Should I Put Riskier Stocks in my Roth IRA?

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00:00:09.800 | - Welcome back to Portfolio Rescue.

00:00:19.540 | We get questions all the time from people on Twitter,

00:00:22.180 | email, YouTube, where else?

00:00:24.020 | Some people shout at Duncan on the street.

00:00:26.120 | Remember our email here is askthecompoundshow@gmail.com.

00:00:29.740 | We're gonna try to answer all their questions today.

00:00:32.020 | John, throw up our first one,

00:00:32.980 | which is just to follow up.

00:00:34.500 | Someone asked on Twitter, actually.

00:00:36.020 | I told you to get us from anywhere.

00:00:37.780 | Oh no, just the first Treasury Yield one, John.

00:00:42.060 | There we go.

00:00:42.940 | Someone asked us this.

00:00:44.020 | Keeping with the theme that we've had in the last,

00:00:47.780 | ah, three or four months.

00:00:48.740 | Lots of bond questions, lots of tax questions.

00:00:50.940 | We're gonna get to a lot of those today.

00:00:52.880 | Someone on Twitter asked,

00:00:54.020 | what are some examples of bond ETFs

00:00:55.740 | that would lock in these rates

00:00:56.560 | for three-month to two-year time frames?

00:00:58.680 | Is there such a thing as an index one for these?

00:01:00.220 | So people are trying to figure out,

00:01:01.500 | how do I invest in T-bills?

00:01:03.600 | Kind of hard to believe,

00:01:04.580 | considering they've basically been zero for so long.

00:01:06.700 | You can see six-month T-bills over 5%,

00:01:08.940 | 12-month T-bills around 5%.

00:01:10.780 | Anything two years and under

00:01:12.020 | is looking pretty good right now.

00:01:13.660 | The good thing is,

00:01:15.060 | Duncan, what did you say your checking account is?

00:01:17.300 | Over 4%?

00:01:18.140 | You're not willing to go to T-bills yet?

00:01:18.980 | - 4.27% in my checking account.

00:01:21.780 | - Okay, see, I think they do the weird numbers

00:01:23.700 | just to get people to look at it,

00:01:25.740 | 'cause it's different.

00:01:26.580 | They don't round up or down.

00:01:27.820 | So the good news about T-bills is there's a ton of ETFs.

00:01:30.480 | So it's easy to Google them,

00:01:31.720 | but iShares has a one- to three-month T-bill.

00:01:34.420 | State Street has a one- to three-month T-bill.

00:01:37.400 | Fidelity has a T-bill index fund.

00:01:40.320 | Vanguard has an ultra-short bond ETF.

00:01:42.800 | Charles Schwab has a U.S. Treasury short-term ETF.

00:01:46.880 | There's also this new ETF provider

00:01:48.400 | called U.S. Benchmark Series

00:01:49.560 | that tries to give you exposure

00:01:50.600 | to single-security U.S. Treasuries,

00:01:52.880 | so you can get three-month or 12-month or two-year,

00:01:55.480 | and it basically just rolls it over every month

00:01:57.400 | into one specific security,

00:01:58.960 | so you're kind of constantly in that thing.

00:02:01.680 | I think the big thing to remember

00:02:02.760 | if you're trying to invest in these

00:02:04.120 | is just to look at the average maturity

00:02:06.000 | and the average yield to maturity

00:02:07.360 | on whatever fund you end up buying,

00:02:08.640 | and kind of compare that to what the T-bill yields are

00:02:10.480 | to make sure you understand what you're getting at,

00:02:11.600 | 'cause some of these, check the holdings by sector, too.

00:02:14.000 | Some of these funds hold all Treasuries.

00:02:15.320 | Some of them might have some corporate bonds.

00:02:17.120 | So no right or wrong answer in terms of getting exposure,

00:02:19.240 | but it's really easy, and also it just shows

00:02:21.680 | how much this market has changed

00:02:23.640 | over the past two or three years.

00:02:25.240 | Before, everyone was, "How do you invest

00:02:26.600 | "in three-times-levered technology innovation stocks?"

00:02:30.240 | And now it's, "How do I get into T-bills?"

00:02:31.800 | - Right, from offering different cryptos

00:02:34.200 | and altcoins and stuff to now, "Oh, we offer T-bills."

00:02:38.280 | - Yes, they're the sexiest thing around right now.

00:02:40.080 | And it's kind of mind-boggling that we had 15 years

00:02:43.600 | of more or less zero rates for a long time,

00:02:47.160 | and now we immediately went from zero to 5%,

00:02:49.320 | and people kind of are trying to figure out,

00:02:50.640 | "What does this mean?"

00:02:51.560 | - Well, it also makes me understand

00:02:52.960 | the zero-coupon bonds even less now.

00:02:55.440 | I was already kind of confused by those back in the day,

00:02:57.640 | but now I'm very confused.

00:02:59.160 | - Well, a T-bill is essentially a zero-coupon bond, Duncan.

00:03:01.720 | So again, if you buy a T-bill,

00:03:03.820 | you're not getting paid an interest rate,

00:03:05.800 | 'cause these things are three-months, six-months, 12-months.

00:03:07.920 | You buy it at a discount.

00:03:09.320 | So let's say the par value is $1,000.

00:03:12.440 | You buy it for 900, and then when it matures,

00:03:15.040 | you get 1,000, depending on what the yield is.

00:03:16.920 | That's a very simple example.

00:03:18.280 | That's how it works.

00:03:19.120 | So you're not being paid a periodic yield on a T-bill.

00:03:21.640 | You're buying at a lower amount,

00:03:23.240 | and then the difference is your yield.

00:03:25.400 | - I see.

00:03:26.240 | All right. - Right?

00:03:27.080 | - Learn something new every day.

00:03:28.420 | - Here we go.

00:03:29.260 | All right, let's get into some questions.

00:03:30.640 | - Okay, up first today-- - Speaking of bonds.

00:03:33.400 | - Yeah, up first today, we have,

00:03:34.640 | "Can we get a breakdown of the pros and cons

00:03:36.280 | "of long-term versus short-term bonds?

00:03:38.000 | "I like it, short and sweet."

00:03:39.520 | - I think this one actually came

00:03:40.400 | from another good Twitter question.

00:03:41.920 | - Johnny on Twitter.

00:03:42.920 | - All right, so again, I think I've received more questions

00:03:46.560 | about bonds in the last six months

00:03:48.200 | than I have in the last six years.

00:03:49.760 | I think part of it is because

00:03:51.480 | so many people got wrecked in bonds last year.

00:03:53.200 | If you had any sort of duration on in your bond portfolio,

00:03:56.840 | you know, intermediate-term bonds fell 15%,

00:03:58.720 | long-term bonds fell 30%.

00:04:00.480 | We'll get into that a little bit.

00:04:01.320 | Let's look at the little pros and cons for each.

00:04:02.720 | So long-term bonds.

00:04:04.600 | Remember, just simple math, Duncan.

00:04:07.620 | Prices and rates are inversely related, right?

00:04:10.320 | So if rates go up, prices go down.

00:04:13.000 | If rates, and if rates go down, prices go up, right?

00:04:16.100 | Inversely related.

00:04:17.040 | The longer your duration of maturity,

00:04:18.920 | the more variability you're going to have

00:04:20.620 | to those rate changes.

00:04:22.720 | So if rates go up a lot,

00:04:25.440 | your long-term bonds are gonna get crushed.

00:04:26.960 | If rates go down a lot,

00:04:27.800 | your long-term bonds are gonna do much better.

