RPF0490-QA
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00:00:32.000 | Welcome to Radical Personal Finance. The show dedicated to providing you with the knowledge,
00:00:39.000 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:00:57.800 | building a plan for financial freedom in 10 years or less. My name is Joshua, and I am
00:01:01.000 | your host, your guide, and your fellow traveler on this journey towards financial independence.
00:01:06.000 | Today we do live Q&A. I've got a conference line opened up, a couple of callers sitting
00:01:10.500 | on the line. We'll go and have some questions and have some chats about financial independence.
00:01:17.500 | I enjoy doing these shows because it gives me a chance to talk to you and allows it to
00:01:25.080 | be very practical. One of the challenges of being a podcast host is it's easy for me to
00:01:29.020 | sit in my office and come up with things that seem relevant to me. But sometimes without
00:01:35.080 | that live interaction with you, it's often hard for me to be sure that the comments are
00:01:40.680 | very – that what I have to share with you is going to be really, really relevant.
00:01:44.400 | So we've got a few callers on the line, and we'll have to deal with some real-life
00:01:47.600 | situations. So let's start with Matt in Tampa. Welcome to Radical Personal Finance.
00:01:51.680 | How can I serve you today, please?
00:01:53.200 | All right. Thanks, Joshua. Thanks for taking my call. So my wife and I, in about two years,
00:02:00.200 | plan on me going to seminary and we'll be moving. And my hope is that I've accumulated
00:02:07.780 | enough cash as well as some assets and different retirement accounts that when I'm at seminary,
00:02:14.140 | I'll be able to primarily focus on my studies and my family and perhaps only work part-time
00:02:21.920 | if necessary. So I guess my main question was to get some of your thoughts about how
00:02:27.360 | I can hack efficiently, get distributions out of these retirement accounts, and specifically
00:02:34.360 | how to utilize a backdoor Roth/Roth conversion. And also to talk about, I guess, the five-year
00:02:42.320 | rule as it pertains to taking out qualified distributions, if I understand it right. But
00:02:49.600 | that's pretty much the main two questions.
00:02:51.680 | Okay. Well, let's start with – I want to make sure we do a good job. So let's start
00:02:55.560 | not with jumping right into that, but give me just a quick overview of your financial
00:03:00.720 | situation. How much money do you have in IRA or 401(k) accounts presently?
00:03:07.720 | Presently in my IRA and Roth IRA –
00:03:10.880 | Separate the Roth – hold on. Just the IRA or traditional 401(k)?
00:03:15.880 | Okay. In the traditional 401(k), my wife and I have a combination of about 7,000 as of
00:03:22.880 | today, and the traditional IRA is about 4,000. So about a total of 12-ish.
00:03:32.880 | And now how much in Roth IRAs between the two of you?
00:03:38.800 | About 4,500.
00:03:39.800 | 4,500. And of that 4,500, do you have any guesses on how much of that is your contribution
00:03:46.800 | to the account?
00:03:50.280 | I haven't looked for a while, but I would say about probably 3,500 or so.
00:03:55.080 | Okay. And do you have other money outside of retirement accounts, other savings or investments
00:04:00.640 | that aren't in these 401(k) accounts?
00:04:03.680 | Sure. As of today, we should have somewhere around $25,000 in cash, just in bank and physical
00:04:10.680 | cash.
00:04:12.320 | Okay. Great. And do you have any debt?
00:04:15.640 | No. No debt.
00:04:18.280 | Okay. So basically the question is you've got $25,000 in cash, you've got $4,500 in
00:04:24.920 | the Roth IRA, and then in traditional IRAs and 401(k)s, you have about $11,000. And your
00:04:30.680 | goal is to go to seminary and graduate with no debt or as little debt as possible and
00:04:37.120 | to do this in the most efficient way. Is that accurate?
00:04:40.280 | Yes, that's accurate. I also, I should have said this, I do have about $2,300 in a 457B
00:04:47.280 | deferred compensation, and I also have about 5,000 in a health savings account, which I
00:04:56.840 | try to forget about and just keep it for health emergencies.
00:04:59.960 | Okay. When do you plan to start seminary? How many years from now?
00:05:04.280 | Approximately two years, fall of 2019.
00:05:08.280 | And have you already chosen where you'd like to go to seminary?
00:05:11.320 | Yes, I believe so. It hasn't been finalized, but I think we've narrowed it down.
00:05:16.080 | How much is it going to cost you per year?
00:05:20.520 | Per year, the tuition is about $6,000.
00:05:23.160 | Okay. And how many years will you be going?
00:05:26.920 | It should be a four-year program.
00:05:28.760 | Okay. So your total cost here for your program is $24,000. Do you have any idea about financial
00:05:35.760 | aid, scholarships, other grants and things like that at this point in time?
00:05:43.600 | No, not really.
00:05:46.480 | Okay. And what's your plan as far as living expenses? How much do you think you're going
00:05:52.760 | to need for living expenses during that $4,000 time, sorry, during that four-year time?
00:05:57.760 | As of right now, it looks like somewhere around $2,200 a month, although the rental situation
00:06:04.760 | is a little iffy. And then of course with healthcare, that's kind of been a difficult
00:06:11.640 | one for me to assess just with some of the political changes or potential changes or
00:06:17.520 | lack thereof.
00:06:19.560 | What's your current plan for household income?
00:06:25.520 | Household income at that time in seminary?
00:06:28.240 | Yes. How are you going to earn your money? Is your wife going to bring income to the
00:06:31.640 | family? What's your plan?
00:06:35.320 | Predominantly it should only be me. My wife and I hope that she can be a homemaker, although
00:06:39.880 | she is a registered nurse, so she might be able to do a little bit here and there. Predominantly
00:06:46.160 | it would be me bringing in somewhere between maybe $5,000 to $10,000, either working at
00:06:52.680 | the seminary or potentially I should have my MBA by then, so I might be able to work
00:06:59.320 | something in accounting or business or taxes.
