RPF0118-Friday

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00:00:30.000 | Happy Friday, Radicals.

00:00:32.000 | It's Friday, and on Fridays we do Q&A.

00:00:34.400 | Ask the financial planner anything you want, and today I've lined up nine questions.

00:00:38.400 | There's some good ones.

00:00:39.200 | Number one, I've got cash. Should I buy a house or should I get a mortgage?

00:00:43.600 | Buy a house for cash or should I get a mortgage?

00:00:46.000 | Number two, can I invest and should I invest in speculative biotech stocks through my Coverdell ESA?

00:00:52.400 | Number three, I'm a physician trying to figure out the differences between private practice

00:00:57.200 | versus working at an academic teaching hospital. What should I do?

00:01:00.800 | Four, business deduction. Should I take them or not?

00:01:03.600 | Five, multi-generational living. Good idea.

00:01:06.800 | Number six, disability insurance. What do I need to know?

00:01:10.600 | Seven, 529 plans. What are qualified distributions and how do I actually work the details of that?

00:01:17.800 | Eight, inflation. Why do I sometimes do inflation-adjusted returns

00:01:21.600 | and why do I sometimes not?

00:01:23.400 | Nine, Chris says, "I want to give money to my nephews.

00:01:27.600 | How do I do that if I don't want to necessarily allocate it toward higher education?"

00:01:32.200 | Welcome to the Radical Personal Finance Podcast.

00:01:50.400 | My name is Joshua Sheets and today is Friday, December 12, 2014.

00:01:54.800 | Thank you for being here.

00:01:57.600 | I've got a great show lined up for you today on Friday Q&A

00:02:00.800 | and these are going to be interesting. I hope you enjoy.

00:02:03.400 | You know what? In fact, I'm going to cut the intro short.

00:02:05.400 | Usually you can listen to the fancy music and let's get right into it.

00:02:08.000 | I've been receiving some great questions from you guys

00:02:11.600 | and these questions are really fun to answer. I really enjoy them.

00:02:15.200 | Keep them coming. If you'd like to get a question answered on a show like this,

00:02:18.400 | come by the show page, go to RadicalPersonalFinance.com,

00:02:21.800 | go on your phone or go on your computer and leave a message.

00:02:25.600 | You'll see a little button that says, "Send us a voice message."

00:02:27.800 | Just leave a message there. I prefer getting calls versus emails,

00:02:32.200 | although I am willing to consider the emails as well.

00:02:34.800 | So you can email me questions, Joshua@RadicalPersonalFinance.com

00:02:39.800 | and they can get on questions for today.

00:02:41.400 | I've received some really fun ones. There's one or two that I wanted to answer today

00:02:44.800 | but they're a little bit too in-depth.

00:02:47.000 | So I decided to just line up nine, some of them that I'll be able to answer quick.

00:02:50.400 | So let's kick it off here with a voicemail from Lee.

00:02:54.400 | Come on, Lee.

00:02:54.800 | Hi, Joshua. This is Lee. I have a question for you.

00:02:57.000 | I wanted you to cover more about the topic that you touched on the other day

00:03:00.400 | in the interview with the gentleman and the three sons that bought their homes in cash.

00:03:05.800 | You mentioned quickly about how the topic of buying a home in cash

00:03:11.600 | versus buying a home and having a mortgage on it,

00:03:16.400 | but specifically what I'm interested in is if you have the cash

00:03:20.000 | but instead you invest that and then the differences of how much better off you would be

00:03:26.800 | in either one of the scenarios.

00:03:30.000 | So I thought that maybe you could cover something like that

00:03:32.200 | on one of your Friday question/answer shows,

00:03:34.200 | just what you think is better, paying cash or getting a mortgage and investing the difference.

00:03:42.800 | Hope to hear your answer. Talk to you later. Bye.

00:03:46.400 | It's a good question, Lee.

00:03:47.600 | And usually I think most people would expect that immediately with a question like that,

00:03:51.400 | you go to a calculator.

00:03:52.200 | But I'm going to point out where the difference is and the difference in your question.

00:03:56.600 | And when I first heard it, I thought, "Well, I'm not going to do that."

00:03:58.600 | I did a whole show on should I pay off a mortgage or invest,

00:04:01.800 | which by the way, I was going to respond to Lee and say, "Listen, you should go listen to the show."

00:04:05.600 | Then I realized it is a different question

00:04:07.800 | than things I've answered on the previous show about should I pay off debt or invest.

00:04:11.800 | If you haven't heard that, Lee, go and listen to episode 95,

00:04:15.600 | which is called Early Retirement Frequently Asked Questions,

00:04:19.000 | Should I Pay Off Debt First or Should I Invest?

00:04:21.200 | And that was with Joe, aka Rebel Spy from the Money Mustache Forums,

00:04:25.200 | radicalpersonalfinance.com/95.

00:04:27.200 | But it's a different question.

00:04:29.400 | But the answer is very clear in the way that you asked the question.

00:04:33.000 | And if you actually listen to the question, in fact,

00:04:37.800 | I'm going to listen to just the first part of this here again.

00:04:40.000 | I have a question for you.

00:04:41.200 | I wanted you to cover more about the topic that you touched on the other day

00:04:44.600 | in the interview with the gentleman and the three sons that bought their homes in cash.

00:04:49.800 | You mentioned quickly about how the topic of buying a home in cash versus buying a home

00:04:57.400 | and having a mortgage on it.

00:05:00.400 | Specifically, what I'm interested in is if you have the cash,

00:05:04.200 | but instead you invest that,

00:05:06.200 | and then the differences of how much better off you would be in either one of the scenarios.

00:05:13.600 | And that's the question, is that part there where you said,

00:05:16.400 | if you have the cash and you invest that,

00:05:19.400 | how much better off would you be in either one of the scenarios?

00:05:21.800 | Hands down, every single time when the question is phrased in that manner,

00:05:27.000 | every single time, investing it is the right situation.

00:05:31.800 | And the reason doesn't have to do with mortgage versus not mortgage,

00:05:35.200 | but it has to do with investment versus consumption.

00:05:40.000 | So when you pay cash for a house,

00:05:42.200 | a house that you live in is a consumption item.

00:05:44.800 | It's not an investment.

00:05:46.600 | It may be an excellent consumption item to have,

00:05:50.200 | and it may be a really great decision to make

00:05:52.600 | because it fits the needs of your family,

00:05:55.200 | but it's not an investment.

00:05:57.200 | The house that you live in is not an investment.

00:05:59.800 | It is a consumption item.

00:06:01.400 | Now, you should also look to minimize that cost as much as possible.

00:06:05.000 | So be intelligent.

00:06:06.000 | Just because it's a consumption item doesn't mean you shouldn't try to get a good deal on it.

00:06:09.800 | Just because it's a consumption item doesn't mean that you shouldn't try to

00:06:12.800 | choose wisely in a neighborhood that is likely to grow in appreciate and value over time.

00:06:17.200 | Just because it's a consumption item doesn't mean that you can't improve some stuff about the property

00:06:21.000 | so that when you sell it, you can make some money.

00:06:23.000 | Just because it's a consumption item doesn't mean that you can't rent out a spare bedroom

00:06:26.400 | or put a little storage shed in the back and rent that out to your neighbor or something like that.

00:06:31.200 | But the point is, if the question is consumption versus investment,

00:06:35.800 | every single time, the investment should win,

00:06:37.800 | assuming that the investment succeeds, assuming that it's well done and carefully done.

00:06:41.800 | That's the question that you're asking.

00:06:45.400 | And that was what my issue was with Steve Maxwell when we got into it,

00:06:49.200 | about when his children, when he talked to them about paying cash for a house,

00:06:53.600 | which I thought was just an amazing story, but I really don't think that I, at this point,

00:06:59.000 | I respect why he did it, but as came out in the interview,

00:07:01.800 | the specific reason why he encouraged his children to buy their houses

00:07:06.400 | was based upon the idea of not owning property, excuse me,

00:07:09.800 | not owing any debt from a religious conviction perspective of the fear of not paying it off.

00:07:15.800 | And I think that is, you know, go for it.

00:07:19.200 | That makes sense to me.

00:07:20.800 | But that's the concern.

00:07:24.000 | So to illustrate my consumption versus investment decision,

00:07:28.800 | pretend that you at, we'll pick on Steve Maxwell's kids,

00:07:32.000 | let's pretend that at 23 years old or 24 years old,

00:07:35.800 | you have $100,000 saved.

00:07:37.800 | And your question is, should I take this money and should I pay cash for a house

00:07:42.600 | or should I invest in a house?

00:07:44.800 | Well, let's assume that you're going to spend $100,000.

00:07:48.800 | What I would do is I would put the $100,000 into an investment house,

00:07:54.400 | then I would take the cash flow and I would mortgage my primary house

00:08:00.400 | and I would take the cash flow from that investment house

00:08:03.200 | and allow that investment house to pay the mortgage on my primary house.

00:08:06.400 | Then at the end of however long the term is,

00:08:09.800 | let's say it's at the end of 30 years,

00:08:11.600 | I'm going to now own two houses

00:08:13.600 | and what my tenants have done for me is they've paid off my personal mortgage.

00:08:20.800 | I never had to make a mortgage payment.

00:08:24.600 | Now, if you're scratching your head saying,

00:08:26.000 | "Well, how does that all compute through?"

00:08:28.000 | The reality is you can't do it quite that simple of one versus the other

00:08:31.800 | because the flip side, if I were going to argue the other side of that discussion,

00:08:36.200 | someone would say, "Well, you have your income,

00:08:38.600 | so you could just take that income and you could go and you could buy rental houses."

00:08:41.800 | Yeah, but how long is it going to take you to save $100,000 again?

00:08:44.600 | That's the question.

00:08:46.400 | So, if the question is, should I invest the money versus should I consume it,

00:08:53.200 | every single time the investment is going to win,

00:08:55.600 | assuming that the investment is done well and the investment doesn't suffer loss.

00:08:59.000 | That's the danger.

00:09:00.000 | So, the danger in the scenario I just outlined is,

00:09:02.000 | let's say that you make a terrible investment

00:09:04.000 | and you buy a house, you suffer a total loss on the house.

00:09:06.800 | Maybe you have a fire, you don't have fire insurance,

00:09:09.600 | you've lost your entire investment, you're in trouble.

00:09:13.000 | So, that's why you need to invest wisely.

00:09:16.000 | But again, investment versus consumption,

00:09:18.400 | financially, investment is always going to win out over consumption.

00:09:22.400 | Well, then shouldn't we at some point consume?

00:09:24.600 | Yes, I think we should at some point.

00:09:27.200 | And so, that's the real question.

00:09:28.400 | So, let's say instead of it just being simple one versus another,

00:09:31.200 | 24-year-old, $100,000 and should I buy a house to live in

00:09:34.800 | or should I buy a rental house?

00:09:37.000 | Let's say that someone a little bit older, a little bit more established.

00:09:40.000 | In my mind then, and maybe a little bit more money

00:09:42.600 | and it's thinking, "Well, what's the right fit for me?"

00:09:45.000 | In my mind, this is all about ratio.

00:09:46.800 | Have you established a portfolio?

00:09:50.800 | Are you wealthy such that your investments are enough to sustain your income?

00:09:56.000 | As you build that wealth and once you build that wealth,

00:09:59.400 | then I think you've got to – it's intelligent and wise to dial back the risk

00:10:06.400 | and eliminate any uncertainty from your life.

00:10:09.600 | Ultimately, I think all real estate investors

00:10:11.600 | really should be working toward a debt-free portfolio.

00:10:14.400 | I've worked with – I had one client that I worked with one time

00:10:18.600 | and it's like he was an addicted real estate investor

00:10:20.800 | and he was totally addicted to the deal

00:10:22.800 | but he never seemed – he never – his net worth was always growing theoretically

00:10:28.600 | but he never had his properties paid down so he never could enjoy the security.

00:10:32.800 | He was always rushing to cover the next deal,

00:10:35.000 | to buy the next deal, to run things and get bigger and bigger and bigger.

00:10:38.600 | Now, he was just addicted to the art of the deal.

00:10:40.600 | That's not – in my mind, that's irrational

00:10:43.600 | because the only reason that you invest is to fund your lifestyle.

00:10:48.200 | So once you've established the lifestyle that you need

00:10:51.400 | and once you've established the lifestyle choice,

00:10:54.000 | then in that scenario, cut back the risk.

00:10:59.800 | Pay off the mortgages.

00:11:01.200 | Cut back the risk and lower the risk so that you can –

00:11:04.000 | so that you've eliminated the uncertainty.

00:11:06.200 | So it all has to do with phase of life, cycle of life.

00:11:08.600 | Where are you in your life span

00:11:11.000 | and where are you with your investment opportunities?

00:11:13.400 | So how could I – what would be another way

00:11:17.000 | that I could flip the discussion about consumption versus investment?

00:11:21.000 | If the question is always consumption versus investment,

00:11:22.800 | my answer is always right.

00:11:23.800 | Investment is always going to win.

00:11:25.000 | But let's say that at 24 years old, you've got $100,000 saved

00:11:29.800 | but you have a well-established business that takes up most of your time

00:11:33.800 | and you don't have much of interest at all in going and investing in rental houses.

00:11:39.800 | You just want to – you have this business.

00:11:42.200 | You're making $300,000 a year at this business.

00:11:44.400 | Now, in this situation, does it make sense to pay cash or to get a mortgage?

00:11:47.400 | Well, it would be a rare intelligent individual who's making $300,000 a year

00:11:53.400 | who only buys a $100,000 house.

00:11:55.000 | So most of the people in that situation would mortgage an $800,000 house.

00:11:58.800 | But in this case, it doesn't even matter one way or the other

00:12:02.400 | because in three months, you're going to have –

00:12:04.000 | four months, you're going to have the $100,000 back.

00:12:06.200 | So it's all a matter of scale and the key concern is,

00:12:09.200 | are you building wealth that will support you and sustain your lifestyle?

00:12:15.400 | And in the beginning, the way that you build wealth,

00:12:17.600 | you have – well, not just in the beginning.

00:12:19.800 | The way you build wealth is by buying and creating assets,

00:12:25.000 | assets that give you cash flow.

00:12:30.400 | Assets that give you cash flow is the key.

00:12:34.200 | Even if somebody were – in my mind, even if somebody were interested

00:12:40.000 | in not having any debt, not having a mortgage or anything of that nature,

00:12:46.000 | then I would still actually rather take that $100,000

00:12:50.400 | and use it to buy an investment house which –

00:12:54.200 | using that investment house to fund me going and paying rent

00:12:58.400 | in the open market to somebody else because at least then,

00:13:02.600 | yes, I have a rental cost but my tenants are paying for my rental cost

00:13:06.800 | and yes, I do have an element of insecurity where if I lose my tenants

00:13:12.600 | and I can't rent the house out for the next eight months, what do I do?

00:13:16.800 | But at least then, I have the potential of hopefully my house can appreciate

00:13:20.600 | and value more than the house that I'm renting at

00:13:23.800 | and you got to work some arbitrage scenario and make that deal work.

00:13:28.600 | But that would be my point and that was what my concern was

00:13:32.000 | I was telling – talking to Steve about is I would rather –

00:13:36.600 | it all comes down to scale.

00:13:38.000 | If somebody has another I guess economic engine that's printing money for them,

00:13:43.600 | then great.

00:13:44.600 | Then in that situation, you probably don't need it.

00:13:47.000 | But if somebody – if I were working with a 24-year-old

00:13:50.000 | and this 24-year-old is making $40,000 a year and they'd saved $100,000

00:13:54.600 | and they're just working at an employed job, I would say invest the money.

00:13:59.600 | Here's the other difference.

00:14:01.200 | The key would be – but the much faster scenario would be

00:14:05.600 | buy five houses, put $20,000 down on each of them

00:14:09.600 | and by putting the $20,000 down, now you have five sets of tenants

00:14:14.600 | all paying cash flow, mortgage them and let those tenants pay them off

00:14:18.600 | and you actually run the numbers on five houses growing in value over time

00:14:22.600 | with ongoing rental income.

00:14:24.600 | Your tenants are paying off your debt and you're left with the net worth of the house

00:14:28.600 | and the excess cash flow along the way.

00:14:31.600 | So it's kind of a nuanced question in the sense of you have to have a margin of safety.

00:14:37.600 | If you only have $100,000, do you want to wipe yourself out

00:14:41.600 | and you have no money to cover some vacancies,

00:14:44.600 | no money to cover property damage? No. That would be foolish.

00:14:47.600 | But on the flip side, you want to have – you need to have an investment.

00:14:51.600 | You need to have something that's going to create wealth.

