How Do I Max Out My Roth IRA?

00:00:00.000 | (projector whirring)

00:00:03.080 | (upbeat music)

00:00:18.500 | - You know it's real when you edit it.

00:00:22.100 | - We're good? - Yeah, we're good.

00:00:25.160 | - Welcome to Portfolio Rescue.

00:00:27.880 | Usually I'm 750 miles away from Duncan.

00:00:30.860 | Today I'm 75 inches away.

00:00:32.680 | We're at the headquarter,

00:00:33.560 | the Compound headquarters in Manhattan.

00:00:35.600 | Nice to be here.

00:00:37.040 | Duncan, how we feeling?

00:00:38.480 | - I'm stressed.

00:00:39.680 | I'm feeling pretty stressed today.

00:00:41.880 | - It's my tea issues, but hey, we're past that.

00:00:43.720 | We're ready to answer some questions.

00:00:45.400 | Remember, our email here, askthecompoundshow@gmail.com.

00:00:48.760 | Let's do it.

00:00:49.640 | - Okay, and in our defense, this is a tight turnaround.

00:00:52.400 | You guys saw from we were doing CNBC with Josh to this,

00:00:55.200 | so we apologize for the delay.

00:00:57.440 | But yeah, we're here now.

00:00:59.320 | So up first today, we have the following.

00:01:03.080 | I like my idea of investing every day.

00:01:05.480 | My OCD took off and I figured out

00:01:07.240 | that investing $25 a day over 260 weekdays in a year

00:01:11.220 | would roughly equal my IRA limit of 6,500.

00:01:14.640 | The investing platform I use allows me

00:01:16.480 | to automate this task over a basket of stocks and ETFs.

00:01:19.240 | My question is, some of my $25 a day investment

00:01:22.480 | equates to only a couple dollars per share/ETF.

00:01:26.700 | Does payment for order flow

00:01:27.840 | negatively impact my smaller trades

00:01:29.880 | more than if I made larger weekly or monthly trades?

00:01:32.880 | Is this impossible to quantify

00:01:34.840 | with fluctuations in the markets?

00:01:36.400 | Should I just take a deep breath

00:01:37.520 | and not be all OCD about it?

00:01:39.220 | - I like the idea here.

00:01:41.160 | So one of the biggest benefits of dollar cost averaging

00:01:43.760 | is just that you're diversifying over time, right?

00:01:45.760 | You avoid that single point of failure

00:01:47.520 | where you take the big lump sum and you put it to work

00:01:50.600 | and it happens to be at an inopportune time.

00:01:52.680 | So I do like the idea of breaking down

00:01:54.760 | the max IRA contributions into various timeframes.

00:01:57.740 | Technically, there's 252 trading days in the year

00:01:59.900 | because of holidays.

00:02:01.460 | So if we're splitting hairs here,

00:02:03.260 | we're talking about $26 a day.

00:02:05.340 | If a man really wants to max out that IRA,

00:02:07.700 | which he does, it sounds like, close enough.

00:02:10.460 | Or you could go, I figured, at $125 a week, $540 a month.

00:02:15.460 | So I think any of those times,

00:02:19.100 | honestly, if you're breaking them down into those levels,

00:02:22.020 | even if you did it monthly, if you did one lump sum,

00:02:24.240 | your market impact is gonna be so minuscule

00:02:26.620 | of the trillions of dollars that are moving all the time

00:02:29.140 | that it's probably not going to matter.

00:02:30.500 | So I think they probably are overthinking things.

00:02:33.360 | I just don't see how you can get taken advantage of any more

00:02:35.460 | at $125 a week versus 25 a day or $540 a month.

00:02:39.860 | I think at these levels,

00:02:41.780 | you're not gonna be any better or worse off.

00:02:44.320 | Ken Griffith is not going to take any more pennies from you.

00:02:46.960 | It kind of just scales, I think.

00:02:48.820 | So we did talk about mental accounting though last week.

00:02:51.660 | And I do think the idea of someone thinking

00:02:54.180 | through their savings as $25 a day

00:02:56.940 | is easier to stomach psychologically

00:02:58.820 | than $540 a month for certain people.

00:03:01.420 | So even though it's the same thing in the end,

00:03:02.620 | I actually like the idea of doing it this way.

00:03:05.280 | So I think investing this way could provide

00:03:08.020 | some sort of double psychological boost

00:03:10.260 | in terms of dollar cost averaging

00:03:11.740 | and spreading it out over tons of different markets.

00:03:15.340 | And I've shared this stat before.

00:03:16.820 | I think since 1928, the win-loss ratio

00:03:20.500 | for the stock market on a daily basis

00:03:22.020 | is 55% up days, 45% down days.

00:03:25.820 | So $25 a day, you're actually giving yourself

00:03:28.580 | that opportunity to buy

00:03:29.860 | when the market is down a little bit.

00:03:32.300 | But as an individual investor, the trading cost thing,

00:03:34.940 | it's not like it's gonna scale any better.

00:03:36.980 | And it's not like you're gonna get

00:03:38.700 | the scale of an institutional investor

00:03:39.980 | by moving millions or hundreds of millions of dollars.

00:03:43.100 | Either way, so I think, yeah,

00:03:44.080 | you're probably overthinking it.

00:03:45.300 | - And so for payment for order flow,

00:03:47.180 | I mean, we are talking about like pennies

00:03:48.540 | and fractions of pennies, right?

00:03:49.740 | We're just to be queer for people.

00:03:51.660 | - And yeah, we're talking about a drop in the bucket though,

00:03:53.980 | a drop in the ocean here in terms of that $25 a day.