00:07:03.880 | And is your question on the backdoor Roth, the five-year plan and all of that, is your
00:07:08.360 | question basically around the idea of converting the traditional IRA and traditional 401(k)
00:07:15.360 | to a Roth with the goal of minimizing your 10% penalty tax? Is that what you're hoping
00:07:20.360 | for?
00:07:21.560 | Yes. Yeah, my hope was that I could begin those conversions in those years that I'm
00:07:27.960 | not really earning any or very much earned income and then pay the "tax" at that
00:07:34.520 | time at a zero rate or close to that and then take the qualified distributions for higher
00:07:42.240 | education expense from the Roth. I think that's what I'm trying to do.
00:07:48.560 | Interesting.
00:07:49.560 | Okay, yeah, and the question I had about the distribution is from what I had read from
00:07:55.880 | the IRS and other articles, I wasn't sure if I needed one particular Roth IRA to have
00:08:04.920 | existed for up to five years and then the monies I convert into that could be taken
00:08:09.900 | out as qualified distributions or if each instance of monies being converted to that
00:08:16.400 | Roth had to have a five-year waiting period in order to avoid that 10% penalty. That's
00:08:21.760 | where I'm a little lost.
00:08:22.760 | It's a good question. I don't know the answer for certain off the top of my head.
00:08:28.000 | My guess would be, based upon the intent, kind of the spirit of the intent of the rules,
00:08:34.720 | my guess would be that the focus that they want is they want to have the money itself
00:08:39.800 | seasoned for five years. So not just that an account has existed. Otherwise, I think
00:08:46.960 | that would be an abusive situation. Let's say that I had – I'm 40 years old. I've
00:08:50.840 | had a Roth account since I was 20 years old. But then I'd want to do a conversion into
00:08:55.760 | the Roth account this year and because of the fact that the Roth has existed for 20
00:09:01.320 | years, then I can just take it out right away. I don't think that is – although I can't
00:09:08.320 | cite it for sure and say, "Hey, here's the code or the tax court ruling," or anything
00:09:11.960 | like that that would say that. That doesn't match the spirit of the law as I understand
00:09:16.640 | it to be.
00:09:17.640 | In general, with tax planning, you're pretty safe to go with the spirit of the law. There
00:09:23.320 | are a few exceptions but in general, if you're looking at it, just think, "OK, how would
00:09:27.240 | a thoughtful, rational person apply this?" The five-year rule is – for distributions
00:09:32.580 | from a Roth IRA, the five-year rule is intended to mean that the money needs to actually be
00:09:36.940 | there for five years. So I think it would actually be the actual dollars that have been
00:09:43.080 | converted that need to sit there for five years.
00:09:46.560 | But I don't think that – I mean in general in your situation, I don't think this is
00:09:55.640 | going to be a big thing either way. You have a lot of money outside of the cash. We're
00:10:01.240 | only – in terms of your asset structure, you're really – these 401(k)s and IRAs
00:10:05.160 | are a very small component of your overall plan.
00:10:10.320 | So yes, if your income drops during the time that you're in school, then look carefully
00:10:16.440 | and see, "Can I go ahead and make a conversion to this?" But if your income drops substantially,
00:10:22.760 | then that is the time to go ahead and make any conversions that you can. Do you think
00:10:27.720 | you'll be able to save more money in the next couple of years?
00:10:30.920 | Yes. By the time I go to seminary, my expectation is we should have about $85,000 or so in the
00:10:40.040 | different assets. And I think the overall cost should be $120,000 to $140,000. So there's
00:10:46.160 | still a gap, but I think most of that could be filled with part-time work or maybe some
00:10:50.480 | other advantageous situations.
00:10:53.080 | And do you and your wife presently have children?
00:10:55.080 | I'm sorry, can you say that again?
00:10:57.760 | Do you guys presently have children?
00:11:00.880 | No, but we are expecting this coming year.
00:11:04.400 | Awesome. Congratulations. Well, I guess my thoughts for you, just to kind of wrap up,
00:11:08.840 | hopefully I've answered the question sufficiently. My thought for you would be do everything
00:11:14.520 | you can to earn now. And then probably the biggest cost is not necessarily the cost of
00:11:21.160 | seminary but the cost of housing and living expenses. And I think that while you're in
00:11:27.880 | seminary it's an appropriate time for you to look for a unique living situation that
00:11:37.120 | can cut your expenses significantly. I hate much of the modern seminary system that spits
00:11:46.080 | out newly minted and certified and ordained preachers with debt, with college debt, just
00:11:56.440 | like the secular world spits out newly minted students with college debt. I hate it. I think
00:12:00.360 | it's a terrible plan. And the biggest cost, there's two ways to attack it. There is, number
00:12:06.800 | one, the discussion of the actual cost of the seminary program, and number two, there
00:12:12.480 | is the cost of living expenses. And if nothing else, I think that one of the most important
00:12:18.520 | places, ways for churches to be involved with supporting students who have decided to go
00:12:23.800 | to seminary is at the very least to provide housing and to provide opportunities. So whether
00:12:29.320 | that's maybe somebody can put a fifth wheel camper on their, you know, behind the barn,
00:12:35.440 | or if there's somebody who has a big enough house where they've got an extra wing where
00:12:39.020 | you and your wife can live. If you only have small children, that's a lot easier than if
00:12:43.560 | you have larger children. But I think that you should look to take advantage of support
00:12:49.880 | within the church for your living expenses. And if you can cut that rent to down significantly,
00:12:57.720 | it dramatically changes the whole scenario.
00:13:01.720 | For those who are interested in seminary, one of the most inspiring articles, I will
00:13:07.160 | make a note here and write about it, but one of the most inspiring articles I've ever read
00:13:12.320 | on the subject of seminary was by Joel McDermott on the American Vision website. He wrote an
00:13:20.040 | article titled "Bachelor's Degree, BA to PhD for Under $15,000 Total – How I Did
00:13:26.520 | It." And he explains his path to, through his bachelor's degree, master's degree,
00:13:31.800 | and PhD, wherein he was able to go to school, get his doctorate in theology with, in total,
00:13:39.960 | his cost was less than $15,000. That doesn't cover some of the challenges of living expenses,
00:13:46.440 | but it does at least cover and talk about some of the challenges and expenses relating
00:13:51.460 | to classes. I found it a really inspirational article. I will link it on today's, in today's
00:13:56.480 | show.