00:14:54.600 | Houses that you live in are consumption.

00:14:57.600 | Houses that you invest in should make you money and make you wealthy over time.

00:15:02.600 | I believe the formula for wealth is let your consumption lag your investment.

00:15:08.600 | At the beginning of life, whether that's at a beginning age or right now,

00:15:12.600 | if you're listening to this show and you're first exposure to paying attention to finance,

00:15:16.600 | you have to buy and build and create assets that send you money.

00:15:21.600 | You have to build a money machine. You have to build an economic engine.

00:15:24.600 | And usually we do that with wages first.

00:15:27.600 | But the problem is trading time for money with wages is a very inefficient thing over the long term

00:15:32.600 | because you're always stuck trading time for wages.

00:15:35.600 | So if you can trade some of those, you've got to create – use your human capital,

00:15:39.600 | your human energy to create wages or profits – profits are better than wages –

00:15:44.600 | wages or profits and then allocate that money toward other investments,

00:15:49.600 | investments that send you money.

00:15:51.600 | And then once you've set up that lifestyle where your investments,

00:15:54.600 | your money machine is there, where it's going to send you checks every month,

00:15:57.600 | now increase your consumption.

00:15:59.600 | And then you can consume forever.

00:16:01.600 | Because if you just consume the money that you have

00:16:04.600 | and you're always focusing on consuming, consuming, consuming,

00:16:07.600 | you never get to the point where you're financially free

00:16:10.600 | because you're getting money without working.

00:16:12.600 | That's what most people do. They consume everything.

00:16:14.600 | You have to put a dam in the consumption.

00:16:20.600 | And that's the key.

00:16:21.600 | So it's a fun question, Lee.

00:16:23.600 | I hope that helps.

00:16:25.600 | And I would say that there is no one-size-fits-all answer to this question.

00:16:32.600 | But the key would be to say in my situation, what are my assets?

00:16:38.600 | What are my liabilities?

00:16:40.600 | What is my cash flow situation and what are my goals?

00:16:44.600 | And how can I make sure that I prioritize wealth?

00:16:49.600 | And is my plan going to result in my becoming wealthy if I do this?

00:16:54.600 | If I take all my money, have a million bucks,

00:16:57.600 | and I take that million dollars and I buy a million-dollar house,

00:17:01.600 | I have a million-dollar house but I have no money to eat with.

00:17:05.600 | But if I take the million dollars and I buy a hundred-thousand-dollar house

00:17:09.600 | and I invest $900,000 of it,

00:17:11.600 | the $900,000 funds the rest of my lifestyle.

00:17:16.600 | That's the key.

00:17:17.600 | So it's all a matter of ratios.

00:17:19.600 | Paying cash for the house or not paying cash for the house

00:17:22.600 | can be good or bad, right or wrong,

00:17:25.600 | in the sense of if the goal is wealth-building,

00:17:28.600 | depending on whether or not--like depending on the scale,

00:17:35.600 | depending on do I have other money or do I have wealth.

00:17:37.600 | That's the key is the scale and the wealth plan.

00:17:41.600 | Hope that helps.

00:17:44.600 | The next question comes from Erica and this one is really fun.

00:17:46.600 | She says, "Hi, Joshua.

00:17:47.600 | Love the podcast and really value your insight.

00:17:49.600 | I've been in the financial industry on the trading and research side

00:17:53.600 | for 14 years and will likely be stepping out soon

00:17:56.600 | to focus on homeschooling our two young boys.

00:17:59.600 | This will give my husband and me the flexibility

00:18:02.600 | to actively invest for the first time

00:18:04.600 | as I won't be subject to all the restrictions

00:18:07.600 | placed on employees of broker-dealers."

00:18:09.600 | By the way, that's one of the toughest things.

00:18:12.600 | If you work for a broker-dealer, you can't do anything for yourself.

00:18:17.600 | "Our plan has been to build wealth and use that wealth as needed

00:18:20.600 | rather than focus on creating separate silos like college funds.

00:18:25.600 | But your show on Coverdell has got me thinking

00:18:28.600 | and I'd love your opinion on my thoughts.

00:18:30.600 | Our wealth-building plans are rental properties and entrepreneurship.

00:18:35.600 | I'm thinking that the Coverdell could provide us a good opportunity

00:18:38.600 | to swing for the fences with early-stage biotechs

00:18:42.600 | since we have particular knowledge in that area,

00:18:45.600 | which could greatly leverage the $2,000 a year limits.

00:18:49.600 | Or we could work with a team to create the investment infrastructure

00:18:53.600 | to put that money to work in the rental market.

00:18:55.600 | Assuming we find the right team

00:18:57.600 | and work through all of the important steps,

00:18:59.600 | does this seem like a good fit for the structure of the Coverdells

00:19:03.600 | or am I missing something?

00:19:05.600 | I'm assuming that we would need to at least create the Coverdells

00:19:08.600 | before the end of the year if we do this,

00:19:11.600 | so I would love to hear back if this is a potentially promising use.

00:19:15.600 | I also see the downside of starting down this path

00:19:18.600 | and then leaving it to be mostly record-keeping

00:19:20.600 | as we would need to stay on top of the accounts

00:19:22.600 | and then make sure they're put to use.

00:19:24.600 | Since our oldest is two years old,

00:19:26.600 | I expect we will have ample opportunities

00:19:28.600 | to use a few thousand dollars on their schooling.

00:19:31.600 | I'm not missing any specific risks on the exit strategy, right?

00:19:34.600 | I expect the exit would get messy if we ended up with a huge pile of money

00:19:38.600 | and our kids wait to reproduce as long as we did.

00:19:43.600 | Out of all the possible problems in the world,

00:19:45.600 | I don't think that's too horrible.

00:19:46.600 | What do you think?

00:19:47.600 | Erica in New Hampshire.

00:19:49.600 | Super fun question, and I love how--

00:19:51.600 | this is a good example of what I hope my show can spark,

00:19:54.600 | is you can take all of your knowledge and your skills and your expertise,

00:19:57.600 | add to it a little bit of technical financial planning,

00:19:59.600 | a few little rules, a few little regulations,

00:20:02.600 | and then figure out what's right for you.

00:20:04.600 | So super, super fun.

00:20:06.600 | In essence, my answer to Erica is yes.

00:20:09.600 | I think that's a perfect fit for this.

00:20:14.600 | Now, I don't remember if New Hampshire was on that list of states,

00:20:17.600 | homeschool states that are eligible.

00:20:20.600 | Let me check.

00:20:22.600 | Okay, I'm glad I checked.

00:20:23.600 | New Hampshire is not on the list,

00:20:25.600 | and so if this is your first introduction,

00:20:26.600 | if you didn't hear the Coverdell show,

00:20:28.600 | one of the advantages to the Coverdell educational savings account

00:20:31.600 | is it can be used for education expenses prior to college,

00:20:36.600 | so primary and secondary education expenses.

00:20:38.600 | And because Erica said that she's planning on homeschooling,

00:20:41.600 | one of the unique advantages to this,

00:20:43.600 | if you are a parent who plans to educate your kids at home

00:20:46.600 | or do some sort of alternative education plan,

00:20:49.600 | then you can use this account to fund that.

00:20:53.600 | But there are only--because of the little wrinkle in the law,

00:20:57.600 | homeschool students only qualify in states that actually define a homeschool

00:21:02.600 | as a private school, and this is dependent on state law.

00:21:05.600 | So the states that define a homeschool as a private school are

00:21:10.600 | Alabama, California, Illinois, Indiana, Kansas, Kentucky,

00:21:18.600 | Louisiana, Michigan, North Carolina, Nebraska, Ohio, Tennessee, and Texas.

00:21:27.600 | So those are the states that write out, define it.

00:21:29.600 | Now, in states where there is more than one option provided--

00:21:35.600 | in states where the state says whether or not the homeschool can be recognized,

00:21:41.600 | if the homeschools are--I'm getting tongue-tied.

00:21:45.600 | Those are the states where you can use it easily.

00:21:47.600 | There are five other states that recognize groups of homeschoolers

00:21:50.600 | to be a private school, and those five other states are

00:21:53.600 | Colorado, Florida, Maine, Virginia, West Virginia, and Utah.

00:21:59.600 | So in those five states, groups of homeschoolers are recognized

00:22:02.600 | to be a private school, but individual homeschools do not qualify.

00:22:06.600 | So I live in Florida, so I would need to work with a local homeschooling group,

00:22:09.600 | and then I could use that and pull the benefits out of this account.

00:22:15.600 | Now, my data on that, by the way, if you ever need to look that up,

00:22:18.600 | is the Homeschool Legal Defense Association, and I know that they have lobbied

00:22:22.600 | multiple times for that rule to be--basically to fix that

00:22:27.600 | and to get the guidelines updated so that all homeschools are treated

00:22:34.600 | as private schools on a federal basis so this account could be used.

00:22:39.600 | So that is one limitation to your questionnaire, because New Hampshire

00:22:42.600 | is not on that list.

00:22:43.600 | So if you plan to move to one of those states, that would be important.

00:22:45.600 | That's up to you.

00:22:47.600 | So you wouldn't be able to use it for homeschool expenses,

00:22:50.600 | but who knows if you're always going to homeschool.

00:22:52.600 | Maybe you're going to do some sort of combination.

00:22:54.600 | Maybe there's going to be some private school.

00:22:56.600 | That's up to you and your family's plans.

00:23:00.600 | Now, in my mind, one of the key things you said is biotech.

00:23:08.600 | And so for me, this would be a really useful way to--

00:23:12.600 | if you're going to speculate on biotechnology stocks,

00:23:14.600 | this would be a really useful account for you to do it in.

00:23:17.600 | I don't see a downside.

00:23:19.600 | Maybe those stocks are--depending on your level of wealth,

00:23:22.600 | maybe those stocks are a smaller capitalization, maybe $2,000,

00:23:26.600 | maybe you're investing at an early stage when the share prices are super cheap

00:23:30.600 | and you're swinging for a home run.

00:23:32.600 | This would be a perfect fit for this type of account.

00:23:34.600 | So you're buying into stocks when they're--I won't say--

00:23:39.600 | but when you're buying in when they're small, and then you have a 10-, 20-, 30-times increase

00:23:42.600 | because a drug gets passed or whatever.

00:23:45.600 | I mean, you know the biotech investing world.

00:23:47.600 | So this would be a perfect scenario.

00:23:49.600 | And putting the $2,000 in there would be great.

00:23:52.600 | It may allow you to buy a lot of shares.

00:23:54.600 | And if you do that for--here it's December.

00:23:57.600 | Toss it in for 2014 and then toss it in in January for 2015.

00:24:01.600 | Now you've got $4,000 in each of your kids' accounts.

00:24:03.600 | That's $8,000 that you can use to speculate on the biotech stocks.

00:24:07.600 | And the benefit--let's say you have a loss.

00:24:10.600 | Well, it's a deductible loss.

00:24:13.600 | You have to wait until the account has been completely distributed.

00:24:17.600 | But in that scenario, if you have a loss, you just simply--it's claimed as a

00:24:21.600 | miscellaneous itemized deduction on your Schedule A.

00:24:24.600 | And it is subject to the 2% of AGI limit.

00:24:27.600 | So that would be your downside depending on your other investments and your other losses.

00:24:32.600 | So it is still deductible is my point.

00:24:37.600 | And you can compare that to how the other entities that you would use to invest in that.

00:24:43.600 | With regard to the rental market, I think this is a lot tougher.

00:24:46.600 | And that's where I think it could be used.

00:24:49.600 | I used some of those examples in the Coverdell show of investing in rental houses.

00:24:53.600 | But in this scenario, you could do it, but you need to be good on financing.

00:24:57.600 | This isn't going to work for people who are just doing large down payments on traditional houses.

00:25:01.600 | You either need a form of real estate investment where you're not--where you don't have to come out with a lot of pocket,

00:25:08.600 | or you need to be working on it in a scenario where you're going to do seller retains the note,

00:25:13.600 | very little money down, negotiated some way in that way.

00:25:16.600 | Or maybe you can set this up with one of the custodians that's basically allowing you to combine your accounts,

00:25:23.600 | your self-directed HSAs, IRAs, and ESAs.

00:25:27.600 | So maybe that would be a good solution for you.

00:25:31.600 | So I think this sounds awesome.

00:25:32.600 | Now, a couple of other notes.

00:25:35.600 | You don't have to do it before the end of the year.

00:25:37.600 | You just have to do it before you file your taxes, so you don't have to do it in December.

00:25:40.600 | But what I would do, if you're thinking about doing this, just toss the money--just start tossing the money in,

00:25:44.600 | and put the money in the account, and start accumulating it, and wait till you--

00:25:49.600 | and that way it's sitting there for you when you're ready to transition out of your firm to where you can do this.

00:25:56.600 | And when you're allowed again to invest.

00:26:00.600 | And as far as the record keeping, it's not that big a deal.

00:26:05.600 | And as far as exit strategy, that was the other note I wanted to make.

00:26:09.600 | Exit strategy is--let's say--here's your exit strategy.

00:26:13.600 | Let's say that in a crazy world--let's say you're a rock star with your biotech speculation.

00:26:19.600 | And you pick some winners.

00:26:21.600 | And you turn 2, 4, 6, 8 grand, however much, into 100, 200, 300.

00:26:26.600 | Let's say they invent--one of your speculations invents the next greatest technology that saves millions of lives.

00:26:33.600 | And now you've got 3 million bucks sitting in there.

00:26:35.600 | What do you do?

00:26:37.600 | Well, remember, you can always get into a 529 account.

00:26:41.600 | And so you start bumping up against the age 30 limitation.

00:26:45.600 | In a biotech world, you've already cashed out of whatever your speculative deal was.

00:26:50.600 | So you get to 30.

00:26:54.600 | Well, now you just simply exit into a 529 plan.

00:26:58.600 | You use the money into a 529 plan.

00:27:01.600 | And let's say that your kids do delay procreation.

00:27:04.600 | And so therefore you're limited as far as grandkids.

00:27:06.600 | Well, you guys use the money.

00:27:08.600 | Go sign up for a--you're in your retirement years.

00:27:12.600 | You're 65 years old.

00:27:14.600 | Sign up for some education.

00:27:15.600 | Sign up for a qualified educational institution in Paris, France.

00:27:20.600 | And go and spend time at that qualified educational institution at Paris, France

00:27:24.600 | and pay for your educational expenses and your room and board out of your 529 account

00:27:29.600 | and use that to cover you for your retirement planning.

00:27:32.600 | So that would be what I would do.

00:27:34.600 | And then if you wind up with too much money, whatever, pay the tax.

00:27:37.600 | And it was a good deal along the way.

00:27:39.600 | You got a lot of deferral.

00:27:41.600 | So there are tons--there are so many exit plans.

00:27:44.600 | That's what always annoys me is it's a great account and it's such an easy exit plan.

00:27:48.600 | Dump it in a 529.

00:27:50.600 | And then any conceivable--then it gets you past the age 30 restriction.

00:27:54.600 | Any conceivable relation to you of any kind, you can use the money for their qualified expenses.

00:28:00.600 | And if no big deal, whatever, you can get the money out and pay the penalty.

00:28:05.600 | So I think this is great.

00:28:06.600 | Choose your custodian carefully.

00:28:09.600 | I don't have any knowledge as far as these different custodians of what they're doing that's good,

00:28:12.600 | what they're doing that's bad.

00:28:14.600 | And so that's one of the questions.

00:28:16.600 | Research, especially these real estate custodians.

00:28:19.600 | I specifically didn't mention any names when I did this because I don't know any that are good or bad.

00:28:24.600 | I haven't ever done this.

00:28:26.600 | It's just it should work, and I know there are custodians that are marketing to this

00:28:30.600 | and setting up the infrastructure.

00:28:32.600 | So I think it's an awesome, awesome, awesome idea.

00:28:35.600 | Very cool.

00:28:37.600 | Next question.

00:28:38.600 | Let's get a voicemail from Peter.

00:28:39.600 | Hi, Joshua.

00:28:40.600 | My name is Peter.

00:28:41.600 | I'm a long-time listener to the podcast.

00:28:43.600 | I enjoy it quite a bit.

00:28:44.600 | And actually, my father is a financial planner,

00:28:46.600 | so it's interesting to hear a different perspective than that which I grew up with.

00:28:50.600 | I've got a bit of a complicated business planning question,

00:28:54.600 | and I thought you might be able to help me with it.

00:28:59.600 | I'm a physician, and a colleague of mine is in a bit of an interesting situation,

00:29:06.600 | and he's bounced some ideas off of me as to how to deal with this,

00:29:10.600 | and I thought I would throw it to you and see what your thoughts are.