00:04:29.480 | So the long-term bond pros include,

00:04:31.820 | you're gonna get more bang for your buck when rates fall.

00:04:33.440 | So that's like recession and deflation protection.

00:04:36.460 | You can lock in your yields for much longer.

00:04:38.520 | These 5% short-term T-bill yields are great right now,

00:04:41.940 | but if we go into recession,

00:04:43.360 | they could easily go away tomorrow, right?

00:04:44.960 | The Fed could drop rates back,

00:04:46.680 | and those 5% yields are gone

00:04:48.440 | with longer-term bonds.

00:04:49.280 | You can lock them in for longer.

00:04:50.540 | You also should earn higher expected returns

00:04:53.500 | for taking more risk, right?

00:04:54.840 | You're lending your money for the government for longer.

00:04:56.920 | That means more economic regimes,

00:04:58.360 | more interest rate movements, more inflation movements.

00:05:00.860 | All these things you should expect to earn higher returns,

00:05:03.240 | even though you can't right now.

00:05:05.200 | Cons for long-term bonds.

00:05:06.600 | They can get crushed when rates rise and inflation rises.

00:05:08.600 | That's what happened last year, right?

00:05:09.920 | There's way more volatility in terms of inflation.

00:05:12.520 | I think we've already seen long-term bonds

00:05:13.840 | be up like 10% this year,

00:05:15.120 | and now they're flat on the year

00:05:17.160 | because rates are moving so much.

00:05:18.000 | - They're the meme stock.

00:05:19.880 | - Kind of.

00:05:20.840 | Zero-coupon bonds are even worse

00:05:22.160 | because that's the longest-duration asset.

00:05:24.760 | And then you're locked into lower yields for longer

00:05:26.760 | if rates rise, right?

00:05:28.080 | Shorter-term bonds mature much quicker,

00:05:29.720 | so you can roll those over into new, higher yields.

00:05:31.720 | Long-term bonds, you can't do that.

00:05:33.200 | So short-term bonds are the opposite.

00:05:34.400 | There's little to no interest rate risk.

00:05:35.640 | I mean, if you go one to two years out,

00:05:36.960 | there's a little bit,

00:05:37.780 | but trucking three or six-month T-bills,

00:05:39.600 | there's basically nothing.

00:05:41.200 | That's great during periods of rising rates,

00:05:43.200 | again, 'cause you can,

00:05:44.400 | once they mature, you roll them over

00:05:45.880 | and reinvest at higher rates.

00:05:46.920 | There's much less volatility.

00:05:48.280 | It's pretty steady-idy,

00:05:49.760 | and then there's less reinvestment risk

00:05:50.960 | because, again, those bonds mature faster.

00:05:52.680 | The cons, you can't lock in those higher rates

00:05:54.680 | for short-term bonds, right?

00:05:56.120 | Yields can change in a hurry.

00:05:57.360 | That's a good thing when they rise,

00:05:58.240 | a bad thing when they fall.

00:05:59.760 | You should have lower expected returns

00:06:00.960 | 'cause you're not taking as much risk.

00:06:02.000 | If you lend your money out to someone for three months,

00:06:06.040 | that should be a lower return

00:06:07.640 | than lending someone out for 30 years, right?

00:06:10.320 | Obviously, the yield curve doesn't reflect that right now,

00:06:12.640 | but that's a normal state of affairs.

00:06:14.360 | And then if we have a recession or deflation protection,

00:06:16.800 | short-term bonds aren't gonna help as much

00:06:18.240 | because if rates fall to the floor,

00:06:20.680 | you don't get that price bump

00:06:21.840 | that other bonds get that are longer-term.

00:06:23.960 | So it kinda comes down to risk-reward and your appetite.

00:06:27.480 | Now, a lot of people fell in love

00:06:28.680 | with the idea of long-term bonds

00:06:29.840 | over the past 20 to 30 years

00:06:30.880 | 'cause they generally provided much higher returns,

00:06:33.480 | and they cushioned the blow

00:06:34.320 | during most market sell-offs until last year, of course.

00:06:37.000 | So John, throw up the chart.

00:06:39.160 | This is just 2022,

00:06:40.640 | and I looked at a bunch of different durations.

00:06:42.200 | So long-term bonds got crushed.

00:06:43.600 | They were down 30%, more than 30%.

00:06:45.960 | That was worse than the stock market.

00:06:47.800 | Intermediate-term bonds, this is talking seven to 10 years.

00:06:50.200 | That was down 15%.

00:06:52.000 | Short-term, one to three years were down a little bit,

00:06:54.280 | less than 4%.

00:06:55.120 | That's like a bad day in the stock market.

00:06:56.760 | And then T-bills, one to three months, were up 1.4%.

00:06:59.760 | You can see they barely move at all.

00:07:01.400 | You're just kind of getting that yield.

00:07:02.720 | So this is what happened last year

00:07:04.200 | in a very high-rate environment

00:07:07.400 | where rates went up really fast.

00:07:08.480 | Inflation goes up, that's what happens.

00:07:10.440 | But that's one year, right?

00:07:13.080 | Anything can happen in one year.

00:07:14.040 | Let's look at the historical performance

00:07:15.880 | on a much longer timeframe.

00:07:16.960 | So this is, my basic thought is,

00:07:18.920 | over the last 100 years or so,

00:07:20.200 | we've had three interest rate regimes.

00:07:22.040 | So I've got the data, this is 10-year Treasuries.

00:07:24.480 | From the 1920s to the early 1950s,

00:07:26.760 | it was basically range-bound from two to 4%.

00:07:30.240 | Rates didn't go much higher or lower than that.

00:07:32.160 | Then from 1950 to 1980, rates went sky high.

00:07:35.200 | We're talking 2% to 15%, basically, in a 30-year period.

00:07:39.120 | Ever since then, we've had falling rates.

00:07:41.440 | And that's basically the three long-term,

00:07:43.800 | like, secular phases, right?

00:07:46.200 | And, okay, what happened in those terms,

00:07:50.000 | in terms of performance?

00:07:50.840 | John, let's do the next one.

00:07:52.120 | So I looked at the returns for long bonds,

00:07:54.760 | five-year Treasuries, and one-month T-bills.

00:07:56.360 | Basically, the longest you can get,

00:07:57.600 | the shortest you can get, and then intermediate term.

00:07:59.680 | So in that range-bound market, long bonds did okay.

00:08:01.880 | We're talking 4% per year.

00:08:03.160 | They beat five-year Treasuries and one-month T-bills,

00:08:05.400 | which gave you 1%.

00:08:06.240 | One-month T-bills is basically a good proxy for cash.

00:08:08.760 | In a rising-rate environment, 1950 to 1980,

00:08:11.440 | when rates went to double digits,

00:08:13.240 | now we're talking cash actually was the best performer.

00:08:15.400 | It beat intermediate-term bonds and long-term bonds,

00:08:18.280 | and it beat long-term bonds by quite a bit.

00:08:20.040 | Then you had the falling-rate environment

00:08:21.440 | from 1980 to 2020.

00:08:23.240 | Then you had those higher starting yields that happened

00:08:25.000 | because they moved so high.

00:08:25.920 | Long bonds did amazing.

00:08:27.840 | We're talking 7% to 10%, basically,

00:08:31.080 | for five-year Treasuries to long-term bonds for 40 years.

00:08:34.360 | That might be one of the greatest bull markets

00:08:35.840 | we'll ever see, certainly in fixed income.

00:08:37.800 | You'd be hard-pressed to see an environment

00:08:39.400 | that would match that.

