What’s the Biggest Financial Bubble of All-Time?

00:00:00.000 | (beeping)

00:00:02.180 | - Welcome back to Ask the Compound.

00:00:15.820 | Our email here is askthecompoundshow@gmail.com.

00:00:19.480 | Today's show is sponsored by Future Proof.

00:00:21.540 | I just did a little video promo this morning

00:00:23.820 | for Future Proof.

00:00:24.980 | Someone asked me, "What am I most excited about?"

00:00:27.060 | I had bullet points, Duncan, 'cause I have so much.

00:00:29.740 | The location, you know, the beach.

00:00:31.880 | They have a perfect little running path,

00:00:34.140 | a walking path that follows the beach.

00:00:36.300 | There's good food, drinks, content is great.

00:00:38.980 | We have all these different speakers, live podcasts.

00:00:41.860 | Last year, there was professional athletes,

00:00:44.380 | your favorite bloggers, social media personalities,

00:00:46.300 | financial pundits.

00:00:47.620 | You might even see us filming on the beach,

00:00:50.380 | movie recreation.

00:00:51.300 | - I thought of a scene, Eternal Sunshine.

00:00:54.780 | How about that?

00:00:55.620 | There's a lot of beach scenes in Eternal Sunshine.

00:00:57.860 | There's also great socializing, ad hoc conversations

00:01:00.340 | with advisors, investment managers,

00:01:02.180 | even normal, everyday investors.

00:01:03.460 | A lot of people who watch our shows come to it.

00:01:06.140 | We were just actually talking this morning

00:01:08.500 | about what we're gonna do for the live version of this show,

00:01:11.380 | to have people who are there ask us questions.

00:01:13.980 | So it's gonna be great.

00:01:14.820 | Last year was hands down the best financial event

00:01:16.540 | I've ever been to, and there isn't a close second place.

00:01:19.800 | But as fun as that was, I think we actually learned a lot

00:01:22.180 | about how to make it better,

00:01:23.000 | so it's gonna be even better this year.

00:01:24.520 | So get your tickets now.

00:01:25.360 | They tell me prices are going up in 22 days.

00:01:27.660 | It's futureproof.advisorcircle.com to sign up.

00:01:31.820 | So do it now.

00:01:33.440 | - Yeah, it's gonna be a lot of fun.

00:01:34.940 | Looking forward to it.

00:01:35.780 | - Yeah, great.

00:01:36.860 | So Duncan, your hat today,

00:01:37.940 | is that the value of your brokerage account, or what?

00:01:40.820 | - Almost, you were close.

00:01:41.960 | It's the alpha that I have in my account, so.

00:01:44.820 | - All right, let's do a question.

00:01:46.780 | A lot of questions today. - Today's a rough day.

00:01:48.060 | Thanks for picking on me, though.

00:01:48.980 | Today's a pretty rough day for my stocks,

00:01:51.140 | as you can probably, as you can assume.

00:01:53.960 | Okay, up first today, we have a fan from Japan,

00:01:58.680 | so konnichiwa, or maybe it's more kombanwa

00:02:01.480 | this time of day, but big fan of the compound from Japan.

00:02:05.360 | My 59-year-old mother is one of those people

00:02:07.720 | who doesn't believe in putting money in the stock market

00:02:09.760 | because she's afraid to, quote unquote, "lose it all."

00:02:12.600 | There are a lot of people in Japan who are still traumatized

00:02:14.920 | from the stock market bubble collapse in the '90s.

00:02:17.920 | Now she's got about $300,000 in cash

00:02:20.160 | sitting in a checking account, literally earning nothing.

00:02:22.880 | This year, I was finally able to convince her

00:02:24.560 | to open a brokerage account and invest $100,000.

00:02:27.320 | I managed this account and decided to allocate 60%

00:02:29.780 | to a 2030 target date fund, that's 40% stocks and 60% bonds,

00:02:34.780 | and the other 40% to an all-world stock index fund.

00:02:39.380 | I chose this allocation because I want to believe

00:02:41.200 | that having an increasing allocation of bonds

00:02:43.380 | is prudent for someone her age,

00:02:44.840 | but I'm constantly fighting the internal battle

00:02:46.960 | to allocate more to stocks so I can improve returns.

00:02:49.640 | She plans to retire in eight years, has no debt,

00:02:51.840 | and expects to have a decent pension,

00:02:53.880 | so this money is largely supplementary.

00:02:56.000 | Should I ditch the prudence and allocate more to stocks?

00:02:59.120 | It's kind of a YOLO question, right?

00:03:01.160 | - I completely understand where the mom is coming from here

00:03:05.160 | as it pertains to being nervous about financial assets,

00:03:07.000 | if she's thinking about it

00:03:08.080 | from a purely Japanese perspective.

00:03:09.440 | John, throw up the growth of wealth.

00:03:11.280 | This is the MSCI Japan index since 1990.

00:03:14.960 | $1 invested in Japan in 1990 grew to $1.32

00:03:19.400 | by the end of April this year,

00:03:20.800 | and that dollar was underwater for almost 30 years.

00:03:24.400 | On the other hand, a dollar invested in the S&P

00:03:26.360 | would have grown to more than $23 in that timeframe,

00:03:28.560 | so we're talking 10% annual returns for the S&P since 1990,

00:03:32.800 | 85 basis points per year for Japan,

00:03:35.280 | and this is actually from the perspective of a U.S. investor.

00:03:37.760 | If you were in Japan, it was actually worse

00:03:39.600 | when we're talking about in yen terms.

00:03:41.740 | So why did this happen?

00:03:43.400 | I consider myself something of a financial historian.

00:03:46.480 | Others may disagree with it, but this is my opinion.

00:03:49.040 | Japan has had the biggest financial asset bubble

00:03:51.760 | in history in the 1980s.

00:03:53.500 | There really aren't that many books

00:03:54.800 | written about it for some reason.

00:03:56.440 | The best one I've found is this "Devil Take the Hindmost"

00:04:01.560 | by Edward Chancellor, and it's basically

00:04:04.360 | one of the better books ever written

00:04:05.800 | on financial manias and crashes,

00:04:07.920 | and he has a whole chapter on the Japanese bubble.

00:04:10.080 | It's not a whole book, but I've compiled,

00:04:12.400 | through this book and some other sources over the years,

00:04:15.200 | some of my favorite stats and anecdotes.

00:04:16.800 | I'm gonna run it through to show

00:04:18.120 | how crazy things got in Japan in the '80s.

00:04:20.620 | 1956 to 1986, land prices in Japan increased 5,000%,

00:04:25.400 | even though consumer prices only doubled in that time.

00:04:28.200 | So inflation doubled, land increased by 5,000%.

00:04:31.240 | By 1990, the Japanese real estate market

00:04:33.040 | was four times the value of the real estate

00:04:35.040 | of the United States, despite being 25 times smaller

00:04:37.760 | in terms of land mass and having 200 million fewer people.

00:04:42.180 | Tokyo itself was on equal footing with the U.S.

00:04:44.560 | in terms of real estate values.