00:13:57.480 | Curtis in Spokane, welcome to Radical Personal Finance. How can I serve you today, sir?
00:14:00.480 | Thank you, Josh, for taking my call, a long-time listener. So my wife and I, we've been married
00:14:08.080 | for just about two years now. We're pretty much settled on making a move to Hawaii within
00:14:18.400 | the next two or three years. The thing that I wanted to ask you about is, A, how viable
00:14:26.120 | is it to be financially independent in paradise? Obviously, the cost of living is substantially
00:14:36.880 | higher there. Rent, housing, food costs, you name it. I can give you a little bit of background
00:14:45.800 | as to why we want to make this move.
00:14:47.920 | Yeah, please do.
00:14:48.920 | If that helps. Yeah, so we got married a couple years ago. There's a lot of things that are
00:14:54.800 | currently going on in our lives. Her mother had colorectal cancer. She passed away about
00:15:05.440 | a year ago. And then my mother right now currently has pancreatic cancer. So we've been doing
00:15:13.280 | a lot of caregiving and we absolutely love doing it. It's just, I don't know if you've
00:15:20.040 | had to care for a loved one with cancer before, but it's very, it's a challenging process
00:15:27.280 | with all the, just the ups and downs that you would expect from taking care of a parent
00:15:33.040 | in those type of situations. Although our marriage is wonderful. It's fantastic. We've
00:15:40.760 | just had a lot of bumps in the road just from that perspective. And my wife, she's from,
00:15:48.640 | actually she's from Thailand and she, our climate here in Spokane is not conducive to
00:15:56.560 | our lifestyle. There's just not a lot of things for us that we enjoy currently in the city
00:16:02.120 | and we want to move somewhere that's more reflective of what we want to do on a daily
00:16:07.800 | basis. Hence why we want to move to Hawaii, just because of the environment, the lifestyle,
00:16:16.600 | the culture. We visited Maui a couple of times in the last two years and absolutely loved
00:16:22.640 | it.
00:16:23.640 | So I guess to me, I would answer the question in this way. The scenario you're describing
00:16:30.760 | is a matter of prioritization. If you need to get to Hawaii for a break, for an opportunity
00:16:44.000 | to rejuvenate after this difficult time of your life, and it's compatible with your and
00:16:51.960 | your wife's lifestyle goals and for her own health and happiness, she needs a change.
00:16:58.280 | So to me, those things are all way more compelling and way more important than financial independence.
00:17:07.400 | If you think about it, if – let's just focus in on the fact that your wife doesn't
00:17:11.640 | like Spokane, is miserable there. If you spend the next 10 years and your wife is miserable
00:17:17.640 | living in Spokane, but you get rich, just so that finally you can go and be happy. So
00:17:24.320 | speaking broadly with these terms, of course, I think that's a dumb plan. If a simple
00:17:30.840 | move can help significantly to bring more happiness and peace to your marriage, in my
00:17:35.960 | mind that's absolutely the way to go.
00:17:40.060 | So I wouldn't look at it in terms of yes or no, should I go or shouldn't I go? I
00:17:45.200 | would look at it and say these things are more important. You need to – your goal
00:17:49.080 | is to be in Hawaii. One component of financial freedom that is very valuable is to focus
00:17:56.180 | in on lifestyle first. I think one of the key things to do is to purchase some of those
00:18:01.300 | basic lifestyle components as early as you can. The biggest ones is location. If you
00:18:06.160 | know where you want to be and you're not there, get to where you want to be as quickly
00:18:09.980 | as you can.
00:18:11.160 | Then once you're there, start to make a new plan toward financial independence. Start
00:18:16.460 | to make a new plan toward figuring out how can I live inexpensively, increase my income
00:18:21.900 | substantially and save the difference until I can live on the cash flow from my investments.
00:18:27.660 | I think it's possible to pursue financial independence in just about any context, living
00:18:31.980 | just about anywhere. But your plan will change depending on the context that you choose.
00:18:37.340 | If you choose to live in an expensive place to live, then you will have to look at it
00:18:41.340 | and say, "Well, how can I accommodate this plan?"
00:18:44.220 | Here will be a couple of comments. Number one, expense is relative. Many times you will
00:18:50.580 | find that a place that costs more will also have higher incomes because costs are going
00:18:57.740 | to be related to income. So you may have more economic opportunities when living in a place
00:19:02.140 | that's expensive than you do in a place that's cheap.
00:19:04.500 | I love the country. I like to live out in the country and Mississippi is a beautiful
00:19:08.580 | state. But there aren't as many opportunities, financial opportunities to earn a lot of money
00:19:14.340 | in a physical job living in Mississippi as there are in New York City. So there's a reason
00:19:19.020 | for the difference in cost. This balance can be changed and kind of brought a little bit
00:19:25.200 | out of whack when you live in a place where a lot of people are retirees or when you live
00:19:29.720 | in a place where people earn their income from abroad. That does change things. But
00:19:33.460 | still, there's got to be some connection between wages and cost of living.
00:19:37.300 | The next thing is every place that you choose to live will have some offsetting features
00:19:43.660 | that you can look at. So Hawaii might have expensive rent, but you might have a climate
00:19:50.420 | that doesn't require as much energy use. Energy is expensive in Hawaii, so I got to be careful
00:19:55.300 | there. But maybe you don't need air conditioning quite so much. Or maybe there's a way that
00:19:59.700 | you can figure out how to get your food less expensively.
