Bogleheads® Chapter Series – Prioritizing Investments

00:00:00.000 | (upbeat music)

00:00:02.580 | - Welcome to the Bogleheads Chapter Series.

00:00:07.680 | This episode was jointly hosted

00:00:09.440 | by the Starting Out Life Stage

00:00:11.000 | and the South Florida Local Chapter

00:00:13.040 | and recorded August 10th, 2021.

00:00:16.120 | It features longtime Boglehead 5K,

00:00:19.040 | discussing investment funding priorities,

00:00:21.360 | including investment locations and tax efficiency.

00:00:24.360 | Bogleheads are investors

00:00:26.480 | who follow John Bogle's investing philosophy

00:00:28.640 | for attaining financial independence.

00:00:31.280 | This recording is for informational purposes only

00:00:33.800 | and should not be construed as investment advice.

00:00:36.240 | - With a presentation by 5K

00:00:39.200 | on prioritizing the investment order,

00:00:42.220 | the Bogleheads is a term intended to honor Jack Bogle.

00:00:46.360 | Mr. Bogle created the first index fund

00:00:48.800 | for retail investors and is the founder of Vanguard.

00:00:52.480 | But Bogleheads are investors who follow

00:00:54.800 | or use the investing advice that Mr. Bogle advocated.

00:00:59.800 | And that investing advice, as you know,

00:01:03.360 | is invest early and often,

00:01:05.400 | develop your workable investing plan,

00:01:08.720 | never trying to time the market,

00:01:11.280 | use index funds when possible,

00:01:14.240 | diversify, keep it simple,

00:01:17.560 | minimize taxes with cost-efficient investing,

00:01:21.200 | and above all, to stay the course with your plan,

00:01:24.840 | both in bull and bear markets,

00:01:26.360 | just keep saving and just keep investing.

00:01:29.400 | And this is where 5K's presentation tonight

00:01:31.920 | will be so useful, developing the plan.

00:01:35.080 | I would also like to introduce my co-moderators tonight.

00:01:39.120 | We have Carol from the pre-retirement chapter

00:01:43.480 | and the Dallas chapter.

00:01:48.000 | And we have Jim, who you just heard from Chicago.

00:01:50.940 | We talked about the recording of the meeting.

00:01:55.760 | When the presentation is over again,

00:01:57.980 | we will stop recording.

00:01:59.200 | We'll have a big question and answer.

00:02:01.240 | However, 5K, if he wants to, he can answer questions.

00:02:05.960 | He has told us he will answer questions

00:02:07.680 | during his presentation if he doesn't feel

00:02:10.400 | that it affects his flow of his presentation.

00:02:14.120 | So you can put your questions in the chat.

00:02:16.760 | And Carol and Jim will, or 5K, will address those questions.

00:02:21.760 | Let me see.

00:02:24.520 | Thank you.

00:02:26.720 | I'd like to introduce Gail Cox, who is here.

00:02:28.840 | Gail is the BOGO head who created the LifeStage investing,

00:02:33.840 | the LifeStage chapters of the BOGO heads.

00:02:38.360 | And we thank her for that.

00:02:39.900 | Okay, on to our presentation.

00:02:43.000 | 5K is a long-time BOGO head

00:02:46.120 | who posts regularly on the forum.

00:02:48.120 | He has many, many helpful posts.

00:02:52.560 | He's kind, competent, answering questions

00:02:55.720 | from newbies and oldies, and we appreciate.

00:02:58.680 | And he's especially good on portfolio creation

00:03:01.640 | and tax-efficient fund placement.

00:03:05.200 | He also has his personal financial toolbox,

00:03:09.600 | which is a huge spreadsheet.

00:03:11.720 | And he has also already given a presentation on that,

00:03:14.640 | and you can find it on the BOGO head blog.

00:03:18.000 | I believe it was in March.

00:03:20.440 | Okay, 5K, welcome, and please, the stage is yours.

00:03:25.360 | - Thank you, Miriam.

00:03:26.360 | So everything that's going to be covered here verbally,

00:03:31.840 | pretty much you can find in various websites.

00:03:35.860 | The presentation will have links to all of those.

00:03:40.560 | So the presentation itself will, in PDF form,

00:03:43.760 | be made available after the meeting.

00:03:46.440 | And these are not my ideas,

00:03:50.680 | as much as I'm just regurgitating

00:03:53.000 | what various groups of people have put together

00:03:56.720 | as these are some pretty good ideas

00:03:59.080 | that you might want to follow.

00:04:00.580 | Okay, so I'll just start out with some general comments.

00:04:08.200 | A lot of this is subjective.

00:04:10.040 | Reasonable people can differ on the exact ordering.

00:04:14.940 | Now, you can stretch that,

00:04:18.440 | but you can't stretch that too far.

00:04:20.360 | Some of the things that you'll find at the top of the list,

00:04:23.040 | they belong there, and you don't want to switch them

00:04:26.200 | with things at the bottom of the list.

00:04:28.680 | And we'll get to the lists shortly.

00:04:30.660 | Sometimes the math is simple,

00:04:34.700 | but the equation values themselves are somewhat speculative.

00:04:38.440 | Like one example would be,

00:04:40.120 | what do you think future tax rates will be

00:04:42.740 | when deciding traditional versus Roth?

00:04:45.320 | And then when we get into the risk versus reward,

00:04:51.080 | you know, there is no deterministic answer.

00:04:54.160 | You can pay debt at a low known rate.

00:04:56.560 | You can invest at a possibly higher,

00:04:58.760 | but possibly lower rate.

00:05:00.960 | And we'll get into that a little bit also.

00:05:03.740 | And you know, other than the above,

00:05:05.360 | this is all straightforward,

00:05:06.760 | and that should be a winking emoji there.

00:05:10.400 | So it's not straightforward, but it's simple enough.

00:05:13.000 | Okay, so this slide and the next slide

00:05:18.000 | are very high level views.

00:05:20.560 | After these two slides,

00:05:21.880 | we'll get into the details on these,

00:05:24.040 | but this one is the picture view that you can see.

00:05:27.680 | I'm not going to read things.

00:05:28.960 | You can read the slide faster than I can talk through it.

00:05:32.760 | There's some things that are high priority,

00:05:34.860 | things that are sort of in the middle,

00:05:36.620 | and then things that are relatively low priority.

00:05:40.260 | So that's the picture view.

00:05:43.260 | You got your emergency fund, your employer match,

00:05:46.180 | your high interest debt.

00:05:48.140 | Then you get into HSAs, IRAs, 401Ks,

00:05:51.740 | you know, the whole alphanumeric lexicon.

00:05:55.080 | Then you get into the taxable accounts

00:05:57.180 | and the paying off debt.

00:06:00.900 | I mentioned you can find these things on the internet.

00:06:03.800 | There's a couple of lists,

00:06:05.120 | and again, we're going to get into details on this.

00:06:07.520 | So don't try to read the small print

00:06:09.280 | if you find it difficult.

00:06:11.440 | The thing to note is all those green lines,

00:06:17.260 | they all match up.

00:06:18.120 | So the two particular lists that I'm most familiar with,

00:06:21.720 | the one in Bogleheads on prioritizing investments,

00:06:24.680 | and there's a Mr. Money Mustache one called,

00:06:27.760 | what is it, investment order.

00:06:29.680 | They pretty much say the same thing.

00:06:31.820 | They may say it in slightly different words.

00:06:33.860 | So if one of them confuses you, try the other,

00:06:37.300 | and the wording may be different enough

00:06:39.620 | that it becomes understandable,

00:06:41.220 | but the concepts are identical.

00:06:44.220 | Okay, so without further ado,

00:06:49.380 | these are really the top three.

00:06:51.360 | And these are all listed more or less in order.

00:06:56.860 | So the top one would be the first thing to do,

00:06:59.100 | and the next one, the second and the third one, the third,

00:07:02.000 | but you can mix and match.

00:07:05.300 | So let me just go through these a little bit here.

00:07:07.340 | So the emergency fund, lots of,

00:07:11.020 | so when we talk about emergency fund,

00:07:13.140 | we'll talk about traditional versus Roth later.

00:07:15.300 | We'll talk about pay that versus invest.

00:07:17.860 | Any one of these individual topics,

00:07:19.660 | we could spend an hour or two on.

00:07:21.660 | So this is a high level view.

00:07:24.860 | So the emergency fund, two-year satisfaction.

00:07:29.580 | I think it's pretty non-controversial to say

00:07:36.420 | that you should give yourself at least enough buffer

00:07:39.420 | that you don't have to worry about bouncing checks

00:07:41.660 | from month to month.

00:07:43.340 | So you need at least the next month's bills

00:07:48.220 | in your emergency fund.

00:07:49.940 | Beyond that, do you need three months,

00:07:51.540 | six months, a year, two years?

00:07:54.200 | That's a personal thing, so two-year satisfaction.

00:07:57.420 | Next one would be get the employer match.

00:08:02.300 | If you've got a 401(k) or a 403(b)

00:08:05.060 | that's going to give you a one-for-one match

00:08:08.460 | or even a 50 cent per dollar match,

00:08:12.540 | that's the highest return you're gonna get.

00:08:14.900 | Even in the next point, you've got credit cards,

00:08:18.100 | even if you're paying 20, 30% interest on your credit cards,

00:08:21.900 | if you can get a one-for-one match from your employer,

00:08:24.720 | that's a hundred percent.

00:08:26.020 | But there is a reason why high interest debt,

00:08:31.900 | for example, credit cards is very high on the list here.

00:08:36.900 | High is somewhat relative.

00:08:41.660 | What's high for one person who's very risk tolerant

00:08:45.420 | might not be the same for someone who's more risk averse.

00:08:50.140 | There's no right answer, it's personal finance.

00:08:53.400 | And these mix and match.

00:08:56.860 | So take the emergency fund

00:08:59.580 | and the paying off the credit card debts.

00:09:01.340 | If you're sitting there with six months expenses

00:09:04.220 | in your emergency fund,

00:09:06.220 | but you owe $10,000 on a credit card

00:09:08.980 | that you're paying 25% per year interest on,

00:09:13.980 | you might call that credit card debt an emergency

00:09:18.460 | and dip into your emergency fund

00:09:20.700 | to wipe out the credit card debt.

00:09:22.500 | So emergency funds are there to be used.

