Everyone says to max out your retirement accounts, but is that always the best move? Today I sit down with financial planning expert Michael Kitsis to challenge the traditional advice and explore why your saving strategy might be holding you back. We cover smarter ways to grow your wealth, how to think more intentionally about where your money's going, how to access your retirement accounts early, how to avoid unnecessary taxes, and what people miss when planning for flexibility or even early retirement.

I'm Chris Hutchins. If you enjoy this episode and want to keep upgrading your life, money and travel, click follow or subscribe. Michael, everyone says to max out your retirement accounts, but do you think that could actually be bad advice sometimes? I tend to start from like one step back, which is to say, not just where am I saving the money, but effectively, what is the opportunity cost of the money?

What else can I do with the money? It's like, okay, I can save in my retirement account. I can put the money aside for potential to start a new business someday because if I actually go and launch a business someday that is successful, that is very challenging. A lot of people fail.

It helps to have a little bit of a financial cushion to fail, but a lot of wealth building comes from successfully creating a business, which I ain't ever going to do unless I have dollars available to do it, which is difficult to draw out of a retirement account. Or I can do this to go get some class training, certification, designation, whatever it is in my profession of choice that maybe gets me a little raise.

That if I'm in my twenties is a raise I get as like a new baseline salary for 40 years from here. I mean, even if I'm in my thirties or forties, like I could have a good 20 something years left in my career. And I find a lot of us just we drastically underestimate the impact that comes from taking our savings and trying to use it to advance our career, as opposed to taking our savings and just kind of yanking it out of my career and putting it in the future retirement savings box.

So if I take two grand and I go get some certification and whatever my profession of choice is, and my boss says, cool, you finished it. You're probably a little more competitive in the marketplace. We want to retain you. Like, here's a thousand dollar raise. We're fairly low stakes here.

You didn't even get your money back in a raise yet. Like you're two grand out of pocket. And they gave you a thousand dollar raise. It's like, well, okay. But for most of us in our careers, salary I earn here is also the salary base from which I negotiate for my next job.

So this not always, but often is like kind of the new baseline of my income for life, like for a trajectory from here, take another thousand dollars of income, make that for the next 40 years. That's 40 grand. If I put $2,000 in my IRA, that's two grand. Now, if I grow two grand by about, you know, like 8% balanced portfolio for the long-term, two grand actually will grow to 40 grand over about 40 years.

If you get long-term rates of return, return. But if I make an extra thousand dollars a year, I can save and invest that every year. It's like I get an extra grand for 40 years. I get an extra grand for 39 years. I get an extra grand for 38 years as I wind that forward.

So if I take my $2,000, I put it into my career, I get a thousand dollar raise. And then I take my extra thousand dollars of earnings and I save that every year for the next 40 years. And I get the savings and the growth that maps out to about $400,000 at the same growth rate that I would have gotten by just putting my two grand in my Roth IRA.

This isn't perfectly apples to apples, but we're literally 10 X difference. This is way more than even, okay, there's some tax benefits to Roth that I don't quite get in the same way. If I'm getting some earnings that themselves are taxes, wages, it's such a massive difference. I mean, even if you're already in your thirties or early forties, like you've only got 20 or 25 years left on your career, $1,000 raised for the next 25 years plus growth, it's about 300 grand.

Two grand into your Roth for the next 25 years, it's like $15,000. It's still like a 20 X difference. Ironically, it's actually even more dramatic because the compounding of the extra earnings favors you more when the time horizon shorter. Starting to think from that frame, like I could put my money into the market.

I can put two grand in and get my growth, right? 8% a year. I make $160 of growth in the first year, or I put my two grand in and I get a certification that gets me a raise and I get a thousand dollar raise. It's like getting a 50% dividend and you get it every year.

And that might grow with inflation because salaries usually get COLA adjustments over time and you can reinvest that money to grow. And so just doing things to make the human capital bucket bigger grows a lot more than compounding the financial wealth. Now there's a point where that changes. You get within 10 years of retirement, it is very much how do we harvest the money out of the human capital and put it into the financial capital so that we can afford to retire.

So like, this is not indefinitely true. It is very specific to time horizon, but for those of us, there are twenties, thirties, even into our forties, where we might still have a multi-decade time horizon. We just so underestimate the impact that comes from spending dollars to do things that might get us raises and promotions and how much it compounds.

And frankly, for a lot of people in a lot of industries, like $2,000 for high quality certification designation, like that is actually more than a thousand dollar raise. It's not always immediate, but show me the career trajectory of people in your profession that have more advanced knowledge versus the people that don't, there's usually a pretty big income gap.

The cardiothoracic surgeons make more than the general family practitioner. Forensic accountant makes more than the generalist CPA. I mean, almost every profession financially rewards specialization and more deeper advanced knowledge, but it apprised across a really wide range of careers. And I would say there are some companies that might even pay for this.

Like you could be listening to this and not have to make the trade off. You could take advantage of your advice to add hundreds of thousands of dollars over your career and potentially do it for free. Whether it's free certification, company paying for certification, applying for a sponsorship. Oh, absolutely.

