

00:59:37.140 | but yeah, I agree.

00:59:37.980 | I think mine was something similar, just anecdotally.

00:59:41.140 | So let me try to recap.

00:59:42.180 | You're in retirement, you have no income,

00:59:44.340 | and you've got a taxable brokerage account,

00:59:46.700 | which is fine.

00:59:47.660 | The only income it's spitting off

00:59:49.260 | are these non-qualified dividends,

00:59:50.980 | which is gonna be probably less than 1% of your balance.

00:59:53.720 | You take the amount of your standard deduction

00:59:56.340 | and minus whatever income you have,

00:59:58.300 | so maybe minus your non-qualified dividends,

01:00:00.660 | and then you take all of your traditional IRA assets,

01:00:04.820 | which are likely things you've rolled

01:00:06.540 | from your 401(k) over to your rollover IRA,

01:00:09.820 | and then you roll that amount over into a Roth every year,

01:00:13.780 | and then five years later, you can take that money out.

01:00:16.340 | And then separately, you can use your stocks

01:00:20.480 | in that taxable brokerage account,

01:00:22.380 | you can sell up to the capital gains limit,

01:00:24.900 | and you can use that money to live on.

01:00:27.300 | That is correct.

01:00:28.120 | I will make a few little finer points to close this out,

01:00:30.780 | is that some people think about that taxable account

01:00:32.820 | like a bridge account.

01:00:33.800 | So it's possible that if you are intending

01:00:36.260 | to start depleting it and eating into the principal,

01:00:38.940 | you could actually be withdrawing more than 94(k)

01:00:42.060 | and just be taking cost basis out,

01:00:43.940 | and then you're not paying capital gains taxes on it

01:00:45.900 | 'cause it's your principal, it's your contribution,

01:00:47.780 | so you wouldn't owe any additional tax money on that.

01:00:50.300 | So that's one consideration.

01:00:52.180 | The other finer points on the accounts themselves

01:00:54.460 | is that by the time you're doing this,

01:00:56.100 | you may have a lot of different pre-tax accounts

01:00:58.660 | in your life that you have contributed to.

01:01:00.860 | You might have multiple 401(k)s,

01:01:02.540 | you might have multiple rollover IRAs,

01:01:04.500 | or traditional IRAs, or SEP IRAs, or SOLO, whatever.

01:01:07.380 | Sometimes, because of how complex this process is,

01:01:10.100 | if you can simplify things on the front end, it can help.

01:01:12.500 | So if you wanted to get all of your pre-tax accounts

01:01:16.340 | and all your pre-tax funds that are in your name

01:01:18.900 | into one rollover IRA or one traditional IRA,

01:01:22.700 | just to have that one bucket.

01:01:24.260 | Now, granted, you and your spouse, if you have one,

01:01:26.620 | will both have to do this 'cause you can't have a joint IRA,

01:01:29.600 | but sometimes that can be helpful,

01:01:31.460 | and then you'd end up having two Roth IRAs,

01:01:33.900 | I guess, per person, 'cause you'd probably have

01:01:35.780 | the Roth IRA that you were contributing to

01:01:37.680 | the entire time that you were working,

01:01:39.540 | and then you're gonna have this new Roth IRA,

01:01:41.620 | a separate account, that is gonna be the receptacle

01:01:44.120 | for these conversions.

01:01:45.220 | And I only say you might wanna keep them separate

01:01:47.300 | just for bookkeeping purposes of knowing,

01:01:49.740 | okay, this Roth IRA I've been contributing to,

01:01:52.420 | it's all cost basis and growth.

01:01:54.240 | This one over here is basically all gonna be cost basis

01:01:58.140 | after the five years are up.

01:01:59.700 | And so keeping them separate can just make it

01:02:01.820 | a little bit easier on you to mentally know

01:02:04.700 | where that money is and what is "usable" and what's not.

01:02:09.180 | So that's kind of like a extra little level of detail,

01:02:12.180 | but sometimes for me personally,

01:02:13.940 | it's helpful to imagine how these accounts,

01:02:16.660 | what the interplay is actually gonna look like.