00:08:40.440 | And then the COVID times, you see long bonds, again,

00:08:42.480 | get crushed, five-year Treasuries have fallen.

00:08:44.880 | Cash has held up well.

00:08:45.800 | Over the long-term, long bonds have the best

00:08:49.120 | long-term returns, but they don't beat

00:08:50.360 | five-year Treasuries by much.

00:08:51.400 | So you experience a lot more volatility.

00:08:52.880 | You don't get a huge bang for your buck.

00:08:54.240 | Obviously, you did better than cash.

00:08:55.400 | So that's kind of where we are.

00:08:58.320 | So the big question now is, okay, what is the next phase?

00:09:01.480 | Obviously, we're in an aggressive rate rise right now.

00:09:04.800 | I honestly don't know what's gonna happen next.

00:09:06.320 | We could see rates go back to 2%.

00:09:07.880 | That wouldn't surprise me in a recession.

00:09:09.280 | We could see rates go a little higher

00:09:10.440 | if the economy remains strong and inflation remains strong.

00:09:13.360 | We could see range-bound rates for a while.

00:09:14.960 | I don't know.

00:09:15.800 | That's kind of a cop-out answer, obviously.

00:09:18.560 | But the truth is, no one really can guess these things.

00:09:21.280 | So, John, put up my next chart.

00:09:23.200 | Torsten Slak at Apollo produced this chart.

00:09:26.000 | This is just looking at, going back to the early 2000s,

00:09:28.800 | the survey of professional forecasters.

00:09:31.080 | And the little dots on that graph

00:09:33.600 | show what they predict interest rates will do.

00:09:36.800 | The bold green line shows what they actually do.

00:09:39.240 | Obviously, they're always off.

00:09:41.680 | It's impossible to predict rates.

00:09:43.720 | Duncan, this feels a little more

00:09:44.560 | like the survey of amateur forecasters.

00:09:46.840 | Am I right?

00:09:47.680 | Anyway, so I think-- - Shots fired.

00:09:51.440 | - Well, listen, I can't do it either.

00:09:53.760 | That's the point.

00:09:54.800 | So I think my main takeaway is you don't choose your bonds

00:09:59.800 | based on your predictions of the path of interest rates,

00:10:02.480 | 'cause that's hard to do.

00:10:03.760 | And even if you nail that macro forecast,

00:10:06.040 | I don't know, the markets might not react

00:10:08.840 | as much as you want them to.

00:10:10.080 | So I think it really comes down to understanding

00:10:13.560 | the risk and reward trade-off for the bonds.

00:10:16.600 | Now, if you're trying to make your decisions

00:10:18.280 | based on the macro economy, you might say,

00:10:20.040 | "I think a recession's coming,

00:10:21.120 | "so I'm gonna put on as much duration as I can

00:10:23.360 | "and get that bang for my buck."

00:10:25.040 | Personally, I like to take risk where I'm being paid for it.

00:10:29.080 | If we're talking about volatility and ups and downs,

00:10:31.320 | and for me, that's the stock market.

00:10:32.960 | So I think it's not worth it

00:10:34.360 | if you're gonna have this more stable anchor part

00:10:36.400 | of your portfolio be bonds.

00:10:38.220 | I don't see the need to try to take that risk,

00:10:40.280 | especially when you're being paid 5% right now,

00:10:43.160 | and you basically completely take volatility off the table

00:10:47.320 | in short-term T-bills.

00:10:49.320 | So that's kind of the way I like to look at it.

00:10:52.600 | Even in normal times, if such a thing exists,

00:10:55.320 | I'm not a big fan of taking out a lot of duration,

00:10:57.080 | 'cause again, I think the fixed income part of your portfolio

00:10:59.520 | is meant for more stability.

00:11:01.560 | Now, if long-term rates got up to 5%, 6%, 7%,

00:11:03.880 | now we can talk, but I just think you have to figure out

00:11:06.720 | how much volatility you can handle

00:11:07.860 | and the kind of risks you're trying to protect yourself from

00:11:09.780 | before picking which bonds to choose from.

00:11:12.660 | But understand that volatility profile,

00:11:14.700 | especially when you take duration,

00:11:15.780 | it sort of works in both directions.

00:11:18.260 | - Now, I'm not trying to derail the whole show

00:11:20.180 | because I know we could talk all day about this topic,

00:11:22.140 | but where do I-bonds fall in all of this now?

00:11:25.740 | I haven't heard anyone ask about those in a while.

00:11:28.140 | - True, I-bonds are pretty good, too.

00:11:29.740 | You're taking the interest rate risk off the table,

00:11:32.340 | and the rate is basically set every six months

00:11:35.740 | based on the inflation rate.

00:11:36.700 | So actually, I guess inflation remaining a little stronger

00:11:39.340 | is probably good for people with the I-bond thing

00:11:41.720 | when that rolls over.

00:11:43.760 | So yeah, no, I-bonds are a pretty good deal still.

00:11:46.380 | - Have you noticed that those questions

00:11:48.060 | have dropped significantly?

00:11:49.260 | We were getting a ton of them.

00:11:50.860 | - Yes, and I think, honestly,

00:11:52.160 | that's because the rates dropped from 9% to 6%,

00:11:54.900 | and now you're getting five in a T-bill.

00:11:56.300 | And remember how much of a pain in the butt they are

00:11:58.060 | for people to open accounts and you can only do $10,000?

00:12:00.220 | - Shout out, Treasury Direct.

00:12:01.940 | - So that made sense when T-bill rates were at two

00:12:04.620 | and I-bonds were at nine.

00:12:05.980 | Now we're talking six versus five,

00:12:07.540 | and maybe it doesn't make as much sense.

00:12:10.120 | - Yeah, I think that's true.

00:12:12.380 | - All right, let's do another one.

00:12:13.660 | - All right, up next, we have a question from Sam.

00:12:15.940 | There for a while, we were basically an I-bond show,

00:12:17.780 | honestly, you know?

00:12:19.340 | - That's true.

00:12:20.500 | - All right, so Sam writes,

00:12:22.140 | "My wife and I are interested in purchasing farmland

00:12:24.500 | "to help diversify our portfolio.

00:12:26.200 | "A 40-acre piece owned by an uncle

00:12:28.000 | "is being offered to us below market value

00:12:29.760 | "to keep it in the family.

00:12:31.180 | "We would buy and hold the land,

00:12:32.460 | "rent it out to a local farmer,

00:12:33.920 | "and have little to do with the farming operation.

00:12:36.360 | "Aside from diversification and rental income,

00:12:38.680 | "does farmland ownership have any tax advantages?"

00:12:41.740 | To me, part of the benefit would be

00:12:43.060 | until I get to be involved in the farming,

00:12:45.540 | you know what I mean?

00:12:46.520 | - I've mentioned before on this show,

00:12:47.620 | I have an uncle who owns a farm,

00:12:48.780 | and when I was young, he would bring my brother and I

00:12:51.340 | and some of our cousins out,

00:12:52.180 | and we worked the farm for a week.

00:12:53.780 | And I think at the end of it,

00:12:54.900 | they would take us go-karting or something and pizza.

00:12:56.900 | - Did you wear overalls?

00:12:58.660 | - I wish I had some overalls.

00:12:59.860 | It's hard, I will say that.

00:13:01.420 | If my uncle put his farm up for sale,

00:13:03.220 | I would not be the first one to hop on it.

00:13:05.020 | It's hard work.

00:13:06.500 | So I'm reading Brad DeLonge's book,

00:13:08.020 | "Slouching Towards Utopia,"

00:13:09.100 | and his stat that caught my eye,

00:13:11.020 | I was reading this last night,

00:13:11.860 | in 1870, 80% of the labor force worked on farms.