00:04:46.600 | There were 20 golf clubs in Japan,

00:04:48.640 | and this is in 1989, it cost a million dollars to join.

00:04:51.400 | The P/E of the Nikkei was, yeah,

00:04:55.200 | P/E on the Japanese stock market

00:04:57.080 | was 60 times trailing 12 months earning.

00:04:59.080 | The CAPE ratio was 100 times,

00:05:00.880 | which is more than double what it was

00:05:02.560 | in the U.S. for the tech bubble.

00:05:04.160 | Japan made up 15% of world stock markets in 1980.

00:05:07.880 | By 1989, it was 42%.

00:05:10.380 | 1970 to 1989, Japanese large cap stocks

00:05:13.640 | grew by 22% per year for two decades,

00:05:16.440 | small cap stocks in Japan were up 30% per year for 20 years.

00:05:20.680 | It was just crazy.

00:05:21.520 | Stocks went from 29% of Japan's GDP in 1980

00:05:24.480 | to 151% by 1989.

00:05:26.960 | Just real estate and stocks at the same time,

00:05:29.440 | just a cluster of a bubble.

00:05:30.520 | If you wanna learn more, read the book

00:05:32.040 | to figure out why it happened.

00:05:33.280 | But there are people who are too scared

00:05:35.660 | to invest in the U.S. stock market,

00:05:37.620 | and the returns here have been fantastic

00:05:39.680 | for 10, 20, 30, 40, 50 years.

00:05:41.260 | Pick your long-term time horizon.

00:05:42.840 | In Japan, they haven't gone anywhere for three decades

00:05:45.000 | because of how out-of-whack things got in the '80s.

00:05:46.720 | Now, side note here, the MSCI data goes back to 1970.

00:05:50.660 | If you take the Japan returns going back to 1970 to today,

00:05:54.420 | it still returned 8.6% per year

00:05:56.380 | despite going nowhere for 30 years.

00:05:57.620 | That's how crazy things got in the '70s and '80s,

00:06:00.040 | because things were,

00:06:00.880 | so it was almost 9% per year still for the long-term.

00:06:03.900 | The big question is, how do you get someone

00:06:07.640 | to change their psychology when it comes to the stock market

00:06:09.540 | after they've been scarred through something like this?

00:06:11.640 | This is kind of like U.S. investors

00:06:13.160 | after the Great Depression.

00:06:14.040 | No one wanted to touch the stock market.

00:06:16.000 | Stocks for the long run wasn't a thing then.

00:06:18.160 | So I think you could walk your mother

00:06:20.200 | through historical rates of return,

00:06:21.640 | and inflation rates, and compounding,

00:06:23.200 | and interest, and earnings, and dividends,

00:06:24.480 | and all that fun spreadsheet stuff

00:06:25.840 | that I like to pay attention to,

00:06:27.360 | but numbers and spreadsheets are essentially useless

00:06:29.920 | when we're talking about changing someone's behavior,

00:06:31.460 | especially when they've been through something like this.

00:06:33.200 | I think it's hard to change how you do things,

00:06:36.240 | especially after you're that old,

00:06:37.880 | so I think you have to lean into the emotions here.

00:06:40.120 | So remember, Duncan, remember the scene in Shawshank?

00:06:42.620 | John, throw this up here,

00:06:43.880 | where the inmates are all working on the roof,

00:06:46.920 | and Andy Dufresne asks Tapp and Hadley

00:06:48.600 | if he trusts his wife, right?

00:06:50.540 | Awesome, awesome scene.

00:06:52.640 | And he runs him through the IRS stuff, bought a gift,

00:06:56.960 | and he's coming on soon,

00:06:59.340 | but I think this would mean Bill Sweet

00:07:00.960 | would do amazing in jail, wouldn't he, as a tax guy?

00:07:04.120 | That's how Andy Dufresne basically survived jail.

00:07:07.240 | I think you have to basically ask your mother

00:07:08.600 | the same question, like, "Mom, do you trust me

00:07:10.820 | "to handle your finances, and investment,

00:07:12.420 | "and prudent matter?

00:07:13.260 | "I'm not gonna gamble, I'm gonna diversify,

00:07:15.500 | "I'm gonna invest, not speculate,

00:07:17.260 | "I'm gonna manage your money with an eye on the long-term,"

00:07:19.000 | all these things, so I think you have to try

00:07:21.660 | to put an element of trust in there,

00:07:22.980 | 'cause sometimes people are so emotionally scarred

00:07:25.960 | when it comes to money,

00:07:27.300 | or they just have made so many mistakes

00:07:29.200 | that they need to just let it out of their hands,

00:07:31.040 | let someone else take care of it,

00:07:32.280 | and just, if there's an element of trust there,

00:07:34.680 | you let them take the steering wheel.

00:07:36.600 | I think you also have to help her figure out

00:07:37.760 | what the money's for in the first place.

00:07:38.880 | So you said it's supplementary,

00:07:40.120 | so is it gonna end up supplementing

00:07:43.100 | her pension income at some point?

00:07:44.180 | Will she even need the money?

00:07:45.460 | Maybe some of this will just be passed down

00:07:46.940 | to kids and grandkids, and that's a way

00:07:48.420 | to pull on those emotional strings

00:07:50.460 | to help her figure out what to do.

00:07:52.100 | So I would appeal more to emotions than the math of it all,

00:07:55.020 | and I do like the fact that you're starting out

00:07:56.540 | with a target date fund here for simplicity,

00:07:58.060 | and diversification, and low cost.

00:07:59.940 | - I knew you were gonna love that.

00:08:01.860 | - Yeah, it makes, I think that's a pretty good first step

00:08:05.260 | as opposed to picking individual stocks

00:08:06.620 | for her or something.

00:08:07.440 | So I would go for the emotions of it,

00:08:09.340 | but I totally understand where someone in Japan

00:08:11.700 | would be coming from in terms of

00:08:13.040 | being pretty nervous about it.

00:08:15.020 | But I like the fact that if you're handling it for her,

00:08:17.660 | that there's an element of trust there,

00:08:19.220 | and she can hopefully let go and just go for it.

00:08:22.440 | - Yeah, that was something when I first started

00:08:23.980 | working with you guys years ago,

00:08:25.580 | I had to get used to was all the comments of,

00:08:27.860 | you know, what about Japan?

00:08:28.940 | Literally, that was the response to almost

00:08:30.540 | everything that we put out.

00:08:31.660 | Someone would be like, what about Japan?

00:08:33.380 | And the comments, it's just kind of funny.

00:08:34.780 | - It really is an outlier,

00:08:35.820 | and the reason that returns were so awful

00:08:37.940 | is because the bubble was so enormous to begin with.

00:08:41.460 | And I think it really was the biggest

00:08:43.660 | financial asset bubble that we've ever had.

00:08:45.780 | And the funny thing is if you read this book,

00:08:46.900 | "Devil Take the Hindmost,"

00:08:48.620 | Japan really, as a people, as a culture,

00:08:52.100 | they have a very conservative nature.

00:08:53.400 | So the fact that it happened there

00:08:54.860 | was kind of crazy to begin with.