00:20:02.780 | And so how I would approach it is I would start by saying we've gone through the process
00:20:06.540 | of saying this is important to us. We want to make this lifestyle change. Let's figure
00:20:11.700 | out how to make the transition. And then once we're there, how can we intelligently handle
00:20:16.340 | all of the details that are there? There may be some sacrifice involved. Maybe you say
00:20:21.100 | we were living in the city, but we found an opportunity to live on a farm where they'll
00:20:24.340 | give us – we're going to live on an organic food farm in the mountains and they'll give
00:20:28.340 | us discounted rent in exchange for labor. That would be a really great thing for us
00:20:32.360 | to go and do for a year while we get our feet under us, give us a time to spend out, spend
00:20:36.340 | time outside working on a farm while we figure out what our next step is. Or maybe you share
00:20:42.220 | a house with other people so that you can cut your expenses, et cetera. You can figure
00:20:46.500 | out a way once you're clear on what you want to do.
00:20:48.820 | And then my other encouragement would be remember, incomes are not fixed. There are lots of ways
00:20:53.220 | to make money. And if you have a goal that's important to you, you can probably find a
00:20:57.580 | way to increase your income substantially towards that goal.
00:21:01.860 | Okay, that's great advice. Yeah, we've – I've done a lot of research on the economics of
00:21:10.740 | Hawaii and it seems like for the last at least five to ten years that wages have remained
00:21:17.420 | relatively flat while the housing market has escalated quite substantially. So jobs, at
00:21:24.660 | least in terms of income, have been difficult even for the locals to afford even their mortgages.
00:21:34.580 | But yes, to give you some background, our current household income right now is about
00:21:41.180 | $115,000 a year, about $40,000 in cash, with about $60,000 in Roth, IRA, and traditional
00:21:50.420 | 401(k)s. Our current value of our house currently is about $280,000 and we owe about $185,000.
00:22:03.220 | I guess one thing we did consider is if we did move, we could sell the house, but we
00:22:07.780 | could potentially rent that out as well at about $2,300, with our current mortgage payment
00:22:16.500 | at $1,350 per month. So – and we also run a local business in the city and just based
00:22:28.300 | on a rough number we could potentially sell that for $100,000. So I guess with all that
00:22:35.100 | information at hand, would it be wise to purchase a home and be house poor in Hawaii or would
00:22:45.560 | you still suggest trying to rent for the first year or so and then figure out what we want
00:22:50.220 | to do?
00:22:51.220 | Paul Shufflett: If you don't know Hawaii, I would be slow to buy quickly. If you know
00:22:57.860 | Hawaii, then certainly you can consider it. But everything you're describing to me, basically
00:23:04.140 | what you described is the fact that you and your family could move with no debt and $300,000
00:23:10.180 | in the bank. You can set up a new life anywhere and figure out your next steps. You can – that
00:23:15.580 | – you have a level of financial independence that makes almost any lifestyle choice accessible
00:23:22.140 | to you because of your careful planning and work over the years. So you have the ability
00:23:28.980 | to do that.
00:23:29.980 | Now the specific details, should you open a business there? Should you get a job? Should
00:23:33.660 | you buy a house? Should you not? I don't know. In general, I think it's probably a
00:23:38.180 | bad idea to buy a house with – it's a bad idea to buy a house quickly and here would
00:23:44.580 | be a couple of reasons why.
00:23:47.060 | Number one, you're not sure the neighborhoods. You probably may not even be sure which island
00:23:51.580 | you want to be on and all real estate is local. It takes a little time to be in a place to
00:23:56.420 | understand the culture of a specific neighborhood to see is this the type of neighborhood that
00:24:00.500 | we want to be in. That's just standard. So in general, if you can find a rental, in
00:24:04.580 | general, it's always a good idea to rent for a little bit until you decide where you
00:24:08.780 | actually want to be.
00:24:09.780 | Number two, you're just describing coming off of a season of life of great pain and
00:24:14.540 | great work and you've described that your wife probably needs some time to rest and
00:24:19.620 | to heal. I wouldn't want to be making long-term decisions with regard to housing in that context.
00:24:28.220 | I don't want to give her some time to heal and to rest and then to make sure that we're
00:24:32.700 | making clear-headed decisions.
00:24:34.740 | Number three, you're moving, making a huge move and you don't know if the lifestyle is
00:24:39.340 | actually suitable to you. Maybe island living is all you've dreamed of and maybe island
00:24:45.340 | living is not for you. So it's best to make small commitments until you're really confident
00:24:53.140 | and sure. I've known lots of people who have moved someplace and, "Hey, this is going
00:24:56.260 | to be great," and then all of a sudden a few months in, they start to realize, "No,
00:24:59.700 | this is not so great." And if you can minimize the cost of those decisions to extricate yourself,
00:25:04.340 | I think it's wise.
00:25:06.300 | And then number four, take a look at the trend of housing in a particular area. If what you're
00:25:12.420 | describing to me about Hawaii real estate is true, you want to be very careful about
00:25:16.180 | buying in. Who knows if it will continue to go up or who knows if it will continue to
00:25:19.300 | go down, but I do think you should be careful about buying in. So for those reasons, I would
00:25:24.940 | move pretty slowly.
00:25:26.740 | Any final follow-up questions, Curtis, before I go on to my next caller?
00:25:28.780 | No, that's great. Thank you, Joshua.
00:25:32.780 | Great. Well, thank you to listen to the show and I appreciate the question. It's an awesome
00:25:38.860 | position that you're in. And I would just emphasize to other listeners, notice how independent
00:25:45.580 | Curtis and his wife already are. In the financial situation they described, no, they can't – they
00:25:50.340 | don't have three million bucks in the bank to spit out money that they can just sit back
00:25:54.220 | and live on, but there's no life decision that is – that's out of their reach. There's
00:26:00.060 | nothing that they can't change lifestyle-wise. And those lifestyle changes are the first
00:26:04.940 | most valuable aspects of financial independence. The process of being able to live on the income
00:26:10.340 | from investments will come later.
00:26:11.940 | Nathan in Pennsylvania, you're up next. Welcome to Radical Personal Finance. How can I serve
00:26:16.540 | you today, please?