00:13:15.100 | People basically made their own food.

00:13:17.300 | It was hard work.

00:13:18.620 | Yeah, that's tough.

00:13:21.240 | So I think in terms of the tax advantages,

00:13:23.900 | we'll have to bring the expert here.

00:13:24.900 | So let's bring on Bill Sweet.

00:13:26.800 | - Hey, Bill.

00:13:28.860 | - Hey, guys, broadcasting to you

00:13:30.260 | from my family farm in Warwick, New York.

00:13:32.180 | How's it going today?

00:13:33.220 | - Yeah, I was about to say, you're basically a farmer.

00:13:35.060 | - Basically, I have to drive through cow fields.

00:13:36.820 | But Ben, I'm curious, at the Carlson Family Farm,

00:13:39.300 | what crop was being grown there?

00:13:40.860 | What were we doing on the weekend?

00:13:42.700 | - Huge, huge cornfields,

00:13:45.340 | and now they've turned it into more of a fruit farm,

00:13:47.360 | but everything.

00:13:48.300 | They had the cows, the pigs, chickens.

00:13:49.940 | - Awesome.

00:13:50.780 | - It was a fully functioning farm.

00:13:51.620 | Yeah, it was pretty impressive.

00:13:52.700 | - Wow.

00:13:53.540 | - So I guess this is the Bill Gates model, right?

00:13:54.580 | He's the largest individual owner

00:13:56.100 | of farmland in the country.

00:13:57.540 | - I didn't know that.

00:13:58.540 | That's fantastic.

00:13:59.500 | - Bill Gates owns 270,000 acres of farmland.

00:14:02.040 | That's less than 1% of the farmland in the United States.

00:14:04.100 | - Wow, he should be the third Bill on our show.

00:14:06.140 | Well, how do we make that happen?

00:14:07.620 | - Let's get him on.

00:14:08.460 | That's a bar bill, though, right?

00:14:09.460 | To have a bunch of Microsoft stock and then farmland?

00:14:12.260 | - Yeah, that's not a bad deal, and then charity, too.

00:14:14.020 | - I'm guessing that farmland doesn't have any huge benefits

00:14:17.500 | beyond owning other sort of rental properties.

00:14:19.700 | Is it basically the same thing

00:14:20.660 | as owning a house that you rent out?

00:14:22.020 | - Oh, Mr. Carlson, you would guess wrong.

00:14:24.140 | No, Schedule F is, yeah, a really fascinating--

00:14:27.140 | - Oh, that's right, 'cause you might get some perks

00:14:28.940 | from the government for this.

00:14:29.780 | I didn't think about that.

00:14:30.600 | - You can do some really funky stuff,

00:14:31.440 | but let's get to Sam's question.

00:14:32.860 | Sam, by the way, really strong name,

00:14:34.420 | name of my firstborn son.

00:14:35.760 | Just couldn't have picked a better name for the family,

00:14:38.220 | so good job, Sam's dad.

00:14:39.920 | This is an interesting question.

00:14:40.980 | So the tax expenses of farmland really depend a lot

00:14:43.860 | on whether you are materially participating or not,

00:14:46.560 | and per Sam's answer,

00:14:48.780 | "I have little to do with a farming operation,"

00:14:51.000 | my guess is Sam's not gonna be materially participating,

00:14:53.480 | and that, Ben, kind of reverts back to treating it

00:14:56.020 | like any other rental property.

00:14:57.300 | You're gonna rent the land out.

00:14:58.340 | You're gonna receive cash every month

00:15:00.220 | that hopefully the farmer will make a sales and pay you,

00:15:04.020 | in which case, you're gonna file a Schedule E,

00:15:05.540 | more than likely, or maybe form a 1065 and LLC,

00:15:08.260 | but ultimately, you're not really gonna differ at all

00:15:10.900 | from owning farmland versus renting an apartment,

00:15:12.980 | let's say, outside of that the property's not developed,

00:15:15.940 | and the primary benefit you get

00:15:17.480 | when you are not materially participating

00:15:19.300 | is the tax code really has two kinds of flavors of income.

00:15:22.460 | There's a lot of sub-flavors,

00:15:23.780 | like different kinds of ice cream and different toppings,

00:15:27.220 | but the two general flavors are active income,

00:15:29.620 | which, you know, wage income, partnership income,

00:15:31.820 | self-employment income, that's taxed at Social Security

00:15:34.500 | at self-employment rates versus passive income.

00:15:37.080 | Passive income, like portfolio income,

00:15:39.180 | net rental income, like it looks like

00:15:40.860 | Sam's gonna participate, that's not,

00:15:42.500 | and that saves Sam about 12.4% of Social Security tax

00:15:46.140 | and about 2.85% of Medicare tax

00:15:49.620 | that he's not going to pay that he would

00:15:52.060 | if he were materially participating in the farm,

00:15:54.020 | so that's the primary tax advantage

00:15:55.860 | that you would get from farmland

00:15:57.360 | over another type of income.

00:16:00.020 | - Can he count on subsidies too?

00:16:01.220 | Is he gonna get some subsidies from the government?

00:16:02.820 | - Yeah, so that's where we flipped the switch, Ben.

00:16:04.500 | I'm glad that you brought that up, it was a perfect segue.

00:16:06.920 | So the other option,

00:16:08.380 | so assuming that Sam is not materially participating,

00:16:10.400 | is this program, this method called crop sharing,

00:16:14.880 | in which case, at some farmland, some ventures,

00:16:17.800 | and I'm picturing the serfs and Marxists involved,

00:16:20.360 | and there's British landlords,

00:16:22.360 | but you can pay your landlord in crops, right?

00:16:24.460 | I'm growing some good crop, I'm growing lentil,

00:16:26.920 | I'm growing sorghum, I'm growing wheat,

00:16:28.640 | and basically you can pay your rent in crops,

00:16:30.360 | and that has this neat advantage

00:16:31.800 | in that you do not have to realize a gain

00:16:33.960 | on your net rental income

00:16:35.560 | until such a time that you convert those crops to cash,

00:16:38.020 | meaning usually you sell them into the open market.

00:16:40.180 | So that's an interesting tax deferral

00:16:41.880 | that Sam could go down if, with his farmer tenant,

00:16:45.040 | that he's getting paid in crops.

00:16:46.640 | I don't know how this works, Ben.

00:16:47.880 | Were you paying your rent on the farm in bushels of corn?

00:16:51.200 | How does this work exactly?

00:16:52.480 | I'm not a farmer, so I don't know.

00:16:54.680 | - Duncan only receives dividends in oat milk, actually.

00:16:57.700 | - Oats? - Right, yeah.

00:16:59.160 | Actually, I take delivery of oats,

00:17:01.000 | and then press it down myself.

00:17:03.040 | - In Brooklyn, New York, somehow.

00:17:05.120 | Not a lot of storage space, yeah.

00:17:06.440 | - Farmland is, I mean, that is the kind of thing

00:17:09.320 | that, I mean, I guess until the robots come

00:17:12.040 | and they start making fake food for us or something,

00:17:14.400 | that's the kind of thing you would assume.

00:17:16.120 | Obviously, there's risks there in terms of weather,

00:17:18.800 | and are you running it correctly,

00:17:20.440 | or is the person you're hiring out to running it correctly

00:17:24.280 | in commodities, prices, all this stuff is a problem,

00:17:26.200 | but it's one of the, I mean,

00:17:28.240 | people are always gonna need food.

00:17:29.760 | - Yeah, exactly.