00:09:26.620 | So if you've got something

00:09:28.860 | that you think qualifies as an emergency,

00:09:31.100 | go ahead and use it.

00:09:32.620 | Now, if you're using your emergency fund

00:09:34.380 | to pay off your credit card every month,

00:09:36.940 | yeah, that's a different story.

00:09:38.500 | Okay, so that's the top three.

00:09:42.860 | Let me just stop here.

00:09:44.980 | If there's any questions on those top three.

00:09:48.520 | Anything in the chat I saw was flipping by too fast

00:09:55.300 | for me to concentrate on as I was giving the presentation,

00:09:58.740 | but are there any open questions at this point?

00:10:01.140 | All right.

00:10:07.640 | Hearing none.

00:10:10.140 | Going once, going twice.

00:10:13.940 | All right.

00:10:15.580 | We shall move on.

00:10:17.300 | So the middle four, you can pay a tax now,

00:10:21.460 | you can pay it later, you can pay it never

00:10:23.620 | on these four options here.

00:10:25.780 | So the first one and the reason why it is the first one

00:10:29.460 | with a health savings account,

00:10:31.580 | if you're eligible for one,

00:10:33.260 | and again, we can get into gory details

00:10:35.580 | on what makes one eligible for a health savings account

00:10:39.380 | in terms of having a high deductible health plan.

00:10:42.340 | But if you're eligible,

00:10:43.300 | you get a tax deduction on your contribution.

00:10:45.660 | You don't pay tax unless you live in what,

00:10:47.940 | California and is it New Jersey or just California,

00:10:51.300 | but you don't pay tax on any gains.

00:10:56.180 | And then when you take it out to pay for medical expenses.

00:10:59.100 | Somebody.

00:11:05.540 | Okay, so it is California and New Jersey.

00:11:07.680 | But the other 48, they're a great deal.

00:11:12.260 | They're even a good deal in California and New Jersey.

00:11:14.660 | They're just not as great.

00:11:15.980 | Okay, so that's the one,

00:11:18.340 | sometimes you hear them referred to as triple tax-free,

00:11:21.300 | you get the tax deduction,

00:11:22.380 | you don't pay tax on annual gains

00:11:25.300 | and then you don't pay tax

00:11:26.560 | if you take it out for medical expense.

00:11:28.560 | So then we get the next two,

00:11:31.740 | the traditional or Roth IRA and the employer plans.

00:11:36.740 | And again, remember where the employer plans,

00:11:39.420 | the top three or the employer plan showed up,

00:11:44.420 | that was just up to getting the match,

00:11:47.240 | the maximum employer match.

00:11:48.940 | So this would be going up to the IRS limit,

00:11:53.660 | the 19,500 for 401ks.

00:11:57.060 | But the reason that the traditional or Roth IRA

00:12:03.140 | comes before the employer plans on this list,

00:12:08.100 | and you see there's a double-headed arrow,

00:12:10.460 | so they can swap, but IRAs tends to have lower fees

00:12:15.460 | and almost by definition, they have more investing options.

00:12:20.500 | So if they have a lower fee than your 401k,

00:12:24.780 | your 403b offer, then go with the IRA first.

00:12:29.780 | But they don't always have lower fees.

00:12:33.300 | Sometimes you get institutional funds in 401ks

00:12:37.860 | and hey, just fill up the 401k.

00:12:41.280 | And sometimes you want to use the 401k

00:12:45.660 | because it can reduce your modified adjusted gross income

00:12:48.900 | for something like the earned income tax credit,

00:12:52.620 | whereas the IRA may not be as efficient at doing that.

00:12:57.620 | So the IRA and the 401k,

00:13:03.860 | yeah, the default order is IRA first,

00:13:07.020 | but there's plenty of examples where you would want to do

00:13:11.220 | the 401k or 403b or 457 ahead of the IRA.

00:13:16.220 | And then you get into,

00:13:19.860 | for those who happen to have it available,

00:13:22.340 | typically if you work for a large company

00:13:24.580 | and they offer an after-tax non-Roth 401k option,

00:13:29.580 | you can do something called the mega backdoor Roth process.

00:13:33.960 | Which is a little bit different

00:13:35.280 | from the plain old backdoor Roth process

00:13:38.800 | you see in the second bullet point,

00:13:41.160 | but it does get after-tax funds into a Roth account

00:13:45.240 | instead of a taxable account.

00:13:46.760 | So that's a good deal.

00:13:48.520 | There was a comment, yeah,

00:13:52.360 | there's another example on MAGI of healthcare subsidies.

00:13:57.360 | That may be another reason

00:14:01.760 | that you'd want to use a 401k in preference to an IRA.

00:14:05.640 | And all of these are if you have to make a choice.

00:14:09.520 | If you're in the wonderful position

00:14:11.120 | that you've got enough disposable cash

00:14:13.080 | that you can fill all these up, well then great.

00:14:16.080 | It doesn't, you know, the order doesn't really matter.

00:14:18.840 | Questions about that middle four

00:14:27.060 | or anything else at this point?

00:14:29.960 | - Yes, I have a question 5k on the mega Roth.

00:14:34.960 | You mentioned the mega Roth.

00:14:39.120 | Can you explain what that is?

00:14:41.560 | - So if this is,

00:14:44.200 | so mega backdoor Roth is something

00:14:46.120 | that goes through an employer plan.

00:14:47.840 | So 401k, 403b.

00:14:50.320 | Most people are familiar with the concept.

00:14:55.760 | You can contribute to a traditional account in your 401k.

00:15:00.760 | And when I say 401k, just assume that I mean, or 403b.

00:15:05.400 | You can contribute to a traditional account

00:15:08.720 | or a Roth account.

00:15:10.000 | Those are, you can elect which one to do.

00:15:13.280 | There's a third option that some employers offer,

00:15:18.160 | not all, but some.

00:15:19.400 | And that is after tax non-Roth.

00:15:25.860 | So you can contribute after tax,

00:15:29.060 | but it's not immediately going into a Roth account.

00:15:34.660 | And it sits there, it's like a non-deductible

00:15:40.740 | traditional IRA contribution.

00:15:42.880 | So that's nice, but not all that interesting

00:15:48.860 | unless the employer plan also allows you

00:15:53.500 | to take that non-deductible after tax account

00:15:58.500 | and roll that over to either the Roth version

00:16:04.140 | of the Roth account within the 401k,

00:16:07.360 | or if the employer plan allows you

00:16:10.140 | to distribute that out to a Roth IRA.

00:16:13.240 | So you make this after tax non-Roth contribution

00:16:18.780 | where if you don't do anything with it, it just sits there.

00:16:22.580 | You're not paying any tax on any gains

00:16:26.220 | while it's sitting there, but when you withdraw it,

00:16:28.420 | you now pay tax on the gains at ordinary income rates,

00:16:32.220 | unless you have the option to take that account

00:16:34.980 | and roll it over immediately, or within a month or two,

00:16:38.540 | or even a year into a Roth 401k or Roth IRA.

00:16:43.540 | And there's a whole, there's two wiki entries,

00:16:47.180 | one on after tax 401k, one on the mega backdoor Roth process.

00:16:52.180 | So they're related, but not identical.

00:16:55.620 | Does that cover it in enough detail?

00:16:59.100 | - Yes, but does that mean that the mega Roth,

00:17:02.760 | it's a mega 401k, correct?

00:17:07.460 | Mega 401k Roth, that it differs

00:17:11.140 | from your regular 401k Roth, regular 401k.

00:17:16.980 | Your regular Roth 401k on the taxing of the earnings.

00:17:21.980 | - Correct, so there's, where do I start?

00:17:29.620 | I'll start with the processes.

00:17:31.020 | So there's a backdoor Roth process,

00:17:34.820 | which involves multiple steps.

00:17:37.780 | And there's a mega backdoor Roth process

00:17:41.880 | that also involves multiple steps,

00:17:45.380 | but the two of them are different.

00:17:48.860 | The regular backdoor Roth process

00:17:53.460 | refers to what you do with IRAs.

00:17:56.420 | The mega backdoor Roth process

00:17:59.700 | refers to what you do with your 401k.

00:18:02.880 | So the process for both of them involves,

00:18:07.840 | you make a non-deductible contribution.

00:18:14.340 | So it goes into an account.

00:18:17.080 | You did not get to deduct that contribution from your taxes,

00:18:21.900 | but if it stays in that account while it grows,

00:18:25.220 | you won't be paying any taxes.

00:18:27.300 | But when you go to withdraw from that account,

00:18:31.380 | you'll pay tax at ordinary income rates on any gains.

00:18:35.900 | So up to this point, if you put it in the account,

00:18:40.260 | you didn't get to deduct it, it's growing,

00:18:42.140 | you're not paying tax, but then when it comes out,

00:18:44.100 | you have to pay tax on any gains.

00:18:46.700 | Kind of interesting, but maybe not all that interesting.

00:18:50.140 | What makes it very interesting

00:18:52.620 | is if you can take that non-deductible amount

00:18:58.260 | and then convert it immediately to a Roth account.

00:19:03.100 | So when you do that conversion,

00:19:06.680 | if there hasn't been any gains,

00:19:09.660 | you're not going to pay any tax,

00:19:13.020 | but now you've got it into a Roth account

00:19:15.540 | where you'll never pay any tax on it.

00:19:17.420 | So you've got, people sometimes say,

00:19:24.700 | I'm going to put it in my backdoor Roth account,

00:19:27.740 | or I'm going to use my mega backdoor Roth account,

00:19:31.060 | which is playing a little fast and loose with the language.

00:19:35.240 | Those backdoor things are processes

00:19:38.600 | that involve a contribution to a non-deductible account

00:19:41.900 | and then a conversion to a Roth account.

00:19:45.180 | - Does the mega backdoor,

00:19:52.300 | does the mega backdoor Roth stay in your employer plan

00:19:58.300 | until you take it out and you roll it over to a regular IRA?

00:20:03.900 | Is that correct?

00:20:08.420 | - I'll give you a definite maybe on that one.

00:20:11.660 | It depends on your employer's plan.

00:20:16.660 | Some employers allow you to roll it into a Roth,

00:20:22.540 | into your Roth 401k account.

00:20:25.500 | Some employers allow you to do what's called

00:20:28.580 | an in-service distribution,

00:20:31.740 | and you can get it out of the 401k completely

00:20:35.700 | and into a Roth IRA.

00:20:38.700 | Either one of those is perfectly fine.