00:03:57.220 | It's not gonna be any better,

00:04:00.140 | even if you put that $6,500 max IRA contribution

00:04:03.940 | to work all at once.

00:04:04.780 | - I've never seen a dude dollar cost average daily.

00:04:06.980 | It's the first time I've thought about that.

00:04:08.640 | I think it's kind of fun.

00:04:09.480 | It's like paying a bill, right?

00:04:10.320 | Buy your coffee, fund your IRA.

00:04:11.940 | I dig it.

00:04:13.160 | - Yeah, let us know in the chat.

00:04:14.700 | I'm not looking at the chat right now,

00:04:15.820 | but let us know, Nicole's in there.

00:04:16.980 | So let us know if you dollar cost average on a daily basis.

00:04:20.020 | - Let's do another one.

00:04:21.940 | - Yeah, up next we have bonds versus money markets.

00:04:25.220 | I manage my investment portfolio largely

00:04:27.620 | with a mix of very boring funds,

00:04:30.300 | U.S. index fund, international index fund,

00:04:32.600 | and a total bond fund.

00:04:34.180 | Looking at the yield on my bond index fund,

00:04:37.100 | it looks like I may be able to get a better yield

00:04:39.340 | in a money market fund.

00:04:40.540 | Is there any reason to keep my bond allocation

00:04:42.820 | where it is rather than moving into a money market fund?

00:04:45.260 | - First of all, kudos on a three fund portfolio.

00:04:47.100 | I love this.

00:04:47.920 | The total stock market index funds,

00:04:49.580 | the U.S., international, and bonds.

00:04:51.280 | Listen, the yield on the 10 year treasury

00:04:53.780 | is like 3.6% right now.

00:04:55.720 | So you can get four to 5% in most money market funds.

00:04:59.300 | Three to six month treasuries right now

00:05:01.140 | are yielding around 5%.

00:05:02.900 | And if the Fed raises rates at the next meeting,

00:05:04.980 | which most people don't think they will,

00:05:07.340 | but some people think it's a possibility,

00:05:08.700 | these rates should actually go up a little more from here.

00:05:10.740 | So I said on this week's Animal Spirits,

00:05:12.280 | I think owning ultra short term bonds

00:05:14.300 | is a no brainer right now.

00:05:15.620 | But that's kind of how I look at fixed income

00:05:18.420 | as an asset class.

00:05:19.780 | I prefer to accept my volatility in stocks.

00:05:22.380 | I know the stock market is gonna fluctuate in the short term

00:05:25.020 | and it could have these bone crushing losses.

00:05:27.580 | And I look to fixed income and cash

00:05:29.860 | as a portfolio stabilizer.

00:05:31.600 | So I think about portfolios in like a barbell approach.

00:05:35.380 | So on one side of the barbell is higher volatility,

00:05:38.700 | higher expected returns.

00:05:40.540 | And on the other side of the barbell is less volatility,

00:05:44.160 | maybe some income, but we're talking more stability

00:05:47.140 | for either rebalancing into the downturn in the stock market

00:05:52.140 | or just keeping that portfolio stabilized

00:05:55.860 | so you have some spending cash on part of it,

00:05:57.880 | that sort of bucketing approach we've talked about.

00:06:00.080 | So in a recent piece,

00:06:01.700 | my favorite financial writer, William Bernstein,

00:06:03.940 | he was talking about bonds and cash versus stock.

00:06:07.260 | And he said, "Investing is an operation

00:06:08.540 | "that transfers wealth to those with a strategy

00:06:11.340 | "and can execute it from those who do not."

00:06:14.220 | Sorry, let me show that again.

00:06:15.040 | "Investing is an operation that transfers wealth

00:06:16.860 | "to those with a strategy and can execute it

00:06:19.040 | "from those who do not or cannot."

00:06:20.980 | And the idea is having some sort of short duration assets,

00:06:23.960 | whether it's cash or cash-like short-term bonds, CDs,

00:06:28.220 | money markets, online savings, whatever it is,

00:06:31.380 | that can help you stick with the other stuff.

00:06:32.900 | So even in the last 10 or 15 years

00:06:34.700 | when cash or cash-like investments

00:06:36.860 | didn't provide much in the way of yield,

00:06:39.020 | the asset class still played a vital role

00:06:41.380 | in portfolio management

00:06:42.420 | if it allowed you to stay invested in stocks

00:06:44.620 | and avoid worrying about your short-term spending needs

00:06:46.480 | being met.

00:06:47.320 | So the good J.P. Morgan line was always,

00:06:51.180 | "A bear marker is when stocks

00:06:52.300 | "are returned to the rightful owners."

00:06:54.140 | And I think most people might,

00:06:57.620 | what that means is the people who have money

00:06:59.060 | to buy stocks are on sale.

00:07:00.100 | And unless you have savings coming in from income,

00:07:03.020 | the people who have money are the people holding cash

00:07:04.700 | and can sort of balance into the pain.

00:07:06.200 | So that's just my preference

00:07:07.300 | when it comes to portfolio management diversification,

00:07:09.500 | not for everyone.

00:07:10.480 | It does seem like a no-brainer

00:07:12.620 | to sit in these short-term vehicles right now,

00:07:14.540 | but there are some risks to consider

00:07:16.260 | before you move your entire bond exposure over.

00:07:18.460 | Like if you were sitting in a total bond market fund,

00:07:20.820 | last year you probably lost

00:07:22.140 | somewhere in the range of 10 to 15%

00:07:24.420 | in like an ag or a total bond index fund.

00:07:27.380 | Interest rate risk works in both directions.