And like the challenge I find for a lot of folks is like they stop at the free line. Yeah. And it seems like the ROI is even easier. The example you gave about business, a lot of wealth in America is made from business, but it's not quite as clear as get this certification, comp people's salaries that have it.

But certainly you could make a case that if many business owners in America had not put the money in their business and had instead put it in whatever index fund of choice, they would have a lot less wealth having never built that business. So I think it's good to open your eyes to other ways that you can use money to build wealth that isn't just savings.

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So check out allthehacks.com/oceans or click the link in the show notes. Again, that's allthehacks.com/oceans for the best proactive global talent I have found. What do you think about the kind of liquidity flexibility argument, which is maybe not don't save, but maybe don't save in a retirement account and instead save in a taxable account?

So in an investment context, we all have different tolerances for risk, right? Some of us buy like the high-flying stocks and we're all in and some of us buy a diversified index fund. There's not a right or wrong answer. Just we all like taking different versions of the journey.

So to me, there's a similar version that shows up in human capital, in career capital with kind of the same parameters. So my more conservative version is I'm going to take the dollars and try to get a certification or designation so I can get a raise. The slightly more aggressive version is I'm going to build up a reserve of a couple of months of expenses so that if I get the dream job that would be amazing, but I have to move halfway across the country, uproot my family, spend the money to move and relocate, go a month without income while I'm going through the transition.

I can take the dream job and do that because I've got some kind of, I'll call it like a financial transition fund. So stage one is this is like certification designation, get me a raise money. Bucket number two or like option number two, we're going a little about riskier is this is the transition fund.

This is the flexibility fund. So if I get a cool career opportunity where I have to take one step back to take two steps forward, I can afford to take one step back in order to take the two steps forward. The third domain is we're like going out on the proverbial risk spectrum is I want to be an entrepreneur and start my own business someday.

And if you talk to most entrepreneurs that have done it, we all have like horror stories of how awful it was and how little money we made for a while or negative money or went into debt or all the things for every one story of the person that's like, I had an idea.

I started my garage with no money and I turned into a bajillionaire. Most people who try entrepreneurship lose a lot of money for an extended period of time. So high reward in the risk reward spectrum, like it holds for human capital the way that it holds for our financial capital.

But what that means is, okay, if I've got aspirations somewhere someday of starting a business, then I need to be able to let even more reserves and I need it more liquid. So if you're saying you're saying, yeah, like never going to start a business, got to defense enough emergency fund, I can float the transition, then maybe you don't need any more liquidity than that.

Core emergency fund is sufficient and either power forward with your retirement accounts or maybe just think about might I want to do a little bit less to retirement if that would let me do a little bit more towards training certification designation, like something in my in my career of choice.

But again, like the scenario where I spend two grand and get a thousand dollar raise and like 15 to 20 X my return on my Roth, that's the low return conservative one on this spectrum because the ones that build businesses successfully tend to build even more significant wealth that goes along with it.

And so all of that to me comes down to, I mean, retirement accounts, yes, like wonderful tax advantages, long-term saving compounding, all of those things are wonderful and completely true. And when we're still early in mid-stage in our career, we still live in a realm where the human capital bucket is a lot larger than the financial capital bucket.

And our ability to impact the human capital bucket, what we can do, what we can earn over the rest of our careers, is something we actually have a lot more financial impact over than sometimes we give it credit to be. And when you look at how this averages out over the long run, it takes a remarkably modest raise or new job promotion to just have like a massive change in financial trajectory in the long term.

Okay. So now I'm going to flip the table and ask you to take the other side, which is for someone who either has enough savings or has enough extra income that they can put money in multiple places, but is kind of thinking, gosh, I don't know what the future holds.

I'd like flexibility. Does it even make sense to put money in a retirement account? Make the case for why the tax advantages of a retirement account might actually outweigh just leaving it in a brokerage account if you didn't end up needing it. I'd answer this two ways. I mean, the first is it's sort of like a practical reality of the rules.

Roth style IRAs, when you put the dollars in the earnings are subject to taxes and potential penalties if you take them out early, but your principal, you can get back. You've got liquid. So you do have some options to get your Roth style dollars back a bit earlier if you want to, which means I've at least got some partial liquidity options available with Roth style accounts.

That aside, we have a natural tendency and proclivity to keep and hoard more dollars that are available than are necessary. Our banking system is literally built and predicated on this. Like the whole nature of how the banking system works in the simplest sense is we put money on deposit that we could withdraw at any time.

And then we don't withdraw it for months or years at a time, which is why banks can pay us a very limited amount for giving us all the liquidity and then actually lend the money out to someone else for 10 to 30 years and not go bankrupt. So everything from banking to emergency reserves is all built around the reality that just as human beings, we have a tendency to desire a little bit more liquidity than we end up needing.

So on the one hand, look, if that's what makes you sleep well at night, please do not go and contribute so much to your retirement accounts that like you have anxiety and can't sleep. Like keep yourself liquid enough, you can sleep. But there comes a point where I'm just financially impairing myself by not taking advantage of opportunities for growth and opportunities for tax preferences, right?