00:20:41.860 | It really doesn't matter as long as your employer plan

00:20:44.260 | allows you to do either one.

00:20:47.320 | - Okay, thank you.

00:20:49.980 | - You're welcome.

00:20:51.580 | All right.

00:20:53.140 | Anything else on this before I move along?

00:20:55.420 | - Okay, I think there was a question in the chat.

00:20:58.300 | What tax bracket should use a Roth 401k

00:21:01.440 | versus a regular 401k?

00:21:03.560 | - Oh, okay.

00:21:08.120 | Let me go back to...

00:21:09.500 | So even when the math is simple,

00:21:14.500 | equation values may be speculative.

00:21:16.660 | It really, it doesn't matter what your current tax bracket is

00:21:22.580 | as much as it matters how does that compare

00:21:26.420 | to what you think your future marginal tax rate will be.

00:21:30.900 | And you notice I use marginal tax rate instead of bracket,

00:21:34.700 | and I really should use that.

00:21:36.500 | Depends on what your current marginal tax rate would be,

00:21:40.580 | which for some people is their nominal bracket amount,

00:21:44.140 | but for others, it's not.

00:21:46.240 | You need to compare that to what you think it will be

00:21:49.100 | in the future.

00:21:50.080 | So we can go after I'm...

00:21:59.280 | So this presentation is mostly on the investment order.

00:22:02.040 | We can certainly go into Roth versus traditional

00:22:06.240 | after this one is done.

00:22:07.780 | And as I said, we can take at least an hour on that alone,

00:22:11.060 | but maybe we can keep it a little shorter than that.

00:22:13.840 | But there is no...

00:22:15.600 | I mean, there's sort of rules of thumb,

00:22:17.820 | but I really don't like rules of thumb

00:22:19.440 | in traditional versus Roth

00:22:20.920 | because there's a huge number of exceptions to them.

00:22:24.540 | And one rule of thumb would be,

00:22:26.060 | well, if you're in the highest tax bracket, use traditional.

00:22:29.120 | Well, that's a great rule of thumb

00:22:31.200 | unless you're gonna stay in the highest tax bracket

00:22:33.680 | even after retirement, and then you should use Roth.

00:22:37.100 | Another decent rule of thumb

00:22:38.680 | is if you're in the 12% bracket or lower,

00:22:41.960 | if you're in 12% bracket, use Roth.

00:22:46.280 | And that's a pretty good rule of thumb

00:22:47.840 | unless this is someone who's late to the party

00:22:50.040 | and they're in their fifties and haven't had much saved

00:22:53.340 | and probably never gonna pay tax in retirement.

00:22:55.560 | So they should use traditional.

00:22:57.040 | So I just, I don't like rules of thumb

00:23:01.680 | because there's too many exceptions

00:23:03.200 | when it comes to traditional versus Roth.

00:23:05.240 | Again, that's a personal opinion.

00:23:08.300 | Okay, any other questions before I go on?

00:23:14.620 | All right.

00:23:19.920 | Okay, so now we're kind of towards the bottom

00:23:23.640 | of the prioritization list

00:23:25.560 | and we've taken care of the top ones.

00:23:28.700 | You know, get your house in order

00:23:31.480 | so that you're not bouncing checks

00:23:33.120 | and get that employer match

00:23:35.280 | that 100% return on your investment.

00:23:38.680 | Get those credit cards paid off

00:23:40.560 | and we're through all of the tax advantaged options,

00:23:45.200 | the HSAs, the IRAs, the 401Ks.

00:23:48.320 | So now we're down to, okay, do I invest

00:23:52.400 | or do I pay off debt that I have?

00:23:54.600 | Good question.

00:23:56.880 | So in the Bogle Hedge Wiki,

00:24:01.280 | you'll see there's three bullet points,

00:24:05.120 | pay off medium interest,

00:24:07.120 | then invest taxably,

00:24:08.960 | then pay off low interest.

00:24:10.440 | It's a little tough

00:24:12.480 | since there is no maximum on taxable investment.

00:24:15.220 | You could reasonably ask,

00:24:17.000 | how do you ever get to paying off low interest debt?

00:24:20.440 | That's a good question.

00:24:21.560 | You can think of those two maybe as parallel

00:24:26.200 | rather than one right after the other.

00:24:28.880 | And it gets into your risk tolerance

00:24:32.240 | or your risk aversion,

00:24:34.080 | just how do you define things?

00:24:35.360 | So there's one definition of medium interest debt

00:24:38.080 | that you'll find over on the Money Mustache one.

00:24:41.640 | And again, it's just a definition,

00:24:44.160 | 3% over the 10-year treasury note yield,

00:24:47.560 | which 10-year treasury has been what,

00:24:50.200 | about one and a quarter percent

00:24:51.960 | averaging over the past year.

00:24:53.320 | So I might say medium would be over four and a quarter.

00:24:58.400 | So that would say 5% would be medium interest debt

00:25:03.400 | and you ought to pay that off.

00:25:04.640 | And 4% that'd be low interest debt.

00:25:09.000 | So you should invest taxably.

00:25:11.880 | And some people would say, yeah, that makes sense.

00:25:13.760 | Other people would say 5%.

00:25:16.680 | Man, that's pretty low.

00:25:18.640 | I think I'm gonna earn more than that.

00:25:20.280 | I'm in this for the long haul.

00:25:21.880 | I'm 100% stocks, away I go.

00:25:24.960 | Other people would say 4%.

00:25:27.200 | Gee, that's a great return.

00:25:28.720 | That's a guaranteed investment return.

00:25:31.160 | I'm all for that.

00:25:32.320 | I'm gonna pay off the debt before I invest.

00:25:34.600 | And so it's personal,

00:25:40.400 | but these are some of the things

00:25:42.640 | that you might wanna think about

00:25:45.000 | when you're making your personal decision.

00:25:54.440 | Other considerations that often pop up with questions,

00:25:58.160 | a common question is where do you put saving

00:26:00.760 | for a house down payment in this ordering?

00:26:04.960 | That's really up to you.

00:26:06.240 | You can either say, hey, we really want the house.

00:26:11.320 | We're gonna consider this a day-to-day expense

00:26:13.520 | like going out and buying groceries,

00:26:15.560 | food, clothing, and eventual better shelter.

00:26:20.160 | So we will do that.

00:26:22.200 | That's just something that we're not gonna consider

00:26:25.520 | that an investment that's at risk.

00:26:28.880 | We're gonna go buy chicken and potatoes and milk

00:26:33.880 | and then we're gonna put a bunch into our down payment fund.

00:26:38.400 | Or people can say, okay, we're renting here

00:26:43.400 | or we've got an okay house and we'll invest.

00:26:46.680 | And if things work out,

00:26:48.560 | we'll take money out of investments later

00:26:50.920 | and buy a house or buy a bigger house,

00:26:54.080 | but we're in no rush.

00:26:55.920 | So again, either one of those is perfectly defensible.

00:27:01.720 | Another question is where do 529 plans come into this?

00:27:06.640 | That's another personal thing.

00:27:08.680 | I kinda like the analogy of do that only

00:27:13.320 | after your retirement plan is set.

00:27:17.040 | Get your own oxygen mask on, then go assist others.

00:27:20.800 | Another phrase that I've heard is you can borrow

00:27:24.520 | for college, but you can't borrow for your retirement.

00:27:27.840 | But that's a personal thing.

00:27:31.080 | Some people consider it extremely important

00:27:33.520 | to be able to pay their kids college.

00:27:36.400 | So you have that as a higher priority.

00:27:38.640 | And in all this, the ordering pretty much assumes

00:27:44.040 | that you've got W-2 earnings or you're a contractor

00:27:49.040 | without, you don't own capital.

00:27:56.520 | So you don't own a chain of dry cleaning stores

00:27:59.160 | or you don't own a food truck

00:28:01.320 | that you're looking to grow your business.

00:28:03.440 | If you are self-employed in that way,

00:28:05.600 | if you own your own business,

00:28:07.400 | you really need to look and figure the return

00:28:09.320 | on your business investment and decide where that fits in.

00:28:14.440 | With all the investment options of IRAs

00:28:18.360 | and solo 401ks and so forth and so on.

00:28:21.720 | And that is it for the formal presentation

00:28:30.200 | on prioritizing investments.

00:28:33.520 | So where are we with questions?

00:28:38.240 | I see some long ones here.

00:28:43.040 | - Chat asking, what's a reasonable amount

00:28:45.640 | to put per month into a 529 for young kids?

00:28:48.400 | - I don't have a good answer for that.

00:28:55.960 | If someone wants to opine on that, that depends.

00:29:00.960 | Is your kid gonna go to Harvard

00:29:03.200 | and you wanna pay for all four years plus a PhD

00:29:06.880 | and whatever, then you'd need to be putting

00:29:12.800 | in a heck of a lot.

00:29:13.920 | Is your kid gonna go to enormous state university

00:29:19.960 | and is likely to get some sort of athletic scholarship?

00:29:23.560 | You probably don't need to put in as much.

00:29:26.680 | That's a really personal one.

00:29:31.360 | I don't have a good answer to that.

00:29:33.800 | If anyone does, raise your hand or open your mic

00:29:37.400 | and I'll be quiet for a bit here.

00:29:39.680 | (mouse clicking)

00:29:42.440 | Well, one thing I would say is that the earlier

00:29:48.360 | you put the money into the 401k,

00:29:51.560 | the more time it has to grow.

00:29:54.480 | And so it's kind of like a front-loading.

00:29:57.840 | I view it as kind of a front-loading effort to put as,

00:30:02.720 | I mean, I realize that saving for retirement is important,

00:30:06.760 | more important, but if there's any way to front-load

00:30:11.520 | the 529 early, then it has more time to grow.

00:30:16.520 | It only has 18 years to grow.

00:30:20.720 | The life of the 529 is shorter than the life

00:30:24.400 | of your retirement, your investing for retirement.

00:30:28.760 | So it's kind of like a different type of an account.

00:30:33.800 | It sort of behaves a little different.

00:30:35.800 | But most of the 529 plans do have a,

00:30:39.160 | like a glide path similar to a target date refund

00:30:43.040 | or target date retirement fund,

00:30:44.840 | where it will glide down to bonds.