00:29:14.600 | My colleague is a specialty physician in the Northeast and in a practice with his father,

00:29:22.600 | and his father is what you and I would probably consider retirement age,

00:29:26.600 | well into his 70s, but is a pretty vital guy, and not quite clear when he's going to retire.

00:29:31.600 | And my partner is in his early 40s.

00:29:36.600 | The setup that he has is interesting.

00:29:40.600 | I'm employed full-time by an academic medical center,

00:29:43.600 | and again my colleague is basically about an 80% higher at the academic medical center,

00:29:51.600 | but with his father, 20% of the time has a private practice.

00:29:55.600 | And through the private practice, he gets to enjoy the tax benefits of the corporation

00:30:00.600 | and do things like write off his car, do some other things with benefits,

00:30:05.600 | and they actually also own the space they're in, which probably has overhead of about $3,500 a month.

00:30:11.600 | So as his father is getting older, within our group,

00:30:16.600 | there's starting to be pressure on him to become a full-time employee of the hospital.

00:30:22.600 | Now when that happens, there's some advantages in terms of the hospital deals with a lot of things for us,

00:30:28.600 | in terms of overhead and hiring and HR and things like that,

00:30:32.600 | but you lose all of the tax advantages that he has.

00:30:35.600 | The only tax break we can get is in our retirement accounts,

00:30:40.600 | and our hospital actually has a very excellent retirement plan,

00:30:44.600 | but he would lose all those other tax advantages.

00:30:48.600 | So the questions that he has are, in the situation he's in, how does he best size this up?

00:30:56.600 | Does he try to leverage a higher guaranteed salary for a short period of time from the hospital

00:31:03.600 | in exchange for buying out the practice or the assets of the practice?

00:31:08.600 | Does he keep doing what he's doing and hope his dad doesn't retire any time soon

00:31:15.600 | to maintain the tax advantages that he has?

00:31:20.600 | Does he just sell the practice when his dad retires and take the passive income from renting that space out,

00:31:27.600 | which is pretty high rent. We're in a northeast city with high rents.

00:31:31.600 | What are the different ways this can be sliced?

00:31:35.600 | So the call got cut off there, but we have enough information to answer the question.

00:31:40.600 | I need to, before I answer Peter's question, I need to clarify something,

00:31:46.600 | in case you didn't hear the coverdell, since I kind of put in that example at the end of the previous question,

00:31:51.600 | about take the money, use it in retirement, go fund yourself at school in Paris.

00:31:57.600 | The restrictions, so you can do what I said.

00:32:01.600 | You can take the money out of a coverdell, move it into a 529 account,

00:32:05.600 | and then you can designate, Erica, you and your husband, you can designate yourselves as the beneficiaries of that,

00:32:10.600 | and then you can use the money at an eligible institution.

00:32:15.600 | The definition of a qualified eligible institution is based upon an institution

00:32:23.600 | that is eligible for participation in the student aid programs that are administered by the U.S. Department of Education.

00:32:34.600 | That includes virtually all educational institutions,

00:32:39.600 | and it does include some educational institutions that are outside of the United States.

00:32:44.600 | If they participate in the federal student aid programs, but I shouldn't have said Paris.

00:32:50.600 | It's unlikely, I don't know if there are any schools in Paris that do or don't.

00:32:53.600 | You have to research, but the point is, at 65 years old, if you've got too much money in there,

00:32:57.600 | you and your husband need to go back to school and get PhDs and live in on-campus housing or the equivalent

00:33:02.600 | so that you can pay for your housing with the money out of the 529 account.

00:33:05.600 | That was my point, so I apologize.

00:33:07.600 | I need to be very careful with these tax issues and be specific,

00:33:11.600 | and if you didn't hear the coverdell or the account where I went over all of that,

00:33:14.600 | then that's an important distinction.

00:33:17.600 | Back to Peter's question.

00:33:19.600 | Peter, it's a fun question, and I don't think it's as complicated as you laid out in the question.

00:33:26.600 | To me, it's pretty simple, and it's not really very much of a financial question.

00:33:31.600 | It's much more of a business question.

00:33:33.600 | In summary, since I went back to the previous one, and probably you forgot the question,

00:33:37.600 | is, okay, this colleague in practice with his dad, 80% of the time he's working at a teaching hospital.

00:33:42.600 | What does he do? The dad's probably going to retire.

00:33:44.600 | Should he sell the practice, go to the hospital, et cetera?

00:33:47.600 | In my mind, it's simple.

00:33:49.600 | What does he want to do?

00:33:51.600 | Because until he knows what he wants to do, there's not really a financial solution.

00:33:55.600 | The only way that a financial planner can help in this situation is if he says,

00:33:58.600 | "Here's what I want to do. What's the smart way to do it?"

00:34:01.600 | Now, I recognize, obviously, you can't know exactly what that situation is,

00:34:07.600 | and so you can't ask that kind of question in a voicemail, but that's the ultimate question.

00:34:11.600 | If he were sitting in my office asking me, I would say, "Well, what do you want to do with your life?

00:34:14.600 | Do you want to work for a teaching hospital, or do you want to work in private practice?"

00:34:18.600 | That needs to be the key. That is the key.

00:34:21.600 | Until he knows that, there's not really a financial situation.

00:34:25.600 | If he wants to go and work for a medical center full-time, then he should go do that.

00:34:30.600 | If he wants to run a private medical practice, a specialty practice, he should do that.

00:34:34.600 | Then we just make the financial stuff fit that in the best way possible.

00:34:38.600 | Here would be my way of thinking through that.

00:34:41.600 | How good of an investment/business, how good of a business/investment is the private medical practice?

00:34:50.600 | There's nothing magical about the tax benefits of a medical practice versus any other form of business.

00:34:56.600 | If he doesn't like the medical practice, there's no reason to keep a failing business or a not-fun business because of the tax benefits.

00:35:05.600 | Go get a good business if you're building one for tax benefits.

00:35:08.600 | You can start a Porsche racing team, and you could probably deduct more of your fun expenses than you can with your medical practice.

00:35:15.600 | That's what I would do.

00:35:17.600 | If the medical practice, if he doesn't want to run it or he doesn't want to be involved and his dad wants to get out,

00:35:22.600 | then go figure out what business he does want to be involved in and make sure that it's a business that's in line with his lifestyle goals.

00:35:29.600 | If he wants to race horses and he likes horses, he should go start a horse stable,

00:35:35.600 | and that's going to allow him to deduct his pickup truck, partially, whatever is used for the horse amount,

00:35:42.600 | and that's going to allow him to deduct his travel to the horse shows and all of that.

00:35:49.600 | The key is if your friend is deducting businesses that aren't associated with the medical practice, then that's a problem.

00:35:55.600 | He gets audited, he's done. He's got to pay the money.

00:35:59.600 | He can't take tax benefits from the medical practice and then transfer that over to his hospital.

00:36:07.600 | He can't just keep the medical practice for tax benefits and then deduct all of his commuting to the hospital.

00:36:12.600 | It doesn't work.

00:36:14.600 | Unless he's going from his office to the hospital, then that's the only way he's going to deduct his trips to the hospital in the car.

00:36:21.600 | It's either commuting or it's business mileage.

00:36:24.600 | I wouldn't mess around. There's not generally much business mileage associated with a medical practice.

00:36:30.600 | I wouldn't be deducting a 40-mile trip across town to get to a hospital.

00:36:36.600 | Don't keep a bad medical practice just for tax benefits.

00:36:41.600 | Ask yourself the question of, "Do I want to do the medical practice?"

00:36:44.600 | I would split out the building and view that as its own question.

00:36:48.600 | Hopefully, they're disconnected from the practice.

00:36:53.600 | I would split that out.

00:36:55.600 | That's the answer from your friend's perspective.

00:36:59.600 | Those are his three primary questions.

00:37:02.600 | What do you want to do with your time and with your life?

00:37:04.600 | Do you want to work at an academic hospital?

00:37:06.600 | Do you want to work in private practice?

00:37:09.600 | That would be the question. What do you want to do?

00:37:11.600 | Even if you get out of the private practice, you still don't have to take that 20% of the time and put it towards the academic hospital.

00:37:19.600 | Take the 20% of the time and work on your Porsche racing league and build your team up and win some races as your racing business.

00:37:28.600 | They're not necessarily equivalent.

00:37:30.600 | What do you want to do with your life?

00:37:32.600 | The number two question is, "Is this private medical practice a good business to have?"

00:37:38.600 | Depending on the specialty, depending on the scenario, with the Affordable Care Act, it may or may not be.

00:37:43.600 | I personally have not met many, actually haven't met any physicians who are still excited about the practice of medicine from a business sense with the passage of the Affordable Care Act.

00:37:54.600 | I'm sure they exist, but most of the ones that I have interacted with are trying to get out in some way or another.

00:38:00.600 | The ones who aren't trying to get out that I do know are just simply young enough that they don't really have a choice.

00:38:07.600 | They're still young enough that it's not about the business. It's still about the mission.

00:38:12.600 | Most of the physicians that I know are trying to get out.

00:38:16.600 | That's been before the Affordable Care Act.

00:38:18.600 | I had one guy that said, "Literally, I worked twice as hard for half the money."

00:38:22.600 | This was over the last 10 years.

00:38:24.600 | He had gotten out a long time ago.

00:38:27.600 | The question, "Is this medical practice a good business to have?"

00:38:30.600 | Does it have a future post-Obamacare?

00:38:33.600 | Can you structure it in such a way that it's actually going to be a worthwhile use of your time?

00:38:39.600 | Or do you want to just take your expertise and go and sew together cleft palate lips of kids in Africa or go to Physicians Without Borders and travel to Haiti and treat earthquake patients or whatever it is that you want to do?

00:38:54.600 | Is that a better use of your skill than dealing with the practice?

00:38:57.600 | And then number three, the separate question is, "Is this office building a quality piece of commercial real estate that you actually want to own?"

00:39:05.600 | If it is, then keep it. That's disconnected from the medical practice.

00:39:08.600 | You could sell the practice, keep the building, collect the rent on the building, and let someone else pay it for you, and you don't have to deal with the hassle of running the practice.

00:39:18.600 | So that may be a great scenario. That really might be.

00:39:22.600 | But on the other hand, it may not be a good investment, so in that situation, get out of it.

00:39:27.600 | Sell it or do a 1031 exchange into another property if you have a better one or you can set one up.

00:39:33.600 | So in my mind, there are three completely separate distinct questions.

00:39:38.600 | What happens is usually in situations like this, people get – at least in my experience, people get addicted to their certain business that they know, not recognizing that there's really nothing magical about – there's nothing magical about a medical practice versus a hospital or versus, again, a Porsche racing team.

00:39:58.600 | Whoever owns a Porsche racing team, if they can make money at it, that's just as – all the same tax code applies regardless of the type of business.

00:40:07.600 | That would be how I would answer the question.

00:40:09.600 | And so it's not a – in my mind, it's a simple question, but those are the questions that I would answer.

00:40:15.600 | Once he and his father know what they want to do, once his father says, "I want to retire," or "I want to keep working for another 15 years," and once your friend knows what he wants to do, "I don't like this.

00:40:26.600 | I want to just go and teach. I want to go do my 9 to 5 at the hospital and then I'm done and spend my time on the weekend in my garden," then it's clear.

00:40:37.600 | And so all financial planning starts with goals.

00:40:40.600 | And so your financial planner's job is to say, "Based upon your goals, what's an intelligent way of doing it?"

00:40:47.600 | But if your friend doesn't have a goal of racing Porsches, then just because you can do it doesn't mean you should do it.

00:40:54.600 | You're better off spending time in the garden if that's what he enjoys.

00:40:57.600 | So I hope that's helpful.

00:40:59.600 | That's just what appears – that's what it seems to me.

00:41:02.600 | I hope that's helpful.

00:41:03.600 | If any of you guys have more ideas, leave them in the show notes for today's show.

00:41:07.600 | Next question comes from John and he says, "Hi, Joshua.

00:41:11.600 | I was listening to your set of three tax planning podcasts in a row.

00:41:14.600 | And I got to thinking that I would like to know how to do correct planning and day-to-day activities to help with my tax deductions related to side businesses.

00:41:22.600 | I currently do a hodgepodge of activities such as keeping receipts and writing people's names on them with the vague notion that maybe these will count as a way to take a deduction on all of my eating expenses throughout the year.

00:41:33.600 | I know this is probably not enough.

00:41:35.600 | I'm guessing I need to take some meeting minutes during those lunch meetings to show what was discussed was business relevant.

00:41:40.600 | But honestly, I don't even know if that is enough.

00:41:42.600 | Do you have a good resource to refer me to?"

00:41:46.600 | It's a good question.

00:41:47.600 | And, John, the best resource that I have found so far is – well, there is A, a resource from your tax accountant.

00:41:54.600 | And you need to work closely with your personal tax accountant.

00:41:59.600 | I'm not an accountant.

00:42:00.600 | I'm not an enrolled agent.

00:42:01.600 | I'm just an interested financial planner.

00:42:04.600 | So that's where I've – why I've studied it.

00:42:06.600 | But the best resource that I've found on actually the specific mechanics – you would think there would be dozens of books on this.

00:42:12.600 | The best one I've found so far is a book called Lower Your Taxes Big Time by Sandy Botkin.

00:42:18.600 | And Sandy Botkin is a CPA and an attorney.

00:42:21.600 | I think he used to work for the IRS and now he does these seminars on lower your taxes.

00:42:25.600 | But what's useful about his book – it's pretty hypey but it's still – it's a good one.

00:42:29.600 | It's pretty hypey.

00:42:32.600 | But he's careful.

00:42:33.600 | And the key is he shows – he talks about little things like that of how to set it up, what to actually do.

00:42:40.600 | And surprisingly, there is some guidance from the IRS.

00:42:44.600 | But there is actually surprisingly little sometimes.

00:42:48.600 | And so what I would say is – I'll answer your question about the meals because there is some guidance on that.

00:42:56.600 | But let me answer the meals first.

00:42:59.600 | Off the top of my head, the IRS doesn't require – a receipt is not required.

00:43:04.600 | There's a little rule.

00:43:05.600 | The receipt is a good idea.

00:43:07.600 | But there's a little rule that if you have – if your expense is less than $75, you don't necessarily need to be able to produce a receipt for the expense.

00:43:17.600 | But you do need to have a diary or a journal of some kind.

00:43:22.600 | And you need to illustrate who you were talking with, who you had lunch with, what you were talking about, what was the business purpose, what was the amounts – what were the amounts of the food.

00:43:31.600 | You need to have notes on this.

00:43:33.600 | And so you got to figure out a system that's going to work for you that will be smooth and appropriate for you.

00:43:41.600 | But the key is to be able to illustrate, "Yes, on this date, I had this notes and here's where I was."

00:43:47.600 | The key is details.

00:43:48.600 | So you got to work out a system that is going to work for you.

00:43:51.600 | An easy way, if you are in the habit of tracking every dollar that goes in and every dollar that goes out – and I think that is probably one of the most important things to do – is that you should set up a system for yourself where you track every single dollar.

00:44:05.600 | Now, the average layperson listening to this show who hears that is going to be totally overwhelmed, which is why I don't harp on that too much because it's really overwhelming.

00:44:16.600 | I know I'm dealing with people from all different stages, and if somebody is just getting interested in personal finance, it's overwhelming to say every single dollar needs a name.

00:44:24.600 | But you really should.

00:44:25.600 | You should be running maybe Quicken.

00:44:27.600 | You might be running QuickBooks or a free alternative.

00:44:30.600 | Maybe it's an Excel spreadsheet.

00:44:32.600 | But every dollar, every transaction should be in that with notes and details about every dollar and every transaction.

00:44:39.600 | That will make your job a lot easier, where on December 31, you're sitting down going through your books and you're just going through every single meal.

00:44:47.600 | And if you can go through that transaction, regardless of the account that you use – and I'm going to give you some tips that I figured out that might help you – regardless of the account that you use, if you could look through and you find out that you ate out 138 times during 2014, and you look through and it says, "Lunch with Joe."

00:45:07.600 | "Here's what we talked about."

00:45:09.600 | "Lunch with Susie."

00:45:10.600 | "Here's what we talked about."

00:45:12.600 | And you can look and say, "Ah, 14 of these meals were a business expense."

00:45:22.600 | Then that makes it very simple to break that out into a category.

00:45:25.600 | And if you're preparing your own returns, you just figure out what's business.

00:45:41.600 | It's not a big deal.

00:45:42.600 | But you have to have the records.