00:17:31.040 | - So it makes sense to me in terms of

00:17:33.080 | this more kind of steady-eddy real estate.

00:17:35.780 | So the idea, to me, makes sense for people

00:17:39.400 | who maybe wanna own some real estate,

00:17:41.280 | but not take as much risk.

00:17:43.200 | - Yeah, and then if Sam does materially participate,

00:17:45.680 | and that means usually you're basically loaning out

00:17:48.000 | more than half of the equipment,

00:17:49.220 | the wheelbarrows, the hose, whatever it is,

00:17:51.040 | or if you're actually doing some part of the farming,

00:17:53.160 | then you're filing a Schedule F,

00:17:54.440 | and then there are a lot of neat tax benefits.

00:17:57.180 | Three-year averaging, there's a lot of sharecrop subsidies,

00:18:00.200 | like you said, Ben, mentioned before,

00:18:01.760 | but that is completely out of my wheelhouse, for example,

00:18:04.000 | so I'm going to very comfortably change the conversation,

00:18:06.480 | Sam, you should Roth Area convert

00:18:08.200 | in the year that you purchase farmland.

00:18:09.440 | - All right, that's a good segue

00:18:10.640 | into our next question here.

00:18:12.080 | - Exactly. - Doug, let's do it.

00:18:13.000 | - Okay, quick follow-up.

00:18:14.680 | If you could farm anything, what would you be farming?

00:18:17.360 | - Probably hops, you know, for beer.

00:18:19.160 | That would be my-- - Yeah, that's a good one.

00:18:20.760 | - My cropping choice. - I think for me,

00:18:21.600 | Bartlett Pears, I love those.

00:18:23.560 | - Yeah, I get them every year, Harry and David,

00:18:25.440 | they're great.

00:18:26.280 | - Okay, let's see, up next, we have a question from Randy.

00:18:31.600 | - Randy. - I don't think

00:18:32.440 | we've ever had a question from a Randy.

00:18:33.840 | - Great name, Randy. - Thanks, Randy.

00:18:36.160 | I am 55 years old and leaning towards retirement.

00:18:38.780 | Our financial situation is solid,

00:18:40.200 | but retirement accounts are 95% of our money.

00:18:42.960 | My wife is four years younger and will work

00:18:44.680 | for five more years with health benefits.

00:18:47.200 | I plan to hold off any retirement distributions

00:18:49.360 | until 59 1/2, but qualify for the rule of 55

00:18:52.280 | as a safety net.

00:18:53.520 | We self-manage without a financial advisor.

00:18:55.880 | That being the case, can you identify

00:18:58.040 | any potential pitfalls that we might not have thought of?

00:19:00.800 | Also, if we have existing investments in traditional IRAs,

00:19:05.760 | we are not good candidates for a backdoor Roth,

00:19:07.600 | given the undesirable tax implications, right?

00:19:10.520 | - All right, Bill, I wanted to tell you this one.

00:19:11.840 | I talked to a group of high school students yesterday,

00:19:14.680 | based in Brooklyn, on the Zoom,

00:19:16.460 | and because they had actually been reading

00:19:18.200 | my "Everything You Need to Know

00:19:19.240 | "About Saving for Retirement" book

00:19:20.560 | in their personal finance class.

00:19:21.640 | We're talking 16, 17-year-olds.

00:19:23.520 | - Wow, that's cool. - And did a long Q&A,

00:19:25.800 | and these kids are way more knowledgeable

00:19:27.560 | than I was at that age, and one of them asked me,

00:19:29.680 | "When I start my IRA," and I liked how they said it,

00:19:32.000 | "When I start it, should I use a Roth

00:19:33.840 | "or a traditional IRA?"

00:19:35.640 | And they said, "I'm leaning towards a Roth,

00:19:37.240 | "but I wanna know," and so I appreciated that one,

00:19:39.600 | right in your wheelhouse.

00:19:40.540 | - That's great, I love it, it's a great setup.

00:19:42.400 | Yeah, so Randy, let's start with the backdoor Roth question,

00:19:45.880 | right, 'cause that's where Randy ended.

00:19:47.800 | Ultimately, let's talk about it.

00:19:49.280 | Roth IRAs are subject to income limits.

00:19:51.840 | If you were earning more than about $153,000 a year,

00:19:54.880 | Randy mentioned that he's a joint filer,

00:19:56.680 | so that would apply to a joint couple.

00:19:58.320 | You cannot directly contribute to a Roth IRA.

00:20:01.100 | Been your student 16, 17, my guess is they're not,

00:20:03.840 | they're not pushing six figures yet,

00:20:05.400 | if they are, God bless them,

00:20:06.640 | and so they can directly contribute.

00:20:08.440 | More than likely, Randy cannot.

00:20:10.200 | But there's this neat quirk in the tax code

00:20:12.160 | in that you can contribute to a traditional IRA,

00:20:14.840 | a tax-deferred or tax-deductible IRA,

00:20:17.400 | at any income limit, and furthermore,

00:20:19.280 | if you get above a certain modified adjusted

00:20:21.480 | growth threshold, about $218,000 a year,

00:20:23.680 | you're not allowed to take a tax deduction.

00:20:25.600 | So, and the last key to this chain of events here

00:20:28.960 | is that there's no income limit to convert

00:20:31.280 | from a traditional IRA into a Roth.

00:20:33.280 | There's no income limit that applies there.

00:20:34.920 | So the process here is you're above the income threshold

00:20:37.240 | to contribute directly, you backdoor contribute

00:20:39.480 | to a traditional IRA, you wait a day,

00:20:41.280 | the next day you convert that to Roth,

00:20:43.080 | bing, bada boom, you've got yourself a super Roth IRA.

00:20:46.160 | - Randy didn't really tell us how much of his,

00:20:48.440 | he said, you know, 95% of the money

00:20:50.560 | is tied up in retirement accounts.

00:20:51.800 | He didn't say what the mix is between traditional and Roth,

00:20:53.640 | but I get the sense from the question,

00:20:54.760 | he's kind of leading us to assume,

00:20:56.720 | does it make sense for him to take

00:20:58.240 | some of that traditional money he has

00:20:59.400 | in like a 401k or an IRA, and convert it to Roth now,

00:21:02.360 | and pay the taxes, or do you think he's so close

00:21:04.040 | that it just doesn't make sense anymore,

00:21:05.280 | and just wait 'til he gets to that point of 59 1/2

00:21:07.480 | and he can start taking those withdrawals?

00:21:09.400 | - Yeah, and that's a great question.

00:21:11.320 | So, but Randy kind of hints at the catch.

00:21:14.440 | There's a catch to this backdoor Roth problem,

00:21:16.720 | which is the IRS treats all of your IRAs

00:21:19.080 | as if they're one giant IRA

00:21:20.520 | for the purposes of Roth conversion.

00:21:22.040 | What that means is, if you contribute $6,500 this year,

00:21:26.200 | and you don't take a tax deduction,

00:21:27.960 | in theory, if you didn't have any other IRAs,

00:21:30.040 | you could immediately convert that and pay no tax.

00:21:31.800 | But the problem is, if Randy has 200,000, 500,000,

00:21:35.120 | if he has a large sum of money in an IRA already,

00:21:37.880 | he's only able to convert pro rata,

00:21:40.240 | and only the small amount that he contributed

00:21:42.720 | out of the total pie would be tax-free.

00:21:44.920 | So more than likely,

00:21:46.200 | if Randy tries to execute this backdoor Roth,

00:21:48.400 | he's going to pay tax on most of the $6,500,

00:21:51.080 | or whatever amount that he chooses to convert.