00:30:47.320 | So if you put your money in,

00:30:48.680 | if you intend to put more money in towards the end

00:30:51.800 | of the 18 year period, you're going to be

00:30:54.400 | in a more conservative portfolio,

00:30:57.600 | or you're going to take more risk

00:30:59.760 | that the market will drop before your child goes to college.

00:31:05.560 | So I see a reason to front-load it as much as you can.

00:31:10.560 | - Okay, there was a long post about after-tax money,

00:31:17.800 | choice between regular taxable account

00:31:19.840 | and Megabackdoor Roth, and RB suggests it's always better

00:31:24.840 | to use Megabackdoor Roth, and I would agree with that.

00:31:30.560 | That's why it shows up in this middle four

00:31:35.560 | as opposed to the bottom three.

00:31:39.400 | So yeah, we talked about,

00:31:43.240 | you can sort of flip-flop some of these,

00:31:45.480 | but I think that top three,

00:31:48.720 | there's a pretty bright line between the top three

00:31:52.280 | and the middle four, and there's a pretty bright line

00:31:56.120 | between the middle four and the bottom three here.

00:32:00.520 | I suppose someone might be able to come up

00:32:03.080 | with an exception, but I can't off the top of my head.

00:32:05.800 | What else do we have in chat?

00:32:13.280 | 529s, 529s.

00:32:15.760 | - Okay, there's another question I can read out if you want.

00:32:17.880 | It's from Deepak.

00:32:19.280 | He said, "My state 529 plan has a state tax deduction.

00:32:23.360 | I thought of this as a guaranteed return on my investment

00:32:25.680 | and hence prioritize it a little higher

00:32:27.640 | than my taxable accounts.

00:32:29.160 | What are your thoughts on this?"

00:32:30.760 | - Yeah, that's, if you're sure

00:32:39.080 | and you get to define the word sure,

00:32:41.320 | if you're sure that your kid's gonna go to college

00:32:44.480 | and you're gonna spend,

00:32:46.800 | and you want to spend the money on that,

00:32:49.200 | sure, that makes sense to do that.

00:32:53.360 | What we've done personally,

00:32:58.480 | well, we weren't really all that,

00:33:02.200 | we were lucky with what we did on our personal finance.

00:33:05.760 | Worked out okay,

00:33:06.600 | but we didn't really know what we were doing.

00:33:08.760 | But what we do now with kids still going through college

00:33:14.320 | is we put in the maximum 529 that we can

00:33:19.320 | to get the state tax break.

00:33:22.480 | And then we take it right out the next year

00:33:24.840 | to use it for tuition and room and board.

00:33:28.320 | So yeah, if you're in a state

00:33:30.120 | that gives you a state tax break,

00:33:31.760 | might as well take advantage of it.

00:33:34.720 | - And a while back, there was a question in the chat,

00:33:37.720 | "If you don't plan to retire in the U.S.,

00:33:40.200 | how does any of this change, if at all?"

00:33:42.880 | - Great question, and that would probably depend

00:33:47.880 | on where you're going to retire

00:33:49.600 | and how that country treats IRAs and 401ks.

00:33:54.720 | IRAs and 401ks in the U.S.,

00:33:56.640 | and I am absolutely not an expert on those,

00:34:00.640 | not even close to being moderately informed on those.

00:34:03.920 | So someone else will have to weigh in on that.

00:34:06.480 | - Okay, I actually had a question as well.

00:34:14.200 | What if you sort of have low to medium interest debt

00:34:18.400 | somewhere in between, say like two and a half percent,

00:34:23.600 | and you weren't really sure

00:34:25.680 | how things were gonna kind of go in the future,

00:34:27.280 | would you focus on paying off the debt or investing,

00:34:31.680 | or I guess, how would you make that decision

00:34:33.720 | if you really were unsure as to the trade-off there?

00:34:36.680 | - Well, one, you could follow these suggestions,

00:34:42.840 | and two and a half percent,

00:34:47.440 | the Bogle Hedge Wiki does not define high, medium, and low.

00:34:51.120 | The Money Mustache one gives some suggestions,

00:34:55.720 | but I don't think it even pretends

00:34:58.080 | that those are wholly writ suggestions.

00:35:01.200 | There are some guidelines.

00:35:03.280 | So if we were to go with the definition of medium

00:35:06.960 | as being 3% over the 10-year treasury note yield,

00:35:10.600 | and at one and a quarter percent roughly,

00:35:13.800 | so medium would be four and a quarter percent.

00:35:16.920 | So you said two and a half percent,

00:35:20.440 | so that's under four and a quarter,

00:35:22.040 | so that would be not medium interest debt,

00:35:24.560 | that would be low interest debt.

00:35:26.800 | And if you follow this ordering,

00:35:29.880 | you'd never pay it off until you paid it off

00:35:33.440 | by paying it monthly.

00:35:34.720 | But if you're staying up at night

00:35:38.520 | because you can't stand debt and you're losing sleep,

00:35:42.000 | well, then maybe you wanna pay it off.

00:35:44.680 | - Can I contribute something to that point as well?

00:35:49.000 | - Sure.

00:35:50.840 | - It's rather helpful if you simplify that debt question.

00:35:55.840 | So for instance, if you're paying two and a half percent

00:36:00.160 | in interest on any form of debt,

00:36:03.400 | you can also look at that as a way to give yourself

00:36:07.320 | a two and a half percent raise on your income

00:36:11.000 | by eliminating that debt.

00:36:13.080 | Furthermore, if you plan to invest

00:36:16.760 | while carrying the example two and a half percent debt,

00:36:21.320 | and let's say you're receiving a nominal,

00:36:24.200 | which is pre-inflation return, say 4%,

00:36:29.200 | you're not really receiving that 4%,

00:36:32.640 | 'cause if you're paying two and a half percent on debt,

00:36:35.280 | but receiving 4%, you could do the math

00:36:38.560 | and you tend to be spinning your wheel.

00:36:40.320 | So it's always prudent to pay off the debt first

00:36:44.320 | and then jump into investing to maximize those efforts.

00:36:48.440 | - That's one way to look at it.

00:36:54.600 | Other people could say that they're not investing

00:36:59.120 | in bonds at all, and they expect their stock returns

00:37:03.360 | to be higher.

00:37:04.200 | So it's never say always, or how does that go?

00:37:09.080 | - We have a question.

00:37:12.200 | - That's one thing I'm missing,

00:37:13.800 | but if you take someone who's decided

00:37:16.000 | they wanna be 100% stocks and they're saying

00:37:20.920 | that the expected return is higher

00:37:24.120 | and then they're willing to run the risk

00:37:25.600 | that that expected return does not materialize,

00:37:28.560 | then I think that they have made a defensible choice

00:37:33.640 | to not pay off their debt.

00:37:35.640 | - David Gravener has a question.

00:37:40.200 | - Okay.

00:37:41.040 | - 5K, were you finished?

00:37:45.560 | - Yeah, yeah.

00:37:46.400 | - Okay, David, do you have a question?

00:37:48.720 | Okay, Christina, do you have a question?

00:37:57.440 | - Yes, I'm wondering, I also put it in the chat,

00:38:01.480 | but I'll just go ahead and state it here.

00:38:03.440 | I'm wondering, as you move closer to retirement,

00:38:07.440 | should you consider moving most of your money

00:38:10.560 | into an after-tax account

00:38:12.600 | so that you're not "surprised" by the taxes you're paying

00:38:17.480 | when you're drawing down from pre-tax accounts

00:38:19.960 | like 401(k) or traditional IRAs?

00:38:24.960 | - I think the answer is in your question,

00:38:30.280 | and that would be, don't be surprised.

00:38:35.560 | You might want to do Roth conversions, or you might not.

00:38:40.560 | While you're still working,

00:38:46.120 | it's usually not beneficial to do Roth conversions

00:38:51.120 | because now your Roth conversion amount

00:38:55.680 | is being added on top of your salary or your wage income,

00:39:00.680 | and so you're gonna pay a pretty high marginal rate, usually.

00:39:05.800 | - Right, but doesn't a Roth conversion assume,

00:39:09.280 | like, excuse my ignorance here,

00:39:13.120 | but doesn't a Roth conversion already assume

00:39:16.400 | that you're making a certain amount of money?

00:39:19.400 | So I'm working from the point of view

00:39:23.760 | that you're not making so much money

00:39:26.040 | that you can do some sort of mega backdoor or Roth

00:39:31.800 | that you just basically have some basic investments

00:39:36.120 | in traditional retirement accounts,

00:39:39.720 | like a 401(k) or what have you,

00:39:42.480 | and you're putting all your money into that,

00:39:47.480 | but perhaps as you move closer to retirement,

00:39:51.360 | when you start to draw down from that 401(k),

00:39:56.200 | you're gonna be paying taxes on that,

00:39:57.800 | or you're gonna be paying taxes on your traditional IRA.

00:40:01.440 | So at what point, I'm wondering,

00:40:04.320 | should you be trying to move money,

00:40:06.280 | or should you, maybe it's not about moving money,

00:40:08.720 | maybe it's just simply about putting money now

00:40:11.840 | into, let's say, a Roth account of some sort.

00:40:15.280 | I'm just really trying to figure out,

00:40:19.480 | like, how do you avoid paying taxes you don't need to pay,

00:40:24.480 | if that makes sense.

00:40:27.440 | - And that would be that you learn enough

00:40:32.440 | to understand your own personal tax situation.

00:40:37.480 | There's lots of ways to do it.

00:40:42.560 | If you use, you can pay a CPA to tell you,

00:40:45.680 | you could use TurboTax, and you can say,

00:40:52.040 | well, okay, here's what it would be, here's my base,

00:40:55.080 | and now if I were to do $1,000 Roth conversion,

00:40:57.960 | how much more tax would I pay,

00:40:59.640 | and what's that divided by 1,000,

00:41:02.840 | so what's my marginal rate on that,

00:41:05.160 | so forth and so on.

00:41:06.520 | You can use spreadsheets

00:41:09.320 | that will do all those calculations for you

00:41:11.720 | and give you a chart that'll show you

00:41:13.920 | what your marginal rate would be for your Roth conversion.

00:41:17.560 | The whole thing on Roth conversions

00:41:21.160 | or traditional versus Roth,

00:41:22.560 | it boils down to, it's the, where is it here?

00:41:27.560 | You really want to understand the rate

00:41:34.080 | that you're gonna pay,

00:41:36.040 | so with a Roth conversion,

00:41:38.920 | if it's gonna cost you 24% to do a Roth conversion now,

00:41:45.840 | but you expect after you retire,

00:41:49.680 | you can take money out of your traditional account

00:41:53.480 | and only pay 15%, then wait.