00:45:43.600 | Now, what's a disaster is if you're going through at the end of the year and all you have is your end-of-the-month statements, bank and credit card statements.

00:45:50.600 | That's a disaster.

00:45:51.600 | So if you can – I mean you can do it all with one account.

00:45:55.600 | There are some dangers in that.

00:45:57.600 | And every accountant that I've ever met would warn against that, especially if you're just doing everything on one credit card.

00:46:04.600 | So, for example, if you had a credit card, you're carrying a credit card balance, and you're trying to deduct that interest balance.

00:46:11.600 | Now, you get pretty squirrely if you've got personal expenses and business expenses on that.

00:46:17.600 | So there's some simple ways to do this.

00:46:19.600 | If you have a system where you're tracking every dollar, make a note of it.

00:46:22.600 | And if you can do it across accounts, you could literally just have one account, and you could go through and keep all of these things if you have simple businesses.

00:46:29.600 | If you have a complex business, and what you described is just simply just a very simple side business, if you have a complex business, this is completely different.

00:46:40.600 | But you could just have one account, and you go through, and because you record every transaction, and you note this is specifically potentially deductible.

00:46:48.600 | What I would do if I had a couple of side businesses, and I know from parts of your email that I didn't read that you have multiple businesses,

00:46:56.600 | I would keep a separate credit card for each account or a separate checking account.

00:47:00.600 | So you just get a little credit card for business A and write with a sharpie on it, "This is the credit card that I use for this company."

00:47:09.600 | And that makes it very simple at the end of the year just simply to go through, and you know every expense from this set of credit card statements is for this company.

00:47:18.600 | Every expense on credit card B is for company B, and that can help to keep you organized.

00:47:26.600 | You need a journal of some kind.

00:47:28.600 | And so how I've often done this over the years when I was a financial planner, I kept a calendar, a paper calendar.

00:47:33.600 | And all you need to do is I had every appointment on that paper calendar, and every appointment, if I had a lunch appointment,

00:47:41.600 | then I know I have a calendar appointment scheduled.

00:47:44.600 | It's there, and I had lots of records.

00:47:47.600 | So if I'm audited on that, I could go back and pull up all of my software and show the records and say, "Here is when I scheduled the appointment."

00:47:54.600 | So it was in advance, and I knew that everything was there.

00:47:57.600 | And so I have the appointment, and then after the appointment, just jot down, you know, in my case, it was financial planning terms.

00:48:04.600 | So I would keep notes after the appointment that said, you know, I got a -- you know, in our business, we would call it -- I got a set of facts.

00:48:12.600 | I have the facts on what the person's situation is.

00:48:14.600 | I opened an active case, which means there's ongoing work that I'm going to do and provide for them.

00:48:18.600 | This was a presentation.

00:48:20.600 | I presented a solution to them or whatever the situation was.

00:48:23.600 | That's all listed in my notes.

00:48:24.600 | And then as soon as I left the meeting, I would dictate detailed case notes from my files.

00:48:29.600 | So if an IRS auditor is sitting in my office, I can just simply pull it out, and every single appointment is there, every single calendar appointment is there.

00:48:38.600 | I've got detailed notes on exactly what we talked about, and that's key.

00:48:41.600 | So it may be as simple for you as taking a paper calendar and doing that.

00:48:45.600 | That would be a good idea also for your mileage.

00:48:47.600 | You want to make sure that you track your business mileage.

00:48:50.600 | So if you're going to go for a business meeting out to this, you know, to this restaurant, track your business mileage there and your business mileage back to your central place of business.

00:49:01.600 | And so a simple calendar can work.

00:49:03.600 | You can do this with a simple notebook and journal.

00:49:05.600 | And so you can establish a day-to-day diary.

00:49:09.600 | That would be a really good idea.

00:49:10.600 | If you're working on your business, you should keep notes.

00:49:12.600 | So December 12th, today I spent two hours recording a show.

00:49:17.600 | I met with Tom.

00:49:18.600 | I did these certain things.

00:49:20.600 | And that will help you when it comes to tax time.

00:49:22.600 | So the key is just track all your expenses and have notes on things.

00:49:26.600 | And then you can go through at the end of the year, and you can go through everything and figure out where do I put this, where do I move this, where do I do that.

00:49:34.600 | That would be my best suggestion for you.

00:49:38.600 | It makes a lot -- if you can get a good system, and it can be as simple as a notebook or an Excel spreadsheet or QuickBooks, NewCash if you want a free version.

00:49:48.600 | I've used NewCash and GNU, C-A-S-H.

00:49:51.600 | It's a free open-source version of QuickBooks.

00:49:53.600 | That will help you a lot.

00:49:55.600 | And I would encourage you.

00:49:57.600 | But, again, simple notebook, simple calendar, great idea.

00:50:00.600 | Just write the details, write the details, write the details.

00:50:05.600 | Get and read Sandy Botkin's book.

00:50:07.600 | I'll put that in the show notes.

00:50:11.600 | Next question from Clarissa.

00:50:13.600 | Joshua, appreciate your show.

00:50:14.600 | As a newly married 26-year-old, I'm taking a huge interest in our financial planning and future.

00:50:19.600 | And your show has brought so much illumination to a completely new subject to me.

00:50:22.600 | I'm self-employed, and my job allows me to listen to audio as much as I like, and I love the long show format.

00:50:27.600 | The depth of the subject matter is great.

00:50:29.600 | An idea I'd love to hear more about would be the benefits and financial implications of multi-generational living.

00:50:37.600 | My sister and I are currently looking into buying an apartment complex to share with our spouses and our parents,

00:50:43.600 | hopefully providing care to them as they age, and possibly child care and support to us as we grow our families.

00:50:50.600 | I'd love to hear your thoughts on that.

00:50:52.600 | Clarissa.

00:50:53.600 | Clarissa, I love this question.

00:50:54.600 | I think this is super, super fun.

00:50:56.600 | One of my beefs, actually, with the U.S. culture, the U.S. American culture, is somehow we've developed this idea that we have to,

00:51:05.600 | you know, we can't get along with family, so we have to be as far away as possible.

00:51:10.600 | I really like the, some aspects, but I like this aspect of the Latin cultures and the Asian cultures.

00:51:18.600 | Those have been where I've had the most experience, where there's a much more integrated family unit.

00:51:23.600 | And in our society, though, this is such a tense subject.

00:51:26.600 | You know, there's the joke about the, what is it, failure to launch.

00:51:30.600 | There's the joke about the person that, you know, can't get out of their parents' house.

00:51:36.600 | And we've built this cultural concept up that somehow the mark of a successful 18-year-old is that he can get out of daddy and mommy's house

00:51:45.600 | and, you know, get out and start paying their own way and start paying their own rent.

00:51:50.600 | And that the mark of a failure of a parent is if your 30-year-old son or daughter moves back in with you, you know,

00:51:57.600 | that somehow that's a shame that your child failed to launch.

00:52:02.600 | Now, I get it if you want to live your own lifestyle.

00:52:05.600 | I don't know what it's like to live with a 22-year-old son at the moment, so I don't, you know, maybe I need to kick the kids out and have my own space.

00:52:14.600 | I probably won't know until I get there, but I think this is one of those cases of confusion, of causation versus correlation.

00:52:22.600 | That I think what parents want when they're trying to do this is they want their children to be independent and self-supporting.

00:52:32.600 | And so, but my question is, do they need to be independent and self-supporting?

00:52:37.600 | Is that measured by being out of the house, or is that, and being away, and so we're going to,

00:52:41.600 | they got to, everyone's got to do their own thing and fight their own way in the world,

00:52:44.600 | or is that measured by their character and personality?

00:52:47.600 | With the exception of two years in college when I lived outside of my parents' house,

00:52:53.600 | I actually lived with my parents until I got married.

00:52:57.600 | But when I got married, I was one of, I'm more responsible and self, like self-directed than anyone I know.

00:53:06.600 | The reason I lived with my parents is because I wanted to help them, and I paid rent, with the exception of some time in college,

00:53:13.600 | I paid rent to my parents every year that I lived there since I was 18.

00:53:18.600 | So even though I was an adult child living in their house, I wasn't freeloading off of them.

00:53:22.600 | In fact, it would have been far easier and far cheaper of me to go and do something else and live in some other way.

00:53:28.600 | I actually thought many times that I'm going to go live in an RV or do something.

00:53:33.600 | It would have been cheaper for me to do some crazy thing like that than living at home and supporting my parents.

00:53:39.600 | But I wanted them to benefit. I wanted to help them. I wanted to support them.

00:53:44.600 | And as their son, I am responsible for them.

00:53:47.600 | I feel I've taken, in our culture, most of us, we reject that responsibility, but to me, that's very important.

00:53:52.600 | So I wanted to help them.

00:53:54.600 | And why would I want to go and live alone and live in some cold, empty apartment

00:53:59.600 | when I can live in a warm, inviting house with people that I love?

00:54:03.600 | And so, in my mind, the question is not, "Do you have to get away from your family and be gone?"

00:54:10.600 | The question is, "Can you be responsible and live as a contributing person?"

00:54:16.600 | Now, I actually, one of the things I don't like is many times,

00:54:20.600 | specifically I've seen this in some of the Latin cultures and some of the Italian,

00:54:24.600 | Italy was where I saw it, just one country in Europe,

00:54:27.600 | where I look at some of the people in that culture, especially, I get pretty harsh on men.

00:54:34.600 | And I say, "Why are you freeloading off of your mom?

00:54:38.600 | You need to be supporting your mom and you need to be helping her.

00:54:42.600 | Why are you freeloading off of your dad?

00:54:44.600 | What's this nonsense of, 'Let me roll into the kitchen and expect my mom to make me food?'

00:54:48.600 | That's ridiculous."

00:54:50.600 | But that's not necessarily in my mind. That's ridiculous.

00:54:53.600 | That doesn't show the values that are important to me.

00:54:56.600 | That's very different than helping my mother.

00:54:59.600 | And there is certainly an exchange of value.

00:55:02.600 | I help her with certain things and she can help me.

00:55:04.600 | And so maybe if my mom enjoys cooking for me, great.

00:55:07.600 | But I'm not going to freeload off of my parents. That would be the question.

00:55:11.600 | So to me, I think people have gotten this cultural idea of wanting people to be independent.

00:55:17.600 | And they feel like, "Well, if I just kick my kid out, they'll be independent."

00:55:20.600 | I'm telling you, just because your kid is living in a different house does not mean that they're independent.

00:55:24.600 | If you actually look at it from the financial aspect, which was your question,

00:55:28.600 | the financial benefits are huge.

00:55:31.600 | Are absolutely huge.

00:55:34.600 | One of the reasons why, one of many reasons why in this country,

00:55:38.600 | you have a growing wealth inequality gap among different...

00:55:46.600 | I don't have the data in front of me, so I'm going to be very careful here.

00:55:50.600 | But if you look through some of the data, and some of the data on different socioeconomic classes,

00:55:57.600 | different ethnic groups, different parts of society,

00:56:02.600 | one of the themes that you can trace is the theme between marriage and wealth.

00:56:10.600 | And in general, married people are wealthier than unmarried people.

00:56:16.600 | And so you have certain segments of our population in which marriage,

00:56:22.600 | the rates of marriage, and the rates of single income parenting and single income households,

00:56:28.600 | are dramatically different, and there's a corresponding wealth inequality.

00:56:33.600 | And part of that has to do with just simply the concentration of the decrease of expenses.

00:56:38.600 | Having two people living together is not twice as expensive as...

00:56:44.600 | You get the point. Multiple people living together lowers costs.

00:56:48.600 | And so this is the key. If you look at immigrants, down here, there are a lot of...

00:56:54.600 | This is like... There are a lot of low income earning immigrant households.

00:57:00.600 | And I actually used to work with... I used to work on a farm,

00:57:03.600 | and I worked with a bunch of Spanish guys that worked on the farm,

00:57:06.600 | and this was entry level labor, and I speak Spanish,

00:57:11.600 | so it was easy for us to spend a lot of time together just chatting.

00:57:14.600 | And I would ask them about their lifestyle, how they do it,

00:57:17.600 | and the amazing thing is, these guys are... It was mainly men,

00:57:20.600 | and they were mainly supporting their families back in Central America,

00:57:24.600 | and they were sending massive amounts of money home.

00:57:28.600 | And the reason they were doing it is because they were willing to live many people in one unit.

00:57:34.600 | And that made a huge difference for them.

00:57:37.600 | And as I travel in Central America, you can see in many towns,

00:57:41.600 | you can just walk down the main street, and you can clearly see who has a...

00:57:45.600 | Usually it's a husband. Who has a husband in the US working and sending money back.

00:57:49.600 | The niceness of the house is dramatically different.

00:57:52.600 | So if you look at it as a tool, if you can solve the relationship issue,

00:57:57.600 | and I think my goal is I don't want to hate my kids when they're older,

00:58:02.600 | and I want them to not hate me either.

00:58:05.600 | Now it's actually a little higher than that.

00:58:07.600 | And many people say, "Oh Joshua, you just don't have a clue what you're talking about yet."

00:58:10.600 | But I've always had good relationships with my parents,

00:58:13.600 | and I have some... This is not a parenting show,

00:58:16.600 | but I do have some ideas as to what they did differently,

00:58:19.600 | that I've always had good relationships with them,

00:58:21.600 | and I enjoy, I love spending time with them.

00:58:24.600 | And I lived with them very easily as an adult,

00:58:27.600 | running my own independent life, caring for myself and supporting myself,

00:58:32.600 | and I was very responsible with everything as an adult,

00:58:37.600 | even though I lived with my parents.

00:58:39.600 | But yet when you start to add these things together,

00:58:42.600 | and the decrease of cost of a family unit can work together,

00:58:48.600 | in my mind it's amazing.

00:58:50.600 | So that's one of the primary reasons I live in West Palm Beach, Florida,

00:58:54.600 | because it's where my family structure is, and that brings huge, huge benefits.

00:58:58.600 | The idea that you said about getting a multi-unit complex,

00:59:02.600 | maybe you've got a triplex or a quad, quadruplex, something like that,

00:59:06.600 | or maybe you're thinking of an 18-unit apartment building,

00:59:09.600 | and you're just going to take three apartments for the family.

00:59:12.600 | I think that is perfect.

00:59:13.600 | And if you look at...

00:59:15.600 | I assume you don't see anything about your family being immigrants,

00:59:18.600 | but I love to study how is it that new immigrants to the United States

00:59:22.600 | get so rich so fast.

00:59:24.600 | The data is stunning.

00:59:25.600 | And I say, "Well, what can we model from this new immigrant family

00:59:29.600 | in the United States that got rich fast?"

00:59:31.600 | And one of the things is the prevalence of family.

00:59:34.600 | And if you take out and you bring in the ability of family with babysitters,

00:59:38.600 | the ability to run many businesses because there are many people around,

00:59:41.600 | even just the lifestyle of what a great lifestyle it is to be with family.

00:59:50.600 | That's what all the retirees sitting in my office want.

00:59:55.600 | What's your number one retirement goal?

00:59:57.600 | I want to spend time with family.

00:59:58.600 | Well, that doesn't cost anything, so why don't you fix that?

01:00:01.600 | Now, I'm not cavalier about people have relationship problems,

01:00:06.600 | and many people need to get as far away from their family as possible.

01:00:09.600 | I get that.

01:00:11.600 | But the thing that drives me nuts, it's a little pet peeve of mine,

01:00:14.600 | is don't confuse living with family or not living with family

01:00:23.600 | with being financially responsible in some way.

01:00:27.600 | Run the numbers.

01:00:29.600 | If you can get--just look at--and if you can find a situation that works,

01:00:32.600 | where everyone has their necessary privacy--I certainly didn't want to--

01:00:37.600 | there was certainly a difference when my wife and I married

01:00:40.600 | that there was not a chance that I was going to go and live in my parents' house at that point.

01:00:45.600 | I needed to establish my own household.

01:00:47.600 | But if I could create a scenario where there was, like you said,

01:00:51.600 | a multi-unit apartment complex or in some scenario like that,

01:00:56.600 | where there's enough space that you can have the personal space

01:00:59.600 | and draw the boundaries that are necessary,

01:01:01.600 | man, the financial benefits of that and the financial implications can be huge,

01:01:05.600 | especially, you said, providing care for them as they age.

01:01:09.600 | My parents--that's what they did--is they built a house,

01:01:14.600 | and that was a house that--I was seven when we moved there--

01:01:18.600 | and--excuse me, ten--they built a house,

01:01:22.600 | and in that house we built an attached--an apartment complex in the house

01:01:28.600 | that was an entirely separate residence,

01:01:32.600 | but within the house, and moved my grandparents into that apartment unit.