If it turns out that I keep my money liquid all the way throughout and I don't use it for the next five or 10 or 20 years, I just pay taxes on growth for the next five or 10 or 20 years that I would not have needed to pay if I used a retirement account.

And that can easily be a quarter of my gross return or more depending on what my tax rate is. It's a huge pile of money that you don't end up getting because you sacrifice to taxes under the sheer preference of, I was afraid I might need the money and therefore I paid Uncle Sam a huge portion of the money for the privilege of not using it myself.

So figure out what we need. For some of us, like, look, if your sleep well at night, peace of mind is like, I don't want three months of an emergency service or I want six months emergency service. I want two years worth. Like, cool. Knock yourself out with two years.

Give yourself permission for two years. At some point, if you're saving and investing diligently, you're going to end out with more than two years of reserves. Can we at least commit that once we get to that point, we're going to take the overflow beyond the two years worth and put that into retirement accounts.

And once we get there where we built that reserve, all future money is now going into retirement accounts. We're not using the reserve. It just kind of sits there as the balance that we need to sleep well at night and be comfortable. I worry less about any dollar over three months of savings is a financial waste and you have to get it into your retirement account.

I've sat across from more than enough clients over the years to know that like just that is not a positive a peace of mind. It just doesn't feel like it's enough money to be comfortable. It's not enough and make an adjustment. But sometimes we just don't know what the number is because we've never really scenarioed through like, what would I really need if bad stuff happens and I needed to tap dollars?

And often when we go through that process, we can get to here's what I need. And it might be more than the traditional advice about emergency savings, but there's some number. And if you're diligently saving, you will cross that number at some point. So let's worry less about whether one year or two years of savings is too much if that's your number instead of three to six months and more about like, cool.

So let's get to that number as quickly as we can. And then I know we're going to take everything above that. Now, can we agree that we've got enough liquidity that we can put this over to retirement accounts? And maybe if you want to, let's look at Roth style of retirement accounts where we still got some way to draw principal back if we really need to.

You mentioned briefly that you could be giving up 25% of your long-term return by not putting that money in some sort of tax advantaged account. We could debate that number for a while because it's based on all kinds of assumptions about future tax rates and all these kinds of things.

Correct. But at its core, if you hold the money to retirement, you're probably going to be better off in a retirement account. For some people, they might only have one option. But for a lot of people, I know, you know, when I had a W-2 job, I had, okay, well, I couldn't put it in a traditional IRA, but I could put it in a backdoor Roth.

I could put money in a 401k pre-tax, or I could put it in a Roth 401k. As people think through their options, do you have kind of a order priority or any kind of framework they can use to decide traditional versus Roth, 401k versus IRA? How do I pick where to go if I've made the decision that I will be investing for retirement?

So beyond just the emergency savings, high debt pay down, mobility fund, just like once we get through that foundational layer. The next one that typically comes up for us is we're not actually fooling the retirement accounts yet. We're in health savings accounts. Tax preference accounts typically have three different ways that the government can incentivize tax benefits.

We get a deduction up front. We get deferred growth while it's in. We get tax free withdrawals. Retirement accounts are typically two of the three. Choose your flavor. So Roth is no deduction going in, but you get tax deferred growth and it's tax free at the end. Traditional, you get the other two.

Deduction up front and tax deferred growth, but no tax free at the end. It's actually taxable. So most retirement accounts are two out of three. HSA's health savings accounts are unique because they're the only three out of three. It's deductible going in. It's deferred while the dollars are in there and it's tax free when it comes out, as long as you use it for a qualified expense.

So traditionally qualified expenses, my medical expenses, and I use it accordingly for any, any medical expenses I've got. But if either I'm relatively healthy or I'm just plowing in the maximum, my HSA enough that I'm actually still saving more than whatever incremental medical expenses I get, even after my high deductible health plan, any dollars that are left over, you get to save, you get to grow.

And if you get all the way to retirement without using them in retirement, HSAs essentially convert to like a mini version of a tax free Roth for medical related expenses. So in retirement, I can still draw my HSA dollars out, but I can use them for things like Medicare expenses and health expenditures that I have in retirement of which there tend to be some eventually.

So it becomes like a long term super turbo charged version of a Roth, except it was actually tax deductible going in and tax free coming out. I can only use it for the sleeve of medical expenses in retirement, but there's actually a lot of things that crop up that are medical expense or medically related in retirement.

And so it runs very nicely in parallel with other retirement accounts. If I'm only ever going to be able to save in one thing, if I'm of more financially limited means, HSA is not a good anchor point because you need dollars for all the other retirement expenses in addition to.

But if you've got multiple wealth buckets that you're building and eventually you're going to save more than the HSA limits and we're going to put money to multiple places, HSA has actually become the most tax efficient layer in this like foundational pyramid of what we're saving. This episode is brought to you by OpenPhone.