00:21:53.160 | So I would separate that question

00:21:54.800 | from whether he should Roth convert or not.

00:21:57.240 | His other questions were, is there anything else

00:21:59.240 | that I'm thinking about retiring at 55?

00:22:00.760 | And Ben, where I wanted to go with this,

00:22:02.440 | just to completely segue,

00:22:04.520 | retirement, in my opinion,

00:22:05.520 | is trading money for time, right, ultimately.

00:22:07.680 | And the ability to retire near 55

00:22:09.600 | and enjoy potentially 40 years, right,

00:22:11.600 | maybe more than your working lifetime

00:22:13.360 | of being retired and being able to do

00:22:15.640 | what you want to do with your time,

00:22:16.920 | that to me is a beautiful thing.

00:22:18.080 | And so the things that I think that I would think about

00:22:20.240 | are things like health insurance.

00:22:21.800 | And it sounds like his spouse

00:22:23.240 | is going to work for a couple of years.

00:22:24.440 | That's awesome.

00:22:25.280 | If you have benefits through the spouse,

00:22:26.160 | that's probably going to cost you 2,000, $3,000 a month

00:22:28.880 | on the open market.

00:22:29.720 | Great, let's ask our employer to pay for that.

00:22:32.880 | Other things I might think about,

00:22:34.560 | Ben, Randy mentioned the rule of 55.

00:22:37.000 | If you retire after age 55,

00:22:39.280 | you can waive the 10% penalty

00:22:41.680 | if you take a distribution from your 401(k)

00:22:44.040 | or other tax deferred retirement plan

00:22:47.240 | early and not pay the 10% penalty.

00:22:48.720 | And that was the other question that Randy had.

00:22:50.480 | I think the ultimate thing to think about there

00:22:52.080 | is you do not want to roll those funds out to an IRA,

00:22:54.680 | 'cause IRAs do not participate in the rule of 55.

00:22:57.320 | But I think Randy's thought about everything

00:22:58.920 | that I would think about, Ben,

00:23:00.280 | thinking about retirement.

00:23:01.200 | He's got a lot of bases covered.

00:23:02.880 | - I think the biggest thing

00:23:03.720 | is what are you going to do with your time, too?

00:23:05.200 | If you're retiring early,

00:23:06.040 | like, are you going to get bored?

00:23:07.080 | Do you have, you can only sit on the beach for so long.

00:23:09.840 | Maybe some people can't,

00:23:10.760 | but I think you need to have it figured out

00:23:12.480 | if you're going to do, what are you going to do?

00:23:13.320 | - You've got to get really good at golf.

00:23:14.920 | - Well, yeah, do you have hobbies?

00:23:16.480 | Do you have, are you going to volunteer?

00:23:17.840 | What are you going to do with your time?

00:23:18.680 | I think that's probably the biggest transition

00:23:20.120 | for most people that they don't even plan.

00:23:22.320 | You have all your finances planned,

00:23:23.360 | but then it's like, what do I do?

00:23:24.800 | How do I stay social?

00:23:25.840 | How do I keep my brain functioning at a high level?

00:23:28.600 | How do I do all these things

00:23:29.680 | so I don't become depressed in retirement

00:23:31.840 | when I start doing what I'm doing?

00:23:32.680 | - Guys, we know the answer.

00:23:33.500 | It's hot farming.

00:23:34.400 | You call Sam a call.

00:23:35.560 | Yeah, get yourself on a farm.

00:23:36.400 | - Duncan, I thought about this.

00:23:37.840 | I thought about this.

00:23:39.120 | I would definitely farm coconuts and strawberries

00:23:41.220 | so I could have my own Miami Vice production.

00:23:43.040 | - Wow.

00:23:43.880 | - You know, I've literally just said in the chat,

00:23:44.880 | I said that Batnick would grow Miami Vices

00:23:47.460 | and Tropical Brothers shirts.

00:23:49.600 | - If you plant a Miami Vice tree,

00:23:51.040 | does it, how long does it take to grow, guys?

00:23:52.480 | So is it--

00:23:53.320 | - All right, next question.

00:23:55.200 | - Okay, up next, we have a question

00:23:56.800 | from a name I recognize, Hadley.

00:23:59.320 | This is the second question that we've answered on the show,

00:24:01.380 | so good job, Hadley.

00:24:02.220 | - Is that our first, second time questioner?

00:24:03.760 | - I don't think so, actually.

00:24:04.840 | - Okay.

00:24:05.680 | - But yeah, so thanks for the question.

00:24:07.280 | - Made the clip.

00:24:08.120 | - I have a question about the best way to diversify

00:24:09.680 | out of large, single-stock positions.

00:24:11.840 | Much of my net worth is in long-term positions

00:24:14.000 | of Apple and Amazon in a brokerage account.

00:24:16.800 | I no longer feel comfortable with this asset allocation

00:24:19.200 | and would like to move into more diversified ETFs

00:24:21.600 | or target date funds.

00:24:23.120 | I'm maxing out my 401(k) this year to lower my income

00:24:25.780 | so as much of the gains as possible

00:24:27.420 | can fall under a 0% capital gains tax rate.

00:24:30.720 | What's the best way for me

00:24:31.560 | to diversify my concentrated positions?

00:24:34.000 | - We get a lot of this at Rituals Wealth, don't we, Bill,

00:24:36.040 | from people coming in, someone comes to us from Amazon

00:24:38.400 | or Google or Exxon, they've received a bunch

00:24:39.840 | of stock options, maybe that makes up 70, 80, 90%

00:24:42.480 | of their wealth in some ways.

00:24:44.320 | They know that they kind of won the lottery

00:24:46.160 | if they were in a company that did well

00:24:48.040 | and the stock that did well,

00:24:49.440 | but now they have these big tax bills

00:24:51.480 | and they wanna figure out, I know I need to diversify,

00:24:53.240 | but I'm also staring down this huge tax bill.

00:24:55.560 | How do I balance that mix?

00:24:58.300 | And so your point has always been, listen,

00:25:00.120 | if you have a big tax bill, that means you won,

00:25:02.040 | that's a good thing, but then how do you transition

00:25:04.680 | from that, and obviously we have some ways that we do,

00:25:06.320 | but what are your initial thoughts here?

00:25:08.140 | - Yeah, so what Hadley is kind of hinting at

00:25:10.040 | and trying to thread the needle on is the mythical,

00:25:12.840 | the magical 0% capital gains bracket,

00:25:15.000 | and for an individual in 2023, an individual filer,

00:25:18.340 | I'm baking in a standard deduction for this.

00:25:20.600 | You can earn about $58,500 this year,

00:25:23.960 | and after a standard deduction,

00:25:25.720 | if that happens to all be capital gains

00:25:27.680 | in qualified dividends, your tax, your fed tax rate is zero.

00:25:30.880 | So hypothetically, if you're earning $50,000 a year,

00:25:34.320 | and Hadley mentioned, hey, I'm gonna max out my 401(k),

00:25:36.440 | I'm gonna take $22,500, you could potentially realize

00:25:40.120 | another 20,000, another $22,000 of capital gains

00:25:43.080 | on top of your ordinary income,

00:25:45.400 | assuming that you're max funding a 401(k)

00:25:47.960 | because the taxable income bracket is what matters.

00:25:50.120 | For a marriage filing joint couple, that's about $117,000.

00:25:53.800 | I'm gonna really annoy Duncan here,

00:25:54.960 | I made a little chart for you guys.