01:01:37.600 | My whole family, three generations living together for years,

01:01:40.600 | and it was a big, big house.

01:01:42.600 | It was awesome because my grandparents could have their space,

01:01:45.600 | my parents could have their space, we as kids could have our space,

01:01:49.600 | and it served us so well, and it allowed my parents and us children--

01:01:55.600 | because that was one of the major reasons why I actually lived there,

01:01:58.600 | was to help care for my grandparents--

01:02:00.600 | that allowed us to care for my grandfather as he had suffered dementia for years

01:02:04.600 | and needed full-time, round-the-clock care for the last few years of his life.

01:02:08.600 | He was completely incapacitated, and we couldn't have done it without that,

01:02:12.600 | and so you would have had to look for an expensive solution

01:02:15.600 | and hire a nurse to come into their house,

01:02:18.600 | or pay down here $6,000 a month for a nursing home,

01:02:21.600 | but we were able to care with just a little bit of help,

01:02:24.600 | a few nurses here and there part-time coming in for a little bit of respite care.

01:02:28.600 | We were able to care for my grandparents because of that planning in advance,

01:02:33.600 | and there's actually--I don't have any data in front of me--

01:02:36.600 | but there's actually a large growth in the new home construction.

01:02:40.600 | I was looking at a report one time from, I think, Toll Brothers,

01:02:43.600 | and they were talking about the increasing prevalence of this in our society,

01:02:51.600 | where if you look at the older generations in the U.S. American society,

01:02:56.600 | we're facing this retirement crisis,

01:02:58.600 | and one of the major components of it is a long-term care crisis,

01:03:01.600 | and the generations that are in the middle--

01:03:04.600 | maybe this is your parents' generation, 50s and 40s to 60s--

01:03:10.600 | this is a major problem, they call it the sandwich generation,

01:03:12.600 | where your parents need care and your kids need care,

01:03:15.600 | and this is a real challenge for many families,

01:03:18.600 | and there aren't enough financial assets to outsource the care,

01:03:22.600 | and so families are having to adjust and to cope,

01:03:25.600 | and one of those ways is by bringing the family unit together.

01:03:28.600 | So if you look at the data, what you're describing,

01:03:31.600 | even just in one house, is very clear,

01:03:33.600 | and the benefits are massive from a cost-savings perspective.

01:03:36.600 | I think if you just solve the relationship issues and fix that,

01:03:40.600 | which is, again, easier to fix than throwing money at the problem, I think,

01:03:44.600 | unless there's a long history of dysfunctional relationships,

01:03:47.600 | fix the relationships and enjoy the wealth that can come.

01:03:52.600 | I love the idea. It annoys me so much when people talk about,

01:03:55.600 | "His kid's a failure because he's 26 years old."

01:03:58.600 | I know a lot of failures that live on their own,

01:04:01.600 | just because they live on their own doesn't make them responsible success.

01:04:05.600 | Rant over. I hope that helps, Clarissa.

01:04:07.600 | Great question. I enjoy it. Thank you for asking.

01:04:10.600 | Next question comes from Ryan.

01:04:13.600 | "Joshua, I want to ask you about disability insurance.

01:04:16.600 | "I hear a lot of people talk about getting disability insurance

01:04:19.600 | "as they say you are more likely to become disabled than unexpectedly die.

01:04:23.600 | "I also hear that it is not recommended to purchase disability insurance

01:04:26.600 | "through your employer because if you ever leave the company,

01:04:29.600 | "then your policy lapses.

01:04:31.600 | "I'm going to start looking at policies in the next few months.

01:04:33.600 | "So my question is, what do I need to know about disability insurance?

01:04:36.600 | "Where is a place that you'd recommend to go shop for disability insurance?

01:04:40.600 | "What should I look for in a policy to make sure it's a good one?

01:04:44.600 | "What should I be looking out for to tell if it's a bad one?

01:04:46.600 | "What would be a good price in a policy?

01:04:48.600 | "Would you recommend purchasing it through my employer?"

01:04:50.600 | Thanks, Joshua. I really enjoy the Friday Q&A shows.

01:04:52.600 | Keep up the good work, Ryan.

01:04:54.600 | Ryan, great question.

01:04:55.600 | I need to do a series on disability insurance.

01:04:58.600 | It's actually a real area of passion.

01:05:01.600 | It's also a real area of expertise for me.

01:05:03.600 | But frankly, I spent so many years--

01:05:06.600 | You'll notice I don't think I've done a single show on insurance

01:05:09.600 | other than a show on do you need it,

01:05:12.600 | like how to figure out if you need it and where is insurance a fit

01:05:15.600 | versus other ways of covering the risk of loss.

01:05:19.600 | Frankly, I'm just tired of talking about insurance.

01:05:21.600 | After six years as an insurance agent,

01:05:24.600 | I'm just tired of talking about it.

01:05:26.600 | So it's taken a while for me to kind of recover

01:05:28.600 | to where I can have a discussion about life insurance and disability insurance.

01:05:32.600 | So let me give you a few ideas that will help you.

01:05:35.600 | And at some point in time, I will do a whole series on disability insurance.

01:05:39.600 | I'll give in-depth information.

01:05:41.600 | I'm just--I'm not quite ready to do it.

01:05:43.600 | It's--I'm not quite ready to do it.

01:05:45.600 | So in my mind, if I could only own one kind of insurance--

01:05:50.600 | and I've said this many times to prospective clients.

01:05:52.600 | Let me tell you why.

01:05:54.600 | Let me share it with you as well.

01:05:56.600 | If I could only own one kind of insurance,

01:05:58.600 | I would buy long-term disability income insurance,

01:06:01.600 | and I would skip every other kind of insurance.

01:06:05.600 | Let me explain practically why.

01:06:07.600 | I would--but I would skip health insurance.

01:06:09.600 | I would skip life insurance.

01:06:11.600 | I would skip short-term disability insurance.

01:06:13.600 | I might even skip liability insurance and property insurance,

01:06:17.600 | property and casualty insurance.

01:06:19.600 | I really would.

01:06:21.600 | And now, I don't think any reasonable, rational, normal person

01:06:24.600 | needs to skip those important insurance coverages,

01:06:27.600 | but I would skip them.

01:06:30.600 | Let me explain why.

01:06:32.600 | The most valuable wealth-building tool that you have is your income.

01:06:37.600 | And your ability to make income is predicated upon your ability to work.

01:06:42.600 | No work, no pay.

01:06:46.600 | So the ability to work is governed by your health, primarily,

01:06:51.600 | and then your capacity.

01:06:52.600 | Let's just call it health.

01:06:54.600 | It's governed by your health.

01:06:56.600 | If you lose your health, you've got a problem.

01:07:00.600 | Now, I can recover, and I can get a financial plan to recover

01:07:03.600 | from every kind of tragedy if there's income.

01:07:08.600 | Let's pick on something simple like health insurance.

01:07:10.600 | Let's say that I get sick or hurt, and I'm unable to work,

01:07:14.600 | and I get a serious health insurance situation--

01:07:17.600 | health costs of health care, and I'm in the hospital,

01:07:22.600 | and I rack up a million dollars of medical debt.

01:07:26.600 | And I don't die, but I get out of the hospital,

01:07:33.600 | and I'm not dead, but I can't work.

01:07:36.600 | The million dollars of medical debt is a problem that I can solve

01:07:40.600 | in bankruptcy court.

01:07:42.600 | That is a legitimate bankruptable debt,

01:07:45.600 | and I personally would go and--me personally,

01:07:51.600 | from my personal moral convictions, I could not declare bankruptcy.

01:07:55.600 | But I wouldn't put that on anybody else.

01:07:57.600 | There's a reason the bankruptcy law exists,

01:08:00.600 | and that's to protect people.

01:08:02.600 | We don't have debtors' prisons anymore, and that's for a very important reason.

01:08:05.600 | So I personally--I wouldn't--but I could get out of that with bankruptcy,

01:08:11.600 | and I think that's a good place for the bankruptcy court.

01:08:14.600 | Now, I would actually probably would legally declare bankruptcy,

01:08:18.600 | and then I would work to make restitution even past that,

01:08:21.600 | voluntary restitution.

01:08:23.600 | I shouldn't have even brought that up.

01:08:25.600 | But the point is, a million bucks, dischargeable in bankruptcy.

01:08:29.600 | So I can get rid of that million dollars.

01:08:31.600 | But let's assume in that situation that I were disabled.

01:08:35.600 | What do I do for income?

01:08:37.600 | What do I live on?

01:08:38.600 | I got rid of the million-dollar debt, but what do I live on?

01:08:42.600 | I have nothing to live on.

01:08:45.600 | But if I have disability income insurance,

01:08:47.600 | and I don't have health insurance,

01:08:49.600 | I have a million dollars of medical debt,

01:08:51.600 | and I have a disability income insurance policy that's paying me money.

01:08:54.600 | Now, I can still discharge that medical debt in bankruptcy court.

01:08:59.600 | But now I actually have some money to pay some rent,

01:09:01.600 | pay some lights, and pay for some food.

01:09:04.600 | So even though I'm disabled, I can still kind of keep my life together.

01:09:07.600 | So I would never buy health insurance.

01:09:09.600 | Before, I would buy disability income insurance

01:09:11.600 | if the choice was between one versus another.

01:09:13.600 | What about life insurance?

01:09:15.600 | Many people have life insurance.

01:09:16.600 | Fewer people have disability income insurance.

01:09:19.600 | Pretend for a moment.

01:09:20.600 | I'm a provider for my family.

01:09:22.600 | I have a young family.

01:09:23.600 | Pretend for a moment that I die, and I don't have life insurance.

01:09:27.600 | Now, is this a financial problem?

01:09:30.600 | It is.

01:09:31.600 | It is a serious financial problem.

01:09:34.600 | Let's come up with some ways that my family could recover from it.

01:09:38.600 | First of all, I'm dead, and I'm gone.

01:09:42.600 | So although it's going to be a very huge emotional tragic loss for my family,

01:09:48.600 | from a practical perspective, my wife can move on with her life.

01:09:55.600 | She can work.

01:09:57.600 | Yes.

01:09:58.600 | Would it be a single-income household?

01:09:59.600 | It would.

01:10:00.600 | Would it be tough?

01:10:01.600 | It would.

01:10:02.600 | But you know what?

01:10:03.600 | I've had single-income divorced moms all over this nation

01:10:06.600 | and divorced dads that make it work.

01:10:08.600 | Is it easy?

01:10:09.600 | No, but she could do it.

01:10:11.600 | I'm dead and gone.

01:10:12.600 | She could get remarried, and maybe that will help her.

01:10:14.600 | Maybe she can find someone else,

01:10:16.600 | and that would allow her to get all the benefits of a marriage relationship,

01:10:20.600 | including the financial benefits of that.

01:10:23.600 | If I'm dead and gone, there's guaranteed,

01:10:25.600 | as long as I'm fully covered with Social Security Administration,

01:10:29.600 | there's a widow and orphan benefit that will be paid to my widow and orphan.

01:10:33.600 | And that's a pass/fail test.

01:10:35.600 | Either there's a death certificate or I'm not.

01:10:39.600 | Excuse me.

01:10:40.600 | Either there is a death certificate or there is not.

01:10:43.600 | And that's pass/fail.

01:10:44.600 | That's a very clear definition of death.

01:10:46.600 | That one we can usually--

01:10:47.600 | There are a few times when it's questionable,

01:10:49.600 | but that one's pretty clear.

01:10:51.600 | There's no contestability there.

01:10:54.600 | I'm either alive or I'm dead.

01:10:56.600 | She can sell the house.

01:10:57.600 | She can move.

01:10:58.600 | She can downsize her life, and she's free.

01:11:01.600 | Family can step in.

01:11:02.600 | This is usually what happens.

01:11:03.600 | Family can step in, can help with child care.

01:11:05.600 | She can work to supply the needs of the household,

01:11:08.600 | and she can get through.

01:11:09.600 | Is it tragic?

01:11:10.600 | Yes.

01:11:11.600 | Is it avoidable?

01:11:12.600 | Yes.

01:11:13.600 | Life insurance is so stinking cheap.

01:11:14.600 | Term life insurance is so stinking cheap.

01:11:15.600 | I don't understand why everybody doesn't have a few million bucks of it.

01:11:21.600 | The point is, let's flip it, though,

01:11:24.600 | and let's say I'm disabled and I'm not dead.

01:11:27.600 | Well, in case of disability, number one, I'm still here,

01:11:31.600 | so I have all of my expenses,

01:11:33.600 | and it's been my experience working with people who have been disabled

01:11:39.600 | that their expenses in some cases go up due to the cost of medical care,

01:11:45.600 | due to the cost of modifications to their lifestyle, to their house.

01:11:49.600 | So I'm disabled.

01:11:50.600 | And let's assume worst-case scenario.

01:11:51.600 | Most disabilities are not worst-case scenarios,

01:11:53.600 | but I like to plan for the worst case and hope for the best.

01:11:56.600 | So now we have all the current expenses plus more new expenses.

01:12:02.600 | My spouse is not free of our marriage bond.

01:12:06.600 | She can't go and get remarried.

01:12:09.600 | If I require full-time care, who's going to provide that care?

01:12:13.600 | Either she has to provide that care, or if she can't provide that care,

01:12:18.600 | she may have to go and work,

01:12:20.600 | and we have to have somebody else provide the care,

01:12:22.600 | and we may have to pay that person.

01:12:25.600 | And her marriage vows is in sickness or in health.

01:12:27.600 | So that's the beauty of marriage,

01:12:32.600 | is that you have a backup plan in case of sickness and in health,

01:12:35.600 | but financially that is tough.

01:12:39.600 | There's no widow and orphan benefit.

01:12:41.600 | Is there potentially a Social Security disability benefit?

01:12:43.600 | Yes, potentially, but the chances and likelihood of receiving it are abysmal,

01:12:49.600 | and you've got to be so incredibly disabled.

01:12:51.600 | It doesn't matter that I was some hot-shot attorney making $300,000 a year.

01:12:55.600 | If I can do any job --

01:12:58.600 | and this is one of the details with disability insurance --

01:13:00.600 | if I can do anything, Social Security considers me not to be disabled.

01:13:04.600 | It's really tough, and it's getting worse and worse

01:13:06.600 | as Social Security's finances get worse and worse and worse.

01:13:09.600 | I've been through that fight with a good friend of mine,

01:13:12.600 | and it was --

01:13:15.600 | don't count on getting a Social Security disability.

01:13:17.600 | It's horrific.

01:13:21.600 | So if I had the choice,

01:13:23.600 | I would always choose to buy disability income insurance versus life insurance,

01:13:26.600 | and I did this many times with clients.

01:13:28.600 | If a client had a limited budget, "Joshua, we've got $80 a month to spend.

01:13:31.600 | Guess what?

01:13:33.600 | We're going to spend $40 of it on disability insurance,

01:13:35.600 | and we're going to buy less life insurance than you technically need,

01:13:39.600 | because I'd rather you have long-term disability insurance

01:13:42.600 | and a few hundred thousand dollars of life insurance

01:13:45.600 | and millions of dollars of life insurance

01:13:47.600 | and no long-term disability insurance.

01:13:49.600 | I'll speed up here.

01:13:51.600 | Property and casualty, same thing.

01:13:53.600 | So my house burns down.

01:13:55.600 | Guess what?

01:13:57.600 | There's a maximum loss.

01:13:59.600 | The maximum loss is the amount of my house and my mortgage.

01:14:01.600 | That's $100,000 -- let's say it's $200,000.

01:14:03.600 | So now I'm in a situation where I've got a $200,000 bill.

01:14:07.600 | I'm in arrears on that.

01:14:09.600 | Bankruptcy court.

01:14:11.600 | Discharged.

01:14:13.600 | But if I don't have income, there's no chance of me recovering

01:14:15.600 | if I don't have the ability to create income.

01:14:17.600 | So I'll take any kind of insurance.

01:14:19.600 | Liability, guess what?

01:14:21.600 | If I don't have any money, no matter what the judgment is,

01:14:24.600 | no matter who sued me and won,

01:14:27.600 | you can't get blood from a stone.

01:14:29.600 | If I don't have any money, it doesn't matter what the court says.

01:14:31.600 | I don't have any money.

01:14:33.600 | But if I've got disability income, I can still at least pay my bills,

01:14:36.600 | and the court will take care of that,

01:14:38.600 | and they'll make sure that I'm not impoverished

01:14:40.600 | to the point of not being able to pay my bills.

01:14:42.600 | I'm not cruising around in a Ferrari

01:14:44.600 | because of my $15,000 a month disability payment.