00:08:56.340 | And again, there's a bunch of reasons why it happened,

00:08:57.900 | but it was just an insane, insane bubble.

00:09:01.520 | - Yeah, crazy.

00:09:03.240 | - All right, next question.

00:09:05.020 | - Speaking of Japan, I'm looking forward

00:09:05.860 | to the next season of "Tokyo Vice."

00:09:07.720 | - That's a good show. - I like that one,

00:09:09.420 | that's right.

00:09:10.820 | - Okay, up next we have a question from Janelle,

00:09:15.820 | I think is how you say it.

00:09:18.140 | I'm a single 32-year-old woman

00:09:20.060 | that makes $70,000 a year in South Florida.

00:09:23.260 | I have a net worth of around $220,000.

00:09:26.160 | $87,000 of this is cash sitting

00:09:28.140 | in a high-yield savings account earning 4% right now.

00:09:31.340 | This savings was originally designated for a home purchase,

00:09:34.500 | but with rising home prices,

00:09:35.920 | it's been tough to find an affordable home.

00:09:38.240 | It's not worth it to buy where I am,

00:09:39.940 | so I'm considering moving to a more affordable area.

00:09:42.660 | My question is this,

00:09:44.060 | is there a better place to part my cash

00:09:45.900 | that is still liquid for the long-term

00:09:47.620 | if I don't buy right away?

00:09:49.260 | I figure about 50,000 is for a house

00:09:51.560 | and the rest is an emergency fund.

00:09:53.740 | I think I should just stop saving

00:09:55.740 | and continue to invest my future earnings

00:09:58.620 | in the stock market through my 401(k) in brokerage.

00:10:00.980 | Do you think this would be a good idea?

00:10:03.460 | It's a good question. - A few different things

00:10:04.540 | are going on in this question, right?

00:10:06.580 | Yes, I agree.

00:10:07.500 | First of all, yeah, good on you

00:10:08.340 | for saving up for down payment

00:10:09.420 | and being realistic about the affordability in your area.

00:10:11.420 | I don't know exactly where you live,

00:10:13.340 | but if you look at the house price gains in Miami,

00:10:15.740 | for instance, relative to the rest of the country,

00:10:17.200 | John, do a chart on here of Miami housing prices.

00:10:20.100 | Do the next one, there you go.

00:10:21.940 | So this is Case-Shiller Home Price Index

00:10:24.780 | for Miami and then nationally.

00:10:26.060 | And this is since the start of the pandemic

00:10:27.640 | at the end of 2019.

00:10:29.220 | And you can see house prices in Miami,

00:10:30.500 | they've sort of leveled out,

00:10:31.520 | but up way more than the rest of the country.

00:10:33.980 | I know a lot of people don't want to move

00:10:35.740 | to a more affordable area of the country

00:10:36.940 | because of friends or family or work or just inertia.

00:10:39.500 | But if this is an option,

00:10:41.020 | I think it's something that you have control over

00:10:42.780 | where you could go somewhere cheaper, Duncan.

00:10:45.060 | No hints here for you, Duncan.

00:10:46.420 | But John, throw up the next chart.

00:10:48.820 | Lance Lambert from Fortune made this one for me.

00:10:50.860 | And it shows the typical median home value by region.

00:10:54.300 | And you can see the orange there

00:10:55.780 | is a median home value of $350,000 to $500,000.

00:10:58.900 | And Florida is filling up with that pretty good.

00:11:01.060 | California has more in the 750 and up range,

00:11:04.740 | which is kind of tough to stomach.

00:11:05.860 | But look at all these other places,

00:11:06.940 | even in the Southeast where you could potentially move

00:11:10.780 | if you want to stick in that area

00:11:12.500 | where home prices are more affordable.

00:11:14.740 | It, you know, I think if you have that,

00:11:17.180 | that makes a lot of sense.

00:11:18.460 | So as far as the cash investments go,

00:11:22.540 | 4% is about average as far as online savings accounts go.

00:11:25.220 | I think Marcus up the rate to 4.15% this week

00:11:28.740 | after the Fed raised rates.

00:11:30.260 | Most of them should be plus or minus something

00:11:32.900 | or right around there.

00:11:33.900 | They're now matching the higher savings account rate, right?

00:11:36.780 | Yep, about time.

00:11:38.020 | You could earn a little more in ultra short-term bonds

00:11:41.300 | if you wanted to.

00:11:42.140 | One to six month T-bills are yielding north of 5% right now.

00:11:45.420 | I think it depends how much

00:11:46.260 | that extra 1% or so means to you.

00:11:48.440 | So you have 87,000 in cash, she said, right?

00:11:51.420 | 1% on $87,000 in cash is $870 a year.

00:11:55.580 | It's not bad, but it's not life-changing money.

00:11:56.980 | So I don't know, is it really worth it to move it around

00:12:00.380 | and buy a short-term T-bill ETF

00:12:02.940 | or try to buy T-bills on your own?

00:12:04.620 | You could, but I think a savings account

00:12:06.700 | and online savings account is probably easier

00:12:08.120 | in terms of moving money around and that sort of thing.

00:12:11.620 | Part three of the question is how much you should save.

00:12:13.580 | So you obviously have a large cash allocation

00:12:15.820 | relative to your net worth

00:12:16.860 | because you're saving up for a house.

00:12:18.140 | So 87,000 out of 220, we're looking at like 40% in cash.

00:12:22.020 | So she's got a really big cash buffer

00:12:24.260 | relative to her net worth.

00:12:25.940 | I think as long as you're comfortable

00:12:27.820 | with that amount in a down payment,

00:12:29.300 | then yeah, future savings should be funneled

00:12:31.260 | towards the stock market of the 401k

00:12:34.340 | and tax for retirement accounts.

00:12:35.420 | So you could do a quick back of the envelope.

00:12:37.820 | You said $50,000 for the down payment.

00:12:39.600 | If you did 20,000 or 20% down payment,

00:12:42.460 | that's a $250,000 house of 50k.

00:12:44.940 | If you did a 10% down payment,

00:12:46.300 | that's a half a million dollar house.

00:12:47.700 | And if you only did five, that's a million dollar house.

00:12:49.920 | I don't know what you can afford,

00:12:51.180 | but that's kind of how you can think about the down payment

00:12:53.180 | and how far it will get you

00:12:54.600 | in terms of how much leverage you want to take.

00:12:56.760 | The good news is you have the ability to save.

00:12:59.080 | Like the fact that you've put aside that much cash,

00:13:01.520 | I think is a good thing.

00:13:02.440 | Now, yeah, I would, at your age and where you are,

00:13:06.080 | start funneling more of that into the market.

00:13:08.080 | And now that you have that cash buffer,

00:13:09.560 | you should feel pretty good about yourself.

00:13:11.640 | But you've already reached the most important first step.

00:13:14.180 | So I think you're in a very good place.

00:13:16.600 | - You know, something I realized having just moved

00:13:18.400 | out of New York City to Connecticut,

00:13:20.920 | something that a lot of young people and myself included

00:13:23.800 | are guilty of is clinging to like living in a big city

00:13:26.720 | for like the name of it.