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Again, that's allthehacks.com/deleteme. And am I right that there's no length of time by which you have to report those expenses? So conceivably, you could be creating a Google Drive folder of all your major medical expenses your whole life, throw your receipts in. And then at retirement, if you don't have a lot of medical expenses, you could just reimburse yourself for the last 30 years of medical expenses.

I mean, your absolute worst case scenario is you can retrospectively go back and say, oh, I'm using my HSA to reimburse my medical expenses. Here's 30 years worth of receipts of all the medical expenses I've gotten. Therefore, they're tax qualified withdrawals and off I go. But in retirement, there is a lot of other stuff that tends to come up that I also have opportunities to use it for.

So just in practice, it's pretty hard to not find any medical expenses that are going to be eligible by the time I get to retirement. Yeah, I don't disagree. I just think if you get nervous putting all this money in an HSA thinking, what if I ever need it?

It's harder to get out. I would argue that anytime you spend, you don't have to do it every time you buy band-aids at the store, but maybe every time you spend over $100, just throw the receipt in a place. And that makes it much more accessible to get your money out.

And you don't have to wait until retirement to reimburse yourself for a medical expense. Correct. You don't have to wait. But if nominally like we're saving for retirement and we've got enough money to be saving for retirement on an ongoing basis, we're accumulating some wealth. We tend to have dollars left over in retirement that we're going to use for retirement once we're done with our working year.

So I mean, yes, you can draw it down if it crops up that you need to earlier, or we can just end out spending more on covering all of our medical expenses when we get there. I mean, Medicare premiums alone are not trivial. Like you're going to have a couple thousand dollars a year per person, particularly if you take current Medicare premiums and inflate them by 20 or 30 years of medical cost inflation of whatever Medicare is.

By the time you get there, you can cover long-term care expenses. There's a lot that crops up. We can give a link in the show notes just for all the different ways that HSAs can get used in retirement that give you just, it's the deduction upfront and the tax-free at the ends that, again, I wouldn't have it as my only bucket for retirement because there's other clearly non-medical, non-health related expenses that crop up.

But for folks that are saving multiple buckets, this is a particularly tax-advantaged one, a uniquely tax-advantaged one, because it's the only one that really runs on a triple tax-free basis. Everything else is two out of three. Now you're only eligible with the right health plan. So let's assume you don't have that health plan right now.

We're not going to go down the path of how to pick health plans. So now let's move on to the other buckets. So then we start getting into core retirement accounts, right? For most of us, it tends to be two dimensions. I've got to go tax versus Roth, and I've got to go employer versus mine.

So employer provided versus my own is really a question of, if it's my own, I get full control. I can invest whatever I want under God's green earth that I can get an IRA custodian to hold and invest for me. If I'm using my employer's plan for at least most plans, I'm limited to their menu of options and what they provide.

If you like their menu and it's reasonable cost, that's great. Depending on the plan, not all of them are the best menu of options or the most reasonable cost. So for some of us, it's just a control autonomy thing and ability to invest flexibly in a low cost that tends to pull us to individual retirement accounts.

We see people more often go after employer plans, either A, just I want to capture my match and free money is a beautiful thing. Beyond that, I might be going after the employer side because they've got things like loan provisions that I want to be able to take advantage of in the future.

And it's nice to have the choice available if that's a version of my emergency reserves. Not a high fan of it because often emergencies involve layoffs that mean you can't keep the loan. But sometimes we'll see clients that pursue employer plans because of loan provisions. Sometimes we'll see them pursue employer plans because we're doing things like mega backdoor Roth contributions as a way to route the money through the employer plan to do additional Roths.

But most folks we find, the primary reason they end up going employer is simply because they contribute to their individual account and max out the accounts and want to keep contributing. And so we go individual retirement account limits first, and then we stack salary deferral contributions to employers on top because we're just trying to keep stacking up the bucket.

So depending on how much disposable dollars I've got, like first I'm HSA, then I've got my match, then I've got my individual retirement account, then I've got my employer salary to contributions. And I just keep stacking on layers of tax preference buckets as far as I can. And so on the personal side, if you have an employer plan, you know, you're kind of both limited in types and by contribution limits.

My belief is that it's become accepted that the backdoor Roth is an appropriate method. I'm sure you've written a post about all the nuance of it. I mean, the core works fine. The only even slight debate out there now is just like, should you wait at all between the contribution and the conversion?

There's like a nerdy step transaction debate that's out there. But do you think you need to? Many people I know wait the next day. I still do. I still advise some level of waiting period. Now I'm a tax nerd and I'm a conservative tax nerd. Do I think there's some risk?

Yes. Do I think it's tiny? Yes. Do I still want to have to go through that with the client and defend them in front of the IRS? No. I'm not particularly looking to get my client's name as like the tax case that determinatively settled this for everybody about exactly where the IRS draws the line.

And this is why I look at the grand scheme of things, you know, if your money's going to be sitting your Roth for 40 years, if it's only there for 39 or 39 and a half, you are never going to notice in the grand scheme of things. If you do a Roth contribution, the IRS comes back and disqualifies it and applies excess contribution penalties, you are definitely going to notice it.