00:41:56.760 | If it's gonna cost you 12% to take your money

00:42:02.840 | and do a Roth conversion now,

00:42:05.120 | and you expect after retirement,

00:42:07.000 | you're gonna have a pension kick in,

00:42:08.640 | and you're gonna start Social Security,

00:42:10.400 | so you're gonna be paying 22.2%,

00:42:14.960 | then don't wait, do that conversion now at 12%.

00:42:19.960 | So it really, it matters what your situation is,

00:42:24.560 | what your tax rate is going to be now

00:42:27.840 | and what you think it's going to be later.

00:42:29.960 | - Thank you. - Thank you.

00:42:35.000 | - Thank you.

00:42:35.840 | - I'm sorry that I can't give a cut and dried answer.

00:42:41.680 | What I can say, Christina, is that for me, for our family,

00:42:46.160 | we were surprised when we retired

00:42:49.240 | that we were in a higher tax bracket

00:42:52.560 | than when we were working, and we did not expect that,

00:42:57.480 | but life has its way of changing your tax expectations.

00:43:02.480 | We have pensions and also RMDs,

00:43:09.120 | and then my husband went back to work with 401k,

00:43:13.120 | with, I'm sorry, W-2 wages.

00:43:18.120 | And before you know it, we're back up in a higher tax,

00:43:21.720 | we're in a higher tax bracket than when we worked.

00:43:24.360 | So there are many Bogleheads who did find that,

00:43:28.360 | I read them on the forum,

00:43:30.360 | and also many Bogleheads

00:43:31.800 | are in more or less the same tax bracket,

00:43:34.880 | just more or less the same tax bracket when they retire

00:43:37.880 | as when they were working.

00:43:39.200 | - Thank you, Miriam, that's very helpful

00:43:43.720 | because what you just described is what I'm talking about.

00:43:48.280 | - What you're looking at.

00:43:49.840 | - Exactly, so that was very helpful, thank you.

00:43:52.200 | It's like, you can try to plan,

00:43:54.280 | but I mean, I'm not quite at or near retirement yet,

00:43:58.960 | but you thought you were doing

00:44:00.280 | all the things you needed to do,

00:44:02.040 | and then yet you get in retirement,

00:44:03.840 | and it's like, surprise, surprise.

00:44:05.520 | So that's helpful, thank you so much.

00:44:08.520 | - You're welcome.

00:44:09.400 | Also, David Grabener, are you unmuted now?

00:44:12.960 | - Yes, I'm unmuted.

00:44:14.080 | - Okay, you're on.

00:44:15.080 | - I want to clarify the way we look

00:44:18.680 | at the paying down a debt versus investing decision.

00:44:23.480 | So try to take an objective look at this.

00:44:29.880 | So if you pay down a loan,

00:44:34.480 | you're getting a risk-free return

00:44:36.280 | equal to the rate on the loan.

00:44:38.320 | And so you have to decide,

00:44:43.640 | would you rather get a risk-free return

00:44:45.280 | equal to the rate on the loan

00:44:46.440 | or the rate on your investments?

00:44:48.480 | Well, if you hold a bond,

00:44:50.760 | you're getting a low risk return

00:44:52.840 | equal to the rate on the bond.

00:44:54.360 | So that I think is a five case point

00:45:00.680 | about if you're 100% stock,

00:45:02.640 | then it might well make sense

00:45:05.920 | to hold a debt that's sufficiently above the bond rate.

00:45:10.920 | You'd rather get a,

00:45:13.440 | you'd rather invest in stock

00:45:15.200 | and expect 7% with a lot of risk

00:45:17.280 | than get a risk-free 3%.

00:45:19.640 | But if you hold a stock,

00:45:21.720 | if you hold a bond yielding 2%

00:45:24.200 | and a loan at 3%,

00:45:26.600 | then if you sell the bond to pay down the loan,

00:45:30.080 | you're getting a guaranteed 1% benefit

00:45:33.160 | without changing your risk.

00:45:34.800 | So unless there's some other reason you wanted,

00:45:38.400 | so if you have any bonds at all,

00:45:42.440 | then paying, unless there's some other reason,

00:45:46.680 | and there may be,

00:45:47.520 | you may need to keep the money liquid.

00:45:49.600 | It's often better to,

00:45:52.040 | it's usually better to max out your 401k

00:45:54.520 | rather than paying down a mortgage

00:45:55.760 | because you get taxed for growth for the long time.

00:45:58.640 | But I think that that's the point

00:46:00.280 | I tend to make on the forum,

00:46:01.480 | that if you are actually 100% stock,

00:46:05.360 | and you're well,

00:46:06.400 | then it may make sense to borrow a lot more,

00:46:09.680 | to borrow more than at significantly above the bond rate.

00:46:14.440 | But if you hold any bonds,

00:46:17.280 | you can view your mortgage as a negative bond,

00:46:19.640 | and therefore paying down the mortgage

00:46:24.480 | is a better kind of "bond" to buy.

00:46:28.600 | - Mm-hmm.

00:46:30.200 | - That if its rate is significantly higher,

00:46:34.480 | and if you can pay down,

00:46:35.920 | and if you don't get any other benefit like liquidity.

00:46:38.960 | And liquidity is useful,

00:46:40.240 | but I don't think on the forum,

00:46:45.240 | I think unless you're 100% stock,

00:46:48.800 | I would certainly pay down a mortgage

00:46:50.280 | that's 3% above the treasury yield.

00:46:52.240 | - Thank you, David.

00:46:56.240 | - That's covered pretty well in the paying down loans

00:46:59.680 | versus investing wiki article,

00:47:02.320 | which that's where it's linked here.

00:47:05.040 | - Yeah, I'm one of the main contributors to that article.

00:47:10.040 | - That's why I made sure to bring it up.

00:47:15.840 | - It does show a lot about how I think about the problem.

00:47:18.960 | - Yep, I think it's well-written.

00:47:23.400 | - 5K, does it depend on the type of debt?

00:47:26.960 | Like what about student loans,

00:47:30.600 | paying off student loans

00:47:32.360 | rather than investing for retirement?

00:47:36.240 | That is often discussed on the forum that-

00:47:39.920 | - I suppose it could.

00:47:44.160 | That's getting to be a really sharp pencil there

00:47:48.600 | to make distinctions.

00:47:50.600 | Debt is debt, you can get into callable

00:47:53.280 | versus non-callable and all that sort of stuff.

00:47:57.880 | But I think if we're gonna stick

00:48:00.640 | with the Boglehead principle of simplicity,

00:48:02.880 | let's just say debt is debt.

00:48:04.360 | - Absolutely, and then one other thing

00:48:07.240 | I'd like to add to on the topic,

00:48:09.120 | I think often gets overlooked

00:48:10.640 | because a lot of people start comparing at different rates,

00:48:13.520 | carrying debts versus investments.

00:48:15.880 | It really boils down to cashflow.

00:48:17.840 | If you're carrying debts,

00:48:19.640 | not only are you paying an interest rate

00:48:22.120 | on that borrowed amount of funds,

00:48:24.160 | but you're also servicing that debt.

00:48:26.480 | And therefore that cashflow

00:48:28.480 | is flowing out of your expense column

00:48:31.040 | rather than staying in your asset column.

00:48:34.120 | And so the more money that you're paying out

00:48:35.880 | servicing debts of say credit cards,

00:48:39.360 | student loans, car payments, XYZ,

00:48:42.280 | let's just call it consumer debt.

00:48:44.160 | That's less money that you're contributing

00:48:45.920 | to your investment efforts

00:48:47.320 | and therefore a smaller nest egg at retirement.

00:48:51.320 | Now, obviously there's no perfect plan.

00:48:53.160 | And as previously mentioned,

00:48:55.360 | there is never a rule of thumb,

00:48:57.440 | but it's worth considering that paying money out

00:49:02.440 | in terms of cashflow to service debts

00:49:06.720 | is money that you're not investing.

00:49:08.280 | And so one should seriously consider that opportunity cost.

00:49:11.280 | - Thank you, Michael.

00:49:13.400 | Carol, do you have a question?

00:49:16.560 | - Yeah, there was a question in the chat a while back,

00:49:19.120 | and I know this is kind of like a whole other topic,

00:49:21.960 | but the question was what assets should go in a Roth

00:49:25.400 | versus a traditional IRA versus taxable account?

00:49:27.960 | And I know that's a big question.

00:49:29.640 | - I'll give the one or two sentence answer.

00:49:33.280 | And again, there's a whole wiki article

00:49:36.000 | that goes into pros and cons and conflicting opinions.

00:49:40.200 | But the one or two sentence answer

00:49:42.200 | is you put your high expected growth things in your Roth,

00:49:47.200 | your low expected growth, like bonds in your traditional

00:49:52.720 | and taxable, you try to make that

00:49:59.080 | as tax efficient as possible.

00:50:01.240 | So that's my quick answer,

00:50:03.920 | but anyone else is certainly welcome to chime in.

00:50:07.560 | - Yeah, it's also worth noting that bonds pay interest,

00:50:11.200 | which are typically taxed at marginal rates.

00:50:14.000 | And therefore in some of Bogle's books,

00:50:15.640 | he definitely highlights and mentions

00:50:17.600 | some of the potential benefits of placing fixed income

00:50:21.960 | within Roths, which are obviously a post-tax contribution.

00:50:26.960 | So the interest earned on those bonds within your Roth

00:50:34.280 | as it compounds over many decades is a serious advantage

00:50:38.760 | because you're not paying any taxes

00:50:40.920 | on those interest payments.

00:50:42.320 | - Right, so this is John.

00:50:44.680 | I'm the one that posed the question.

00:50:46.480 | I struggle with the question of what to put

00:50:48.760 | in my Roth account because those are

00:50:51.320 | a finite amount of assets.

00:50:52.880 | I mean, it's not as large as my taxable or my 401k.

00:50:57.600 | So I'm trying to be choosy about what I put

00:51:00.400 | in my Roth account.

00:51:02.840 | And so I struggle between,

00:51:04.360 | like you mentioned, higher growth stocks,

00:51:06.520 | but I also have things that pay pretty good dividends

00:51:10.120 | that I don't necessarily wanna pay taxes on,

00:51:12.440 | like a high yield junk bond fund or a Verizon, for instance,

00:51:17.440 | that pays 4.5% dividends.