00:26:17.540 | Hey, Josh. Thanks for taking my call. Had a couple of life changes recently. Wanted
00:26:24.180 | to get your opinion on it. So changing jobs, moving a couple of states away. And I have
00:26:34.860 | – so we had two houses. I had a house that we owned and we rented just south in another
00:26:42.620 | state about an hour south of us. Long-term renters in that house, they told us recently
00:26:49.500 | that they would be moving. We basically – sorry. So we sold our house that we're in now and
00:27:00.660 | we'll get probably about $60,000 cash back to us on this. The house that we own about
00:27:10.500 | an hour south of us is paid off. It was our first house that we moved into. And it was
00:27:16.660 | – we moved north when the market was bad. So we decided to keep it and rent it. Had
00:27:21.380 | really good renters. Good experience renting. So really what we're looking at is in a few
00:27:29.220 | years possibly coming back to that area. And we don't know whether to sell the house to
00:27:35.660 | keep it. We're not sure of the tax implications. And if we did sell it, not sure what we would
00:27:44.340 | do with that money, whether to invest it. I know the market's really high. So it makes
00:27:49.980 | me a little nervous putting all that in the market high. Not sure exactly what to do with
00:27:56.260 | that.
00:27:57.260 | How much is the house worth?
00:28:00.220 | Probably about $185,000.
00:28:03.620 | And do you remember how much?
00:28:04.620 | Maybe $190,000.
00:28:05.620 | And you paid for it?
00:28:06.620 | Yes. $115,000.
00:28:11.500 | If you moved back to that area, would you want to live in that house again?
00:28:17.900 | It's not a bad house. It was more of a starter home. We would be okay living in it for a
00:28:24.460 | couple of years to not pay the capital gains. There's no guarantee of getting back in that
00:28:33.020 | area, but it sounds pretty promising that a position would open up with the company
00:28:39.900 | that I started working at. If not, I could always find another job in that area. And
00:28:52.220 | I can give you background information on our situation too.
00:28:56.220 | Yeah, that's probably enough. So the two decision factors that jump out at me in this decision
00:29:02.620 | is one, the rental and the challenge of managing a rental from abroad or from another state,
00:29:10.180 | from farther away. And number two is the capital gains. So that's the tax question. Is it worth
00:29:15.620 | going around? So number one, the rental. If you didn't own the house today, would you
00:29:22.900 | buy a rental house two states away and in the neighborhood and the type of house that
00:29:28.100 | this house is?
00:29:32.180 | Probably not, unless it was a really good deal I couldn't walk away from. But I probably
00:29:37.540 | wouldn't seek it out, yes.
00:29:39.020 | At $185,000, would you buy a house like this one? Would that be a really good deal?
00:29:46.020 | No.
00:29:47.460 | Okay. So just kind of a simple way of trying to get to the heart of the matter of zero-based
00:29:53.420 | thinking. If you wouldn't do it again today, then you probably should be careful about
00:29:58.140 | continuing to do it. Now, that question ignores the embedded tax liability, because the only
00:30:04.380 | reason that you don't want to put it on the market right now and sell it for $185,000
00:30:10.940 | is that you're saying, "Well, I've been out of it, so now it's not my primary residence.
00:30:15.060 | Now I'm going to have to pay the tax on the gain of the property." So what you need to
00:30:19.140 | do is you need to calculate the embedded tax liability in the property. If you did sell
00:30:24.780 | it today at $185,000, calculate the sales costs, how much are you going to lose in realtor
00:30:30.980 | fees, et cetera. Probably get a market analysis done by a local real estate agent so you have
00:30:35.540 | an accurate idea of what you think it would sell for. And then calculate how much tax
00:30:42.180 | you'll owe on the sale. You have to figure out and calculate what is your modified adjusted
00:30:47.180 | basis in the property, how much you paid for it, how much your actual basis is today based
00:30:53.060 | on the fact that you've rented it out, and then calculate what the tax that you would
00:30:58.100 | owe would be on the sale and then ask yourself that question again.
00:31:02.380 | Let me just use some simple numbers. Let's say that on the sale of it, you can sell it
00:31:06.460 | for $185,000. Let's say that your sales costs are eight grand. So let's use 10 grand for
00:31:16.180 | round numbers, $10,000 of sales costs and $15,000 of tax, capital gains tax on your
00:31:26.980 | gain when you figure out what you've actually benefited from it. So now let's say instead
00:31:31.700 | of clearing $185,000, you're going to clear $150,000. So calculate that math and then
00:31:36.940 | ask yourself the question again. Would I buy this house for $150,000? If so, is that a
00:31:43.580 | great deal? Well, if it's not, then you should consider going ahead and just taking the profit.
00:31:48.900 | Because as you said, the reason you didn't want to sell it when you moved was because
00:31:53.220 | the market was down, but the market has been up. So we've got to do a little guessing.
00:31:58.020 | Do you think the market has more room to run locally? Are the trends strong or do you feel
00:32:01.940 | like we're at a strong point where it might be good to go ahead and sell it?
00:32:06.180 | I think the market's going to be strong. There's a lot of major companies coming in there.
00:32:11.620 | And in the last three months, it's went up considerable, probably 15% jump.
00:32:22.020 | So that's significant. That's really important for you to pay attention to. But you've got
00:32:26.780 | to consider it and do the analysis and run the numbers and then ask yourself that question.
00:32:31.100 | Do I think this house is going to be worth more in the future?
00:32:35.660 | Now number two, if you move back, I think your biggest risk here is lifestyle. It would
00:32:41.280 | be unusual for many families who purchased a starter home and then moved out of the starter
00:32:46.620 | home into what I presume is probably a nicer home to want to move back to the starter home
00:32:52.860 | and to be content with that from a lifestyle perspective. That would be unusual.
00:32:58.100 | Now I like unusual, but you've got to ask the question, ask your wife, would we really
00:33:02.740 | be willing to move into this starter home again? Would we really be excited about it?
00:33:07.140 | And then what you can do is calculate the tax savings because in my understanding of
00:33:14.700 | the ownership and use rule that would help you to avoid the tax on the sale of a house,
00:33:22.420 | if you move back into the house, the two rules are that you have to own and occupy a house
00:33:29.640 | as your principal residence for at least two years before you sell it and you have to have
00:33:36.440 | it for at least two years out of the previous five. So you've got to have both of those
00:33:45.520 | things as your – you must have used the home as your principal residence for at least
00:33:50.600 | two out of the five years before the sale.