There's so many other ways that we can push the limits and take risk. It's just not a terribly compelling risk return trade-off scenario relative to a slightly modest waiting period. And then go get your multi-decade compounding high time horizon in a Roth account. That's going to be great in the long run, even if you didn't get the first couple months or years worth of growth.

When it comes to, you know, like a traditional pre-tax contribution and an after-tax Roth contribution, whether it's a 401k or another retirement account, how do you think people can make that decision? Well, I think about the Roth versus traditional decision very opportunistically. The math version of this is if your tax rates end up being higher now and lower in the future, it's better to do the traditional account.

If your tax rates are lower now and higher in the future, it's better to do Roth, which gets down to the remarkably simple rule. It turns out it's best to pay your taxes whenever the rate's going to be the lowest. And if you do all the fancy underlying math, that really is what you get to when you do present value, future value, adjustments, and the rest.

So if I think my rates are going to be worse in the future, I may as well do Roth, get my bill out of the way today at current tax rates. If I think I'm higher tax rates today and I'm going to be lower in the future, then I do a good old fashioned traditional account, take my tax deduction up front at my obnoxiously high tax rates, and then take the money out and pay Uncle Sam his share later when he gets a smaller percentage because my tax rates have gone down.

The further out you are at either extreme, literally like the more tax arbitrage is on the table, the more difference potential there is between where your tax brackets are now and where they may be in the future. A lot of the time we talk to folks, right? Like I'm kind of in the middle.

I make a good six figure income, which means a married couple. I'm in the 22 or 24% bracket, roughly rounding almost anybody between one and 400,000 of income as a married couple is in the 22 or 24% bracket. It's like, I make pretty good money. I don't think it's really going to be lower bracket than this in the future.

I don't know that I'm going to climb to higher brackets in the future. So I'm not really sure where it's going to go. And the answer is if you really end out roughly where you are now, it won't matter. They're the same. You can't really get it wrong is the good news.

The other thing that we find that a lot of folks miss is particularly the traditional bucket. It's not static. Like we can flip it to Roth at some point in the future. So we have a lot of clients that are peak earnings years saying, you know, I hate how much I pay in taxes to Uncle Sam, please do something about this.

Like I want to put money into a Roth so I never have to pay taxes on this growth again. And we point out to them, like, you'd probably be much better off to put the money into a good old fashioned traditional IRA or 401k. Take your maximum deduction, stick it to Uncle Sam at the absolute maximum tax rate.

And when you retire and your tax breaks come down a little bit, then let's do giant multi-hundred thousand dollar Roth conversions. So we'll get the money in Roth. It'll be in Roth by the time you're finishing retirement and leaving money to your kids if that's what you want to do.

But I don't have to make the Roth bucket in my very expensive peak earnings years. I can make the Roth bucket after my income dials down. And I get that kind of what often is a valley after my wages stop before Social Security and required minimum distributions and like begin.

So the fact that we get even more of a flexible toggle switch creates additional opportunities to say, let's be opportunistic around this and really make sure we're loading up on Roth when income years are low and really loading up on traditional when income years are high. And because our income goes through fluctuations and life happens, that can change from year to year.

Like this year, I did a big IRA contribution because I had a big income year. And then next year I get laid off. Bad things happen. And I do a giant Roth conversion of the money I contributed last year because now my tax bracket's nothing while I'm between jobs.

Now that Roth conversion income will count towards your income for your tax bracket, right? So if you have no income for a year, you can't just convert the entire thing. Oh, correct. I mean, I'm going to create income and fill my brackets. But if I got no other income this year, at least I'm starting at zero.

So great. Now I can do a Roth conversion of almost $400,000 and stay in a part of the money in each bracket. So like some 10% money, some 12% money, some 22, some 24 as I blend through the tax brackets. But I can stop before I get to the 30 plus percent brackets that hurt a little bit more.

Or for our clients who are mere average Americans and not very high income earning folks, that might simply be, I'm going to convert up to $100,000 and stay in the 12% bracket. Because if I do that diligently over multiple years, like I could create a million dollar Roth and never pay more than 10 or 12% in taxes.

All I have to do is not contribute all at once and not convert all at once. I do it in small pieces opportunistically over time. This episode is brought to you by Gelt. When it comes to building wealth, taxes are such a big part of the strategy. And as tax time gets closer, getting prepared now is so important.

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But if someone is listening to this and has put a lot of money in a pre-tax account and is taking 18 months off for sabbatical, for a mini retirement, they should absolutely in that window be thinking about conversions. We've got these seven tax brackets. The more income you earn, the more money that spills over to the higher tax bracket.

So most of us are pretty clear when you're in high tax brackets, avoid, avoid, avoid, defer, defer, defer. No one wants to pay more dollars in high brackets than they have to. The part that often gets missed, though, is that because when you have too much income, it automatically spills over to the next higher brackets.

Low income brackets are basically use it or lose it buckets. The number one problem that we deal with with retirees are folks that come in in their seventies with giant retirement accounts saying, I'm getting killed on RMDs. Is there anything you can do? I'm like, yes. Not now. Now it's too late.