00:13:27.880 | And like kind of, there's almost like a prestige, I guess,

00:13:30.360 | of being like, "Oh, I live in Brooklyn."

00:13:31.720 | Or, "Oh, I live in Manhattan."

00:13:33.280 | You know, and I'm sure the same with Miami

00:13:34.680 | and a lot of big cities.

00:13:36.040 | And at a certain point, I just got to where I was like,

00:13:38.020 | "I don't care about that anymore."

00:13:39.640 | Like, I want to go where like it's livable

00:13:42.180 | and where things are more affordable, you know?

00:13:44.160 | - And if you're not going to use all the things

00:13:46.700 | that are great about a big city,

00:13:48.240 | you're just paying up for no,

00:13:49.440 | you just take a tax on yourself, right?

00:13:50.960 | - Right. - Yeah.

00:13:51.800 | So at a certain point, you want to Costco

00:13:53.920 | as opposed to a local little bodega, right?

00:13:56.560 | - Right, or drive as opposed to the subway, yeah.

00:13:59.000 | Okay. - All right.

00:14:01.400 | Next one. - Up next, question three.

00:14:03.080 | We have a question from Will.

00:14:05.280 | "I run a one-member consulting LLC

00:14:07.840 | "and was looking at SEP IRAs.

00:14:10.260 | "I saw that there's a new Roth option

00:14:12.380 | "as part of the December 22 legislation.

00:14:15.540 | "I need you to remind me what SEP means."

00:14:17.640 | We can wait until after.

00:14:20.580 | "Can I contribute to both the SEP Roth

00:14:22.380 | "and my own personal Roth?

00:14:24.160 | "There's conflicting advice out there

00:14:25.420 | "about whether the Roth limits impact one another.

00:14:27.500 | "Side note, when I started doing research on the question,

00:14:29.920 | "I came across a random internet article.

00:14:31.680 | "I started reading the article

00:14:32.720 | "and I thought I was reading Bill Sweet

00:14:34.360 | "because of the Roth gushing.

00:14:35.920 | "It wasn't him, but it was that giant of personal finance,

00:14:39.260 | "Susie Orman.

00:14:40.260 | "Does Bill get confused for her often?"

00:14:42.840 | Don't know, compliment or shade, you know?

00:14:45.920 | No way to know. - Let's bring in

00:14:46.840 | Susie Sweet now, I guess, and ask him.

00:14:50.200 | Bill, you don't have the bangs of Susie Orman,

00:14:51.820 | so I'm guessing not.

00:14:53.800 | So SEP is what, Simplified Employee Pension?

00:14:56.760 | Employer, is that right?

00:14:58.080 | - Yeah, you've got it.

00:14:58.920 | Yeah, and I have to tell you,

00:15:00.140 | people are always asking me if I know Tyler Durden.

00:15:02.720 | This is the first time I've been confused for Susie Orman

00:15:05.360 | outside of a New York City draft club,

00:15:07.040 | so this is the very first time.

00:15:08.560 | Not a lot of those up in Milford, Connecticut,

00:15:10.280 | I'd imagine, Duncan, but I'm not here to judge.

00:15:13.560 | - You helped me set up a SEP IRA four or five years ago.

00:15:18.520 | I didn't know about this Roth option.

00:15:20.280 | - Yeah, well, it's new.

00:15:21.520 | - So what's the story?

00:15:22.760 | I didn't know about this, tell me about it.

00:15:24.440 | - Yeah, so Duncan, SEP is a Simplified Employee Pension Plan

00:15:28.680 | and it's basically a way for small businesses

00:15:31.440 | to turbocharge retirement contributions,

00:15:33.920 | but they're using kind of a hybrid of the IRA structure.

00:15:37.480 | And the biggest difference between your traditional

00:15:39.760 | sort of standard IRA that you or I can contribute to

00:15:42.600 | are the income limits.

00:15:44.040 | This year, we can do about $6,500 per,

00:15:47.140 | subject to income limits,

00:15:48.240 | but a SEP IRA, A, is not subject to income limits,

00:15:51.600 | and then B, you can do up to the 415(c) limit in 2023,

00:15:54.800 | that's $66,000.

00:15:56.840 | Now, you have to have a lot of income

00:15:58.200 | to contribute that much.

00:15:59.560 | It's limited about 20% of your net income,

00:16:02.120 | but that's a big one.

00:16:03.560 | And so what Will is taking a look at here

00:16:06.360 | before he went down a really weird rabbit hole

00:16:08.680 | with who I look like and don't look like

00:16:11.100 | is the Consolidated Omnibus Act bill, Ben,

00:16:14.800 | in Secure Act 2.0,

00:16:16.520 | as it's colloquially known in the industry,

00:16:18.680 | basically changed the way

00:16:19.560 | that certain contributions could be made.

00:16:21.420 | And he's 100% right.

00:16:23.400 | Will is on it.

00:16:24.320 | You can do now a SEP Roth IRA as of January 1st, 2023.

00:16:29.280 | And ultimately, I think that's an awesome option, right?

00:16:32.320 | I think I have the back tattoo,

00:16:33.620 | first episode of Portfolio Rescue.

00:16:35.560 | Now as a compound, back tattoo says Roth IRA conversion.

00:16:38.600 | I'm into this stuff.

00:16:39.520 | So I think ultimately it's a great option.

00:16:41.660 | You just need a way to tax pros and cons.

00:16:43.960 | And there are some unanswered questions in the legislation,

00:16:46.500 | which we'll get to in a second.

00:16:48.040 | - All right, so they can do the Roth,

00:16:52.520 | so they might as well, right?

00:16:54.280 | - I mean, I think so.

00:16:55.240 | You need to know a lot about what's going on.

00:16:57.440 | But what Will sort of asked is,

00:17:00.020 | does this impact my ability to do a regular Roth IRA, right?

00:17:02.680 | Because why not have your cake and eat it too

00:17:04.300 | if you can dump in $60,000 into a SEP?

00:17:06.800 | Why not do the additional $6,500 too?

00:17:09.600 | And unfortunately, the answer to that, Ben,

00:17:10.920 | is we don't know.

00:17:12.240 | The omnibus bill was passed I think on December 29th

00:17:16.080 | of last year and the IRS, even though it's May now,

00:17:18.380 | they haven't gone around to promulgating guidance.

00:17:20.880 | So we don't actually know if the SEP Roth IRA contribution

00:17:24.600 | is gonna be subject to FICA tax, as another example.

00:17:27.300 | We don't know if you're gonna need to report that income

00:17:29.280 | if it's something that's not a single member LLC

00:17:30.800 | on a W-2 or 1099.

00:17:32.400 | And we do not know if you're able to contribute

00:17:34.520 | to a SEP Roth IRA for 2022.

00:17:36.720 | Because as you might know, Ben,

00:17:37.820 | you can contribute to a SEP IRA

00:17:39.120 | up to the extension deadline all the way in October.

00:17:41.440 | So there's a couple of unanswered questions here,

00:17:42.880 | but I think all things being equal,

00:17:44.360 | more Roth, better than not enough Roth.