00:25:56.440 | So for a married couple-- - I did a poll,

00:25:58.000 | I did a poll today, and a lot of people

00:25:59.960 | thought you were gonna bring it.

00:26:00.880 | - Oh, great, well, here it is, the napkin.

00:26:02.960 | So for viewers, let's say a married couple,

00:26:05.760 | $117,000 is that threshold, so that's my dotted line

00:26:10.120 | that runs across the page here.

00:26:11.280 | And so let's say the couple's earning $80,000,

00:26:13.640 | again, they can realize these gains on top of that

00:26:16.400 | and still thread the needle.

00:26:17.720 | Let's assume that we're deducting a standard deduction

00:26:19.680 | here in 23,000, let's assume that we're deducting a 401(k),

00:26:22.480 | as long as you're below that taxable income threshold,

00:26:25.120 | your wage income's gonna get taxed at roughly 12%,

00:26:27.720 | but your capital gains are gonna be taxed at 0%.

00:26:29.840 | Ben, that's a great way to thread that needle.

00:26:31.840 | - If you are someone who has a variable income,

00:26:34.200 | and your income could go up and down for whatever reason,

00:26:37.040 | and you wanted to take these taxes,

00:26:39.680 | it might make sense to sort of slow down your income

00:26:42.680 | this year if you could massage it in a way.

00:26:44.480 | - Yeah, in a way, cash basis,

00:26:45.600 | taxpayers have that option, right?

00:26:46.720 | You send out your invoices on December 30th, right?

00:26:49.320 | Nobody's gonna pay you the next day on New Year's Eve.

00:26:52.000 | But the other thing to think about for Hadley

00:26:53.440 | is last year or this year, depending on when we're executing,

00:26:56.200 | I mean, this year, obviously,

00:26:57.720 | there's carnage, right,

00:26:59.280 | in some of the same investment accounts, right?

00:27:00.960 | If you happen to have a cryptocurrency account,

00:27:02.320 | if you own Bitcoin or anything,

00:27:03.400 | and you've held it for two to three years,

00:27:05.040 | you're probably down 50% there.

00:27:06.600 | So this matching, let's say you have Amazon and Apple,

00:27:08.960 | great, I'm sure that you had other stocks

00:27:10.760 | that didn't do so well.

00:27:11.600 | So realizing those capital losses to help offset the gains,

00:27:14.480 | that's another strategy.

00:27:15.400 | - Duncan, maybe you can donate

00:27:16.640 | something beyond meat shares to this person

00:27:18.600 | and kind of help them out.

00:27:20.920 | - Yeah, on a gift basis transfer.

00:27:22.920 | - I actually, I don't have many left,

00:27:25.080 | so I don't have many left to give.

00:27:27.040 | - You bailed, huh?

00:27:28.440 | - Yeah.

00:27:29.280 | - And obviously, the way that we kind of try to do this

00:27:31.160 | is through direct indexing,

00:27:32.400 | where you can set like a tax budget

00:27:33.720 | and do some tax loss harvesting.

00:27:35.280 | But you're right, that requires a lot more planning

00:27:37.400 | and being thoughtful about where those losses

00:27:39.200 | are coming from in execution.

00:27:40.040 | Yeah, it's a little hard.

00:27:40.960 | - Is that a segue, Ben?

00:27:42.120 | - Sure, let's do another one.

00:27:44.480 | Well, no, not quite, but let's do one more.

00:27:47.000 | - Okay, so last but not least,

00:27:48.840 | we have a question from Ben.

00:27:50.200 | This is a long one, but a good one,

00:27:52.080 | especially the first part.

00:27:53.560 | Love Portfolio Rescue, love the compound.

00:27:55.840 | No pressure, but if you answer this question on the podcast,

00:27:58.120 | there will be a case of assorted California wine

00:28:00.000 | headed your direction.

00:28:01.440 | - Ben knows the way to my heart, through red wine.

00:28:04.000 | - Flattery will get you everywhere.

00:28:05.560 | - I'm sold.

00:28:06.680 | - I recently started a backdoor Roth IRA

00:28:08.760 | because I've run out of other tax,

00:28:10.800 | other savings vehicles that make sense.

00:28:13.120 | After the lesson of Peter Thiel

00:28:14.680 | with the $6 billion in tax-free gains,

00:28:16.700 | I'm thinking I should use my Roth IRA

00:28:18.560 | for the speculative end of my savings barbell.

00:28:21.440 | Between a DB pension,

00:28:22.800 | which I learned is defined benefit, right?

00:28:24.920 | - Yep, correct.

00:28:25.760 | - I thought it was Deutsche Bank.

00:28:27.320 | Between a DB pension and pre-tax savings,

00:28:30.560 | my retirement income is already safe.

00:28:32.520 | I was thinking of going for riskier stock bets

00:28:34.640 | in the Roth IRA,

00:28:35.840 | but it seems that any stock that goes to zero

00:28:38.160 | is a hard loss with no tax loss harvesting available.

00:28:40.820 | Is that correct?

00:28:41.920 | What else should I take into account

00:28:43.600 | when it comes to allocating money in my Roth IRA?

00:28:46.160 | I just wanna make sure I don't chase a tax-free return

00:28:49.000 | and end up losing a capital loss

00:28:50.460 | I could take in my brokerage account.

00:28:52.380 | - So the typical rule from my voice heard, Bill,

00:28:54.960 | is that you want your sort of income-producing assets

00:28:57.300 | in your tax-free account,

00:28:58.140 | so bonds and REITs and that sort of stuff,

00:29:00.840 | maybe in the Roth or traditional IRA.

00:29:02.760 | Maybe your more indexed funds and ETFs

00:29:04.360 | that are more tax-efficient in the brokerage account

00:29:06.040 | if you're gonna separate it out that way

00:29:07.440 | in terms of asset location.

00:29:09.380 | But I have heard a number of people say,

00:29:10.560 | "Well, I'm taking a swing.

00:29:12.160 | "I wanna have some home-run swings.

00:29:13.420 | "I wanna invest in venture capital

00:29:15.640 | "or some other sort of crypto or whatever it is."

00:29:19.160 | And if there ends up being this huge gain,

00:29:21.680 | I want it in a Roth,

00:29:22.640 | so that way it's just tax-free when I get out of there.

00:29:24.860 | They see the Peter Thiel thing.

00:29:26.460 | In theory, that kind of makes sense to me,

00:29:29.000 | but do you think it's unrealistic for most people to think,

00:29:31.040 | "I'm gonna hit a grand slam"?

00:29:32.560 | - Yeah, I think this would work.

00:29:34.760 | This would work, Ben.

00:29:35.760 | Great name, by the way.

00:29:37.000 | Good guy, I noticed, named Ben.

00:29:39.340 | This would work to the extent

00:29:40.600 | that you can predict accurately

00:29:42.200 | which assets are going to outperform

00:29:44.520 | and which are gonna underperform, right?

00:29:46.000 | And so if you have the ability for foresight,

00:29:48.140 | like I guess our zero-to-one guy, Peter Thiel,

00:29:50.480 | to accurately forecast which those are, then yes.

00:29:52.600 | Then you can asset locate and pick and choose,

00:29:54.760 | and definitely, from the theoretical standpoint,

00:29:57.480 | there's no better account for massive gains than a Roth

00:29:59.880 | because all the gains come out tax-free,

00:30:01.560 | assuming you can make it to age 60.

00:30:03.560 | But Ben, like spilled wine,

00:30:05.720 | tax losses within a Roth IRA cannot be recovered.

00:30:08.680 | That is the downside of tax-qualified accounts.