01:02:19.320 | - Okay, and does the five-year rule apply

01:02:21.980 | to all conversions, including backdoor Roth conversions?

01:02:25.580 | - No, because the backdoor Roth conversions

01:02:27.580 | are post-tax conversions to Roth.

01:02:30.060 | The five-year only applies

01:02:31.420 | if it's a pre-tax conversion to Roth.

01:02:33.780 | - We've covered a lot.

01:02:34.760 | I wanna briefly spend a few minutes

01:02:37.060 | on work small business plans.

01:02:39.400 | I know not everyone listening is a business owner,

01:02:41.620 | but there are a few things to hit on here.

01:02:43.840 | So why don't you quickly run through a few,

01:02:46.780 | and then I'll talk a little bit

01:02:47.820 | about this cash balance plan thing I've been exploring.

01:02:50.500 | - Amazing, 'cause I'm really interested

01:02:51.820 | to hear more about this.

01:02:52.660 | So this is actually pretty simple.

01:02:53.900 | There are really two major players

01:02:55.740 | if you're, I will say, a solopreneur,

01:02:57.620 | or like a entrepreneur where your only employee

01:03:00.020 | is like your spouse.

01:03:01.100 | Things get more complicated once you have employees,

01:03:03.180 | so definitely consult your CPA if that's the case.

01:03:05.440 | But if you're just like a side hustler with 1099 income,

01:03:08.780 | you are a solopreneur, right?

01:03:10.280 | So you can use these.

01:03:11.220 | So if you've got 1099 income, this is for you.

01:03:13.480 | The two major things to be aware of is your solo 401k,

01:03:16.660 | which is basically you need an EIN number to open one,

01:03:19.900 | like the business needs to be incorporated,

01:03:21.880 | but EIN numbers are pretty easy to apply for online.

01:03:24.420 | Same rules in a lot of respect

01:03:26.540 | that an employer account would have

01:03:27.900 | that we've already talked about.

01:03:28.920 | So 2024, overall contribution limit, 68K.

01:03:32.500 | You have that $23,000 elective employee deferral

01:03:35.900 | that you could use.

01:03:36.820 | But as I would maybe say,

01:03:38.060 | the only kind of like complicated, nuanced thing

01:03:40.740 | to be aware of is that for whatever reason,

01:03:43.100 | the IRS looks at these different 401ks,

01:03:45.700 | your 401k from your job and maybe a solo 401k

01:03:48.240 | from a side hustler or a business that you're running.

01:03:50.180 | And they're like, "Cool, as long as different sources

01:03:53.060 | "of income are funding those, you're good, have at it."

01:03:55.900 | Except for that elective employee, $23,000.

01:04:00.700 | That is by person, by social security number,

01:04:03.860 | not by source of income.

01:04:06.100 | So if you are already putting in 23K at your job

01:04:09.460 | into that 401k, you could still put 68,000

01:04:12.980 | into that solo 401k on the side funded by your business,

01:04:16.220 | but your business has to have enough income

01:04:18.540 | in order to justify it.

01:04:20.100 | And so for most sole proprietors, solopreneurs,

01:04:22.860 | it's the easy way to find that is that you can put in

01:04:25.500 | up to 20% of your net business income

01:04:28.180 | into that solo 401k up to 68K,

01:04:31.380 | but it all has to be employer contribution,

01:04:34.300 | you as the employer, right?

01:04:36.060 | You are your own employer in this case.

01:04:38.060 | Employer contribution based on the net income

01:04:40.820 | of the business.

01:04:41.660 | SEP IRA, very similar, no elective deferral option,

01:04:45.860 | only employer contribution option.

01:04:47.740 | Again, if you're a sole proprietor,

01:04:49.340 | usually works out to around 20% of your net business income

01:04:52.700 | that you can defer up to $68,000 per year in 2024.

01:04:56.700 | And it's for all intents and purposes,

01:04:58.860 | like you can kind of think about it functioning

01:05:00.540 | on the tax side of things,

01:05:02.020 | pretty similarly to the way that like you would benefit

01:05:04.980 | from the 401k at work or like a deduction

01:05:07.740 | from a traditional IRA.