00:07:29.540 | So last year when rates rose,

00:07:30.740 | long-duration bonds got hammered.

00:07:31.900 | So John, do a chart on here of last year.

00:07:33.860 | This is bonds at different duration rates.

00:07:35.700 | So you can see that zero-coupon bonds,

00:07:37.420 | which is 25-plus years,

00:07:39.140 | they were down 40-some percent last year.

00:07:41.100 | That's like all sorts of duration.

00:07:42.820 | That's all duration, basically.

00:07:44.940 | 20 to 30-year, kind of going on the list,

00:07:47.420 | then one to three-year didn't have many losses.

00:07:48.860 | So the further out duration, the more you lost.

00:07:51.780 | Now, throw this year's chart up, John.

00:07:54.080 | Not huge gains in bonds,

00:07:56.700 | but it kind of works the opposite direction

00:07:57.820 | 'cause rates have fallen this year.

00:07:58.940 | So anything with duration did much better.

00:08:01.460 | So if we go into recession and the Fed cuts rates

00:08:04.620 | or yields in the bond market fall

00:08:06.220 | 'cause of inflation or whatever, the economy's slowing,

00:08:09.300 | which you would expect to happen,

00:08:10.220 | bonds with more duration will provide

00:08:11.540 | more bang for your buck.

00:08:12.380 | So making up some of those losses,

00:08:14.380 | if you kind of get out now,

00:08:16.340 | is much easier if you stay in some duration.

00:08:18.920 | Some investors like this feature of bonds.

00:08:20.700 | When the stock market is down, usually,

00:08:23.740 | not last year, but usually, or when there's a recession,

00:08:26.380 | we see a flight to safety, people go into bonds,

00:08:29.180 | and bonds provide some sort of price boost

00:08:31.900 | and not just income.

00:08:32.980 | Reinvestment risk is also a potential problem here.

00:08:35.380 | Let's say the Fed overplays its hand,

00:08:36.860 | do get even like a run-of-the-mill recession

00:08:38.580 | and inflation falls.

00:08:40.220 | I don't know, rates could go from 5% currently

00:08:42.220 | to 3% or 2%, maybe,

00:08:43.740 | depending on the severity of the downturn.

00:08:46.060 | In short-term bonds or cash or money markets or whatever,

00:08:48.500 | you don't get price appreciation from rates falling

00:08:51.100 | like you would in long-duration bonds.

00:08:52.220 | Plus, now your 5% T-bill is now yielding 2%.

00:08:55.780 | So you kind of have to think, what do I do?

00:08:57.020 | Do I stick it out in this more stable asset

00:08:58.540 | or do I look for something that can potentially,

00:09:00.260 | in that scenario, get more yield?

00:09:01.540 | So I think you will have a heads-up from the Fed

00:09:03.980 | when time comes and rates move,

00:09:06.380 | but the bond market's not gonna wait around for you.

00:09:08.980 | So I think you just have to figure out

00:09:11.660 | why you're investing in bonds in the first place.

00:09:13.620 | Is it more stability, like me,

00:09:15.540 | or are you trying to get ahead of the interest rate market

00:09:17.900 | and be some sort of hedge fund manager?

00:09:19.380 | I guess that's kind of the way I look at it.

00:09:21.020 | - Have you taken a look at how much

00:09:22.060 | does the price appreciation help in fixed income

00:09:24.940 | when markets are in turmoil?

00:09:26.500 | - Over the long, well, so we have looked at that,

00:09:28.980 | and during, I think, the relative outperformance

00:09:31.260 | and down year in the stock market,

00:09:33.060 | it's like, again, stocks are down and bonds are up a little.

00:09:36.300 | It's like almost a 20% outperformance

00:09:37.980 | on a relative basis for the 10-year Treasury.

00:09:39.740 | So you do get a bump.

00:09:40.620 | Like in 2008, Treasuries were up double digits.

00:09:43.700 | So that is something to consider.

00:09:45.780 | Like, what is the point of fixed income

00:09:47.220 | in the first place for you?

00:09:48.260 | - Yeah, and that would be my argument

00:09:49.580 | is that you will get that price appreciation

00:09:51.380 | from a money market fund, right?

00:09:52.580 | You get yield and yield alone.

00:09:53.860 | - Yes, you have the stability piece and the income piece,

00:09:55.940 | but that's it, right?

00:09:57.660 | - I do think bonds have been a really tough asset class

00:10:01.940 | for the past 10 years or so,

00:10:02.900 | and I think they're pretty straightforward to me

00:10:04.340 | in terms of this, but that's the wrench in the equation.

00:10:07.460 | - Pretty exciting right now, the last year or so, yeah.

00:10:09.900 | - And that's the thing.

00:10:11.380 | Interest rates have fluctuated so much.

00:10:12.900 | Maybe some people are saying,

00:10:14.300 | "Just get me out of this game.

00:10:15.580 | "I don't care.

00:10:16.420 | "I'm gonna lock in what I can now,

00:10:17.940 | "and if rates go down in the future,

00:10:18.980 | "we'll figure it out then."

00:10:20.100 | But I do think rates being at 5% in short-term T-bills

00:10:24.140 | is something that investors haven't had the chance

00:10:25.940 | for 15, 20 years at this point.

00:10:28.580 | I'd say enjoy 'em while they last.

00:10:30.900 | - In a word, it's tasty.

00:10:32.660 | - I gotta be honest.

00:10:33.500 | I still don't understand what a money market fund

00:10:34.860 | really is at the end of the day.

00:10:36.500 | I really couldn't explain it.

00:10:38.060 | I have no idea.