00:51:21.120 | So that's just my struggle.

00:51:23.480 | And I just retired, so that's my context.

00:51:27.040 | - Congratulations.

00:51:28.160 | Let's see, then there's a, right under that,

00:51:34.560 | there's a question on Mega Backdoor Roth.

00:51:36.720 | Currently invest Roth sells offered.

00:51:39.720 | Funds I have in 401k, taxes on games.

00:51:43.160 | Oh, don't worry about being confused.

00:51:46.200 | Join the crowd on that.

00:51:47.320 | The whole, whether it's a regular backdoor

00:51:49.360 | or a Mega Backdoor, they can get confusing.

00:51:53.960 | So what you would need to understand is,

00:51:59.400 | do you have a third option in your 401k?

00:52:03.520 | So you have the traditional pre-tax,

00:52:07.160 | you have the Roth that goes in after tax,

00:52:10.880 | and you need to find out

00:52:12.800 | if your employer also offers after tax non-Roth.

00:52:17.800 | That's the first step.

00:52:23.040 | So does your employer,

00:52:24.600 | so you can contribute up to 19.5 or if you're older,

00:52:28.760 | so more to either the traditional or the Roth.

00:52:33.480 | But then there's that $58,000 limit

00:52:38.240 | that's employer contributions and the 19.5

00:52:42.840 | and anything else that you kick in.

00:52:45.600 | So that's where the after tax non-Roth comes in.

00:52:49.280 | That if your employer hasn't matched you 2X or whatever,

00:52:54.280 | you still have this room.

00:52:57.440 | If your employer allows you to put in after tax non-Roth,

00:53:02.440 | you can do that.

00:53:04.320 | And then you need to, so that's step one.

00:53:06.600 | Step two is, does your employer also allow you

00:53:10.000 | to then immediately or in the relatively near future,

00:53:14.920 | allow you to take that contribution

00:53:17.280 | and roll it over into a Roth account,

00:53:21.320 | either inside the 401k or out to a Roth IRA.

00:53:26.280 | So it's a two-step process

00:53:28.680 | and you need to check with your employer

00:53:30.320 | on whether both of them are allowed.

00:53:32.600 | - If I could just add that quick question there.

00:53:37.320 | I think someone had also asked,

00:53:38.920 | in terms of the gains before the mega backdoor is completed,

00:53:43.160 | I believe you'd pay taxes on those gains, is that correct?

00:53:46.080 | - Oh yes, okay, yep.

00:53:47.720 | Taxes are paid on the gains, that's correct.

00:53:49.640 | So if it's gone up by $25,

00:53:56.000 | 'cause you waited a month,

00:53:57.520 | you're gonna pay tax on that $25,

00:53:59.840 | but I wouldn't let that hold you back.

00:54:02.000 | - Okay, sounds good.

00:54:04.040 | It sounds like the best way to really find out about that

00:54:05.160 | is to contact your employer and your plan.

00:54:07.680 | Okay, that makes sense.

00:54:08.680 | And I think there was a question in the chat asking,

00:54:11.160 | does the sales rental property,

00:54:12.920 | capital gains on that rental property

00:54:15.760 | affect the distribution from IRAs on your tax return?

00:54:19.080 | - Okay, hang on to that one.

00:54:20.240 | Let me just check with Gail of North Texas.

00:54:23.040 | Did that answer your question?

00:54:24.560 | (mouse clicking)

00:54:27.320 | - Yes, thank you.

00:54:30.640 | - Okay, great.

00:54:32.440 | Okay, sorry, Maddie.

00:54:33.280 | What was the one about the capital gains?

00:54:36.480 | - Oh, sure.

00:54:37.680 | The person was asking,

00:54:38.760 | does a sale of a rental property capital gain

00:54:41.840 | affect the distribution from IRAs on your tax return?

00:54:53.720 | - Well, it depends.

00:54:56.200 | So if you've got a capital gain,

00:54:57.640 | if you're in one of those zones

00:55:00.640 | where your capital gains are not being completely taxed,

00:55:05.280 | or you're hitting the NIIT boundary,

00:55:09.880 | and so they're gonna be taxed a little more,

00:55:12.360 | if you're in one of those,

00:55:14.080 | then additional ordinary income

00:55:18.040 | gets taxed at a higher marginal rate.

00:55:22.440 | Otherwise, no.

00:55:23.680 | So that's another one of those, it depends answers.

00:55:29.720 | Does that make sense?

00:55:30.800 | And if it does make sense to everyone,

00:55:36.880 | I'm amazed because it's not something that's obvious.

00:55:40.240 | - Sounds like it's a complicated answer,

00:55:44.000 | but I think that that makes sense to me.

00:55:46.200 | - I just mentioned in the chat

00:55:49.000 | the presentation you gave us at Chicago a few months ago,

00:55:52.760 | where you used the financial toolbox.

00:55:54.480 | That was a really good thing

00:55:55.880 | to play around with some numbers

00:55:57.320 | to see the financial impact and the tax consequences

00:56:01.040 | and marginal rates, effective rates, all that.

00:56:03.160 | So I put the link in the notes here in the chat.

00:56:07.440 | - And if we have some time tonight, I could...

00:56:18.040 | - 5K, I think you put yourself on mute.

00:56:20.040 | - Sorry, that was me, sorry.

00:56:22.680 | - Oh, okay.

00:56:27.400 | All right, I'm not sure what got muted.

00:56:33.360 | - Okay, that's fine.

00:56:35.200 | 5K, would you say that our young investors should aim

00:56:40.200 | or it would be good to arrange their order,

00:56:47.840 | their investing so that when they reach retirement,

00:56:52.840 | they pretty much have a nice pot of money in their pre-tax,

00:56:58.760 | a nice pot of money in their after-tax Roths

00:57:03.880 | and money also in their taxable account?

00:57:06.640 | - It really depends on what their marginal tax rate

00:57:13.800 | has been through their employment.

00:57:18.040 | And it's a common question.

00:57:20.840 | People say, well, what percentage should be in which bucket?

00:57:25.600 | And it's really not the best,

00:57:27.640 | the percentage is a consequence, not a goal.

00:57:32.640 | So the goal is you want to fill up your traditional account

00:57:38.160 | up to, but no higher than,

00:57:44.840 | you want to fill it up by saving,

00:57:49.840 | as you put into your traditional account,

00:57:52.440 | you're saving some certain marginal rate,

00:57:54.920 | 12%, 22%, whatever.

00:57:59.280 | If you're in the earned income tax credit area,

00:58:02.240 | you can be saving a high marginal rate.

00:58:06.240 | If you're paying NIIT, you can be paying,

00:58:08.800 | you can be saving a higher marginal rate, et cetera.

00:58:11.960 | You want to keep filling up that traditional account

00:58:15.000 | by saving at whatever marginal rate you're saving at

00:58:19.040 | until it gets large enough that you think

00:58:21.360 | that when you start to withdraw

00:58:23.000 | from that traditional account,

00:58:24.960 | you're going to be paying somewhere close

00:58:28.600 | to that same marginal rate.

00:58:30.760 | So if you've got someone that's making

00:58:34.440 | relatively low income,

00:58:38.160 | they may end up with 90% of their investments

00:58:43.160 | in traditional because they're going to be pulling it out

00:58:47.040 | at a fairly low marginal rate.

00:58:50.000 | Or you take someone, you've got a brain surgeon

00:58:53.360 | who's making half a million a year or whatever,

00:58:55.760 | they're going to have a relatively small amount

00:59:01.960 | in traditional because they can only put so much in there.

00:59:06.640 | And they're going to have a whole bunch in taxable

00:59:11.640 | and Roth because it's spilled over.

00:59:14.440 | So I can understand why people want a percentage

00:59:18.560 | because that's a nice, easy thing to look at,

00:59:20.880 | but it's really the percentage should be an outcome,

00:59:24.560 | not a goal.

00:59:25.480 | - We actually have a question in chat on that.

00:59:35.840 | It says, is there such a thing as too much money

00:59:40.840 | in a Roth versus traditional IRAs?

00:59:45.480 | In other words, if I only have Roth funds

00:59:48.760 | with no more traditional IRA funds,

00:59:52.440 | aren't I wasting some of my efficiency?

00:59:55.400 | - Yeah, if you have everything in Roth,

01:00:01.720 | and I mean everything,

01:00:03.000 | so you're not paying any tax at all in retirement,

01:00:07.120 | then yeah, you missed a bet.

01:00:08.520 | You should have made some traditional contribution

01:00:12.720 | and saved taxes back at that point.

01:00:15.600 | - Sonia, do you have a question?

01:00:20.440 | Sonia, you're on mute.

01:00:25.840 | - No, sorry, it's a mistake.

01:00:32.800 | - Okay.

01:00:33.640 | - No, I think someone else had a question in the chat.

01:00:37.800 | Any thought on placing similar asset allocation funds

01:00:40.560 | in tax and tax deferred accounts

01:00:42.560 | wouldn't be a hundred percent tax efficient,

01:00:44.160 | but you'd avoid behavioral issues

01:00:46.360 | and you'd get automatic rebalancing.

01:00:49.400 | And what are your thoughts about that?

01:00:51.720 | And the other advantage that they pointed out

01:00:53.120 | was you might be able to do a similar amount withdrawal

01:00:55.400 | across all accounts when you need to spend in retirement.

01:01:01.320 | - That's a trade-off between simplicity and optimization.

01:01:06.320 | And both of those are somewhat subjective.

01:01:12.480 | One person's simple is another person's complex

01:01:16.560 | and one person's optimum is another person's not worth it.

01:01:20.200 | I can't improve on the pros and cons

01:01:26.760 | in the tax efficient investment wiki.

01:01:31.520 | - Thanks, and Doug, I mean, just to follow up on that,

01:01:36.640 | curious, has anyone actually looked at like,

01:01:39.200 | what are the percent differences in, for instance,

01:01:42.960 | accounts if you did that

01:01:45.200 | versus doing something that's more tax efficient?

01:01:47.720 | Like how much of a difference does that make

01:01:49.360 | at a retirement time?

01:01:51.480 | (mouse clicking)

01:01:54.240 | - I'll let anyone else who wants to weigh in on that one.

01:02:02.320 | - Manny, could you ask your question again?