01:05:09.420 | - I can't remember all the reasons why,

01:05:11.060 | but when I looked into it, I opened up the solo 401k.

01:05:14.020 | I didn't pay myself a high enough salary

01:05:16.060 | that I could do a lot last year,

01:05:17.900 | but this year I'm really gonna focus on optimizing it.

01:05:20.660 | But one cool thing is the same principles apply

01:05:24.140 | in terms of being able to make after-tax contributions,

01:05:27.380 | being able to do Roth and everything.

01:05:29.180 | So I have, technically I have a solo 401k

01:05:31.380 | with three accounts.

01:05:32.460 | It's a pre-tax, a Roth and an after-tax.

01:05:35.060 | You can mega backdoor it, you can do all kinds of stuff.

01:05:37.660 | So that's super interesting.

01:05:38.940 | I set mine up with a company that was formerly called Ocho

01:05:42.060 | and is now called Carey,

01:05:43.460 | but there are other providers out there that let you do this.

01:05:46.380 | But I don't think Vanguard has all the mega backdoor,

01:05:50.300 | fanciness.

01:05:51.500 | - I use Vanguard, I think for mine.

01:05:54.060 | I think they call it like an individual 401k.

01:05:56.460 | I don't think so either.

01:05:57.700 | I think it's more kind of standard or like traditional.

01:06:01.220 | - And then the only reason I know

01:06:02.540 | about this cash balance plan is actually

01:06:04.060 | 'cause Carey sent an email out saying

01:06:05.900 | they are working on this product

01:06:07.580 | and I went down a rabbit hole.

01:06:09.220 | And so a cash balance plan,

01:06:10.900 | it's a type of defined benefit plan,

01:06:13.260 | meaning there are kind of two kinds.

01:06:15.060 | There's defined contribution and defined benefit.

01:06:17.060 | In a defined benefit plan, it's a form of pension.

01:06:20.140 | The company says this is the benefit you're going to get.

01:06:22.980 | So the company is actually on the hook

01:06:25.300 | for any of the investment risk down the road.

01:06:27.660 | But the plan effectively is like a simpler pension

01:06:31.540 | for small business owners.

01:06:33.140 | And the goal of the plan is to get

01:06:35.260 | to this maximum balance at retirement,

01:06:37.540 | which right now is around $3.5 million.

01:06:40.820 | And based on your age and some actuarial assumptions,

01:06:44.940 | there is an amount you can try to get to,

01:06:46.940 | an amount you can contribute.

01:06:48.300 | And if you are a business owner making mid to six figures,

01:06:52.900 | it is possible to get a pre-tax deduction

01:06:55.580 | all the way up to 100, 200, maybe even $300,000,

01:06:59.300 | depending on how old you are.

01:07:00.540 | So obviously this is the next step.

01:07:03.540 | It sits on top of it, right?

01:07:04.780 | You can do your solo 401(k),

01:07:06.260 | you can max everything out there,

01:07:07.740 | and then you can do your cash balance plan.

01:07:10.300 | The cost, it does have an administration cost

01:07:12.380 | in the kind of low single digit,

01:07:14.220 | thousands of dollars a year to set up.

01:07:15.980 | It is even more lucrative the closer you are to retirement

01:07:19.300 | because the goal is to hit this huge number at retirement.

01:07:22.900 | But if you are making a lot of money

01:07:25.020 | and you want to put that in a pre-tax vehicle,

01:07:27.380 | you wanna reduce your taxable income,

01:07:29.140 | it is definitely something to look at.

01:07:30.660 | There are a lot of companies that seem complicated

01:07:32.980 | that offer it, Cary or Ocho,

01:07:34.580 | which I'm gonna see if I can set up actually

01:07:36.260 | a referral code for people that might offer some discount.

01:07:38.620 | So look at the show notes.

01:07:40.060 | I'll set it up at allthehacks.com/cary, C-A-R-R-Y,

01:07:43.980 | and I will get something set up

01:07:44.980 | before this episode comes out

01:07:46.300 | because I happen to have met the founder.

01:07:48.180 | I am optimistic he will be willing

01:07:49.860 | to set something up for us.