00:10:39.460 | It's like a fancy bank account.

00:10:40.980 | - It's a fancy savings account, it really is,

00:10:43.180 | but you can write checks on it.

00:10:44.740 | It really is a fancy savings account.

00:10:46.820 | This is the Winnie the Pooh meme.

00:10:48.580 | Savings account, money market.

00:10:50.260 | It's not really a savings account, but it kind of is.

00:10:52.660 | - Yeah, but there's a distinction between that

00:10:54.500 | and a money market mutual fund.

00:10:55.740 | - We'd have to go through the financialization history

00:10:57.860 | to explain it all.

00:10:59.220 | - Oh, we have time.

00:11:00.060 | - I don't know that from Shinola.

00:11:02.100 | 14 minutes for this episode.

00:11:03.580 | - Okay, up next we have,

00:11:05.860 | and that question was from Michael, by the way.

00:11:08.540 | Up next we have a long one, but a good one.

00:11:10.180 | I got laid off from a tech startup in New York City.

00:11:12.860 | Shocker.

00:11:13.780 | I'm 30, single, and have been wanting to do something

00:11:16.420 | on my own for years.

00:11:17.540 | I have experience, relationships, and a decent idea

00:11:20.620 | to bring a niche product to market.

00:11:22.660 | I need about $100,000 to live and fund the business

00:11:25.720 | for year one, assuming no positive cashflow.

00:11:28.380 | How would you approach setting up funding?

00:11:30.140 | I have $25,000 cash, negligible debt, good credit,

00:11:34.340 | about $50,000 in a brokerage, about $75,000 in a 401(k).

00:11:39.000 | I'll probably never have fewer responsibilities in my life,

00:11:41.300 | and it feels like the right time to make a bet on myself.

00:11:43.580 | I've meant to, I totally forgot

00:11:44.940 | in all the hectic prep for this.

00:11:47.400 | I was gonna read this like a shark pitch,

00:11:49.300 | like say, "Hey sharks, what are the pros and cons

00:11:52.500 | "of liquidating my brokerage account, a 401(k) loan,

00:11:55.960 | "taking an SBA or bank loan,

00:11:58.720 | "raising from angels, friends, and family?"

00:12:01.400 | - I like the idea here, like good for you

00:12:03.080 | for betting on yourself.

00:12:04.880 | You definitely wanna do this in your 20s or 30s

00:12:06.720 | before you have more responsibilities as a single person.

00:12:09.320 | You don't have kids running around

00:12:11.040 | or a mortgage to worry about.

00:12:12.920 | I think that is, there's, risk means different people

00:12:16.140 | at different points of their life, and I think this,

00:12:17.800 | if you're gonna do it and you make this leap, do it.

00:12:20.400 | - Obviously the caveat here is most startups fail,

00:12:23.760 | you know, which is tough, but I do think it's,

00:12:28.760 | this is the time to do this.

00:12:31.000 | So, Bill, you've actually been a part

00:12:32.040 | of small businesses over the years.

00:12:33.740 | Not necessarily a startup per se,

00:12:36.200 | but Ritholtz was more or less a startup

00:12:37.400 | when you and I joined seven or eight years ago.

00:12:38.800 | - I think so, yeah. - There was a handful of us.

00:12:40.520 | - Yeah, Mr. Josh Brown, Mr. Barry Ritholtz.

00:12:42.560 | - Well, let's ask you this before we get into like the,

00:12:45.080 | weighing the pros and cons of each.

00:12:46.400 | Are there any tax implications here of starting a business

00:12:49.360 | and different kind of funding approaches?

00:12:50.580 | Does that matter at all?

00:12:51.880 | - Yeah, there's a lot of tax implications.

00:12:53.880 | I was gonna suggest, Ben, that we end up ranking these,

00:12:56.120 | right, I mean, at the end of this, this is priorities.

00:12:58.200 | And before we get there, I wanna tell you a quick story.

00:13:00.740 | So the year's 2007, the great financial crisis

00:13:04.080 | is a year or two away, and I picked the perfect time

00:13:05.980 | to get out of the Army, leave a stable job,

00:13:08.040 | not unlike my friend Chris here, and get out.

00:13:10.440 | I linked up with a tax practice partner,

00:13:12.040 | my partner Greg, who turned 78 this year,

00:13:13.920 | and by the way, he's still cranking out tax returns

00:13:16.160 | on an annual basis, that man is my hero

00:13:18.560 | and very much a mentor.

00:13:19.760 | So I go to the bank, 'cause I wanna focus on CFP,

00:13:22.200 | I wanna become a financial planner,

00:13:24.040 | work with the tax practice.

00:13:25.280 | So I go to the bank and I say,

00:13:26.240 | what kind of deal can we work here?

00:13:28.360 | You know, I slip the note under the table,

00:13:30.000 | and then hard pass, hard pass from the bank.

00:13:32.720 | I go talk to the SBA.

00:13:34.400 | Personal guarantee, they could give me $2,000 at 12%.

00:13:38.120 | Not very helpful if I wanna hire somebody.

00:13:40.120 | - At that point, you might as well get a credit card.

00:13:42.200 | - Right, basically.

00:13:43.200 | Went to the Veterans Affairs, funding had dried up,

00:13:45.720 | again, this is 2007, not an asset-backed loan.

00:13:48.760 | I go to the county, I'm not adding manufacturing jobs.

00:13:51.200 | A finance bro, they're probably not just gonna

00:13:53.320 | loan you money at the end of this.