01:14:46.600 | The point is, I would always, always, always choose

01:14:49.600 | to buy disability insurance first

01:14:51.600 | because that protects against the one thing

01:14:53.600 | that's the ultimate disaster.

01:14:55.600 | If I lose my income, if I lose my income,

01:14:57.600 | and I cannot work,

01:14:59.600 | I've got to have a backup plan for that.

01:15:02.600 | So statistically, depending on what statistics you read,

01:15:06.600 | you're two to three times more likely to be disabled

01:15:08.600 | for some period of time.

01:15:10.600 | This all depends on the statistic.

01:15:12.600 | At an early age, then you are to die at an early age.

01:15:14.600 | Guaranteed to die, so plan for it.

01:15:16.600 | But you're more likely to get disabled than to die prematurely.

01:15:19.600 | And I don't think death is as big of a deal as disability is

01:15:22.600 | from a financial planning perspective.

01:15:25.600 | Now, where to start?

01:15:28.600 | Let me give you just a couple of quick hits,

01:15:30.600 | and I've got to boogie on.

01:15:33.600 | Where to go to shop for disability insurance?

01:15:35.600 | You need a good agent.

01:15:37.600 | I wouldn't buy this stuff online.

01:15:39.600 | And the thing is, everyone knows about life insurance.

01:15:41.600 | Everyone is an expert on life insurance

01:15:43.600 | and what kind of life insurance you should buy.

01:15:45.600 | "Oh, you should only buy 10 or 15 or 20-year level-term life insurance,

01:15:48.600 | and you should go to lifeinsurance.com."

01:15:50.600 | Fine, go for it. It works. Everyone's an expert on that.

01:15:52.600 | They don't know what they're talking about half the time.

01:15:54.600 | But nobody has a clue when it comes to disability insurance.

01:15:56.600 | I cannot think of any way that I would know how to encourage you

01:16:02.600 | to negotiate the disability insurance marketplace

01:16:05.600 | except to work with a good disability insurance agent,

01:16:08.600 | an agent is going to know, because this is so occupation-specific.

01:16:12.600 | If you are an electrician and you're a tradesperson,

01:16:17.600 | that's very different than if you are a specialty brain surgeon.

01:16:21.600 | If you're a chiropractor, that's very different

01:16:23.600 | than if you're a general practitioner doctor,

01:16:26.600 | and you need someone who has specialized knowledge of your industry

01:16:29.600 | or who is at least smart enough to research it,

01:16:33.600 | because different disability companies will cover different occupations.

01:16:36.600 | And the key with disability insurance is what is written in the contract.

01:16:40.600 | That's where all the gotchas are, is what is written in the contract.

01:16:44.600 | It is very difficult to compare,

01:16:46.600 | unless you are a real expert with disability insurance,

01:16:48.600 | it's very difficult to compare one disability policy

01:16:51.600 | to another disability policy.

01:16:53.600 | You may be looking at one that's $100 a month

01:16:55.600 | and one that's $20 a month.

01:16:57.600 | And hands down, I would never even waste the money on the $20 a month one.

01:17:01.600 | I would always choose the $100 a month one.

01:17:04.600 | So I think you need a good insurance agent.

01:17:06.600 | I really do.

01:17:08.600 | Where to shop for it?

01:17:09.600 | Start by asking around in your industry and ask if anybody else does.

01:17:12.600 | This is very common if you're in a professional capacity.

01:17:15.600 | So let's say you're an attorney, an accountant, something like that.

01:17:18.600 | Then you can just ask around and interview the people

01:17:22.600 | that your friends are using.

01:17:25.600 | If you're a tradesperson, it's much less likely

01:17:27.600 | that you know anybody that has disability insurance.

01:17:31.600 | I would look for one of the large traditional

01:17:36.600 | flagship insurance companies.

01:17:39.600 | And I would look for a mutual insurance company.

01:17:41.600 | A mutual insurance company, in my opinion,

01:17:43.600 | for disability insurance makes a big difference.

01:17:45.600 | It doesn't mean I would never buy one from a stock insurance--

01:17:47.600 | a policy from a stock insurance company,

01:17:49.600 | but it does make a difference as far as how the company functions.

01:17:52.600 | So you're big for mutual insurance companies.

01:17:55.600 | If they're right in your industry,

01:17:59.600 | it would be Northwestern Mutual, New York Life, MassMutual, and Guardian.

01:18:04.600 | Those are your big four companies.

01:18:06.600 | I would consider working with an agent from one of those

01:18:08.600 | or an independent agent if they're expert.

01:18:11.600 | It's a rare wire house.

01:18:15.600 | I know many of my friends that are wire house financial advisors.

01:18:19.600 | Very few of them are experts in disability insurance.

01:18:22.600 | But if you start with one of those companies,

01:18:25.600 | based upon my history, you could probably guess

01:18:27.600 | that I'm partial to Northwestern.

01:18:29.600 | But if you started with one of those companies,

01:18:31.600 | then you could probably get started in a good direction.

01:18:35.600 | And if you can work with a decent agent from one of those companies,

01:18:39.600 | they will be able to help you with a company that--

01:18:44.600 | help you with a policy from a carrier that will serve you.

01:18:48.600 | So, for example, over the years, I've worked with chiropractors.

01:18:52.600 | Chiropractors, none of those companies will write

01:18:54.600 | decent insurance for chiropractors.

01:18:56.600 | They're very risky.

01:18:57.600 | So I think you need to use another carrier that's one of those.

01:19:01.600 | I had worked with a client who was a TV anchor, a TV host.

01:19:07.600 | And in that situation, and had some unique health challenges,

01:19:11.600 | I placed the policy with Lloyd's of London,

01:19:13.600 | their subsidiary that does that.

01:19:16.600 | So there's some little tricks that you can--

01:19:18.600 | I worked with a client who was a rancher,

01:19:20.600 | and completely uninsurable from a disability perspective

01:19:23.600 | because on paper he made no money,

01:19:25.600 | but we were able to solve that problem with actually a cash long-term care policy,

01:19:29.600 | which is an interesting solution that's no longer existent.

01:19:32.600 | But for him it worked really well,

01:19:34.600 | is that we set up a long-term care insurance policy

01:19:37.600 | that had a cash indemnity where instead of being a reimbursement policy

01:19:40.600 | where it would pay for his cost of expenses,

01:19:45.600 | it would just pay a cash payment if he met the qualifications for long-term care.

01:19:50.600 | So it was actually a really--it worked for him.

01:19:53.600 | But it's a very specialized scenario, so I would start there.

01:19:57.600 | You need to be very careful about what's in the contract.

01:20:00.600 | That's why you need a good agent to explain it to you.

01:20:03.600 | And you can't expect some call center person

01:20:06.600 | who it's their first day on the job to be able to explain to you

01:20:09.600 | because you're going to get into some important terms.

01:20:12.600 | You're going to get into what's the definition of disability.

01:20:16.600 | Is the definition my own specific occupation?

01:20:19.600 | You'll hear lingo like "own occupation," "any occupation,"

01:20:22.600 | "modified own occupation."

01:20:24.600 | There's some very technical legal language that you need to be expert in.

01:20:27.600 | And is partial disability covered? Is total disability covered?

01:20:31.600 | Is partial covered? What are the terms of the contract?

01:20:34.600 | Does the benefit have an inflation option? How long is it covered?

01:20:37.600 | So there's a lot of kind of intricate details.

01:20:39.600 | Find an agent that you trust. I would start with those big four.

01:20:42.600 | They will--one of those, if you know someone or can call in there.

01:20:47.600 | A good way, if you don't have--pick one in your area,

01:20:50.600 | a good way is to call in and ask to speak with the managing director

01:20:56.600 | of the office or the person who's in charge of the office

01:20:58.600 | and ask which of your--describe your situation

01:21:01.600 | and ask which person you should work with.

01:21:05.600 | And if you know somebody--I would rather go with somebody I knew,

01:21:07.600 | that I knew knew their stuff when it came to disability insurance

01:21:10.600 | than I would--even if they're not one of those,

01:21:14.600 | that's just my best attempt.

01:21:16.600 | Don't buy the stuff online. Find somebody who can help you with it.

01:21:20.600 | I will do some shows on the topic in the future in detail

01:21:23.600 | so that you can feel educated, but it's pretty simple

01:21:27.600 | once you understand it, and it's very much going to depend

01:21:29.600 | on your occupation as well.

01:21:31.600 | It's very different trying to write insurance for a roofer

01:21:34.600 | than it is for a surgeon, and so it's very unique,

01:21:38.600 | and you cannot judge anything by the price of the contract.

01:21:41.600 | The last two things I need to cover.

01:21:43.600 | You can't judge anything in disability by the price of the contract

01:21:46.600 | because I could always change disability insurance contract price,

01:21:50.600 | and I literally, for the same client, same industry, same occupation,

01:21:54.600 | I could make the premiums go from $350 a month to $70 a month,

01:21:59.600 | but it's all in adjusting the terms of the contract,

01:22:02.600 | and so your agent needs to work with you to define

01:22:05.600 | what is the--what are the terms of the contract,

01:22:09.600 | and you can't compare it to group insurance

01:22:11.600 | because some group policies are great,

01:22:14.600 | and some are occupation-specific.

01:22:16.600 | So, for example, if I'm sitting down with an accountant

01:22:18.600 | and I'm reviewing the AICPA, the association--

01:22:21.600 | whatever that AI stands for--of CPAs,

01:22:24.600 | then I can review the terms of their contract.

01:22:27.600 | It's a standardized contract for a group.

01:22:29.600 | That's very different than some small company

01:22:32.600 | with 40 or 50 employees where the owner just went out

01:22:35.600 | and picked up whatever the first, cheapest policy he could get was,

01:22:39.600 | and bought it, and it placates the employee,

01:22:44.600 | and they think, "Oh, I'm covered," but in reality,

01:22:46.600 | what they have is they have a two-year benefit

01:22:48.600 | that's only covered if they can't do anything.

01:22:50.600 | Like, it's just--there can be some horrific policies.

01:22:53.600 | I always would send my clients a cheat sheet, a list of questions

01:22:58.600 | that they would send to their HR coordinator,

01:23:00.600 | and it was about 1 out of 15 where the HR coordinator

01:23:03.600 | could actually answer just some very simple questions

01:23:05.600 | about the disability policy.

01:23:07.600 | The last--oh, the other thing I needed to say before I go on is,

01:23:11.600 | should you buy it at your job or should you buy it individually?

01:23:14.600 | The answer is yes, and it depends.

01:23:17.600 | There are actually many important aspects that it depends on.

01:23:22.600 | A couple of just quick hits for you.

01:23:25.600 | If you can get insurance in the individual market,

01:23:28.600 | I would usually buy it in the individual market first.

01:23:32.600 | If you are medically uninsurable, then I would get it with the group,

01:23:37.600 | and I would make sure to go in through the group

01:23:40.600 | because there it's a lot easier to get than it is in the individual market

01:23:44.600 | where you're going to be individually underwritten.

01:23:47.600 | If you can get it in the individual market first

01:23:50.600 | and then go into your group and pile the group coverage on top of that,

01:23:55.600 | you will be able to get more coverage total than you can get

01:24:01.600 | if you do it the other way around.

01:24:03.600 | When you are individually underwritten for disability income insurance,

01:24:07.600 | you will be asked how much coverage you have,

01:24:14.600 | and they'll never replace more than whatever ratio they're willing to give

01:24:17.600 | depending on your income.

01:24:20.600 | At 60% to 70%, as your income goes up, they're willing to cover much lower.

01:24:23.600 | As your income is low, they're willing to cover, frankly,

01:24:26.600 | almost 100% of your take-home pay because the benefit is going to be tax-free to you,

01:24:30.600 | income tax-free.

01:24:33.600 | So that is one.

01:24:36.600 | But if you apply for it individually, you get that.

01:24:38.600 | Then you go to the group.

01:24:39.600 | Usually the group is just going to add on.

01:24:41.600 | So you can wind up in a situation where if you did get disabled,

01:24:44.600 | you theoretically could actually be receiving more money

01:24:48.600 | than when you were working.

01:24:50.600 | That's what the insurance company is trying to protect against

01:24:52.600 | to cover themselves for adverse selection of people trying to get more coverage

01:24:56.600 | where they would actually be better off financially disabled than working.

01:25:01.600 | But if you flip it, that's what they're trying to protect against.

01:25:04.600 | If you flip it, you get the group first.

01:25:06.600 | Let's say you get a 60% benefit with the group.

01:25:08.600 | You may be able to supplement that with an extra 20% covered by an individual policy,

01:25:12.600 | but it's not going to be as much.

01:25:14.600 | So that would be one reason to get the individual first.

01:25:17.600 | It's going to be dependent, though, very much on industry and what you're doing.

01:25:21.600 | There are some little wrinkles that can be useful.

01:25:24.600 | So, for example, if you're an accountant, if you're an attorney, an engineer,

01:25:28.600 | architect, one of these very conservative, safe professions,

01:25:31.600 | get as much as you can individually because then even if you leave--

01:25:34.600 | let's say you're an accountant and an attorney,

01:25:37.600 | and you leave and you go to another occupation,

01:25:40.600 | then your coverage will be at the best occupation classification,

01:25:43.600 | even if you go--and I used to tell clients, "Even if you go start a roofing company."

01:25:46.600 | So that is another consideration for you.

01:25:50.600 | So I'm sorry that there's so much data.

01:25:52.600 | It is a complex industry.

01:25:53.600 | I don't see any way that a layperson can negotiate it without a guide.

01:25:59.600 | I really don't.

01:26:01.600 | Because if you don't have somebody to guide you,

01:26:04.600 | I mean there's just too many areas where you can stumble and not know.

01:26:11.600 | I mean you don't know what a guaranteed renewable contract is

01:26:13.600 | versus a non-cancelable contract versus--you don't know what all these terms mean.

01:26:17.600 | And so you're trying to compare a bit.

01:26:19.600 | Now, price is important.

01:26:21.600 | It is important.

01:26:22.600 | But you're trying to shop based upon price.

01:26:23.600 | You're like, "This one's cheaper. I'll go with it."

01:26:25.600 | Yeah, but it's worthless.

01:26:27.600 | So you've got to be educated, and I don't know any way to do that other than with help.

01:26:32.600 | I really don't.

01:26:33.600 | Next question from Lane.

01:26:34.600 | "Joshua, I saved for several years from my youngest son's college through a 529,

01:26:38.600 | and now he is a freshman in college.

01:26:41.600 | His mother and I saved about $80,000 in the 529

01:26:44.600 | and another $30,000 in a separate savings account.

01:26:47.600 | We feared the government rules regarding spending.

01:26:49.600 | Now that he is in college, my question is with regard to the use of the 529 funds.

01:26:55.600 | For his first semester, I requested a check for $15,000

01:26:58.600 | and have spent about $10,500, the majority directly to the college.

01:27:02.600 | I have maintained a detailed Excel sheet on every dollar of spending.

01:27:06.600 | Questions."

01:27:07.600 | So I'm going to answer these actually one by one as he goes through them

01:27:10.600 | instead of reading them and then answering.

01:27:12.600 | "Do I need to report anything on taxes at the end of the year,

01:27:15.600 | either my 1040, his 1040, or his mother's 1040?

01:27:18.600 | We're divorced."

01:27:19.600 | The answer, Lane, is if all of the distributions from the account

01:27:25.600 | are indeed qualified education expenses,

01:27:29.600 | which I'm going to show what those are on the next question that you ask,

01:27:32.600 | if they are qualified education expenses, then there is no reporting on your return.

01:27:38.600 | If you took a distribution from your 529 plan,

01:27:41.600 | you're going to receive a Form 1099-Q at the end of the year from your custodian.

01:27:47.600 | And that form will illustrate how much came out of the plan.

01:27:52.600 | So they're going to show how much came out.

01:27:54.600 | And the distribution is actually going to be divided

01:27:57.600 | between the contributions to the plan and the earnings.

01:28:00.600 | So that's going to be key.

01:28:02.600 | If it's all qualified money, then you don't need to put it anywhere.

01:28:06.600 | You don't need to put it on your tax return.

01:28:08.600 | You don't need to do any reporting of it wherever.

01:28:13.600 | So if it's for qualified expenses, you don't need to return or mark anything anywhere.

01:28:18.600 | So that's relatively easy.

01:28:20.600 | And I'm sure there's actually a lot of abuse of that.

01:28:23.600 | We'll see.

01:28:24.600 | But that's the rule.

01:28:25.600 | You don't need to do anything.