00:17:46.640 | So I would say go for it, Will.

00:17:48.360 | - See, this is why, did you become a,

00:17:50.720 | Bill, did you get into accounting and tax

00:17:52.200 | because of Andy Dufresne?

00:17:53.400 | Is he your hero?

00:17:54.400 | Because I rewatched that scene today

00:17:56.360 | and you survived prison pretty well, I think.

00:17:59.120 | - Well, I appreciate that.

00:18:00.440 | I didn't know if that was a compliment or an insult.

00:18:02.640 | I can't tell.

00:18:03.800 | Same thing with Susie Orman.

00:18:04.920 | Again, I'm not sure what exactly is going on here.

00:18:07.280 | Or is this an insult to Susie Orman?

00:18:08.840 | I don't know.

00:18:09.760 | But no, what was going on backstage was,

00:18:12.100 | I love that movie so much.

00:18:13.200 | It's a foundational film for me.

00:18:14.780 | I was so upset when Forrest Gump won the Oscar.

00:18:17.340 | I guess I understand, but come on.

00:18:18.880 | In the annals of film, give me a break.

00:18:21.280 | Looking backwards in hindsight,

00:18:22.560 | which one would you rather watch on a Tuesday night

00:18:24.760 | with your kids?

00:18:25.840 | The prison scene, obviously, is awful.

00:18:28.040 | It's the worst part of the film.

00:18:29.720 | But that said, you didn't see backstage.

00:18:32.400 | I was trying to smash the unmute button

00:18:34.120 | 'cause I wanted to chime in and comment.

00:18:36.000 | But John blocked me.

00:18:37.200 | He prison blocked me at the time.

00:18:39.080 | - I'm not gonna get that by John.

00:18:40.160 | - Nope, nope.

00:18:41.160 | - Never.

00:18:42.000 | - All right, let's do another one.

00:18:42.820 | - Also, Sean says in the chat,

00:18:44.500 | you keep talking about this tattoo,

00:18:45.920 | but no one's seen it.

00:18:46.980 | (laughing)

00:18:47.880 | - I did, I was putting my shirt on

00:18:49.420 | when the camera turned on today, as you guys know.

00:18:52.200 | - It's like a Tupac on Roth Life as opposed to Thug Life.

00:18:54.360 | - I wanna make a shirt that says,

00:18:55.960 | "When in doubt, Roth it out."

00:18:57.860 | And have people wear that.

00:18:59.120 | - I like that, I like that.

00:19:01.320 | - All right, up next, we have a question from Colin.

00:19:04.800 | I got married last year, and after doing our taxes,

00:19:07.200 | it turns out that my wife and I have been phased out,

00:19:09.720 | annoyingly, by only $1,000 or so,

00:19:12.560 | of being able to contribute to a Roth IRA.

00:19:15.080 | I had already maxed out my contribution for 2022

00:19:17.800 | and was on my way for 2023.

00:19:19.940 | I have a rollover IRA from a previous employer,

00:19:24.080 | and Vanguard is saying that if I don't wanna pay taxes

00:19:26.280 | on the total account amount when I transfer,

00:19:28.920 | I need to move that rollover IRA to my current 401(k).

00:19:32.040 | To do this, I would need to liquidate everything,

00:19:33.960 | which I don't wanna do because I like the ETFs I have

00:19:36.600 | and I don't wanna give up on the compounding interest.

00:19:38.960 | What is the easiest way to move Roth IRA contributions

00:19:41.920 | to a rollover IRA while minimizing taxes

00:19:44.480 | and not having to sell?

00:19:45.740 | - This gets back to my idea

00:19:47.920 | that we should have one mulligan.

00:19:49.760 | You get to make one mistake within reason,

00:19:51.360 | plus or minus some percentage of your AGI,

00:19:53.600 | and the IRS calls it good, right?

00:19:55.340 | Especially when you get so close to the Roth thing, right?

00:19:58.100 | It's like playing, I played Operation

00:19:59.520 | with my kids this weekend,

00:20:00.800 | where you get to the side and it buzzes you, you know?

00:20:02.560 | - That's a classic, yeah.

00:20:04.320 | Yeah, so, the other thing is the rollover process

00:20:06.760 | from a 401(k) to IRA is a nightmare in this country.

00:20:09.560 | You have to sell everything,

00:20:12.040 | then they send you a check two or three weeks later,

00:20:14.760 | then you have to deposit, it's so antiquated,

00:20:16.840 | and I know why they do this,

00:20:17.760 | because they don't want you to move money from them,

00:20:19.860 | but what is going on here if he's over the limit

00:20:23.160 | because their income came in a little higher than expected,

00:20:26.160 | and he's doing a rollover, what's going on here?

00:20:28.360 | Because I'm confused.

00:20:29.200 | - Yeah, so Collin forgot to say the magic words,

00:20:31.240 | not to brag, this is only a problem

00:20:32.920 | if you're earning more than $214,000 a year

00:20:35.600 | of taxable income, so good for you, Collin,

00:20:37.760 | congratulations, yeah, good on ya.

00:20:40.680 | So, I think what he's getting at, Ben,

00:20:42.640 | is I think he's thinking he wants to set the conditions

00:20:44.980 | to do backdoor Roth IRA contributions going forward,

00:20:48.360 | because as we've discussed many times on the show,

00:20:50.580 | there's no income limit to contribute to a traditional IRA,

00:20:53.320 | and there's no income limit to convert

00:20:54.800 | that traditional IRA to a Roth IRA,

00:20:56.920 | but Collin's gonna run into a problem

00:20:58.940 | known as the pro rata rule,

00:21:00.080 | that if he has a large IRA balance,

00:21:02.720 | anything that he hasn't paid tax on

00:21:04.520 | is gonna be taxed when he goes in that conversion pro rata.

00:21:07.720 | So, if he has $60,000 set aside, he contributes 6,000,

00:21:11.000 | 90% of that conversion is gonna be taxable,

00:21:13.600 | and that's obviously not advantageous,

00:21:15.080 | it kind of defeats the whole purpose, right,

00:21:17.240 | of doing that backdoor Roth.

00:21:19.580 | So, the solution, Collin already figured it out,

00:21:21.920 | use your employer-sponsored 401(k) plan.

00:21:24.680 | He mentions a fantastic company, Vanguard,

00:21:27.840 | and they have a lot of great ETFs, Ben,

00:21:29.880 | some of which we are very familiar with here

00:21:32.040 | at our company and elsewhere,

00:21:33.600 | and I think a very reputable company.

00:21:34.920 | I would take a hard second look at that, Collin, about that.

00:21:38.600 | And further to me, I understand,

00:21:41.240 | you don't wanna liquidate your investments,

00:21:42.840 | you fell in love with your ETFs, you got married,

00:21:45.080 | you don't wanna let 'em go, I get it,

00:21:46.920 | but you kinda need to balance that

00:21:48.520 | versus what you could get on the other side,

00:21:50.680 | and Ben, you're right, it's probably gonna take you

00:21:52.720 | two to three weeks to make this happen,

00:21:54.840 | but two to three weeks in the time span of 40 to 50 years,

00:21:58.440 | probably not a big deal in my opinion.