00:13:54.920 | So ultimately, maybe things have changed,

00:13:57.800 | but I think, Chris, every note on your list

00:14:00.520 | involves you basically betting on yourself

00:14:03.320 | with your own financial resources, except for one.

00:14:05.840 | And that's the one that I would focus on,

00:14:07.560 | which is the friends and family element.

00:14:09.120 | That, to me, is the most interesting thing to go,

00:14:11.600 | because ultimately, crowdsourcing would allow

00:14:13.400 | other people to share in the risk that he's taking on

00:14:15.880 | with his career right now.

00:14:17.120 | And that way, you're able to financialize it a little bit,

00:14:19.600 | and for tax implications, if somebody's gonna put risk in,

00:14:22.400 | they would also share with them a little bit of the upside

00:14:24.180 | in how you do that.

00:14:25.020 | But that's the direction I would go.

00:14:26.120 | - If you have trusted sources of capital

00:14:28.200 | that are willing to make a bet on you,

00:14:29.860 | and they understand the risks,

00:14:31.080 | that you could lose all this money,

00:14:32.680 | and then also, hey, I'm gonna be using

00:14:34.440 | some of my brokerage account here.

00:14:35.740 | I'm gonna be maybe using credit card.

00:14:37.200 | I'm gonna bootstrap this, and I'm gonna do whatever I can.

00:14:39.560 | If they know that you've got skin in the game, too,

00:14:42.140 | where you're just not using a loan or something,

00:14:45.360 | I think that makes a lot of sense, too,

00:14:46.880 | as long as they go into it with their eyes wide open

00:14:49.720 | that this could be a zero for them.

00:14:50.800 | - Yeah, exactly.

00:14:51.640 | And so, if you finance half of it with the $50,000 you have,

00:14:54.360 | half brokerage, half cash,

00:14:55.560 | if you can raise another $50,000 from friends, family,

00:14:58.160 | maybe it's something where you pay 'em back

00:14:59.460 | one-fifth a year for six years, right?

00:15:01.160 | And so, they get paid.

00:15:02.000 | They get the 20% kinda kicker there at the end

00:15:05.040 | if you split it up, but know that you're five,

00:15:08.080 | and that allows you to financialize

00:15:09.320 | and spread out some of the risk.

00:15:10.520 | Look at a partnership LLC.

00:15:11.760 | That's certainly a great structure.

00:15:13.080 | Would Elliot have folks enter and exit the partnership

00:15:14.920 | with little, no tax consequences?

00:15:16.460 | That's where I'd go for Chris,

00:15:17.880 | but I'd like that crowdsourcing idea.

00:15:19.640 | That one stands out to me.

00:15:20.660 | - I'm not a big American exceptionalism guy,

00:15:23.140 | but I think this is one of the cool things

00:15:24.280 | about our country that people do try this,

00:15:26.520 | because I'm not, you know,

00:15:30.120 | again, real estate's kind of a startup here,

00:15:31.480 | but it wasn't like starting from the ground floor,

00:15:35.280 | and I think that's just a huge risk,

00:15:37.560 | and you have to be the right kind of person, too,

00:15:38.760 | and have the right personality to do something like that.

00:15:40.440 | - Right, but it's capable here.

00:15:41.820 | Manifest destiny, and for here, you can make it.

00:15:44.080 | I mean, this is the American dream.

00:15:45.160 | - And kudos to him for giving it a try,

00:15:47.580 | and if it doesn't work, guess what?

00:15:48.760 | You work in tech startups.

00:15:50.120 | That's a place where you can see large amounts of people

00:15:53.240 | lose their job pretty quickly,

00:15:54.400 | and why not give it a try,

00:15:55.920 | and if you can, get back in with techs on the upswing again.

00:15:58.280 | - Yeah, he could get an entry-level, you know,

00:16:00.080 | 200K job in tech or something, right, you know,

00:16:02.760 | if he always had, if he had to fall back.

00:16:04.440 | - Inflation, inflation works wonders.

00:16:06.600 | - All right, let's do another one.

00:16:07.440 | - Congrats, Chris.

00:16:08.260 | - Yeah, good luck.

00:16:09.100 | Keep us posted on how it goes.

00:16:10.040 | - Yeah, let us know.

00:16:11.080 | Okay, up next, question four, we've got--

00:16:13.160 | - Also, he's probably gonna ask us to invest.

00:16:14.740 | (laughing)

00:16:15.580 | I don't know what he said.

00:16:16.420 | - Oh, there's an idea, Chris.

00:16:17.680 | There's an idea.

00:16:18.520 | Okay, up next.

00:16:20.640 | I've gotten into dividend investing recently

00:16:22.520 | and need some clarification on the difference

00:16:24.320 | between ordinary and qualified dividends.

00:16:26.580 | I want qualified dividends

00:16:27.760 | because of the preferential tax treatment.

00:16:29.680 | The IRS states that most American companies

00:16:32.080 | and some foreign stocks, ETFs, and mutual funds

00:16:34.800 | will be qualified dividends

00:16:36.280 | as long as you hold them for 60 days.

00:16:38.360 | How do you easily screen for equities

00:16:40.080 | that will produce qualified dividends?

00:16:41.680 | So he's basically looking to build a portfolio

00:16:44.240 | where he's getting tax advantage dividends, right?

00:16:47.200 | Smart.

00:16:48.040 | - So, obviously, the first explanation here

00:16:49.200 | is qualified versus ordinary.

00:16:50.760 | Let's do, Ben tries to explain taxes.

00:16:53.840 | (laughing)

00:16:55.100 | Ordinary just means they're taxed at ordinary income, right?

00:16:57.640 | - That's it.