00:30:11.160 | You get this benefit of appreciation and deferral,

00:30:13.960 | but you do not get to realize any gains,

00:30:15.740 | and so that, to me, does not lend itself.

00:30:18.040 | So to these types of investments.

00:30:20.260 | The frame I like to use when I'm thinking about this

00:30:21.920 | is distribution of returns.

00:30:23.080 | Ben, I know which image is coming to your head, right?

00:30:25.320 | It's this VC image of a concentrated bet

00:30:29.400 | of, let's say, 20 or 30 investments,

00:30:31.240 | and in the kind of the VC private equity model,

00:30:33.840 | in order to get those excess returns,

00:30:36.040 | those really good returns,

00:30:37.020 | you really only need a small number of those companies,

00:30:39.040 | but they need to be moonshots.

00:30:40.100 | They need to go absolutely insane.

00:30:41.800 | And that's the problem,

00:30:43.480 | that if you're trying to do that within a Roth IRA,

00:30:45.760 | I'm not certain that's the right vehicle

00:30:48.080 | in order for you to realize

00:30:49.220 | that kind of distribution of returns.

00:30:50.800 | I think, Ben, you hit a key point.

00:30:52.560 | Roth IRAs, traditional IRAs,

00:30:54.000 | those are much better for income-producing assets.

00:30:55.680 | I'm not certain that they're good for this type of moonshot

00:30:58.080 | because of what Ben is getting at.

00:31:00.640 | So, Ben, what would you want?

00:31:02.140 | What would you want the perfect kind of investment to be?

00:31:04.080 | You would want it to have a couple of conditions

00:31:05.440 | from a tax perspective.

00:31:07.000 | You would want it to be able to deduct any losses, right?

00:31:10.760 | So if it didn't work out,

00:31:11.800 | you want to offset gains from elsewhere,

00:31:13.680 | and you want gains to realize completely income tax-free,

00:31:16.440 | is there any investment from a tax perspective

00:31:18.400 | that fits that mold that you're aware of?

00:31:20.880 | - Sounds familiar, Bill.

00:31:21.720 | - It sounds familiar.

00:31:22.800 | I would point Mr. Ben to a Section 1202 kind of stock,

00:31:26.300 | a qualified small business stock that has that feature

00:31:29.120 | of ultimately you're able to spread your bets,

00:31:31.000 | you're able to do all this sort of planning.

00:31:33.000 | And if those companies don't work out,

00:31:34.420 | let's say you pick out 10 or 20,

00:31:35.960 | you'll be able to realize the losses

00:31:37.400 | to offset gains from elsewhere.

00:31:38.600 | And Section 1202 is this neat benefit

00:31:41.000 | that allows them to be completely income tax-free

00:31:42.960 | up to a gain of about $10 million,

00:31:44.640 | which again, we're not talking Peter Thiel money.

00:31:46.640 | - If you're going to have this home run account,

00:31:48.960 | whatever it is, whatever percentage of your portfolio,

00:31:50.480 | it's going to be your fund account, your speculative account,

00:31:52.560 | you're probably going to have some losses

00:31:53.920 | to offset those gains.

00:31:54.760 | So if you do hit it big, yeah.

00:31:57.840 | Even if you hit one out of 10,

00:31:59.320 | the other nine are probably going to either do nothing,

00:32:01.120 | or especially if you are speculating.

00:32:03.200 | So that, yes.

00:32:04.680 | - So basically what you're getting at though

00:32:05.840 | is if you're going to put a bunch of speculative stocks

00:32:08.040 | in your Roth, you just want to make sure

00:32:10.080 | they're ones that go up.

00:32:11.200 | - Yeah, that would be the key.

00:32:12.520 | - Okay.

00:32:13.360 | - But if we could talk really quickly,

00:32:15.240 | the Peter Thiel, Mitt Romney is the other individual

00:32:17.640 | in bank capital who pulled this off in the '90s with IRAs.

00:32:20.680 | The way this happened, as far as I can understand,

00:32:23.200 | is it was mostly, it was options,

00:32:24.960 | and it was these sort of deep in the money options

00:32:26.880 | that they were able to contribute, basically,

00:32:28.360 | and buy within the IRA, and having some,

00:32:31.000 | I wouldn't say foresight,

00:32:32.040 | but the ability to basically plan out

00:32:34.160 | five to 10 years in the future

00:32:35.640 | that these things were going to go insane in hog wild,

00:32:37.520 | due to their efforts, by the way,

00:32:38.680 | which is somewhat problematic,

00:32:40.160 | and might open them for some IRA scrutiny in the future.

00:32:42.960 | That's how these things got really insane.

00:32:45.120 | I'm not certain that type of option is really open to us

00:32:48.320 | that can't afford high-priced lawyers

00:32:51.200 | to kind of fight the IRS if this goes south.

00:32:53.480 | So I think a more traditional approach

00:32:55.240 | to me would make more sense.

00:32:56.400 | I would, if you can see connection,

00:32:58.480 | I'm not sure that this kind of corporate pirate strategy

00:33:02.240 | is something that's available to us,

00:33:03.520 | but maybe we're talking about the wine farm,

00:33:05.160 | you know, the vineyard here.

00:33:06.000 | - Yes, I hate to be a Debbie Downer,

00:33:08.160 | and I don't want to lose out on my wine here,

00:33:10.600 | but just start with the baseline assumption

00:33:13.520 | that you're probably not Peter Thiel and Mitt Romney.

00:33:15.340 | I think that's a pretty good starting point.

00:33:18.000 | - Yeah, yeah, and I'm hoping it's Maybach.

00:33:19.760 | I mean, honestly, California wines are,

00:33:22.040 | in my opinion, top of the world, big fan.

00:33:24.160 | Stag's Leap, and what's your favorite California red?

00:33:26.320 | I don't know, where are you at?

00:33:28.160 | - Any, any of them, anything.

00:33:29.800 | - Any, any of them.

00:33:31.280 | - I'll take a Pilsner, yeah.

00:33:32.600 | - Ben's like, I like wine.

00:33:34.040 | - Yeah.

00:33:35.000 | - Pretty much, I'm not a wine snob.

00:33:36.640 | - Equal opportunity employer.

00:33:37.920 | - Our audience has been loving the tax questions.

00:33:40.320 | We may even bring on both tax bills

00:33:42.080 | at some point in the future,

00:33:43.480 | because we've got so many.

00:33:44.720 | - Don't forget about Bill Gates.

00:33:45.840 | - You can ask us a question

00:33:46.960 | at askthecompoundshow@gmail.com.

00:33:48.600 | You don't even have to promise us alcohol.

00:33:50.540 | We'll do it for free, we promise.

00:33:52.520 | - I know, his comment, no pressure.

00:33:54.040 | I don't feel any pressure, this is fun.

00:33:56.040 | I'm happy to be with you.

00:33:56.880 | - All right, if you're watching on YouTube,

00:33:57.960 | remember, leave us a comment.

00:33:59.120 | Thanks to all the people in the chat.

00:34:01.000 | As always, we always appreciate your comments

00:34:02.560 | and following along.

00:34:03.400 | If you want some compound merch, idontshop.com.

00:34:06.020 | Tomorrow, Compound & Friends, right Duncan?

00:34:08.420 | New Compound & Friends tomorrow.

00:34:09.620 | - Right, very excited.

00:34:10.460 | - Keep those questions and comments coming,

00:34:11.900 | and we will see you next time.

00:34:13.940 | - See you, everyone.

00:34:14.940 | (upbeat music)

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Should I Put Riskier Stocks in my Roth IRA? | Portfolio Rescue 65

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