01:02:11.320 | Was it your question or a question from the chat?

01:02:14.520 | - It is my question.

01:02:15.680 | I was just more curious based off that question,

01:02:17.080 | but essentially they were saying simplicity

01:02:20.480 | versus more complexity.

01:02:22.520 | If you had similar asset allocation

01:02:25.320 | in tax and tax deferred accounts

01:02:27.800 | versus doing a more tax efficient asset allocation,

01:02:31.920 | what's the actual difference in retirement?

01:02:33.720 | Like what's the percent difference you might have

01:02:36.280 | in the amount you're able to withdraw in retirement?

01:02:45.480 | - Are you talking about tax efficient by putting,

01:02:48.360 | are you talking about stocks versus bonds

01:02:50.280 | in your tax, in your pre-tax versus your Roth?

01:02:55.280 | - Yeah, yeah, yeah.

01:02:59.640 | If you were to, you know,

01:03:01.360 | rather than just putting similar asset allocations

01:03:03.280 | across tax and tax deferred,

01:03:05.040 | exactly, to put them in a more tax efficient manner.

01:03:08.000 | So it wouldn't be, you wouldn't be accumulating tax drag.

01:03:12.200 | - Okay.

01:03:13.040 | - Well, I can, I'm, even when I was working,

01:03:20.640 | my Roth account, I had mostly stocks.

01:03:25.160 | And the reason was I wanted it to grow

01:03:27.840 | because it was my account I was anticipating

01:03:31.920 | to be used for health reasons.

01:03:36.720 | For, since we do not have,

01:03:41.000 | we don't, we have health insurance,

01:03:42.360 | but we don't have long-term care insurance.

01:03:45.440 | And so I was, wanted it to be big for that

01:03:49.360 | and also to leave to the kids.

01:03:52.840 | I simply wanted it to grow.

01:03:55.600 | I could not get over.

01:03:57.520 | It just seemed to me that it was tax free.

01:04:00.640 | All the growth in my Roth IRA was tax free.

01:04:04.400 | It was just going to grow and grow and grow.

01:04:08.120 | And it just seemed to me,

01:04:09.520 | I just could not get over how it would grow big

01:04:14.120 | if I had a lot of taxes, a lot of stocks in there

01:04:17.880 | for what I needed in the long-term future.

01:04:20.960 | Is that what you're talking about?

01:04:25.200 | - Yeah, yeah, no, that makes sense.

01:04:26.520 | And I was really wondering like,

01:04:27.840 | what is the actual difference in retirement?

01:04:29.640 | You know, if someone didn't do that and they put,

01:04:31.480 | you know, taxes, like equities and bonds

01:04:34.960 | in their tax protected accounts,

01:04:38.680 | like what would the actual difference be?

01:04:39.960 | But it sounds like it'd be, it's beneficial really,

01:04:42.800 | or it could be beneficial

01:04:44.000 | to leave stocks in those tax protected accounts.

01:04:47.080 | - In Jack Bogle's "Guide to Investing" book,

01:04:50.920 | there's a chapter near the back of the book somewhere,

01:04:53.680 | I actually have it here in my library,

01:04:55.360 | where he does a small little breakdown

01:04:57.360 | of exactly what you're asking

01:04:58.640 | and does a comparison of putting X amount of dollars

01:05:02.480 | in a taxable account

01:05:03.880 | and then taking the same amount of dollars

01:05:05.520 | and putting it in a tax deferred or advantaged account.

01:05:10.520 | Additionally, whether you select equities or bonds

01:05:14.600 | and what the resulting investment total would be at the end

01:05:19.600 | considering tax drag that you're referencing.

01:05:23.280 | So I don't know if you can get your hands on that book,

01:05:26.040 | but I think that may point you

01:05:29.400 | in the direction to what you're asking.

01:05:31.920 | - You're talking tax drag from a taxable account, Michael,

01:05:35.600 | is that right?

01:05:37.000 | Not the tax drag that comes or the taxes that you pay

01:05:42.000 | when you withdraw from your traditional 401k

01:05:47.080 | or your traditional IRA, right?

01:05:49.960 | You're talking about a taxable account

01:05:53.200 | versus a traditional IRA or a traditional 401k?

01:06:00.520 | - Yeah, I was just trying to reference that chapter

01:06:02.200 | in the book that may have helped the gentleman

01:06:04.000 | ask him the question,

01:06:05.200 | if it may have helped clarify his question.

01:06:08.800 | It just came to mind 'cause what he was asking

01:06:11.360 | seemed to be similar to what I recall reading

01:06:13.520 | in that chapter of "Boglehead's Guide to Investing" book.

01:06:17.040 | - Thank you.

01:06:19.000 | 5K.

01:06:23.520 | - Let's see, question about IBONs

01:06:28.120 | with which I am not familiar.

01:06:29.760 | So if someone would like to weigh in

01:06:31.560 | on Deepak's question on IBONs.

01:06:34.400 | - 5K, I do have another question on teachers

01:06:53.560 | and 403(b) plans.

01:06:57.440 | We do have many teachers on the Bogleheads

01:06:59.920 | and I know that they have a weird setup

01:07:03.560 | with their 403(b) plans.

01:07:06.280 | How does that fit into your investing priorities?

01:07:10.400 | Should they like, you know, abandon,

01:07:13.320 | get out of them if they really could

01:07:15.040 | and move into Roths and traditional?

01:07:17.880 | They also have annuities,

01:07:19.440 | which sometimes are not the best investment for them.

01:07:24.800 | - There's one, I know there's a link

01:07:27.360 | in the Money Mustache one.

01:07:29.400 | I'm not sure if there's a link in the Wiki.

01:07:31.120 | If there's not, I'm sure we could put it in there,

01:07:33.720 | but it goes something like, you know,

01:07:36.120 | if you have poor choices in your 401(k)

01:07:41.120 | and it refers people to the Bogleheads Wiki article

01:07:48.920 | on how do you decide how poor is too poor?

01:07:54.240 | And David Grabener could go into more details on that,

01:07:58.040 | but there's some calculations you could do.

01:08:02.680 | You know, there was a recent thread

01:08:04.240 | where someone was paying, I think,

01:08:05.840 | a total of about 0.3% in their 401(k)

01:08:09.360 | or maybe it was a 403(b)

01:08:11.320 | and they thought that this was terrible.

01:08:13.320 | And, you know, while it's not as good as a 0.04%

01:08:17.760 | for 401(k) or 403(b), it's by no means terrible.

01:08:22.360 | You know, if you're getting up into 2% and 3%,

01:08:25.920 | you know, that can be terrible.

01:08:27.400 | And especially with teachers who may stay

01:08:29.920 | with the same school district for a long time.

01:08:33.040 | But yeah, that's just something that they need to look at,

01:08:37.680 | just how bad is it?

01:08:38.760 | And sometimes 90% of the funds are really terrible,

01:08:43.760 | but there's a Vanguard S&P 500 one in there

01:08:50.160 | that the salesman never tell you about,

01:08:52.200 | but if they look closely, they can see it

01:08:54.480 | or something similar.

01:08:56.040 | - Okay, thank you.

01:09:01.160 | Mega Man, are you, you have a question?

01:09:03.840 | - Yes, I wanted to circle back

01:09:07.880 | to the Roth versus traditional IRA.

01:09:10.920 | And the question was, is it possible

01:09:14.040 | to have too much in the Roth?

01:09:15.400 | And I think the answer is yes.

01:09:17.800 | If you've got 100%, you're losing tax efficiency

01:09:21.360 | at some point.

01:09:22.640 | I've got about 70% in my Roth and I'm retired for 10 years.

01:09:27.640 | So we're really, it's nice to have both

01:09:31.680 | because it gives me great flexibility for taxes,

01:09:35.800 | especially when you look at the tax brackets,

01:09:39.800 | there's a jump from 12% to 22% tax rate.

01:09:46.800 | And that's if you're making 20,000 a year up to 81,000,

01:09:51.800 | you're paying just 12% tax.

01:09:55.560 | So that's a 10% spread.

01:09:57.920 | So I can use my taxable funds up to the 81,000.

01:10:02.920 | And then if I need more, I can just take it from my Roth.

01:10:12.880 | So I can, you know, 300, 400,000 for that year,

01:10:17.200 | I can take out of my Roth.

01:10:20.800 | So I think in those particular,

01:10:23.400 | that bracket is 8% or 10% spread.

01:10:26.600 | And then the spread from 173,000,

01:10:30.040 | this is joint married couples, up to 330,000,

01:10:34.560 | that's a 24% bracket up to a 32% bracket.

01:10:38.880 | So that's an 8% spread.

01:10:40.880 | So if you're in that bracket,

01:10:43.200 | you'd take your traditional up to the 173 and pay 24%,

01:10:48.200 | but use Roth money that if you need more beyond that,

01:10:52.960 | because you don't wanna be in the 32% bracket.

01:10:56.040 | So that's what I like is keeping the bracket

01:11:01.040 | and I know where my tax is gonna be.

01:11:03.920 | And I have the flexibility because I have a lot of Roth

01:11:06.800 | and I also have traditional.

01:11:09.120 | - Interesting, thank you.

01:11:11.480 | - Sure.

01:11:12.320 | - 5K, do you have comments on that?

01:11:17.800 | - I agree.

01:11:21.400 | (laughing)

01:11:23.640 | Lady Geek has put the link to the expensive

01:11:32.440 | or mediocre choices and some I-bonds.

01:11:36.080 | As well, so I love it when there's a good person

01:11:40.720 | filling in the answers in chat.

01:11:42.240 | So thank you.

01:11:43.600 | - Okay, thank you.

01:11:45.480 | Could you go over 5K,

01:11:47.240 | what the difference is between tax brackets

01:11:52.240 | and marginal tax rate and how young investors

01:11:57.240 | who don't wanna learn,

01:12:02.600 | who do not want to get into the weeds of taxes,

01:12:07.600 | but they want to just create their portfolio,

01:12:14.840 | a simple portfolio.

01:12:17.400 | Do they have to worry about marginal tax rate versus bracket?

01:12:20.440 | Can they just look at their tax bracket

01:12:22.200 | and they'll be pretty safe in assessing their portfolio

01:12:26.360 | or their investments and where to put them?

01:12:29.960 | - Probably, I mean, the whole Roth versus traditional thing,

01:12:34.120 | we're just nibbling around the edges on that anyway.