00:16:58.480 | - Qualified means you get some sort

00:16:59.600 | of preferential treatment at whatever,

00:17:01.520 | capital gains or whatever.

00:17:03.480 | What would be classified as ordinary?

00:17:05.120 | That's like REITs.

00:17:06.640 | - Yeah, REITs is a good one.

00:17:08.520 | The most common one, I was gonna get it to the end,

00:17:10.240 | but you just put it first, Ben,

00:17:11.280 | is income from a bond fund.

00:17:13.520 | Income from a bond fund is typically taxed

00:17:15.040 | as a non-qualified dividend,

00:17:16.160 | but that's not what the question's trying to get at.

00:17:18.760 | - Right, so they wanna know,

00:17:20.120 | what stocks, ETFs, and mutual funds do I invest in

00:17:22.320 | if I want qualified dividends?

00:17:24.320 | - Yeah, so first off, let's start with the why.

00:17:26.160 | Why, you said it, Ben.

00:17:27.160 | Ordinary income stings, and it can be a 0% rate,

00:17:30.240 | but all the way up to about 41%

00:17:32.320 | for investors in the highest tax brackets,

00:17:34.040 | making about $600,000 or more if you're married.

00:17:36.560 | However, most median taxpayers are paying about 22%.

00:17:40.080 | Now, a qualified dividend, it's the same tax rate

00:17:42.960 | that you would apply to long-term capital gains.

00:17:45.280 | So for most investors, that's 15%.

00:17:47.720 | At the very high end, it ends up being 24%.

00:17:50.840 | And so the gap there can be pretty large.

00:17:52.600 | It can almost be a 15% differential

00:17:54.920 | between your tax rate for ordinary income

00:17:56.960 | versus qualified capital gains or qualified dividends.

00:17:59.360 | So that's step one.

00:18:00.200 | What do you get from that?

00:18:01.240 | So now, how do you get a qualified dividend?

00:18:03.240 | There's really two conditions you need to hit.

00:18:04.800 | Number one, it needs to be a U.S. company.

00:18:06.880 | That's task number one.

00:18:08.000 | However, counted in that qualified dividend

00:18:10.200 | for U.S. purposes are countries

00:18:11.680 | that we have a favorable tax treaty with.

00:18:13.600 | Ben, what countries do you favor

00:18:15.560 | when it comes to your tax treaties?

00:18:16.920 | - Saudi Arabia?

00:18:18.040 | - That is actually one, yes.

00:18:18.880 | - Is it really? - That's a really good one.

00:18:19.840 | Yeah, 'cause they're friends.

00:18:20.680 | They're friends of the United States, definitely.

00:18:22.440 | But yeah, Japan. - What about Ireland?

00:18:23.640 | - Ireland, big one.

00:18:24.520 | Yep, big up there on the list.

00:18:25.640 | I mean, I can give you a full list.

00:18:26.640 | The list is longer than a list of not.

00:18:28.280 | - Could you give us your picks?

00:18:29.280 | - Sure. (laughs)

00:18:30.120 | - That's what everyone's waiting on.

00:18:31.480 | - I'll give you my qualified dividend list,

00:18:33.080 | which is Canada, Mexico, UK, Germany, China, Japan,

00:18:36.040 | Switzerland, India, South Korea, Italy,

00:18:37.800 | and the list goes on and on and on.

00:18:39.240 | A lot of the developed world.

00:18:40.320 | What's interesting is if you look at the countries

00:18:41.800 | that are not included in the qualified dividend list.

00:18:44.160 | I'll give you one, Taiwan.

00:18:45.640 | This is a country, by the way,

00:18:47.000 | but Taiwan is not included

00:18:48.400 | because we don't have a favorable tax treaty.

00:18:50.120 | Taiwan Semiconductor,

00:18:51.280 | one of the 10 largest companies in the world,

00:18:52.920 | dividend rate about 2.5%.

00:18:54.360 | Sorry, you gotta pay full freight of U.S. taxes.

00:18:56.640 | It's not qualified.

00:18:57.760 | Another example, Singapore, Colombia, Iran.

00:19:00.600 | Not really good friends with Iran right now,

00:19:02.720 | but the differences can just be in that tax treaty thing.

00:19:04.520 | - So it's pretty easy to find qualified dividends.

00:19:06.800 | - It is, it is.

00:19:07.840 | And the second thing you need to hit is a holding period.

00:19:10.320 | And the holding period is super funky.

00:19:12.040 | Don't wanna get too much into details,

00:19:13.580 | but you basically need to hold the stock

00:19:15.640 | for a 61-day period at least 60 days prior

00:19:20.640 | to the dividend being held.

00:19:22.560 | And so the holding period test

00:19:24.440 | goes all the way back six months,

00:19:26.160 | and you basically have to hold the stock

00:19:27.720 | for about two months,

00:19:28.760 | at least two months before the dividend.

00:19:30.720 | So we're looking at a long timeframe.

00:19:32.140 | And what this prevents, Ben,

00:19:33.080 | is people buying a company that's about to issue a dividend

00:19:35.720 | and then they sell it later.

00:19:36.980 | So you have to hold this as a long-term investors game,

00:19:39.680 | and if you meet those criteria.

00:19:40.520 | - Right, I hope you're not day-trading dividend stocks.

00:19:42.320 | That's not the point. - Day-trading dividend stocks

00:19:43.520 | turns out not to be a great strategy.

00:19:44.680 | - Now let's take this one step further.

00:19:46.000 | Since I wanna do dividends,

00:19:47.680 | do you think it almost always makes sense

00:19:49.320 | to hold dividends in a tax-squared account,

00:19:50.920 | if you can?