01:07:50.940 | So that's one.

01:07:52.500 | Yeah, Anker is amazing.

01:07:53.940 | Some of the content they produce is incredible.

01:07:55.820 | They do a lot of content for business owners.

01:07:57.660 | The other really cool thing is it's an incredibly low fee

01:08:01.060 | with access to all the basic Vanguard ETFs in it, 401(k),

01:08:06.060 | and you can roll your past 401(k)s into your solo 401(k).

01:08:10.340 | So right now, my wife and I are both in the process

01:08:12.860 | of taking our old Census Fidelity Vanguard 401(k)s

01:08:17.260 | and rolling them all into our solo 401(k)

01:08:19.940 | so we can manage them all in one convenient place

01:08:22.420 | that happens to be low fee and easy to take care of.

01:08:25.020 | So when we're done, we will have one account

01:08:27.740 | for all of our retirement vehicles, except Roth IRAs.

01:08:31.660 | One account each.

01:08:32.780 | Beautiful.

01:08:33.620 | I should have known that you would have this on lock.

01:08:36.820 | Well, I went pretty deep 'cause I was like,

01:08:38.180 | now that I have a business, I need to figure this out.

01:08:40.100 | If you had asked me two years ago,

01:08:41.460 | I would have been like, "Is that by IRA?"

01:08:43.180 | I don't even know if I knew what a solo 401(k) did or was.

01:08:46.340 | But one thing we didn't talk about, which I'll touch on

01:08:49.020 | because it's part of this whole strategy,

01:08:50.940 | now that you have all this money

01:08:52.380 | in your tax-advantaged accounts,

01:08:54.580 | how do you think about your investment strategy?

01:08:56.820 | So I think it's important to consider,

01:08:59.140 | let's say, hypothetically, you had $100,000

01:09:01.740 | in a taxable account and $100,000

01:09:04.020 | in a tax-advantaged account,

01:09:05.580 | be it a 401(k), a Roth IRA, whatever it is,

01:09:07.780 | there's this concept of what's called tax-aware allocation,

01:09:10.820 | which is how you think about what to put in each.

01:09:13.500 | So for example, if you wanted an investment strategy,

01:09:16.860 | and I'm not gonna pretend here, nor think are you,

01:09:19.500 | to tell people how they should invest their money,

01:09:21.220 | but if you wanted to have part of your strategy

01:09:24.140 | be allocated toward real estate in the form of REITs,

01:09:27.540 | ETFs that invest in real estate,

01:09:29.580 | the income that gets distributed from a REIT

01:09:32.220 | is taxable as ordinary income.

01:09:34.780 | And so that tax feature, you could maybe call it negative.

01:09:38.300 | A bug.

01:09:39.140 | A bug is definitely something that makes it

01:09:41.700 | almost not worth including in a taxable account.

01:09:44.780 | In fact, at Wealthfront, when we built portfolios

01:09:47.740 | and we ran them through and wrote all the white papers,

01:09:49.820 | we found that adding real estate to a taxable account

01:09:52.180 | wasn't worth it.

01:09:53.020 | Adding real estate to a tax-advantaged account was.

01:09:55.460 | And so I think it's worth thinking about

01:09:58.380 | how you want to use the funds in different

01:10:01.100 | Roth pre-tax or taxable accounts in tandem.

01:10:04.460 | It's a bit more of a...

01:10:06.060 | It's like asset location.

01:10:07.380 | It's like, how do I optimize that I'm not basically

01:10:11.340 | holding all of my bonds that are throwing off

01:10:13.940 | a bunch of interest and all my dividend-yielding stocks

01:10:16.540 | in my account that is the least tax-sheltered?

01:10:19.140 | Like if it's all the same to me,

01:10:21.260 | I'm not as well-versed in asset location,

01:10:23.780 | but I think typically people will recommend high growth

01:10:26.900 | and large cap, high growth stocks and ETFs,

01:10:30.620 | just like standard S&P 500 or like Russell 1000

01:10:34.100 | in the taxable accounts because those stocks

01:10:36.940 | are very rarely going to be paying high dividends.