But like for the past 10 years, when you were so excited that you were sticking it to Uncle Sam paying 0% in taxes through your sixties, you wasted a decade of low tax brackets that we could have been doing six figure Roth conversions every year for a minuscule fraction of the tax bill that you are now facing because all your money is hyper concentrated into an IRA.

Now that doesn't mean it would have been better for you to contribute to a Roth when you were a doctor in your peak surgery years, then you would have paid 30 something percent and it would have been even worse. But if I've got low income years, if I don't do the conversion and use up that low bucket in that year, I can't get it back.

I just get a bigger balance in the future and have more money crammed in the tax brackets in the future, which starts to overflow to higher tax brackets. So yes, whether it's the years after retirements, before things like social security and required minimum distributions begin, or it's a time window of laid off job, not doing well business that is not doing well and has no income or negative income sabbatical year, like low income years are a gift when you've been building up traditional IRA dollars, because those are the years that you opportunistically convert, not necessarily the whole thing, but enough to fill the low brackets.

And indirectly, this is why it's so helpful to contribute to the traditional accounts when you're in your peak income years, because I'm getting my tax deduction at the top rates. And then I'm opportunistically doing my Roth conversions at much lower rates. Now you said traditional IRA, but you could have easily had money in a traditional 401k from a previous employer or some other traditional retirement account, roll it out into an IRA and convert it.

Roll it out in plan conversion if the plan allows, often if we're in sabbatical or between income years, we separated from the employer. So it's easier to just roll it to an IRA. But yes, converting by whatever means any pre-tax IRA or retirement account bucket I've got. So I can do an IRA, I can do it 401k, I can move it from the 401k to the IRA and do it there.

And for people who have multiple previous employers and have never really thought about the fact that they might have like six or seven 401ks stranded out there. Do you have any advice to those people on whether they should roll it into their current employer, roll it out into an IRA as one better or worse?

I mean, aside from just literally like the costs of the retirement plan, whatever the plan expenses are, the expenses of the funds that are in the plan versus what you can get your own individual IRA. There's not a dramatic difference between the two. Most folks I find ultimately just it's kind of a pain to keep going back to the old employer that you don't still work with.

And so either you're going to keep rolling money to each new employer as you go with this increasingly large snowball effect, just like the money builds up from each plan with savings, then you get to the next one, or you just make your own IRA under your own control, pick the investments where you can fully control the choices and the expenses and just make that your repository that any and all retirement accounts that you accumulate from employers now and in the future, just when you transition, you're going to roll it there.

So as advisors, we tend to kind of bias towards control and flexibility. The only counter to that I've heard is if you're thinking about doing recurring every year backdoor Roth contributions and you roll all your old 401 s into a traditional IRA, I would say it can get messy, either really understand it or work with someone or skip it.

Yes. Yes. There is a thing out there called the IRA aggregation rule that says if you've got multiple IRA accounts, when you do Roth conversions, including for a backdoor Roth, you can't just convert the one account to a Roth. You're technically converting a pro-rata portion of all of your accounts, which means you put a couple thousand dollars after tax into an account, immediately convert it.

And Uncle Sam comes back and says, well, you didn't convert that account. You converted 1% of all your IRAs. And since 99% of your IRAs were pre-tax, 99% of your conversion is taxable and you just ate a tax bill on your Roth conversion that you may not have meant to.

So yes, if you're doing systematic backdoors, you need to be careful about IRA roll-ins, but there are still workarounds to it. Okay. I want to make sure we get to a few topics before we have to wrap. So one is about any other ways to access your money before the date in which you stop having penalties.

And so one thing that our conversation about Roth conversions brought up was, well, let's say I have $300,000 that I've strategically converted to a Roth IRA. How does that work in terms of my ability to access the principal, which had I done that with a traditional 401k, you know, I'd be facing penalties and fees.

Are these Roth conversions effectively a way to access my retirement funds early? They do end out that way. So under the original framing for retirement accounts, 59 and a half was never supposed to be a mandatory retirement age. You can't use your money before 59 and a half. That wasn't actually the intent per se.

It wasn't to force you to work until 59 and a half. It was to make sure that you use the money quote long-term for retirement because they're supposed to be retirement accounts, IRAs and 401ks. And so from the very start, there was always an intention to say, but if someone actually retires early, they should be able to get their retirement money early.

Like we don't want to penalize early retirement. We just don't want people to use the money as their own liquid piggy bank when it's supposed to be long-term money. And we're giving a tax preference to it to be long-term retirement money. So the question that cropped up originally in Congress was, how do you figure out whether someone is using their retirement account as like a liquid flexible piggy bank and how you figure out when someone is just like legitimately early retired and needs to live off of the money?

When you get kind of literal and thinking about like, well, what's the difference between the two? The difference is people that are just using as a liquid account, like they take some money, money, or they don't take any of the next year. They take like a big draw withdrawal and need to fix the roof.