01:28:27.600 | Now, if you wind up where, let's say, that you requested $15,000

01:28:34.600 | and you only have $12,000 of qualified expenses,

01:28:38.600 | now you've got the extra $3,000 to deal with.

01:28:41.600 | And so in this situation, you do need to actually report that.

01:28:47.600 | You actually will report it in two ways.

01:28:49.600 | Number one is you will report it as income.

01:28:53.600 | And so as you report that money as income, you'll put that on your 1040.

01:28:57.600 | I pulled up the 1040 to make sure I could give you the details.

01:29:00.600 | You're going to put that on line 21, which line 21 is other income,

01:29:04.600 | and you're going to list the type and the amount.

01:29:06.600 | So you report it there as income so that it is included for your tax calculation.

01:29:11.600 | And then because it is subject to a penalty,

01:29:16.600 | if you take a non-qualified withdrawal, then you're going to pay the penalty.

01:29:20.600 | And so you're going to use Form 5329, and it's listed right on the IRS forms.

01:29:28.600 | And Form 5329 is called Additional Taxes on Qualified Plans,

01:29:33.600 | including IRAs and other tax-favored accounts.

01:29:36.600 | Part two is Additional Tax on Certain Distributions from Education Accounts.

01:29:41.600 | And this is what covers Qualified Tuition Plans, aka 529 plans.

01:29:46.600 | And so that's where you would report that.

01:29:48.600 | You would calculate the penalty, and then that penalty goes on to your tax return on line 58.

01:29:54.600 | And if you look at line 58, line 58 here says Additional Tax on IRAs,

01:30:00.600 | other Qualified Retirement Plans, etc., attach Form 5329 if required.

01:30:05.600 | So that's the answer on tax reporting.

01:30:07.600 | Next question, are there clear-cut rules regarding what is a qualified expense?

01:30:10.600 | For example, he needed an office chair for his dorm room.

01:30:13.600 | It cost $65. Was that qualified?

01:30:16.600 | The answer is yes.

01:30:18.600 | These expenses--and pull up--always go--

01:30:22.600 | whenever you're answering these questions, first place you should go,

01:30:25.600 | IRS website, pull up their publication on the subject.

01:30:27.600 | So in this case, it's publication 970, section 8, Qualified Tuition Programs.

01:30:32.600 | What is a Qualified Tuition Program and the expenses?

01:30:35.600 | So the expenses that must be required by the institution--

01:30:39.600 | tuition fees, books, supplies, and equipment.

01:30:42.600 | So any tuition and fees or books, supplies, and equipment that are required by the college

01:30:49.600 | are all qualified expenses.

01:30:52.600 | Special needs expenses are qualified if they're connected with enrollment.

01:30:56.600 | And then expenses for room and board, they are covered if they're incurred by a student

01:31:02.600 | who is enrolled at least half-time, but it only qualifies up to the amount

01:31:08.600 | that the college estimates.

01:31:11.600 | So let's say that--I think you said you have a son.

01:31:14.600 | Yeah, son.

01:31:15.600 | So if you have a son who is living off campus and he's spending $3,000 a month

01:31:22.600 | on an apartment, but the school says that we estimate it costs $12,000 for room

01:31:27.600 | and board at the school, then $12,000 of that account is qualified.

01:31:31.600 | So it's either up to the amount that the institution says is the proper number

01:31:35.600 | or the actual amount charged if the student is living in housing that's owned

01:31:39.600 | and operated by the eligible educational institution.

01:31:42.600 | So that is what is covered.

01:31:44.600 | Office chair for a dorm room?

01:31:47.600 | No.

01:31:48.600 | It's got to be tuition fees, books, supplies, and equipment that are required

01:31:51.600 | by the college or the room and board.

01:31:58.600 | And I wouldn't consider the office chair to qualify.

01:32:02.600 | Next question, "Other example, repairs to his truck that he drives to and from

01:32:05.600 | a few times each semester--drives to and from home a few times each semester.

01:32:08.600 | Is that qualified?"

01:32:10.600 | No.

01:32:11.600 | The IRS will never allow you to actually deduct any expenses associated with cars

01:32:16.600 | unless it's associated with a business or a charitable activity

01:32:19.600 | or there are a couple other things.

01:32:21.600 | But the answer is almost always no with cars used for personal use.

01:32:25.600 | So no, that's not a qualified expense.

01:32:27.600 | "Should I be saving receipts?

01:32:29.600 | To date, all I have saved is the electronic record of each expense,

01:32:31.600 | not a paper copy of receipt."

01:32:33.600 | Not sure the answer to that question.

01:32:35.600 | I would if you have receipts.

01:32:37.600 | Otherwise, just save the electronic copy and your requirements.

01:32:40.600 | I can't remember what the IRS rules on that would be at this point.

01:32:44.600 | Receipts are always good and important, but I think in today's world

01:32:48.600 | it's probably changing.

01:32:50.600 | I should ask--I have a buddy of mine that's--two buddies that are IRS revenue agents.

01:32:54.600 | I need to ask him this question.

01:32:57.600 | In my opinion, I think that they're probably changing,

01:33:00.600 | that if you have an electronic log and you have the electronic receipts,

01:33:03.600 | that to me would be--or the electronic record, and that's archived in some way,

01:33:07.600 | I think that would be important.

01:33:09.600 | And I would make sure that those are separate records.

01:33:11.600 | And if you have receipts, I would save them.

01:33:14.600 | So it's always safer to have receipts than not.

01:33:18.600 | It doesn't mean you're not going to get it if you don't have one,

01:33:21.600 | but always safer to do that.

01:33:23.600 | "Any advice regarding how to keep the balance of the funds invested?"

01:33:26.600 | They're in the College Bound Fund and Alliance Bernstein product.

01:33:29.600 | No, no advice on that.

01:33:32.600 | I don't give investment advice on here.

01:33:34.600 | And actually, even as far as how to think of it, if your son is in college,

01:33:38.600 | I mean, this is going to depend on how comfortable you are with volatility,

01:33:43.600 | the cost of the college versus the balance in the account,

01:33:46.600 | the potential investment performance that you have.

01:33:49.600 | It's just there are so many details that I couldn't even make an intelligent comment on it.

01:33:57.600 | Two more questions.

01:33:58.600 | A question from John.

01:33:59.600 | "Joshua, quick question.

01:34:00.600 | I've heard you mention on a few of the shows,

01:34:02.600 | 'Let's ignore the inflation part of the calculation for now.'

01:34:05.600 | Usually this is said in the midst of doing simplified radio math

01:34:08.600 | to preserve the flow of the topic.

01:34:10.600 | While I appreciate the simplification and continuity of a conversation

01:34:13.600 | without going down the road of every mathematical factor,

01:34:16.600 | I do scratch my head when you do this.

01:34:18.600 | Mostly this is because of the other times when people ask about the 4% rule

01:34:21.600 | in their withdrawals to which you correct them and say,

01:34:24.600 | 'If you want a 4% real rate, then you have to factor an inflation of,

01:34:27.600 | let's say, 3%, and so you need 7%.

01:34:29.600 | What a huge difference.

01:34:30.600 | So how can you just wave off the inflation part of the calculation

01:34:33.600 | when talking about longer time horizons?

01:34:35.600 | Wouldn't the effect be even bigger?

01:34:37.600 | Perhaps it's the larger amounts in question on these longer horizon calculations

01:34:41.600 | that can make the inflation factor less.

01:34:43.600 | Thanks for any clarification you can give.

01:34:45.600 | Keep up the great show.

01:34:46.600 | I hope everyone decides to become a member."

01:34:48.600 | Me too.

01:34:50.600 | So answer that question.

01:34:51.600 | There are a couple answers.

01:34:52.600 | Number one, I may make a mistake.

01:34:54.600 | So for example, sometimes maybe I just simply mistakenly say,

01:34:57.600 | 'Let's ignore the inflation calculation,'

01:34:59.600 | and I shouldn't in that situation.

01:35:04.600 | I could make that as a mistake.

01:35:06.600 | I do make mistakes, and I've learned that it's not so easy sometimes to actually--

01:35:13.600 | it's hard to be precise when you're talking as much as I'm talking on these shows,

01:35:17.600 | and it's largely stream of consciousness.

01:35:21.600 | And I'm working to be precise, but there's so many little details.

01:35:24.600 | I'm sure I get some of them wrong, which is why I mean what I say.

01:35:27.600 | Anytime you ever catch me in a mistake, comment on the show and tell me.

01:35:31.600 | And if I find it, I'll listen to it, and I will immediately correct it.

01:35:35.600 | And that's very important.

01:35:36.600 | I need the crowdsourcing.

01:35:38.600 | That's why I say that.

01:35:42.600 | But in general, yes, it is simplified for the purpose of just simply doing--

01:35:46.600 | not getting bogged down in all the math.

01:35:48.600 | But what I'll usually do is I'll usually use a plug number.

01:35:53.600 | Depending on what I'm doing, I'll usually use--

01:35:55.600 | you'll hear me use different numbers.

01:35:57.600 | So I'll usually, in my mind, use a plug number that roughly accounts for inflation.

01:36:01.600 | So my personal benchmark that I often refer to for investment returns is 10%.

01:36:08.600 | And that's just based upon--that's about the historical return of the generalized U.S. stock market.

01:36:13.600 | That's in nominal terms, not in real terms, meaning it's not adjusted for inflation.

01:36:19.600 | So if we were adjusting it for inflation, and we were going to use a 3% or 4% number,

01:36:24.600 | then I would just plug in 6% or 7% as the rate of return if I'm adjusting for inflation in my head.

01:36:30.600 | So I'll often do that.

01:36:32.600 | That's not technically correct.

01:36:34.600 | To do technically correct math, you need to do the inflation-adjusted return.

01:36:39.600 | But usually I will skip that just to do rough math because it's enough for proving the point.

01:36:44.600 | So I often--you'll hear me use 10% or 6% because those are kind of my plug numbers.

01:36:48.600 | But the other thing I'll do is I'll often shorten up the time horizon.

01:36:51.600 | So let's say someone's asking me about a six-year goal.

01:36:55.600 | I'll shorten up the time horizon because I wouldn't use an all-stock portfolio in that scenario.

01:36:59.600 | I wouldn't use a 10% rate of return.

01:37:01.600 | That would be not right.

01:37:03.600 | So I'll often plug in 3% or 4% or 5% and I'm just going based upon a bond portfolio, a bond yield,

01:37:09.600 | or a CD of some kind.

01:37:12.600 | So I'm just kind of using a lower number and just doing quick math.

01:37:16.600 | If I've corrected people on the 4% rule and if I've made that comment about got to factor in inflation,

01:37:23.600 | then that is incorrect.

01:37:25.600 | The 4% rule--there are many 4% rules.

01:37:27.600 | There's two.

01:37:28.600 | But the one that usually comes up on this show is known as the safe withdrawal rate.

01:37:33.600 | So the 4% rule is the safe withdrawal rate, and those calculations are based upon an inflation-adjusted return.

01:37:40.600 | So there already is an inflation-adjusted return in that number.

01:37:44.600 | So if I've done that, I may have made that mistake at some point in time.

01:37:51.600 | But to clarify it, usually I will either adjust for inflation with using a lower number,

01:37:58.600 | or that's usually what I'll do.

01:38:02.600 | And I'm just partly covering my tracks, recognizing that when I'm doing a quick calculation

01:38:08.600 | and I'm doing these things live, making them up off the top of my head often,

01:38:13.600 | which gets me in trouble sometimes, then I want to make sure that this isn't precise.

01:38:17.600 | If we were going to do this, I'm going to sit down and work it.

01:38:19.600 | I need to do a proper inflation-adjusted return.

01:38:23.600 | The other aspect of it is depending on what we're talking about,

01:38:26.600 | people often aren't conscious of actual inflation rates.

01:38:32.600 | So just because the generalized consumer price index is experiencing a certain inflation rate,

01:38:38.600 | that doesn't mean that you're experiencing that inflation rate.

01:38:41.600 | If you are living in a house with a fixed rate mortgage and a fixed mortgage payment over time,

01:38:45.600 | even though the inflation for the general consumer price index may be adjusting,

01:38:50.600 | that doesn't mean that your inflation rate is adjusting.

01:38:53.600 | And there are so many ways to actually personalize an inflation rate

01:38:56.600 | that I prefer to actually over time give specific--

01:39:00.600 | if I were doing retirement planning, I want to specifically adjust each spending category

01:39:08.600 | for an inflation rate.

01:39:09.600 | So housing, if somebody's living in their own housing that's paid for,

01:39:13.600 | has a fixed rate mortgage, that's going to be adjusted much less than health care.

01:39:17.600 | So I want to apply a higher inflation rate to health care than I would to their housing.

01:39:22.600 | Or to transportation, that's going to decline over time because they're going to be maybe driving less

01:39:27.600 | or because their cars are becoming more fuel efficient.

01:39:30.600 | So even though gas prices are increasing, on an inflation-adjusted basis,

01:39:34.600 | you can drive cheaper now than you could in the past of total cost of transportation

01:39:39.600 | for a better, higher-quality product.

01:39:41.600 | So there's so many factors in it that I sometimes will just short-circuit it to try to cut it off.

01:39:47.600 | I hope that helps.

01:39:49.600 | I try to be precise, but that's the challenge of producing media content,

01:39:54.600 | is sometimes you can't be.

01:39:56.600 | Last question comes from Chris, and it's about gifting.

01:40:00.600 | So he says, "Joshua, I find myself as a recent new uncle,

01:40:04.600 | and I'd like to start contributing to an account for my nephew to use later in life.

01:40:08.600 | I would prefer not to use a 529 plan, as he may simply not want to go to college

01:40:13.600 | and instead choose a non-traditional education, start a business,

01:40:17.600 | use the money for a house down payment, etc.

01:40:20.600 | I also would like to have this fund set up so his parents cannot draw from it.

01:40:25.600 | My brother-in-law is still very young and is not currently married or engaged to his girlfriend.

01:40:31.600 | I love them both, but neither of them are what I would consider financially savvy.

01:40:35.600 | As my wife and I do not currently have children,

01:40:38.600 | I would like to be able to make routine deposits into an account,

01:40:41.600 | preferably something with low-cost index funds

01:40:44.600 | instead of making a one-time purchase of some kind of bond.

01:40:48.600 | Do you have any advice as to the type of account I should look for,

01:40:52.600 | whether it be a trust, custodial savings account, or some other investment vehicle?

01:40:58.600 | I realize that if I do not contribute to a 529, there are no upfront tax benefits,

01:41:03.600 | but if it is possible to have these monetary contributions help reduce my taxes,

01:41:08.600 | that would be a huge plus also.

01:41:10.600 | As always, thanks for the show, Chris.

01:41:12.600 | There's one important clarification that I needed to answer this question,

01:41:16.600 | so I clarified it with Chris.

01:41:19.600 | I asked him how much he planned to contribute, and he says,

01:41:22.600 | "Right now, our finances will allow us to contribute $2,000 to $3,000 per year."

01:41:27.600 | The reason why that clarification is incredibly important is that

01:41:30.600 | this question could go in so many different ways depending on what we're talking about.

01:41:35.600 | If Chris is saying, "I've got $50 million bucks,

01:41:38.600 | and I'm trying to set aside a few million to cover my nephew,"

01:41:42.600 | then how can I do that?

01:41:43.600 | That's a very different planning scenario than $2,000 to $3,000 a year.

01:41:48.600 | Let's try to answer this in a couple different ways.

01:41:51.600 | First, I want to cover up front real quick the 529 plan.

01:41:55.600 | There actually, Chris, is no account that will give you upfront tax benefits

01:42:02.600 | or reduce your current taxes other than the 529 account,

01:42:08.600 | which may, if you are in a state that you can deduct your state income taxes,

01:42:14.600 | may allow you to deduct a certain portion of your state income taxes

01:42:19.600 | based upon your 529 contributions.

01:42:24.600 | It's actually easier to cover the states that don't allow the deduction.

01:42:29.600 | 34 of the states and the District of Columbia do offer a deduction on state income taxes.

01:42:34.600 | The states that don't are California, Delaware, Hawaii, Kentucky,

01:42:41.600 | Massachusetts, Minnesota, New Jersey, and Tennessee.

01:42:45.600 | Those states all have state income taxes,

01:42:47.600 | but they don't offer a state income tax deduction or a tax credit

01:42:51.600 | for contributing to that state's 529 plan.

01:42:53.600 | Then, of course, you've got the states that don't have state income taxes at all,

01:42:57.600 | which are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

01:43:01.600 | So I'm not aware of any account that you would be able to use

01:43:07.600 | for this type of scenario that would permit you to get any up-front tax benefits,

01:43:12.600 | any up-front deductions as far as current deductions,

01:43:16.600 | although I do have one account that will allow you to do that.