01:10:40.140 | And I think usually people will say,

01:10:42.020 | hold bonds and hold things that are yielding interest

01:10:44.820 | and dividend stocks and things like that

01:10:46.780 | in the tax-advantaged accounts

01:10:48.140 | so you're not getting dinged every year.

01:10:50.260 | - A link to a Bogleheads Wiki page

01:10:52.740 | that's called "Tax-Efficient Fund Placement"

01:10:54.740 | that goes into all of this.

01:10:56.140 | It has a little chart about halfway down

01:10:57.940 | where it's like the most inefficient are real estate,

01:11:00.180 | REIT funds, high turnover active funds,

01:11:02.540 | which by the way, I don't recommend anyone invest in,

01:11:04.620 | and high-yield corporate bonds.

01:11:05.980 | So that's something to think about.

01:11:07.740 | It does make your entire process much more complicated.

01:11:10.700 | So for me at Wealthfront,

01:11:12.220 | if I want my portfolios to kind of all work in tandem,

01:11:15.540 | it kind of breaks if you say,

01:11:17.340 | well, my investment account is all real estate

01:11:19.540 | and my personal account doesn't include it

01:11:21.740 | because they're, to my knowledge,

01:11:23.340 | is not a automated solution to rebalance

01:11:26.220 | across all accounts.

01:11:27.780 | So it might not be worth it to do this,

01:11:29.620 | but it is just something to consider.

01:11:31.340 | The other one is when it comes to Roth IRAs,

01:11:34.060 | people may have seen articles about how people

01:11:36.340 | like Peter Thiel have these massive Roth IRA accounts.

01:11:39.420 | And part of the reason is there is an ability

01:11:42.060 | with Roth IRAs and even some 401Ks.

01:11:45.140 | In fact, Cary actually has this feature

01:11:47.140 | to self-direct your investment accounts.

01:11:49.860 | And so you can elect to use a custodian or create an LLC,

01:11:54.860 | and I'll get to that piece later,

01:11:56.420 | and invest in whatever you want.

01:11:58.260 | You could invest in startups, in venture capital,

01:12:01.060 | in various things and put the assets

01:12:03.740 | that you think have the highest return potential

01:12:06.780 | in your Roth IRA, where you are going to pay no taxes

01:12:10.580 | on all of those gains.

01:12:11.700 | There are a few requirements.

01:12:12.940 | You can't invest in companies that you have control of.

01:12:15.300 | So you couldn't start a company

01:12:16.380 | and invest in your own company,

01:12:17.900 | invest in a company you're on the board of.

01:12:19.420 | I would say, when you get to this level of detail,

01:12:21.540 | do more homework than we're gonna cover today.

01:12:23.500 | But there is a very important caveat,

01:12:25.580 | which is this is a strategy for people

01:12:27.780 | who already have retirement covered.

01:12:30.100 | Because the last thing you wanna do is say,

01:12:31.980 | well, all my retirement is in my Roth IRA,

01:12:34.580 | and I'm gonna go put that in something

01:12:36.220 | with the highest return potential.

01:12:37.620 | I'm gonna invest in 10 startups

01:12:39.060 | and have your retirement go to zero.

01:12:40.540 | So if you already have things covered,

01:12:42.980 | and you are investing for the future,

01:12:45.380 | and you're disciplined enough

01:12:46.780 | that your non-retirement assets

01:12:48.740 | are going to be where they need to be,

01:12:50.220 | and they're not gonna be touched,

01:12:51.420 | you can elect to have a self-directed IRA or 401(k)

01:12:55.060 | and invest in some of the more high return, high risk assets

01:12:59.300 | to kind of reduce the future tax liability on those assets.

01:13:02.580 | Yes, and if you wanna go one step further,

01:13:04.660 | I was reading about how this feature works.

01:13:07.100 | It's not just having self-directed,

01:13:08.940 | but having what's called a checkbook IRA.

01:13:11.100 | So your self-directed IRA gives you all these options,

01:13:13.580 | but you usually have to have a custodian manage it.

01:13:15.820 | So if you wanted to invest in a fund,

01:13:18.060 | you say, hey, custodian, can you write this check?