00:22:00.120 | I'd take a second look at it, Collin.

00:22:00.960 | - It's annoying, but yes, it's annoying,

00:22:02.960 | but it's not gonna be the end of the world.

00:22:04.360 | - Yep, yep.

00:22:05.200 | So probably the only other thing I could throw at you,

00:22:06.600 | Collin, if you have any self-employment income,

00:22:08.440 | you could set up your own solo 401(k),

00:22:10.800 | so that's something that you can always consider

00:22:12.440 | if you do happen to own a business.

00:22:14.160 | Unfortunately, if you have a single employer,

00:22:16.000 | that's not an option, but Vanguard, to me,

00:22:17.860 | is among the upper echelon of reputable providers,

00:22:21.480 | so I'd look at it, 'cause then you could have your cake,

00:22:23.960 | you could eat it, too.

00:22:25.120 | There's just some confusion.

00:22:26.200 | He says something about easiest way

00:22:27.620 | to move Roth IRA conversions to Roth rollover IRAs.

00:22:30.420 | That's not a thing.

00:22:31.680 | If you over-contributed for a prior year,

00:22:33.840 | yeah, you have to take an excess distribution.

00:22:36.200 | You had to do it by the tax deadline, unfortunately.

00:22:38.280 | Hopefully, you filed an extension,

00:22:39.760 | and if you don't, you're paying a 6% excise tax,

00:22:42.440 | and the IRS can come slap you with up to now a 25% penalty

00:22:45.600 | for any excess contributions.

00:22:47.260 | So Collin, talk to your tax professional about this,

00:22:49.840 | but for what you're gonna get what it's worth,

00:22:52.840 | it's free advice, but I would take a strong look

00:22:54.920 | at doing an excess distribution,

00:22:56.760 | get that out of your account as soon as possible.

00:22:58.440 | - And so I'm looking at the live chat here.

00:22:59.980 | Did I see Duncan's mom is in the chat today?

00:23:02.160 | - Whoa!

00:23:03.000 | - My mom is often in the chat, to be fair.

00:23:04.760 | - Your mom is proud of you, Duncan.

00:23:05.600 | - She is?

00:23:06.440 | - She wants to see you at work.

00:23:07.320 | I think that's beautiful, man.

00:23:08.880 | - All right.

00:23:09.720 | - Miss Hill, you raised a fine son.

00:23:10.840 | We're very proud to have Duncan as part of our team.

00:23:13.620 | - People in the comments aren't paying attention

00:23:16.680 | to the show, they're just talking to your mom now.

00:23:18.240 | - It's a family affair, yeah.

00:23:20.080 | What does she think about rollover Roth IRA conversions?

00:23:23.920 | - Well, I think that one thing I was gonna ask you about

00:23:27.280 | is the thing about compounding interest.

00:23:29.600 | I mean, that doesn't stop just because you rollover, right?

00:23:31.780 | I mean, your accounts are still-

00:23:33.780 | - No, let's assume that he's able to replicate.

00:23:34.620 | - Yeah, you might miss out a little bit.

00:23:36.480 | Yeah, it's like you go to cash for a couple of weeks,

00:23:38.180 | then you get back in.

00:23:39.020 | So it's not like the-

00:23:39.840 | - Yeah, I think that's what Ben highlighted at the onset.

00:23:41.780 | That's what he's worried about.

00:23:42.620 | This process takes, unfortunately,

00:23:44.100 | a month for some providers.

00:23:45.180 | Again, I think Vanguard's a very good company

00:23:46.900 | and I would take a second look at it.

00:23:48.980 | - Also, you can time the transfer, right?

00:23:51.460 | No, I'm just kidding.

00:23:52.300 | - I could work in his favor.

00:23:53.820 | I mean, that's true.

00:23:54.660 | Unfortunately, we don't know.

00:23:55.740 | It's easy for me to tell what's gonna happen

00:23:57.460 | three weeks from now in three weeks.

00:24:00.240 | - All right, next one.

00:24:01.360 | - Okay, up next, we have a question from Brad.

00:24:03.440 | I'm 34 years old and I live in a state with no income tax

00:24:07.060 | and my salary is in the 22% bracket.

00:24:09.760 | I started a new job that has a 401(k) with a Roth option.

00:24:12.800 | I can max out my 401(k) contribution

00:24:14.920 | by splitting my contribution between traditional and Roth.

00:24:17.840 | My employer's plan has a safe harbor match

00:24:20.640 | after a year that would add 4%,

00:24:22.960 | but I'm not currently receiving a match.

00:24:24.880 | Am I better off maxing out my 401(k) in multiple buckets

00:24:27.700 | or saving a lower percentage by having it all in Roth?

00:24:31.380 | Can you guys explain safe harbor?

00:24:33.180 | I don't know what that means.

00:24:34.620 | - How about it, Bill?

00:24:36.420 | - Yeah, I think so.

00:24:37.900 | - Bill runs the 401(k) at our place, basically,

00:24:39.840 | so he can take this one.

00:24:41.540 | - I'm your plan administrator.

00:24:43.340 | No, the safe harbor, Duncan, is simply that it allows

00:24:45.880 | for a certain type of contribution,

00:24:47.620 | specifically kind of toward executives,

00:24:49.740 | that ultimately, if you give everybody a free 3% or 4%,

00:24:52.580 | the safe harbor minimum is 3%.

00:24:54.500 | I guess they're a little bit more generous like us.

00:24:56.440 | They're doing 4%.

00:24:57.640 | If you're doing that and matching contributions,

00:24:59.880 | if actually you can sort of tilt the dial,

00:25:02.460 | you don't have to go through some

00:25:03.600 | of the really complicated Department of Labor

00:25:06.080 | high-compensated employee tests.

00:25:07.880 | And so the 401(k) plan is a people's plan.

00:25:10.560 | Most plans are, and ultimately,

00:25:12.160 | there's a test that applies each year

00:25:13.920 | that says, hey, if you have too much money

00:25:15.640 | in your highest-paid folks,

00:25:16.840 | we're gonna declare this plan not valid,

00:25:19.920 | and they're gonna make the distribution happen

00:25:22.160 | from the higher-compensated folks.

00:25:23.920 | So if you go safe harbor route,

00:25:25.400 | everybody gets 4% or 3% minimum,

00:25:27.800 | but you don't have to go through

00:25:28.840 | some of the more stringent tests.

00:25:29.680 | - It's a pretty good deal.

00:25:30.500 | So my guess is as much as you like a Roth IRA or 401(k),

00:25:34.880 | if they, for whatever reason, have to split this

00:25:36.800 | and gives them a bigger match,

00:25:38.120 | you would probably recommend splitting

00:25:39.560 | because you can't really get,

00:25:41.200 | even the tax benefits of the Roth in the future

00:25:43.520 | are not gonna be better than 100% return on the match,

00:25:45.960 | right?

00:25:46.800 | - Yeah, I think you're right.