01:43:18.600 | I'll get to that at the end. It's kind of a trick.

01:43:21.600 | So kind of set that aside unless the state income tax deal is a good deal for you,

01:43:26.600 | and you said you don't want to use a 529 plan because you don't want money

01:43:28.600 | to be restricted to education.

01:43:30.600 | So that's kind of done. So 529 plan's out.

01:43:32.600 | The Coverdell Educational Savings Account, you could set one of those up for him.

01:43:36.600 | But that money has to be used for education.

01:43:40.600 | It's more flexible, so it can be used for primary or secondary education,

01:43:44.600 | but it has to be used for education.

01:43:46.600 | So that's not going to work, so toss that out for you.

01:43:48.600 | Then your only other exceptions of as far as accounts, you know,

01:43:52.600 | custodial accounts, if you actually want to make the transfer,

01:43:55.600 | would be the UTMA/UGMA accounts.

01:43:59.600 | And those are problematic.

01:44:02.600 | And the primary reason that those are problematic is because

01:44:07.600 | you're making a transfer.

01:44:10.600 | So the reason the number is important, if we were doing estate planning

01:44:13.600 | and you're super rich and we're trying to make the transfer,

01:44:15.600 | then we might actually want to create what's called a completed gift,

01:44:18.600 | a completed transfer.

01:44:20.600 | We want to get the money out of your hands and into his hands.

01:44:23.600 | But in your situation, getting the money out of your hands into his hands

01:44:26.600 | is not really that big of a deal because you're not going to be able to

01:44:30.600 | get it out of his hands.

01:44:32.600 | It's not really that big of a deal because what's the benefit?

01:44:35.600 | So if we transfer the money into a UTMA or UGMA account,

01:44:40.600 | then that completes the gift.

01:44:42.600 | It's a custodial account where now your child -- or excuse me,

01:44:45.600 | your nephew is the person who has the legal right to the account.

01:44:49.600 | But what happens is that automatically at the age of majority,

01:44:53.600 | whatever it is in your state, whether it's 18 or 21,

01:44:55.600 | automatically those assets become the property of the child

01:44:58.600 | and the child can use them for any purpose.

01:45:00.600 | So I am not a fan of UTMA or UGMA accounts generally.

01:45:04.600 | They have their place, but generally because you don't have any control

01:45:07.600 | over the money at 18 or 21 and they can use it on anything that they want

01:45:11.600 | and that may or may not be in their best interest.

01:45:13.600 | If they're on crack, all of a sudden you've saved 80 grand

01:45:17.600 | and now here's 80 grand.

01:45:19.600 | Well, they're going to be dead from overdosing on crack

01:45:22.600 | and you don't have any legal authority in that case.

01:45:25.600 | And the other problem with those accounts is depending on what their parents'

01:45:29.600 | tax rates are is that in there you've got to deal with kiddie tax.

01:45:33.600 | So it used to be that the UGMA or UTMA accounts would allow you to avoid --

01:45:37.600 | there didn't used to be kiddie tax, but now if you have a minor

01:45:42.600 | who is receiving unearned income from investment income,

01:45:46.600 | the first $1,000 comes in tax-free because of the way the brackets work.

01:45:50.600 | The second $1,000 is taxed at whatever the minor's rate is,

01:45:55.600 | which is 0 or 15%, basically nothing.

01:45:58.600 | So basically anything over $2,000, though, that will get taxed

01:46:01.600 | at the parent's marginal income tax bracket.

01:46:04.600 | So depending on what you have or don't have in this situation

01:46:09.600 | with your brother or brother-in-law -- brother --

01:46:15.600 | you don't have to -- that's not going to solve your problem.

01:46:19.600 | And then you can do IRAs, Roth IRAs, but he doesn't have any earned income yet

01:46:23.600 | if he's a baby, so you can't do an IRA or Roth IRA.

01:46:26.600 | So here's my deal.

01:46:28.600 | You don't have a problem.

01:46:29.600 | At $2,000 or $3,000 a year, I would just toss the money into an account,

01:46:32.600 | keep it as a separate account for your own mental accounting,

01:46:35.600 | invest it however you want, buy the index fund, or do something like that

01:46:39.600 | and just you keep it and just accumulate the money knowing that you can give it

01:46:43.600 | to him in the future.

01:46:45.600 | You're never going to have any issue with $2,000 or $3,000 a year.

01:46:48.600 | You're never going to have any issue with making that transfer.

01:46:51.600 | Right now the annual gift tax exclusions are $14,000.

01:46:55.600 | You can double that up for you and your wife.

01:46:57.600 | So if you put $2,000 into the account, let's say we've got 18 years,

01:47:01.600 | $2,000 is what we're going to put in.

01:47:04.600 | We're going to use 10% per year.

01:47:05.600 | We're going to start with nothing.

01:47:07.600 | At the end of 18 years, you're going to have $100,000 in the account.

01:47:10.600 | Well, as the gift tax -- annual gift tax exclusions go up over time,

01:47:15.600 | you can just transfer that between you and your wife.

01:47:18.600 | You split it between the two of you.

01:47:20.600 | You split it over a year, and you can just give the money to him

01:47:22.600 | at that point in time.

01:47:24.600 | You can buy a tax-efficient investment and an index fund.

01:47:27.600 | It's not going to be a big deal.

01:47:30.600 | You're going to be fine.

01:47:32.600 | So I wouldn't even make the gift.

01:47:33.600 | I would just set it aside.

01:47:35.600 | Now some ideas, however, that I would focus on --

01:47:39.600 | I don't see any possible reason why you should make a gift

01:47:42.600 | into another account in the scenario that you illustrated.

01:47:45.600 | Keep it yourself so you have full control.

01:47:47.600 | The tax benefits are negligible as far as the growth.

01:47:50.600 | None of the accounts -- if you're not willing to put it into a college account,

01:47:53.600 | none of these accounts are going to save you money on the increases of taxes.

01:47:59.600 | The college accounts will do that.

01:48:00.600 | So just keep it yourself.

01:48:02.600 | Buy an index fund and a taxable brokerage account.

01:48:04.600 | And don't even put his name on it.

01:48:06.600 | You just keep it.

01:48:07.600 | Now here would be my thought to you.

01:48:08.600 | You mentioned things like nontraditional education.

01:48:11.600 | That's what I would use the money for.

01:48:13.600 | So I might not even invest it.

01:48:16.600 | Oh, I should have fixed my outline better.

01:48:21.600 | Buy him something he needs

01:48:23.600 | and focus on spending the money on him at an early age

01:48:26.600 | so you become the wise uncle, the wise favorite uncle.

01:48:31.600 | Contribute to something that he specifically needs now.

01:48:35.600 | If that's a microscope because he's into science

01:48:37.600 | or if that's a fancy computer because he's into videography,

01:48:42.600 | if he needs a new camera, buy him a starter camera.

01:48:45.600 | Spend the money on whatever those kinds of things are.

01:48:48.600 | And then you can just simply do it and support him.

01:48:51.600 | And that will make a bigger difference long term in his life.

01:48:54.600 | By having that for him, then the account will,

01:48:59.600 | then having just magically receiving this investment account.

01:49:02.600 | Spend the money on something that's going to help him.

01:49:04.600 | Buy him the extra classes.

01:49:05.600 | Buy him piano lessons or archery lessons or a geometry tutor

01:49:10.600 | or whatever it is that he needs.

01:49:12.600 | And invest in him in that way.

01:49:14.600 | And that investment will pay off much more in the long run.

01:49:17.600 | Or consider investing in a way that you can teach him.

01:49:20.600 | So, for example, look for a stock that he'll be interested in

01:49:24.600 | with a brand name and teach him how to invest in stocks

01:49:27.600 | and buy him shares of a company and teach him how to track it

01:49:30.600 | and teach him how to read the balance sheets

01:49:32.600 | and teach him how to read the annual reports

01:49:34.600 | and use that money so that it's actually a learning tool.

01:49:37.600 | Maybe invest in a business project.

01:49:40.600 | So if he has a business project at a young age, encourage him.

01:49:43.600 | Take him and encourage him and be an investor and give him some seed capital.

01:49:48.600 | Invest in a house with him.

01:49:50.600 | Teach him how to rehab a house or flip a house with him.

01:49:53.600 | Buy him useful toys.

01:49:55.600 | Take him to a seminar.

01:49:57.600 | Invest in business seminars and things that he can get exposed to

01:50:01.600 | the adult world at an early age that's going to cost money

01:50:06.600 | that his parents may not be able to allocate for him.

01:50:09.600 | Invest in that.

01:50:11.600 | Buy him books and pay him money for giving you book reports on those.

01:50:15.600 | Pay for hosting fees to set up his website or to set up his podcast

01:50:20.600 | or to set up his YouTube channel or whatever he needs to do.

01:50:23.600 | Give him money and give him silver coins or gold coins

01:50:27.600 | and teach him about the history of money.

01:50:30.600 | Those types of things are going to be a bigger difference for you

01:50:35.600 | because you're not going to have any problem making this transfer down the road.

01:50:39.600 | And even if--what I had forgotten to say earlier was even if you made the--

01:50:44.600 | let's say you have $100,000 in the account or $200,000 in the account

01:50:48.600 | and now he wants to go to college.

01:50:50.600 | Even then you don't have a transfer problem because you can just write the check

01:50:54.600 | to the college and then so you don't even have to deal with the gift.

01:50:58.600 | You don't have to deal with the gift tax.

01:51:00.600 | You can just write the check to the college.

01:51:02.600 | But the usefulness is you may write a check to a college

01:51:04.600 | or you may write a check so he can go to Europe and backpack around Europe for a year.

01:51:08.600 | Or you may write--so you're going to be fine.

01:51:11.600 | So that's what I would do.

01:51:13.600 | The only best idea that I have for you that would actually be deductible, however,

01:51:17.600 | is my final idea is wait a few years, pile up the money,

01:51:22.600 | and then hire him to work for you and pay him wages,

01:51:25.600 | pay him reasonable fair wages, and then double his wages

01:51:29.600 | and have him and match him and match him into a Roth IRA.

01:51:34.600 | And that's the way that you could actually get a deductible contribution

01:51:37.600 | that will actually help you on your taxes.

01:51:39.600 | Hire him in your business.

01:51:41.600 | Pay him wages. Those wages are fully deductible.

01:51:44.600 | He's only going to be making a few thousand bucks.

01:51:47.600 | So let's say it's $2,000.

01:51:49.600 | Let's say you're going to contribute $2,000.

01:51:52.600 | Hire him. Pay him to work for you on Saturdays while he's in school.

01:51:55.600 | Pay him $1,000. File a tax return.

01:51:58.600 | He reports the earned income on $1,000.

01:52:01.600 | And then match him with $1,000 into the Roth IRA, into his own Roth IRA.

01:52:06.600 | Once he has earned income, he can participate in the Roth IRA.

01:52:09.600 | And so essentially what you've done is you've given him a $1,000 gift

01:52:12.600 | that he can spend on whatever he wants, and you match him into the Roth IRA.

01:52:16.600 | And so then he's got the money.

01:52:19.600 | He can use it for college. He can pull the money out for college.

01:52:22.600 | He can pull the money out for anything he wants to do along the way.

01:52:25.600 | And that's how you get a deductible contribution to your nephew.

01:52:29.600 | That's the best idea.

01:52:30.600 | But I think if you just ignore this whole stupid--

01:52:33.600 | You're not stupid. I'm just saying this is what our society says.

01:52:36.600 | The best way to help kids is to save money for them.

01:52:39.600 | No, the best way to help kids, in my opinion, is to mentor them

01:52:42.600 | and to teach them and to share with them the wisdom

01:52:45.600 | and the things that you've learned.

01:52:46.600 | That's what makes a difference.

01:52:47.600 | Not spending money on them, not giving them a bunch of--

01:52:50.600 | a chunk of money for college, but taking them to Europe with you for a summer.

01:52:54.600 | Take them to Haiti for a summer.

01:52:56.600 | Go and build a school in Ghana.

01:53:00.600 | Go and spend the money on experiences.

01:53:04.600 | And then allow them--that will hopefully allow them to have

01:53:10.600 | a much better outlook on what he wants, and he can make up the money.

01:53:13.600 | That's the thing, is setting aside money for your nephew would be awesome.

01:53:18.600 | But $100,000 is not that big a deal to somebody who is capable

01:53:24.600 | and able to stand on their own two feet and is energetic

01:53:28.600 | and has started a couple of businesses and has been invested in

01:53:31.600 | by an uncle who took the time to spend time.

01:53:35.600 | $100,000 doesn't compare to that time.

01:53:38.600 | Shoot, take the money and take time off from work

01:53:41.600 | so you can spend time with him.

01:53:43.600 | Maybe his dad and mom don't have time.

01:53:45.600 | And so mentor him and take your time and do that.

01:53:48.600 | And I think that will make a--be a much better investment

01:53:51.600 | than an index fund in some random account.

01:53:55.600 | So I hope that helps. I really do.

01:53:58.600 | I love the question.

01:53:59.600 | I think about this a lot with my nephews and nieces.

01:54:01.600 | I've got a bunch of them, and I've got some ideas for what I can do.

01:54:04.600 | I've got more than one, though. I've got ten.

01:54:06.600 | So the question is, how do I actually negotiate that for myself?

01:54:09.600 | That's it for today's show. I thank you all for listening.

01:54:12.600 | I love doing these shows. Keep your questions coming.

01:54:15.600 | I hope you like the variety. I love the variety.

01:54:18.600 | I like--I mean, some of it may not make sense.

01:54:22.600 | I mean, I went into--gift taxes are so stupid and complicated,

01:54:26.600 | and you start tossing out gift taxes and annual exclusions

01:54:31.600 | and gift tax lifetime exemption amounts and IRAs and UTMAs.

01:54:35.600 | I didn't even mention you could do a 2503(c) trust and all this nonsense.

01:54:40.600 | So I just get simple, stay simple, keep things simple.

01:54:44.600 | My new favorite quote, as I mentioned on the show a few times--

01:54:47.600 | What is it? I forgot it.

01:54:50.600 | Anyway, keep things simple. Thank you all for listening.

01:54:52.600 | Email me the questions, Joshua@radicalpersonalfinance.com.

01:54:56.600 | Twitter, find me @radicalPF, Facebook.com/radicalpersonalfinance.

01:54:59.600 | Consider, if this has been helpful to you, if this has been useful to you,

01:55:02.600 | consider joining the Irregulars.

01:55:04.600 | A lot of stuff going on. You can't see it on the surface,

01:55:06.600 | but I got a lot of stuff going on, and I am going to be--

01:55:09.600 | that's number one focus for this next year.

01:55:12.600 | Last six months, I think we proved this concept.

01:55:14.600 | Enough of you have signed up for the Irregulars that we proved the concept.

01:55:17.600 | Now it's my job to make this a world-class financial education empire,

01:55:23.600 | basically, is what I'm going to do, because it's needed.

01:55:26.600 | So now my job is to improve the quality, make things more professional,

01:55:31.600 | get better answers, get better things.

01:55:34.600 | So that's my task.

01:55:37.600 | Thank you guys so much for listening. I appreciate it.

01:55:39.600 | Thank you, thank you, thank you. Send me the questions.

01:55:41.600 | Call them in on the voicemail line and join the membership program.

01:55:45.600 | I'm out of here. Have a great weekend.

01:55:48.600 | [music]

01:55:51.600 | [music]

01:56:18.600 | Thank you for listening to today's show.

01:56:20.600 | This show is intended to provide entertainment, education,

01:56:24.600 | and financial enlightenment.

01:56:28.600 | Your situation is unique, and I cannot deliver any actionable advice

01:56:33.600 | without knowing anything about you.

01:56:36.600 | This show is not, and is not intended, to be any form of financial advice.

01:56:43.600 | Please, develop a team of professional advisors

01:56:48.600 | who you find to be caring, competent, and trustworthy,

01:56:53.600 | and consult them, because they are the ones who can understand

01:56:57.600 | your specific needs, your specific goals,

01:57:01.600 | and provide specific answers to your questions.

01:57:05.600 | Hold them accountable for your results.

01:57:08.600 | I've done my absolute best to be clear and accurate in today's show,

01:57:11.600 | but I'm one person, and I make mistakes.

01:57:14.600 | If you spot a mistake in something I've said,

01:57:16.600 | please come by the show page and comment,

01:57:18.600 | so we can all learn together.

01:57:21.600 | Until tomorrow, thanks for being here.

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RPF0118-Friday_QandA