00:19:51.760 | If this person is saying,

00:19:52.600 | I wanna be a dividend investor,

00:19:55.400 | obviously, they're obviously asking

00:19:56.480 | for a taxable account here,

00:19:58.000 | but would it be better for them

00:19:59.160 | to hold it in a Roth or an IRA?

00:20:00.680 | - It's really interesting,

00:20:01.840 | 'cause tax location, I think, is all of a sudden

00:20:03.840 | back in vogue.

00:20:04.680 | 'Cause all of a sudden, if you can get 4%, 5%,

00:20:06.560 | we talked about treasury rate,

00:20:07.600 | a money market rate of 3%,

00:20:08.940 | that does change the math and equation a little bit.

00:20:10.600 | Tax location, a really good idea.

00:20:12.280 | I'm not, I think at higher levels of dollars,

00:20:14.480 | that makes a lot of sense.

00:20:15.320 | I think for solving for a portfolio question like this,

00:20:18.120 | I would just stick to the basics.

00:20:19.800 | It's really just, you need to hold your stocks

00:20:21.780 | for a long period of time, and you're good to go.

00:20:23.920 | - Okay, that's easy.

00:20:24.880 | Cool, keep it easy.

00:20:25.960 | - All right, last question, Duncan.

00:20:28.280 | - Okay, so last but not least,

00:20:31.440 | I work at a company that offers a 401(k) with no match

00:20:34.400 | and a tax-deferred Supplemental Executive Retirement Plan,

00:20:37.400 | or SERP, that's how I'm going to say it.

00:20:39.680 | I don't know if that's right.

00:20:41.120 | Not to brag.

00:20:42.200 | They recently added the option to contribute

00:20:44.280 | to an after-tax 401(k) with automatic conversion

00:20:46.840 | to a Roth 401(k). - I think about three people

00:20:47.760 | listening got that not to brag.

00:20:49.120 | - Yeah, exactly.

00:20:53.240 | So yeah, they recently added the option

00:20:55.240 | to contribute to an after-tax 401(k)

00:20:57.120 | with automatic conversion to Roth 401(k),

00:20:59.320 | as well as the option to do an in-plan rollover

00:21:01.560 | of existing traditional 401(k) funds to Roth 401(k).

00:21:05.360 | I'm 38 and in my high-earning years.

00:21:07.720 | If I did the mega back to a Roth,

00:21:09.740 | I would be paying tax on the conversion

00:21:11.960 | while in this high tax bracket.

00:21:14.020 | Wouldn't it make more sense to contribute

00:21:15.440 | as much as possible to the SERP

00:21:16.840 | in order to max out pre-tax retirement savings

00:21:19.400 | and pay tax on withdrawals from the SERP during retirement

00:21:22.640 | when I'm in a lower tax bracket?

00:21:24.800 | I understand there's a risk of losing funds in a SERP

00:21:27.560 | if the company files for bankruptcy,

00:21:29.040 | but my employer is owned by the world's

00:21:30.960 | largest asset management firm,

00:21:32.680 | so I see little risk of that happening.

00:21:34.120 | Wow, they're feeling pretty good,

00:21:35.520 | feeling pretty good about themselves.

00:21:36.440 | - So the executive retirement plan

00:21:37.760 | is probably not all that well-known,

00:21:39.480 | so why don't you explain to us that one

00:21:42.200 | and why it's contributing to income inequality.

00:21:44.480 | - Yeah, I have precisely one client with a SERP.

00:21:46.820 | So this is a rare-- - Really, okay.

00:21:47.760 | - Yeah, this is a rare advantage.

00:21:49.080 | - I have not heard much about these, I gotta be honest.

00:21:50.760 | - Very cool, but they've fallen into this bucket

00:21:52.560 | of non-qualified retirement plans,

00:21:54.560 | and ultimately, it is just a compensation structure.

00:21:57.080 | The company's giving you an IOU,

00:21:58.920 | and they're saying, "Instead of paying you now,

00:22:00.520 | "is it cool if we pay you later?"

00:22:02.500 | That's what's going on here.

00:22:03.800 | And part of the qualification rules are

00:22:05.680 | that the company's only allowed,

00:22:07.120 | due to U.S. Department of Labor rules,

00:22:08.840 | to fund a certain amount for certain people

00:22:10.520 | at certain times, and this allows them to go beyond that.

00:22:13.240 | But as a condition of that, the SERP is not,

00:22:15.440 | they don't set the money aside.

00:22:16.780 | They cannot budget the money

00:22:18.200 | and put it into an account for you.

00:22:19.960 | It's literally an IOU from the company

00:22:21.960 | saying that, "We're promised, don't worry about it.

00:22:24.120 | "We're gonna pay you later."

00:22:25.320 | I think for highly compensated executives

00:22:27.440 | in a large, stable firm, it's a really valuable option,

00:22:29.880 | something to consider,

00:22:30.980 | especially sometimes there's not a choice.

00:22:32.600 | It's like, look, this is part of your compensation package.

00:22:34.840 | This isn't an optional plan.

00:22:36.380 | But the downside is, as Martin gets to,

00:22:39.080 | is if the company goes under.

00:22:40.460 | Big companies have failed, Ben.

00:22:41.640 | General Motors, we're talking about Xerox.

00:22:43.240 | Like, big companies have gone under.

00:22:44.800 | - So if it goes under, that IOU is worthless.

00:22:46.640 | - That IOU could be worthless.

00:22:48.040 | It really depends on the courts.

00:22:49.160 | And in bankruptcy, we're finding out

00:22:50.760 | with Silicon Valley Bank, it's not always what it seems.