01:13:20.060 | And a lot of times you're making these investments,

01:13:21.940 | things are moving quickly.

01:13:22.940 | So you can actually create a self-directed IRA LLC,

01:13:27.180 | also kind of a checkbook control IRA,

01:13:29.940 | which is a special type of self-directed IRA

01:13:32.220 | that uses an LLC to give you full checkbook control

01:13:35.380 | on your own.

01:13:36.220 | So you control the checkbook,

01:13:37.620 | you're able to make those contributions

01:13:39.820 | or investments on your own.

01:13:41.380 | Buying real estate funds, buying real estate,

01:13:43.700 | even you can buy lots of things on your own.

01:13:45.700 | I noticed Kerry has that feature.

01:13:47.140 | There's another company that I think is mysolo401k.net

01:13:50.340 | or something.

01:13:51.180 | It's basically like, looks like a site from 20 years ago,

01:13:53.940 | but is able to do this as well.

01:13:55.940 | But after looking at a lot of things,

01:13:57.180 | I went with Kerry personally.

01:13:58.500 | I have no vested interest.

01:14:00.020 | In fact, I tried to invest in the company,

01:14:01.420 | but it didn't work out

01:14:02.420 | because they'd already closed the round,

01:14:03.940 | but I was very excited about the company.

01:14:05.340 | And so that's what I use, but they have this feature.

01:14:07.460 | So if I were to make an angel investment,

01:14:09.540 | if I were to make a higher risk investment,

01:14:11.860 | I could do all that through my Kerry account.

01:14:14.180 | So that's something to know.

01:14:15.500 | Okay, so that was employer plans.

01:14:17.700 | We covered rollovers,

01:14:18.540 | we covered pretty much all the kind of standard retirement

01:14:22.140 | investment plans.

01:14:23.060 | Let's quickly run through a couple of things

01:14:24.900 | we said we would.

01:14:25.740 | I actually think let's punt on HSAs

01:14:27.700 | because I did a whole episode on open enrollment,

01:14:29.780 | covered HSAs, we don't need to go there.

01:14:31.980 | Although just to be clear,

01:14:33.260 | they are my favorite tax advantage to count.

01:14:35.340 | Pre-tax in, no taxes on gains, no taxes on withdrawals,

01:14:39.020 | max that out, don't spend it, great.

01:14:41.620 | 529s, now that we have children,

01:14:43.900 | it's something I've been thinking about.

01:14:45.260 | I will say there are a few quick things.

01:14:47.820 | One, the hesitation I have

01:14:49.580 | is I don't know the future of education.

01:14:51.180 | So for me, I don't know what education looks like.

01:14:54.060 | On one hand, you know, now and 20 years ago,

01:14:57.260 | it looked the same.

01:14:58.300 | And on the other hand, it'll probably look the same,

01:15:00.540 | but I'm nervous.

01:15:01.380 | You can use it for room and board, apprenticeships,

01:15:04.500 | professional education, secondary education, lots of things,

01:15:07.820 | even private school for primary education.

01:15:10.260 | You can change the beneficiaries,

01:15:12.020 | but the tax benefit is not quite as good for most states.

01:15:15.500 | There are some states where you get a state tax deduction,

01:15:18.420 | but in California, for example,

01:15:20.380 | the only benefit is that you don't pay taxes on the gains

01:15:24.300 | as long as they're used for those educational expenses.

01:15:27.300 | - And there's no federal tax break

01:15:29.460 | for contributing to a 529.

01:15:31.460 | So if you're interested in federal tax breaks,

01:15:34.500 | the 529 will not give you that.

01:15:36.380 | - I think putting in enough money

01:15:38.220 | to cover what you're pretty confident will be expenses,

01:15:40.700 | great if you are starting to do private school for your kids

01:15:44.620 | and you know you're gonna have that cost for 10 years,

01:15:46.740 | there's probably a way you can optimize it.

01:15:48.460 | But at the end of the day, it's not nearly as lucrative

01:15:51.500 | as other accounts in terms of the tax breaks you get.