00:33:53.580 | So I think you could run this scenario where you could move back there. It's your principal
00:33:58.660 | residence, declare it as such, and then you go ahead and sell it and then you have the
00:34:04.000 | tax-free gain. But that's going to come with a lifestyle cost. So it might be worth
00:34:09.040 | it. But – and the question is, ask your wife, how much do you value this tax-free
00:34:13.720 | money that we can get? Is it worth it? Are we actually going to do that?
00:34:18.560 | Michael Munger Right. So we have talked about that and we
00:34:22.660 | are pretty weird. The last five years, we've changed our lifestyle considerably, kind of
00:34:32.280 | got onto different people's forums. Mr. Money Mustache and JL Collins found you not
00:34:41.000 | too long ago. So all of the – well, actually, it all started with Dave Ramsey, I think,
00:34:46.720 | similar to your story a little bit, I think, if I remember it. But I guess maybe graduated
00:34:52.620 | up from that, but give him a lot of credit. He got it started.
00:34:57.080 | So my wife is pretty excited at least the potential of what it's done so far and
00:35:02.600 | where it's going. It wouldn't be an endgame, but we see the potential with the growth.
00:35:09.000 | But we're not – I would say we're not emotionally attached to it or anything like
00:35:14.140 | that. But I guess if we did decide to sell it, because it's kind of on the fence with
00:35:21.480 | it, I really am struggling where to put it. Because if we sell our current house and where
00:35:29.040 | we're going, we're going to rent for – we're probably going to rent the few years
00:35:35.080 | we expect to be there because we don't think financially it would be worth buying.
00:35:40.480 | And we don't want to put roots down there and make it more difficult to leave. So if
00:35:45.000 | we sell that and we have this, we'll probably have about $120,000 in cash. And if we sell
00:35:50.600 | the other one, let's say we clear, I would say conservatively, $150,000, that's a lot
00:35:57.720 | of cash. And I'm just not sure what to do with it, which sounds crazy, I guess. But
00:36:06.200 | I'm nervous about putting it all in the market all at once at record highs.
00:36:10.800 | Yeah, we'll just put it in a bank and wait until you find a good opportunity.
00:36:16.800 | That's my plan if I don't think of anything else to do.
00:36:20.480 | This is a big pet peeve of mine and not picking on you but you're expressing the thing.
00:36:25.540 | People have a fear of having just money sitting in the bank and I don't get it. When we're
00:36:30.720 | talking a short-term perspective, having money sitting in the bank is not a problem. And
00:36:35.800 | by short-term, I mean a few years. There's no reason to worry about what to do with money
00:36:44.120 | on the short term. The best thing to do if you don't know what to do with it is just
00:36:47.840 | keep it safe, put it in the bank and leave it alone and wait until you have an opportunity
00:36:54.400 | where something will come along.
00:36:57.000 | If you imagine just about any scenario, you think back in two, three, four-year chunks
00:37:02.240 | of your life, it's very common in most people's lives that in two, three or four-year chunks,
00:37:08.680 | you'll find a good use of money. That may be that there's a correction in the stock
00:37:13.160 | market and you say, "You know what? I'm going to buy in." That may be that there's a change
00:37:16.680 | in the housing market and you say, "This is a time for us to go ahead and pull the trigger
00:37:20.200 | and buy this particular type of house." That may be you have an idea for a business or
00:37:25.240 | you have a friend of yours that you want to engage in some kind of private investment,
00:37:30.360 | but there's no reason for you not to just put the money in the bank and that shouldn't
00:37:34.800 | be a reason for you to keep the money in real estate.
00:37:39.240 | If you want the money in real estate, you can always just – if it's a good time to
00:37:42.440 | sell this house and take your profits and you want this particular part of your portfolio
00:37:47.920 | to be invested in real estate, you can always find another house to put it into. But there's
00:37:52.240 | no – you shouldn't be scared of putting $300,000 in the bank, letting it sit there
00:37:57.560 | for two, three, four years until you find something good to do with it.
00:38:01.360 | Michael: Perfect.
00:38:03.440 | Tavis: Yeah. It's a big psychological thing that I think people face, but when you have
00:38:09.600 | money I think you'll find that there are plenty of people that want to help you invest
00:38:15.480 | it as time goes on.
00:38:17.560 | All right. Last caller for today, Josh in Illinois. Welcome to the show. How can I serve
00:38:23.000 | you today?
00:38:24.000 | Josh: Yeah. Hey, I was hoping I could ask two questions. I think one's going to be
00:38:27.520 | really easy for you.
00:38:28.680 | Tavis: Go for it. I like easy.
00:38:30.360 | Josh: All right. Great. So I've just been listening for a few weeks and I started with
00:38:36.080 | the most recent shows and I jumped back with some of the older ones and I came across a
00:38:40.200 | couple of shows about the cash flow statement and the financial condition, statement of
00:38:43.920 | financial condition. I kind of wanted to do that, but I was hoping I could take a look
00:38:49.480 | at your template, but it's not there anymore and I wasn't sure if there's a way to get
00:38:55.400 | access to it. It expired in the show notes or something, that document.
00:38:58.360 | Tavis: Yeah. That was an old link and I do need to replace the document. It's on my
00:39:01.680 | list of things that I need to do. But to make it just very simple, in the audio of that
00:39:08.160 | show, I described how to do it. Again, I should go ahead and re-upload those templates and
00:39:13.520 | fix some of those old shows with those minor details. But don't let seeing something else
00:39:21.040 | intimidate you. For your statement of financial condition, you just simply write down a list
00:39:24.880 | of all your assets and group them according to kind. Group your real estate assets together,
00:39:31.960 | group your investment assets together, group your cash assets together, group your tangible
00:39:36.880 | assets together and then list your liabilities and just write it out. You can do it on a
00:39:43.040 | legal pad, et cetera. With your statement of cash flows, top of the page, just write
00:39:48.800 | out or top of the spreadsheet, write out your total gross income and then systematically
00:39:53.440 | pull out each of the categories and calculate how much you pay in categories. Put your employment
00:39:59.720 | taxes, put your federal income taxes, put any other deductions that you have from your
00:40:05.200 | paycheck. So figure out how to get from your gross income to your net income and then start
00:40:09.440 | listing your household expenses. So if you understood just the basic outline of it, you
00:40:15.080 | can do it. But yes, it is on my list that I do need to fix that document for the old
00:40:20.680 | file.