00:25:47.720 | And Brad says he's not getting a safe harbor match,

00:25:50.840 | so I don't know that it really comes into play.

00:25:52.960 | Most plans would allow for a match

00:25:54.680 | on either traditional or Roth,

00:25:56.480 | so I don't think that's necessarily a factor.

00:25:58.960 | But his real question is, should I split this?

00:26:01.680 | Should I have a split?

00:26:03.520 | Brad, if we could see in the future

00:26:04.880 | and know exactly what your tax rate is gonna be at 64,

00:26:07.160 | like we kind of know at 34,

00:26:08.520 | we'd be able to answer that question very specifically.

00:26:10.480 | I've got no problem.

00:26:11.480 | If you don't know the right answer, just diversify, right?

00:26:14.360 | I think, guys, I've got the back tattoo.

00:26:16.120 | We talked about Roth.

00:26:16.960 | I'm pushing Roth.

00:26:17.780 | I think the audience of asset compounds

00:26:19.480 | skews relatively younger.

00:26:20.620 | I could be wrong about that.

00:26:21.840 | I think early in our career,

00:26:23.040 | let's say 20s, 30s, Roth is gonna be the way to go.

00:26:25.800 | But there's a big case,

00:26:27.360 | a huge case for traditional contributions.

00:26:30.080 | And if you're not sure,

00:26:30.960 | if you kind of think that my tax rate might be lower

00:26:33.320 | in retirement,

00:26:34.160 | traditional contributions could be the best option for you.

00:26:36.680 | And so, Brad, I think if you can't,

00:26:39.200 | in the inability to see the future,

00:26:41.200 | splitting the baby in half doesn't make a,

00:26:43.320 | that makes a ton of sense to me.

00:26:44.440 | I'd keep doing what you're doing, Brad,

00:26:45.840 | in the absence of perfect information.

00:26:47.820 | - It's funny you mentioned the age of people in the chat

00:26:51.400 | because the other day,

00:26:52.520 | or it's been several weeks, I think,

00:26:54.200 | David Wysocki, who's often in the chat on our shows,

00:26:57.480 | said something about being 72 years old.

00:26:59.640 | - That's great, I love it.

00:27:00.480 | - I just assumed that he was,

00:27:01.840 | I was just picturing like a 30-something year old.

00:27:03.760 | - He's a young man at heart.

00:27:04.760 | I mean, God bless him, he's got 30 years left.

00:27:07.520 | So yeah, I'd urge a Roth contribution for him

00:27:11.240 | as anyone else.

00:27:12.080 | - Bringing up the averages.

00:27:12.960 | All right, we got one more.

00:27:13.960 | - Okay, last but not least,

00:27:15.640 | we have a question from Tom.

00:27:18.280 | I'm married filing jointly with $150,000 income.

00:27:21.920 | I have four to five years of short-term capital losses

00:27:24.360 | from 2022 of $13,000.

00:27:27.320 | I used $3,000 of the losses against our 2022 income.

00:27:31.360 | If I have $3,000 of long-term capital gains in 2023,

00:27:35.080 | do I pay the lower rate on the long-term capital gains

00:27:38.000 | while still deducting $3,000 against our income

00:27:41.160 | with the short-term capital losses?

00:27:43.620 | Maybe a small potatoes question

00:27:44.840 | compared to some of the not to brag questions.

00:27:47.500 | - There's no small potatoes on "Ask Joe" now.

00:27:49.400 | - No, this is a show for the people.

00:27:51.600 | - All right, so Bill,

00:27:53.040 | I got a question about the carrying losses over.

00:27:54.840 | So you have a certain amount,

00:27:57.040 | you have $10,000 of losses.

00:27:58.520 | This year, you can carry over 3,000

00:28:00.080 | from that couple of years.

00:28:01.200 | Does the IRS just hope that you're gonna forget

00:28:02.800 | about those carryover losses?

00:28:04.040 | Is that why they do it?

00:28:05.080 | Why can't we just take them all in one year?

00:28:06.680 | - It happens sometimes.

00:28:07.760 | My partner in crime here, Bill Arzaroni in CPA,

00:28:10.200 | who I have not spent any time in jail with,

00:28:12.500 | but he's my battle buddy.

00:28:14.540 | He would correct you on that, Ben.

00:28:16.560 | He would say that you can deduct $3,000

00:28:18.500 | against your ordinary income.

00:28:19.920 | And so then the remainder carries forward.

00:28:21.440 | And the reason I mentioned him

00:28:22.480 | is we see a lot of bad tax work, to be honest, Ben.

00:28:24.840 | And one of the more common things is they miss some folks.

00:28:28.280 | Unfortunately, when they pick up a new client,

00:28:30.840 | they don't catch that carry forward number

00:28:32.640 | from last year or the prior years.

00:28:34.440 | So if you're meeting with a new tax professional

00:28:36.560 | and they haven't in detail reviewed

00:28:38.280 | your prior year's tax return,

00:28:39.840 | massive red flag that they're not doing their due diligence.

00:28:43.200 | But Ben, to your point,

00:28:44.080 | no, they do carry forward indefinitely.

00:28:46.400 | I mean, I imagine there's some people

00:28:47.480 | that lost a lot of money during COVID

00:28:49.640 | or maybe in the dot-com era,

00:28:51.440 | they're still deducting their capital losses,

00:28:53.480 | let's say from 20 years ago,

00:28:54.620 | because if you're only able to deduct $3,000 a year,

00:28:57.360 | that doesn't go very far in the context

00:28:59.400 | of some of the larger losses.

00:29:01.980 | So let's talk about ordering.

00:29:04.480 | So Ben, to answer the question just directly,

00:29:06.640 | this is the answer.

00:29:07.640 | Any losses that are carried forward into a future tax year

00:29:10.880 | are considered long-term in nature

00:29:12.680 | by the time that next year rolls around,

00:29:14.080 | which kind of makes sense, right?

00:29:15.840 | If you have a short versus long-term loss,

00:29:18.840 | you hold that for a year,

00:29:20.200 | anything that you've held a short-term, a year later,

00:29:22.680 | is gonna be long-term, right?

00:29:24.320 | Because the holding period is a year

00:29:25.880 | and we're talking about a year periods here.

00:29:27.440 | So the ordering rules work like this.

00:29:30.120 | Short-term losses offset short-term gains on the tax form.

00:29:33.480 | Makes sense, then you get a net short-term number.

00:29:35.760 | Long-term losses, less long-term carry forward losses,

00:29:40.040 | less offset long-term gains.

00:29:42.120 | So again, from the prior year,

00:29:43.680 | that number is magically transformed into a long-term loss

00:29:47.040 | because it happened more than a year ago.

00:29:48.780 | Then you get a net long-term gain.

00:29:50.400 | Then, net short-term losses or gains.

00:29:53.800 | - I got the Zach Galifianakis numbers going on right now.

00:29:56.600 | (laughing)

00:29:57.440 | And this is why I just let you do my taxes, Bill,

00:29:59.760 | because I'm lost.

00:30:01.280 | - Well, this is why I let the software handle it, right?

00:30:03.200 | So I don't even do in this calculus.