01:15:54.260 | But if you're confident you're gonna spend this

01:15:56.020 | for education, you could put the money in now

01:15:58.460 | and not have to pay taxes on the gains,

01:16:01.220 | assuming you're using it for those purposes.

01:16:02.900 | And I have to believe, maybe not,

01:16:04.900 | but if something drastically changes

01:16:06.860 | with the educational system,

01:16:08.180 | I think it's possible that they would make some changes

01:16:11.140 | to the rules, but who knows.

01:16:12.580 | - That's a good point.

01:16:13.540 | I agree with and co-sign everything you just said.

01:16:16.340 | They're not my favorite for the reasons you just stated,

01:16:18.780 | but if you are pretty confident about your expenses,

01:16:21.580 | I think that they make sense if you're in a state

01:16:23.340 | where you're gonna see some sort of benefit for that.

01:16:26.260 | I hope the educational bubble bursts

01:16:28.540 | before my unborn children are in college.

01:16:31.460 | And that's how I will finish that section.

01:16:34.380 | - And then the last other one I'm gonna cover

01:16:37.100 | is donor advised funds.

01:16:38.420 | I don't know how much you've gone into them.

01:16:40.180 | For me, they are not a way to grow your wealth,

01:16:43.980 | but they are a way to tax advantagely contribute to charity.

01:16:48.780 | We've talked about them in the past.

01:16:50.220 | I'll link to a few episodes where we cover them.

01:16:52.500 | At the highest level,

01:16:53.940 | you are able to make contributions to charity

01:16:56.700 | by contributing to a fund that is itself a charity.

01:17:00.220 | And then you get access to those funds.

01:17:02.660 | You can invest those funds

01:17:04.100 | in whatever investments the provider offers.

01:17:06.780 | You don't pay tax on any of that

01:17:08.140 | 'cause you've already given it away,

01:17:09.540 | but you don't have to make all the contributions now.

01:17:11.700 | So really great if you're in a high tax year

01:17:14.660 | because you can make 10 years of contributions

01:17:17.540 | to charity in that year.

01:17:19.140 | And then later in lower tax years

01:17:21.220 | where you're not getting as much value,

01:17:22.940 | you're not making any taxable contributions.

01:17:24.900 | And so that's something that is a tax advantage to count,

01:17:28.540 | but it is a little bit different

01:17:30.220 | in that you're giving the money away, right?

01:17:31.940 | Nothing's coming back,

01:17:33.060 | but it does give you a lot of efficiency

01:17:35.420 | in terms of reducing your taxable income

01:17:37.580 | and growing that money tax-free for the purpose of giving.

01:17:40.700 | So if you're charitably inclined, it's a great option.

01:17:44.020 | And the absolute best way to fund it

01:17:46.660 | is with appreciated securities

01:17:48.780 | because when you donate those appreciated securities,

01:17:51.540 | you're not paying the capital gains tax.

01:17:53.380 | So if you had some stock at a company you worked at

01:17:56.140 | or something you've held for many years

01:17:57.940 | where let's say you bought it for $1,000

01:18:00.500 | and now it's worth $2,000,

01:18:02.220 | if you were to sell that,

01:18:03.380 | you'd pay taxes on that $1,000 of gain.

01:18:05.580 | If you donate it, you don't,

01:18:07.380 | but you get the full write-off for the $2,000 amount.

01:18:10.220 | And fun hack, there is no wash sale rule that applies here.

01:18:14.060 | So you could donate $2,000 of Apple stock

01:18:17.460 | and immediately rebuy $2,000 of Apple stock.

01:18:20.780 | You increase your cost basis,

01:18:22.340 | you don't pay capital gains tax,

01:18:24.060 | and you get $2,000 contributed to charity

01:18:27.340 | that you can kind of give over your life.

01:18:29.060 | And the other really efficient thing

01:18:30.700 | is that if you're the kind of person

01:18:32.180 | that might make five, 10, 15 charitable contributions a year,

01:18:34.940 | you are not going to have to keep track of all those receipts

01:18:37.980 | because you make one contribution

01:18:39.500 | to your donor-advised fund,

01:18:40.620 | it's so much easier to keep track of at the end of the year.