00:40:21.680 | Preston Pysh (00:36:40): Right. Yeah. No, and I've created both of
00:40:25.640 | my own versions in Excel. I just kind of wanted to take a look at yours.
00:40:29.320 | Trey Lockerbie (00:36:46): You're a spreadsheet nerd. You want to see
00:40:30.800 | my spreadsheets.
00:40:31.800 | Preston Pysh (00:36:49): Oh, I love them. I love them. I got spreadsheets
00:40:34.800 | for everything. Hey, my other question was, I guess the short version of the question
00:40:41.440 | is do you have any exposure to or any thoughts on these sort of medical bill sharing organizations
00:40:49.680 | as a substitute for health insurance? The one that I'm familiar with is called Samaritan
00:40:54.360 | Ministries. It's sort of a Christian base. You pay a certain amount every month, but
00:40:58.680 | you, instead of sending it to a health insurance company or something like that, you send checks
00:41:02.880 | to people that have bills. And I don't know if you know anything about that, but the reason
00:41:07.600 | I'm asking is because I'm trying to transition my wife out of her job by some other side
00:41:14.560 | of the family business and stuff that I'm doing. And so she can be home, but her health
00:41:18.960 | care is great and we're going to lose it obviously if she quits. So I'm just looking at other
00:41:24.080 | alternatives and that's one of them, but I've never really heard anybody from outside of
00:41:29.280 | the organization be able to critique them. I don't know if you had any knowledge on that
00:41:33.040 | or thoughts on that.
00:41:34.040 | Trey Lockerbie (00:37:22): Back in December of 2016, I did a series on
00:41:36.600 | health insurance. Episode 393 was part one and then it continued on through that series.
00:41:46.280 | In episode 403, I talked about, it was called the health insurance series part four, how
00:41:51.360 | to avoid and evade the Obamacare tax penalty. I introduced in that show, episode 403, I
00:41:57.320 | introduced the concept of health care sharing ministries. And then episode 404 of the show
00:42:04.240 | is called the health insurance series part five, health care sharing ministries. This
00:42:09.280 | is how we pay for our health care costs in the Sheetz family. And then episode 405 was
00:42:13.640 | the health care sharing ministries wrap up with a few additional comments. I'll give
00:42:16.640 | you the short version of those shows in answer to your question.
00:42:20.560 | Trey Lockerbie (00:38:02): I love the health care sharing ministry model.
00:42:25.120 | There are a number of good ones. Samaritan Ministries is the one that my family and I
00:42:30.720 | use, but there are other good ones as well. There's Liberty Health Share. There are four
00:42:37.320 | big ones. Can I do this off the top of my head? I don't have it off the top of my head.
00:42:41.880 | I would need to go and find my notes, but an episode of, oh, here we go. In the notes
00:42:45.920 | for episode 404 of my show, there's Christian Healthcare Ministries. Then there's MediShare,
00:42:52.000 | also Liberty Health Share and Altrua Health Share. So the biggest ones, or the Liberty
00:42:57.160 | Health Share is more well-known now because they've been advertising aggressively in some
00:43:02.080 | of the right-wing conservative political space. Christian Healthcare Ministries is very large,
00:43:06.760 | and so is MediShare and then Samaritan Ministries as well.
00:43:09.560 | I like Samaritan. I have nothing but good things to say about health care sharing ministries.
00:43:15.160 | I love the model. I love the concept, and I have been thoroughly pleased with our participation
00:43:23.520 | in the Samaritan Ministries model of health care sharing ministries. I don't think they're
00:43:28.360 | for everyone. The couple things that you need to look out for is, number one, there is an
00:43:32.720 | ideological and religious statement of – basically a statement of faith that you have to affirm
00:43:38.920 | to be able to participate. That statement of faith ranges from very liberal and inclusive
00:43:44.080 | to very conservative and exclusive across those companies. So for example, Liberty Health
00:43:53.520 | Share requires you to affirm a statement of faith that is very inclusive, almost kind
00:43:58.200 | of the American civil religion. You affirm that there is a god of some kind, but you
00:44:02.600 | don't necessarily have to make too many specifications about what that god is or means,
00:44:09.160 | and it's much more kind of the American civil religion, god, freedom, etc. That ranges.
00:44:15.200 | Samaritan Ministries on the other hand, their statement of faith is very exclusive. It's
00:44:19.440 | very tight. It's a Trinitarian confession of faith, and it's very, very careful in
00:44:23.800 | its approach. So not everybody can endorse such a statement of faith, and so that's
00:44:28.680 | why they're excluded. So for a listener who can't endorse one of those statements
00:44:36.640 | of faith as required for membership, they would have to find another option for them.
00:44:42.640 | But I love it. We've loved Samaritan Ministries. I love with Samaritan Ministries that the
00:44:45.720 | checks don't come from the centralized organization. We had – this last year, my wife and I had
00:44:51.360 | a child, and every dollar of the cost of childbirth was paid for out from the healthcare sharing
00:45:01.260 | ministry organization, and it all came in with very nice checks from our fellow participants
00:45:07.320 | in the plan, accompanied with beautiful notes and congratulations and notes of encouragement
00:45:13.260 | and scripture verses, etc. It was a very refreshing experience after years of dealing with a cold
00:45:20.360 | insurance company at the other end of the line. But it's not without risk. So that's
00:45:24.880 | my answer. I love it. We have – I heartily endorse these organizations. We've found
00:45:29.640 | it to be very inexpensive and to – well, to be very reasonable in terms of the cost.
00:45:36.440 | For our family of five, our monthly share cost is $495 a month, and so that's very,
00:45:42.760 | very reasonable considering the benefits that we get.