They take nothing in the next year because the appliances held up. Like the dollars are really uneven in amount and timing. Contrast that with what does it look like if you retire early and you have this retirement account and it's the primary or sole source of your retirement income?

You get a check every month. I got bills to pay every month. So I'm taking money out every month and my bills are at least usually relatively stable. For most of us, we've got some standard of living. So I tend to take out money on a regular basis that's pretty similar in amount or what one might call substantially equal periodic payments, which is literally where the provision in the tax code came from and the name came from.

So what Congress wrote in was a provision that said, if you are taking money out of your retirement account prior to age 59 and a half, and your distributions are following a substantially equal periodic payments flow, we will not penalize them as early withdrawals. You can have your money early.

It's still taxable. It is still a pre-tax IRA. So this is for pre-tax accounts. It is still taxable, but no early withdrawal penalty attached. Now, over the years, there was some back and forth because as always happens, the creative people then come up with crazy, screwy ways to try to abuse this.

Like I'm going to take substantially equal periodic payments for like, I need a roof repair. If I take out 20 grand, I get in trouble. So I got it. I'm going to take out two grand a month for 10 months, and then I'm going to stop after 10 months.

So it kind of looks like substantially equal periodic payments, but they don't actually continue. So the rule then that got added says, well, okay, if you want to do 72T distributions, if you want to do substantially equal periodic payments, once you start the payment stream, it must continue until the later of either age 59 and a half or five years from when the distribution started.

So if I start young, it's until 59 and a half. Like if I start at age 57, I got to go to age 62. And if I don't continue the series of payments, if I stop them or modify them in any way, then Congress comes in with the nasty gram and says, okay, you violated your substantially equal periodic payments, which means your distributions aren't eligible for the early withdrawal penalty.

And we're actually going to retroactively apply early withdrawal penalties to all your prior substantial equal periodic payments that apparently weren't actually early retirement assets. And we're going to apply late interest penalties for the fact that you didn't pay the penalty in the original year because you're paying it now.

All of which means once you turn on the 72T spigot, you really don't stop. It is very harshly penalized if you try to stop it. So then people came in and said, well, like, oh, okay, no problem. You know, I actually have some other assets, but I really wanted to draw my retirement account down more quickly.

So I'm just going to take like 20% a year for five years. It'll continue for five years. And I'll just like drill my account down from 56 until 61 because I've got other resources. So then we got more guidance from the IRS that said, no, no, no, like that's still not within the intent and purpose of these rules.

In order to figure out what a reasonable payment is, there's a series of formula options that they give you. One is basically, what would I get if I just took my account balance and divided by my life expectancy? IRS gives you the tables so you don't gain the life expectancy tables.

There's another version that says, what would I draw out if I bought the equivalent of a commercial rate annuity with this money? That's sort of my payments for life adjusted for mortality risk. And there's a third version that says, what would I just get if I amortize my current value plus future growth over my life expectancy?

So it's three different formulas. The IRS doesn't really care which one you use. They just say like, once you pick one, you're expected to stick with one. What it effectively amounts to is you can use your IRA early for retirement distributions. But once you turn on the spigot, you have to keep it.

And once you pick the method, you're generally limited to stick with the method. You can do a one time change from annuitization and amortization to life expectancy method if you've got a problem, but for where you're drawing down the account, you're at risk of depleting it. But if you really need the money early for retirement and this is how you're affording your retirement lifestyle, the dollars are available.

And the dollars are available enough that in practice, we usually are doing Roth conversion ladders to free it up where we're doing Roth conversions at high tax rates. We're simply doing 72T distributions because we can get the money anyways. And now we're getting the money when you actually early retired, which means your rates are generally lower and it's much more tax advantageous.

Yeah, you're not waiting the five years. You're not waiting the five years and you're almost by definition like you're taking the money out after your wages went away. It sounds like for most people, they're probably going to end up at retirement age with some of their retirement assets still in their account.

And so for people who are either almost there, there, or maybe who are trying to help their parents figure it out. Yeah. How do you think about taking those distributions? When to take them? Which buckets to take them out of? So in the retirement research, we call this the account sequencing problem, right?

I've got multiple different types of accounts. Most of us, even if we're just sort of opportunistically doing the things over time, we end up with basically three different buckets. Like I've got my taxable dollars, bank accounts, brokerage, et cetera. I've got my tax deferred bucket, pre-tax IRAs and 401Ks.

And I've got my tax free bucket, which is my Roth and maybe my HSA for retirement if I held onto it this long. So there's a couple of ways I can sequence this. The first says growth at capital gains rates is better than growth at ordinary income rates. So I'm going to spend my IRA dollars down first and I'm going to let my investment brokerage accounts grow, right?

I'd rather grow the things that get capital gains rates than the stuff that gets ordinary income out of my IRA. There's a second version of this that says, no, no, let's flip it around. We're going to spend the brokerage accounts down first because we can actually do it fairly tax efficiently.

It's only capital gains and a lot of it is basis. And we're going to let the IRA run because tax deferred compounding growth is an amazing thing when it gets to compound for multiple years. If you've got a 20, 30 plus year retirement time horizon, draw the brokerage account down first and let the tax deferred run.