00:22:52.980 | But ultimately, you can expect your money

00:22:54.280 | to be about 10 up for a lot of time.

00:22:55.120 | - Jim Carrey said IOUs are just as good as money.

00:22:56.720 | (laughing)

00:22:58.600 | - That's the famous--

00:22:59.440 | - So I know you're a big Roth guy.

00:23:00.600 | - Yeah.

00:23:01.440 | - But does he have a point here?

00:23:02.260 | He says he's in his highest earning years

00:23:03.800 | and highest tax bracket.

00:23:05.520 | Does it make sense for him to hold off

00:23:07.920 | on making those Roth conversions

00:23:09.400 | since he's paying big taxes now?

00:23:11.500 | - Yeah, I think so.

00:23:12.340 | And Martin, I don't know which state Martin's writing from,

00:23:14.560 | but let's presume it's New York.

00:23:15.800 | Let's presume it's New Jersey.

00:23:16.980 | Maybe in California, large asset manager.

00:23:19.000 | I'm guessing that's not gonna be in Florida.

00:23:20.760 | It could be, but I doubt it.

00:23:22.160 | I think so, yes.

00:23:23.500 | I think ultimately, Roth conversions are great.

00:23:25.640 | Roth IRAs are fantastic.

00:23:27.000 | They're a fantastic vehicle.

00:23:28.280 | But if you're at the highest possible tax bracket,

00:23:30.120 | that's probably not the primary vehicle for you.

00:23:32.360 | Martin's got his head in the right place here.

00:23:34.040 | - Okay.

00:23:34.880 | But he's talking about making contributions to these SERPs.

00:23:37.040 | So that's just, he's making a contribution.

00:23:38.480 | So are they making IOUs to each other?

00:23:39.320 | - It sounds like it's elective, yes.

00:23:40.700 | He basically says, instead of getting my money today,

00:23:43.160 | please pay it to me later.

00:23:44.360 | And then he gets to defer the tax on that.

00:23:46.360 | - Okay, and it allows you to make a bigger contribution,

00:23:48.520 | I would assume.

00:23:49.360 | - More or less, yeah.

00:23:50.180 | But again, not a contribution

00:23:51.020 | because it's not in an account, it's not in a fund.

00:23:53.040 | It's literally a promise for a future account.

00:23:55.560 | - I feel like we're usually teaching Duncan

00:23:56.940 | about these acronyms.

00:23:58.480 | I learned something today.

00:23:59.320 | - Yeah, I had no idea.

00:24:00.160 | I'd never, never heard of that.

00:24:01.500 | Never encountered that.

00:24:02.800 | - Yep.

00:24:03.640 | - Okay.

00:24:04.460 | - Yep, but it's good stuff.

00:24:05.300 | They do track a value.

00:24:06.140 | Again, it's just not immediately accessible.

00:24:08.120 | - Okay.

00:24:09.040 | Good stuff.

00:24:09.880 | - I'll take your word for it.

00:24:10.700 | - All right, cool.

00:24:11.960 | - We appreciate the audience,

00:24:12.800 | everyone in the live chat for sticking with us.

00:24:14.300 | We got a little bit of a late start today,

00:24:15.780 | but we had to do it from the compound here

00:24:18.620 | and Duncan was unplugging things, plugging things in.

00:24:21.780 | - It's always exciting.

00:24:23.040 | And anyone who's watching right now,

00:24:24.740 | that's the true hardcore audience.

00:24:26.180 | So thank you, listener.

00:24:28.060 | - Sure, yes.

00:24:28.900 | - Thank you.

00:24:29.720 | - Someone in the chat says

00:24:30.560 | that we need to give Duncan a Serp.

00:24:31.900 | Just for-

00:24:32.720 | - Give me a Serp.

00:24:33.560 | I still don't quite understand.

00:24:34.380 | - Just for today.

00:24:35.220 | - Sure, sounds good.

00:24:36.380 | - No, we always appreciate your comments and feedback.

00:24:38.900 | If you're watching on YouTube,

00:24:39.740 | leave us a question or a comment in the feed.

00:24:41.380 | I always go through all the comments.

00:24:43.180 | I'm a man of the people.

00:24:45.100 | If you have a question for us,

00:24:46.400 | email us, askthecompoundshow@gmail.com.

00:24:50.500 | What else?

00:24:51.340 | We need a review.

00:24:52.160 | - Yeah, we need everything.

00:24:53.260 | Give us everything.

00:24:54.100 | - Give us a subscription.

00:24:55.500 | - We also want you to go to the shop.

00:24:58.480 | We have a shop.

00:24:59.320 | Also, I wanted to say thanks to John,

00:25:00.680 | who you can't see on camera,

00:25:01.620 | but he's been running the show, basically,

00:25:04.700 | behind the scenes today.

00:25:05.540 | So I basically threw this in his lap and said, good luck.

00:25:09.100 | So thanks, John.

00:25:10.520 | - John is the man.

00:25:11.360 | We appreciate everything.

00:25:12.180 | Remember, send us an email,

00:25:13.140 | askthecompoundshow@gmail.com,

00:25:15.180 | and we'll see you next time.

00:25:16.340 | - See you, everyone.

00:25:17.340 | - All right.

00:25:21.680 | (upbeat music)

00:25:24.260 | (upbeat music continues)

00:25:27.680 | (upbeat music continues)

00:25:31.100 | (upbeat music continues)

00:25:34.540 | (upbeat music continues)

00:25:37.960 | (upbeat music)

How Do I Max Out My Roth IRA?

Chapters