01:18:43.620 | So people who've listened for a long time

01:18:46.060 | know that Daffy is a donor-advised fund

01:18:48.620 | that is a partner of the show.

01:18:50.020 | They're a sponsor of the show.

01:18:51.100 | They're where I keep all of our charitable giving.

01:18:53.360 | It's where we've made

01:18:54.200 | all of our donor-advised fund contributions.

01:18:56.100 | It's an amazing product.

01:18:57.300 | They are paying me as a sponsor,

01:18:58.860 | but they are not paying me to say this.

01:19:00.620 | They don't know that we're even doing this episode.

01:19:02.620 | And so I had the Daffy account opened up

01:19:04.920 | before they even became a partner.

01:19:06.580 | I'm a big fan of Daffy.

01:19:08.120 | And if you are charitably inclined, definitely check it out.

01:19:10.900 | You can even get $25 towards a charity of your choice

01:19:14.340 | at allthehacks.com/daffy.

01:19:16.000 | I think that's a lot.

01:19:16.980 | I mean, we went 90 minutes into tax-advantaged accounts.

01:19:21.220 | - I mean, that was a lot.

01:19:22.100 | That was definitely a crash course.

01:19:24.400 | And I think that if there were things specific

01:19:26.740 | to what I talked about, that you're like,

01:19:28.740 | "Oh, wait, I wanna go deeper there."

01:19:30.580 | I'm almost positive we would have a podcast episode about it.

01:19:33.380 | And if we don't, Chris almost certainly does.

01:19:35.260 | So I'm glad that we did the crash course, though,

01:19:37.460 | 'cause it's a nice little,

01:19:38.460 | let's address all the big points

01:19:40.980 | for someone so that they know where to go next

01:19:43.740 | and what to focus their effort on now.

01:19:46.060 | - Thank you for hanging in with me.

01:19:47.100 | Thank you for joining me.

01:19:48.460 | For people that wanna go deeper,

01:19:49.660 | because you've talked about all this stuff,

01:19:51.320 | where should we send them?

01:19:52.160 | - If you like podcasts, "The Money With Katie Show,"

01:19:55.000 | wherever you listen to your podcasts.

01:19:57.100 | And if you prefer to read, you like blog posts

01:20:00.380 | or you like written content,

01:20:02.340 | moneywithkatie.com will have you covered there.

01:20:05.380 | - And I assume it's a podcast audience,

01:20:07.140 | since you had to have been listening

01:20:08.780 | to the podcast to get here.

01:20:10.140 | Katie, this has been awesome.

01:20:11.580 | Thank you for going over an hour on a nerdy topic.

01:20:14.960 | There are only a few people in the world

01:20:16.760 | that I think would enjoy a conversation like this

01:20:19.100 | as much as you.

01:20:19.980 | I am so glad we are friends

01:20:21.640 | and can have conversations like this.

01:20:23.740 | - Likewise.

01:20:24.580 | Well, it was truly my pleasure.

01:20:25.700 | I could feel myself getting excited.

01:20:27.280 | I'm all energized now after talking about this.

01:20:29.500 | So I'm excited to have you on my show as well,

01:20:31.300 | so we can talk about all the hacks for high earners

01:20:34.700 | and people that are looking

01:20:36.260 | for that next level of optimization.

01:20:38.160 | - I really hope you enjoyed this episode.

01:20:41.460 | Thank you so much for listening.

01:20:43.220 | If you haven't already left a rating

01:20:44.700 | and a review for the show in Apple Podcasts or Spotify,

01:20:48.140 | I would really appreciate it.

01:20:49.820 | And if you have any feedback on the show,

01:20:51.260 | questions for me, or just want to say hi,

01:20:53.660 | I'm chris@allthehacks.com or @hutchins on Twitter.

01:20:57.940 | That's it for this week.

01:20:58.980 | I'll see you next week.

01:21:00.600 | (upbeat music)

01:21:03.300 | (bubbles popping)

01:21:06.140 | (bubbles popping)

01:21:08.980 | (bubbles popping)

01:21:11.820 | [BLANK_AUDIO]