01:12:37.960 | If someone's gonna agonize over Roth versus traditional,

01:12:43.200 | they should just invest and flip a coin.

01:12:46.240 | So the short answer is, yeah,

01:12:49.360 | they can just use their tax brackets.

01:12:52.480 | But you did ask about young investors.

01:12:57.160 | So I'm going to make the perhaps unwarranted assumption

01:13:00.160 | that if you're talking about a young person,

01:13:02.400 | they can handle a spreadsheet.

01:13:05.360 | So let me show how easy it can be.

01:13:11.960 | So, okay, so if we're gonna do young,

01:13:26.960 | so let's say we've got a young married couple

01:13:28.920 | and they're both 35.

01:13:31.080 | Can people see the spreadsheet?

01:13:36.760 | - Yes, is this your personal toolbox spreadsheet?

01:13:40.240 | - Yeah, it's the one, it's, as I've said,

01:13:44.040 | I can answer probably most questions about it.

01:13:46.440 | The detailed questions go back to the Money Mustache Forum

01:13:50.840 | where it's hosted there.

01:13:52.200 | But yeah, I can probably answer

01:13:53.680 | any beginner questions about it.

01:13:56.560 | I find it a very useful tool.

01:13:58.800 | So, okay, so we've got married.

01:14:02.800 | Oh, let's say they've got two kids.

01:14:06.440 | They're both under 18.

01:14:09.480 | Yeah, they're both under 13.

01:14:12.840 | One of them's under six and they both qualify

01:14:16.360 | for earned income credits.

01:14:17.760 | So it depends on what kind of earning.

01:14:21.280 | So let's say we've got one of them

01:14:25.440 | is making, gosh, I don't know, $60,000 a year.

01:14:30.440 | The other one's making $40,000 a year.

01:14:34.360 | And they want to know if they make 401(k) contributions,

01:14:42.960 | how much is that going to save them?

01:14:50.480 | So they are firmly in the 12% bracket.

01:14:55.480 | So if all they knew was that they were in the 12% bracket,

01:15:06.440 | that would have been fine

01:15:10.640 | because they are so firmly within that,

01:15:13.760 | that if they both contribute the maximum to their 401(k),

01:15:18.920 | then they get down and they just reach the first tier

01:15:23.440 | of the saver's credit.

01:15:25.600 | But because they had to put over $30,000 in there,

01:15:30.600 | just to reach the first tier of the saver's credit,

01:15:34.120 | it really doesn't change their marginal rate

01:15:36.800 | very much at all.

01:15:38.160 | They're still at 12%.

01:15:40.360 | So if you've got someone in that situation,

01:15:42.800 | they say, I'm in the 12% bracket.

01:15:44.720 | I'm gonna roll the dice and figure this is the lowest.

01:15:48.880 | Tax rate I'm ever gonna pay.

01:15:50.640 | And they go all off.

01:15:52.080 | That's a defensible choice.

01:15:54.960 | But let's change things a little bit around here.

01:16:01.040 | Let's say one of them decides I'm gonna go on.

01:16:06.040 | - It's a little hard for me to see the box you're changing.

01:16:12.080 | If you could just mention what you're changing

01:16:13.920 | when you just-

01:16:15.200 | - Okay, so I had it set up.

01:16:18.520 | So I'm in the upper left here,

01:16:20.480 | then one of them was making 60,000.

01:16:22.320 | The other was making 40,000.

01:16:24.720 | Over here, they've got a couple of kids.

01:16:27.120 | One of them's under six and one of them's not.

01:16:30.720 | Say one of them's five, the other's 10, whatever.

01:16:33.160 | And so this was their only income.

01:16:39.640 | And they wanted to know what should they do

01:16:42.240 | with their 401k?

01:16:43.200 | Should they do traditional or Roth?

01:16:46.680 | Well, in that case, they're in the 12% bracket.

01:16:50.480 | They are firmly in the 12% bracket.

01:16:53.080 | So I'm down here looking at the chart and it's 12%.

01:16:58.080 | No matter how much they contribute to the 401k,

01:17:01.240 | except for that one little blip

01:17:03.760 | where they hit the first tier of the saver's credit,

01:17:06.040 | they're smack in the 12% bracket.

01:17:08.600 | But now let's say the one that was making 60,000 says,

01:17:12.640 | well, I'm gonna go back to school for two years

01:17:16.960 | to get a better nursing degree or whatever.

01:17:20.120 | So that drops out.

01:17:23.200 | Well, now that changes things a bit.

01:17:26.560 | Now you've got someone that, good grief,

01:17:30.880 | they're in the earned income tax credit zone now.

01:17:35.480 | So they're saving more than 50%.

01:17:41.480 | I'd have to change the scale here.

01:17:45.080 | So they're actually, if they could afford it,

01:17:50.080 | now this gets into, can they afford it?

01:17:54.240 | So now only one of them can possibly contribute.

01:17:57.280 | But let's say maybe they received an inheritance

01:18:02.280 | and bemoan the fact that they got the inheritance,

01:18:07.280 | but now they got it.

01:18:08.160 | They've got this cash that they can live off

01:18:11.160 | for a couple of years

01:18:12.080 | while one of them goes back for a better degree.

01:18:14.560 | Well, you might think that they're earning $40,000,

01:18:20.640 | they're in the bottom of the 12% or top of the 10% even.

01:18:25.160 | But because of the earned income tax credit,

01:18:28.960 | they can actually save 80%

01:18:31.600 | on at least some amount of traditional contribution.

01:18:35.760 | So that they ought to do.

01:18:37.520 | Here they ought to take a 12,

01:18:39.600 | they ought to take a traditional contribution

01:18:42.720 | and maybe up to $5,000, they do all traditional.

01:18:47.720 | And they're still at 20%,

01:18:49.480 | which is maybe they go traditional,

01:18:52.720 | maybe they go off.

01:18:55.320 | That's at 80%, they should do traditional.

01:18:58.680 | And then once they get up to contributing 15,000

01:19:03.080 | while they're not paying any tax,

01:19:04.400 | they're not getting any credit,

01:19:06.360 | they should put it all in Roth.

01:19:08.560 | So that's a quick, it depends answer to your question about

01:19:15.200 | can they just go by tax bracket

01:19:17.440 | or do they need to look at marginal rate?

01:19:20.320 | But the point of using a tool like this,

01:19:22.720 | it's just very, very fast to get a quick look

01:19:26.640 | at what the marginal rates are.

01:19:33.720 | For someone who's 92 years old

01:19:37.440 | and has never used a spreadsheet,

01:19:40.320 | I wouldn't suggest this.

01:19:42.800 | But someone in their 20s or 30s

01:19:45.360 | and they use spreadsheets in college,

01:19:48.280 | they ought to be able to handle something like this.

01:19:51.800 | - I did a presentation on this spreadsheet,

01:19:59.240 | the personal financial toolbox.

01:20:01.840 | I think it was in March for the Chicago chapter

01:20:06.640 | and it is on the Vogelheads virtual presentation list.

01:20:11.640 | I believe it's all there.

01:20:17.160 | - And as I'm looking in the chat,

01:20:19.360 | yeah, the answer to all the questions,

01:20:21.560 | recent questions are yes.

01:20:24.080 | Whether it's personal finance toolbox

01:20:26.840 | or the case study spreadsheet, it's the same thing.

01:20:31.080 | - Okay.

01:20:32.280 | And it is also in our wiki in the,

01:20:35.840 | I think, is it in the tax efficient fund placement wiki

01:20:39.480 | or the-

01:20:40.800 | - It's in the tools and calculators wiki.

01:20:43.040 | - Tools and calculations wiki.

01:20:45.240 | Okay.

01:20:46.560 | - Yeah.

01:20:47.400 | - 5K, is there a time at which a point

01:20:57.800 | at which the taxes you have paid

01:21:01.920 | to convert a traditional to a Roth

01:21:04.880 | are outpaced by your earnings in the Roth

01:21:11.160 | that are now tax free?

01:21:16.000 | What point would that be?

01:21:19.600 | How would we see that?

01:21:27.360 | - That sounds like a return on investment thing.

01:21:30.040 | And I know that's a hot topic these days.

01:21:34.760 | Personally, I don't get the whole return on investment

01:21:37.720 | idea of analyzing traditional versus Roth.

01:21:42.640 | I mean, you have to pay tax.

01:21:44.600 | You either pay it now or you pay it later

01:21:47.680 | or your heirs pay it now

01:21:49.760 | or your heirs are gonna pay it later.

01:21:51.920 | Or if you leave it to a charity,

01:21:56.320 | no one's gonna pay tax.

01:21:57.600 | But it's not like you're going to take a thousand dollars

01:22:01.800 | and invest it in stocks

01:22:03.360 | and hope to get your thousand plus gains back.

01:22:07.880 | If you're paying tax, you're paying tax.

01:22:09.920 | It's just, when are you paying it?

01:22:11.720 | And at what rate are you paying it?

01:22:14.520 | So it's all about the rate.

01:22:17.920 | It's not the amount of tax you pay

01:22:20.680 | because if you go by amount of tax you pay,

01:22:25.480 | Roth is going to win every time

01:22:27.640 | because you pay a little bit of tax now

01:22:33.160 | and after, let's say it's grown tenfold,

01:22:36.440 | well, you're gonna pay 10 times the amount of tax later

01:22:40.240 | even if it's at the same rate,

01:22:42.920 | but it ends up being the same amount after tax.

01:22:46.160 | So looking at the amount of tax paid

01:22:49.000 | is just not the right way to look at it.

01:22:51.280 | You've got to look at the tax rates.

01:22:54.040 | And so the traditional versus Roth wiki has,

01:22:59.040 | there's a common misconceptions section.

01:23:04.400 | That's the second one.

01:23:05.640 | The second one is the one that says,

01:23:08.040 | look at the amount of tax paid.

01:23:10.080 | No, that's a misconception.

01:23:12.480 | And the first one, first misconception

01:23:14.760 | is that you get to save at a marginal rate,

01:23:18.000 | but you only pay at your effective rate.

01:23:21.720 | No, you don't get to start from zero

01:23:24.400 | on every single withdrawal.

01:23:27.920 | So, but that section of the Roth versus traditional wiki

01:23:32.280 | covers those two common misconceptions.

01:23:36.120 | One favors Roth, one favors traditional,

01:23:38.560 | but neither one is correct.

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