00:45:44.960 | Michael Myre: Great. So I should have just done a search on your website basically.
00:45:49.920 | Ted Whitten: I try to keep the website useful to work with search, but sometimes it's
00:45:55.720 | a little overwhelming and I don't do as good of a job as possible. But yes, go and
00:45:58.380 | listen to those episodes of the show, and I think especially episode 404, and it'll
00:46:02.680 | give you the comprehensive treatment. Any specific questions on Samaritan Ministries
00:46:07.520 | or the concept in general?
00:46:09.320 | Ted Whitten: I mean, not really. I think almost about half the people I know here in Peoria
00:46:15.080 | area work for the company, so I'm not really lacking information about Samaritan Ministries.
00:46:20.640 | It's just kind of wanted to get an outsider's viewpoint. So that kind of confirms some of
00:46:27.000 | my thoughts.
00:46:28.000 | So the only – I guess the final kind of light that I could add would be in terms of
00:46:33.160 | deciding and thinking through which option to go with, which company to go with, I find
00:46:39.000 | them all to be competitive with one another in terms of premiums, et cetera. I think the
00:46:44.220 | biggest difference would be a couple of things. Number one, that confession of faith that
00:46:51.320 | you would have to affirm upon membership. That will be a big thing.
00:46:56.520 | Number two, there may be some specific coverage for a specific thing that would guide you
00:47:06.480 | from one to another. For example, the thing that put me over the top for Samaritan Ministries
00:47:10.640 | was twofold. One, I liked the fact that the money doesn't go through the central disbursement
00:47:16.500 | account, but it comes directly from fellow participants. I like that because it feels
00:47:21.640 | very much like the community sharing approach. But another one was for me, Samaritan Ministries
00:47:26.860 | had a specific option in their plan and in their guidelines where they said that with
00:47:35.160 | regard to tobacco use, that an occasional celebratory cigar was expressly permitted.
00:47:41.460 | All of the rest of them have – when I was doing the research, all the rest of them had
00:47:45.220 | a complete blanket prohibition against any tobacco use and they didn't discriminate
00:47:49.680 | between cigarettes and cigars, pipes, etc. There's a huge difference in terms of the
00:47:55.440 | health risk from a daily pack of cigarettes versus an occasional pipe or an occasional
00:48:00.860 | cigar and I enjoy an occasional celebratory cigar. So I found – would have found it
00:48:06.560 | frustrating to have that choice excluded from me by joining one of the others.
00:48:11.080 | But in the Samaritan Ministries guidelines, they had a specific exception for – with
00:48:14.920 | regard to tobacco use, an occasional celebratory cigar was permitted. So that was just a minor
00:48:19.320 | thing that when I was reading through all the guidelines was valuable and important
00:48:23.580 | for me.
00:48:24.580 | So if you listen to that show and if you read the various guidelines to the different companies,
00:48:28.320 | I think you'll find them. The final thing would be each company has a different maximum
00:48:33.240 | cap on their coverage. So not all medical – unlike traditional health insurance under
00:48:40.020 | today's Affordable Care Act compliant plans which has no maximum out of pocket – sorry,
00:48:45.660 | no maximum limit to the plan. The plan if you have a $20 million medical expense, the
00:48:50.240 | plan will pay for. Christian Healthcare Sharing Ministries do indeed have a max, have a maximum
00:48:56.760 | cap. Now it can range as high as I believe the highest is a million bucks but you would
00:49:00.600 | need to read among them and decide what's the appropriate setup for me. But we've
00:49:05.400 | loved it.
00:49:06.400 | And if you do join Samaritan Ministries, mention to them please that Joshua Sheets sent you.
00:49:12.120 | Joshua Sheets is spelled S-H-E-A-T-S. Tell them Joshua Sheets sent you and then I will
00:49:15.680 | get on my next statement, I'll get a reduction in my bill. So that's nice. And that's
00:49:23.320 | not something that's exclusive for me. I need to start advertising that more on Radical
00:49:29.240 | Personal Finance because it would be very helpful to have dozens and dozens of you signing
00:49:32.800 | up with Samaritan Ministries every month and telling them that Joshua Sheets sent you because
00:49:37.600 | that would help me with my monthly share amount. But anytime you're a member of, well
00:49:44.760 | these were Samaritan Ministries and the others I think have equivalent programs as well,
00:49:49.140 | you can just simply share it with your friends and if you share it with your friends you'll
00:49:52.440 | find that they will give you a discount on your next bill as a referral fee. I think
00:50:00.600 | that's really nice and it's very, very helpful. So those of us who have a platform
00:50:04.120 | should share it. So if you're interested in Christian Healthcare Sharing Ministries,
00:50:07.800 | go to episode 404 of the show, listen to it. I can heartily endorse the approach. In that
00:50:13.560 | show I talk about who it may not be right for, just as I've just done, but in general
00:50:17.640 | if you can affirm the statement of faith and if you're looking for a consistent, reliable
00:50:21.520 | way to pay for your healthcare costs, that may work for you. If you choose Samaritan
00:50:26.560 | Ministries, tell them Joshua Sheets sent you and I would greatly appreciate that. Thank
00:50:30.360 | you to all of you who called in for today's Q&A show. I have enjoyed the interaction.
00:50:34.760 | One more of these scheduled for tomorrow, Wednesday, October 4th. So if you'd like
00:50:38.600 | to do that, go by my Twitter page, just click the link in today's show notes. The call
00:50:43.840 | in number is there, you can call up and you can ask me any question that you like. These
00:50:47.480 | particular Q&A shows are not exclusive to patrons of the show. You can have access if
00:50:54.080 | you're just interested in calling in. Finally, if you would like to support the show that
00:50:56.760 | I do and support me financially, I would be greatly appreciative of that. Go to radicalpersonalfinance.com/patron
00:51:03.360 | and you can set that up. Radicalpersonalfinance.com/patron. Be back with you soon.
00:51:21.200 | This show is part of the Radical Life Media network of podcasts and resources. Find out
00:51:27.000 | more at radicallifemedia.com.