00:30:04.640 | I'm not Galifianakis in this stuff here.

00:30:06.920 | So ultimately it all goes into a blender

00:30:08.680 | and then you pay tax on what's left.

00:30:10.440 | And so to give you guys an example,

00:30:11.680 | stick with me here for a second.

00:30:13.200 | Let's say that I have a $3,000 short-term gain.

00:30:16.040 | I'm not drawing this down.

00:30:17.120 | Duncan, don't laugh at me.

00:30:18.620 | A $3,000 short-term gain, a $3,000 long-term gain,

00:30:21.980 | and I have $5,000 loss carry forward.

00:30:24.440 | So the net gain I have there is 1,000.

00:30:26.840 | Is that short or long?

00:30:29.040 | Duncan, which one is it?

00:30:30.360 | Based on what I've told you.

00:30:31.760 | - I wasn't paying that close attention.

00:30:34.320 | - Okay, that's fine.

00:30:35.320 | That is gonna be a short-term gain

00:30:36.880 | because as I said before,

00:30:38.080 | the ordering steps are the long-term carry forward offsets,

00:30:41.680 | long-term gains first,

00:30:43.080 | and then they get put in a blender.

00:30:44.400 | So in that instance, in that case,

00:30:46.260 | that would be a net short-term gain.

00:30:48.380 | Does that answer the question, Ben?

00:30:51.820 | - Yes.

00:30:54.680 | - We do need a whiteboard.

00:30:55.680 | - I think so.

00:30:56.520 | - On the next Ask the Compound,

00:30:57.880 | we'll do this on a whiteboard.

00:30:58.920 | - I do have a little bit of a follow-up question.

00:31:01.320 | I think you basically just answered it,

00:31:02.600 | but just to distill it down,

00:31:04.200 | I have a friend who I was talking to recently

00:31:06.360 | who was telling me he lost quite a bit

00:31:07.880 | in the market last year.

00:31:09.520 | And I was telling him about this very thing,

00:31:11.760 | being able to write off up to 3,000,

00:31:13.920 | and he was like, "Oh, I don't think my tax guy did that."

00:31:16.640 | Is there anything you can do after the fact

00:31:18.600 | to like, or is it just too late?

00:31:20.900 | Can you amend your return?

00:31:22.800 | What are your options there?

00:31:24.280 | - Great question.

00:31:25.120 | So ultimately, take a look at Schedule D, page two,

00:31:28.260 | and if you see a loss on that page two at the top,

00:31:30.720 | and then a $3,000 number that flows up through Schedule 1,

00:31:34.160 | and then on the front page of the 1040,

00:31:35.800 | you'll see negative $3,000.

00:31:37.620 | If that number ain't there, you're right, Duncan,

00:31:39.500 | your buddy, something went wrong.

00:31:41.160 | To answer your question directly, yes.

00:31:42.640 | You can amend a tax return up to three years

00:31:46.040 | after the filing deadline.

00:31:47.600 | And that means right now,

00:31:49.080 | tax year 2020 returns are up for amendment.

00:31:51.140 | But as you remember, it was all that COVID weirdness.

00:31:53.480 | The amendment deadline is actually July.

00:31:56.040 | July 15th, 2023 for tax returns filed in 2020.

00:32:00.120 | So I would advise him to take a look.

00:32:02.360 | - It seems obvious, but some people think

00:32:04.120 | I lost a ton of money last year.

00:32:05.120 | It depends if you actually locked in those losses too.

00:32:06.880 | It's not just a paper loss.

00:32:08.320 | - Very good point.

00:32:09.280 | - I think some people might misunderstand that,

00:32:11.800 | but it has to be something that you sold for a loss,

00:32:15.940 | not just you were down last year.

00:32:17.760 | - Yeah, back to the question

00:32:18.920 | about CompHunter's interest in ETFs.

00:32:20.720 | If that's in an IRA, it just keeps compounding, right?

00:32:23.380 | I mean, your gain just rolls into your account.

00:32:25.520 | You don't have to realize any gains on it.

00:32:27.160 | So yeah, Ben, I think that would be something to look at.

00:32:29.520 | Duncan, get your friend a copy of his 2022 1040.

00:32:32.920 | We'll take a look at it.

00:32:33.880 | - Cool.

00:32:34.720 | - See, this is why we have our own Andy Dufresne

00:32:36.200 | on staff here.

00:32:37.040 | - That's what I'm here for.

00:32:37.860 | - Exactly, yeah.

00:32:38.700 | - I'll see you at San Juantaneo.

00:32:40.120 | I'm on vacation this week,

00:32:41.240 | so I am actually heading to the beach.

00:32:43.520 | - Just waiting until how exciting this all gets

00:32:46.160 | when we start taxing and taking into account

00:32:48.120 | unrealized gains and losses, right?

00:32:50.080 | That's gonna be fun.

00:32:50.920 | - Yeah, and that's the nightmare, right?

00:32:51.800 | And that's always the thing

00:32:52.640 | that gets thrown in my face on Twitter.

00:32:54.040 | It's like, "What if the IRS taxes your Roth IRAs?"

00:32:56.480 | Well, okay, what if they start taxing my back tattoo, right?

00:33:01.200 | I mean, yeah, we could plan for anything.

00:33:03.240 | - My comment this morning was,

00:33:04.560 | people in the finance world spend 95% of the time

00:33:07.200 | worrying about stuff that could happen 5% of the time.

00:33:08.980 | - Right, and what about--

00:33:10.280 | - Let's focus on what's actually happening,

00:33:11.500 | not what could happen.

00:33:12.340 | - I like that.

00:33:13.160 | - Focus on what drag queen Susie Orman's into.

00:33:15.800 | - Go enjoy the beach.

00:33:18.040 | - Thanks.

00:33:18.880 | - Yeah. - Thanks, guys.

00:33:19.700 | - All right, remember, you can email us,

00:33:20.540 | askthecompoundshow@gmail.com.

00:33:21.720 | But also, if you wanna send us a voice memo

00:33:24.060 | or a video from your phone, feel free to do that.

00:33:26.140 | We will play it right here.

00:33:26.980 | If you wanna personalize it a little more,

00:33:28.420 | if anyone wants. - We're gonna experiment

00:33:29.260 | with that, yeah.

00:33:30.080 | - Yeah, if anyone wants to do that.

00:33:30.920 | We were thinking about sending them a voicemail,

00:33:31.760 | but you can easily do a voicemail.

00:33:32.820 | Send us that, or send us a video of yourself,

00:33:34.360 | if you're willing.

00:33:36.200 | Thanks to everyone in the live chat for showing up,

00:33:37.520 | especially Duncan's mom.

00:33:39.080 | We always appreciate it.

00:33:40.320 | - She did a great job.

00:33:42.280 | - If you're listening in the podcast form.

00:33:43.100 | Yeah, leave us a review.

00:33:44.280 | Hit like, subscribe, all that stuff.

00:33:46.500 | And we'll see you next time.

00:33:47.800 | - Thanks, everyone.

00:33:48.740 | - Bye, guys.

00:33:49.580 | (upbeat music)

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