Generally works better than the other way around. The caveat is if you've built some pretty significant wealth, it works too well. You spend down the brokerage account, the pre-tax account continues to grow on a wonderfully, beautifully tax deferred basis, except it grows so large that it starts pushing you into higher tax brackets because there's just so much darn money in a pre-tax status that either 100% of your distributions become ordinary income because now you have to do all your spending from your retirement account, or you hit required minimum distribution age in your seventies.

And now it starts forcing out money that if you grew a large IRA becomes a very large number and you get vaulted into higher tax brackets. So you can partially ameliorate that by say, well, what if we do a blend strategy? Like I'm going to take half my retirement distributions from my brokerage account, and I'm going to take the other half from my pre-tax IRA.

So I'm going to spend my IRA down enough that it doesn't grow huge and knock my tax rates up higher in the future, but I'm only going to take a partial amount today because I don't want to knock my tax rates higher today by taking up more from my IRA than I need to.

And as it turns out, blended strategies do better than either of the first two, taking some from each works better than all IRA and brokerage later. And it works better than all brokerage IRA later because now I'm not hitting high tax rates now or high tax rates in the future.

I'm essentially levelizing my taxes in retirement, which lets me average out at a lower rate. The core principle to this is the way we optimize drawdown in retirement is by trying to bring down the average tax rate that we play throughout retirement. And the way we do that is by making sure we don't bunch the income up too much at the beginning or bunch the income too much up at the end.

We try to smooth out when the income is occurring so that we can keep it in lower tax brackets each year and always fill whatever that low tax bracket bucket is each year. If we dribble dollars out at lower tax rates over time, we can constrain the growth enough that we don't climb into higher tax rates in the future either.

And we just get lower average tax rates for life. And that turns out to save dollars and increase wealth. Does this change at all? If you realize I'm going to have too much money, I'm not going to spend it all. I'm going to leave some to my children or other heirs or charity.

Should you do something differently? Yes, potentially. You have a couple of different scenarios there that actually pop up different outcomes. So it depends a little bit on which ones you're going after. In the context of charity, the most notable thing for those who are thinking about charity is that, so we get a tax deduction when we donate to charity.

If we die with the money and leave it to the charity, there's an estate deduction if you are subject to federal estate taxes. When the charity gets the money, it doesn't owe any income taxes. It's a tax free entity, which means practically speaking, IRAs are awesome things to leave to a charity.

You don't pay the taxes while you're alive because it's tax deferred and they don't pay the taxes when you die because they're tax free. Which also means I don't really need to wind down or Roth convert or do other things to make my IRA dollars pay taxes now on distributions or conversions to make them tax free later.

If I'm going to earmark it to the charity, it's going to be tax free for the charity no matter what. So I don't really need to push on reduce my IRA strategies beyond maybe making sure I'm not getting crushed by required minimum distributions in my 70s and 80s. If the account's really compounding a lot, we tend to earmark IRAs to charity first.

It's super tax efficient. Even if I'm just putting some money to charity and the rest of the money to my family, earmark the IRA to the charity, earmark the other stuff to the family and you end up with much more net tax wealth to everyone. The charity finishes more, your family finishes with more and Uncle Sam finishes with less when you put the three pie slices together.

If you're leaving the dollars to family, the situation looks a little bit different because now the whole discussion of, well, what's a better deal? Like my tax rates now when I might Roth convert or my tax rates in the future when I might take the money out of the pre-tax account.

It's not my rates now versus my rates in the future. It's my rates now versus my kids' rates or whoever my heirs, whoever my inheritors are, which means now it really depends on what's going on in the family situation. Sometimes we get scenarios, mom and dad invested heavily into their children's future.

Johnny and Sally are a lawyer and a doctor doing incredibly well for themselves. Mom and dad only ever accumulated a fairly modest lifestyle for themselves because they put so much in their kids. And so mom and dad are going to leave a couple hundred thousand dollars to the kids and the kids make a couple hundred thousand dollars a year.

In which case I really like mom and dad to do Roth conversions at their tax rates and leave the kids some tax-free Roths instead of pushing the money into their rates. Sometimes it's the other way around though. So mom and dad were the accumulators and wealth builders and gave their children a lot of financial room and flexibility.

And one of them has built a very high income year and the other two are artists who are dedicated to their craft but do not make a lot of taxable income. In which case, the best thing I can do is take my high dollar value parents' assets and leave good old fashioned boring traditional IRAs to these children because their average tax rate is going to be a whole lot lower than what mom and dads are going to be.

Maybe the one high income child is going to be equal to mom and dad, but the other two are going to be much better off to not Roth convert this. So either I can leave all of them traditional. If you really want to get into the sophisticated stuff, I can start doing partial Roth conversions so that I leave a Roth to the high income child and I leave pre-tax assets to the lower income children.

It's very tax efficient. It's really messy in practice because the accounts grow and move every year. And so suddenly your inheritances are not equal the way that you might have meant them to be equal amongst the children. So there's some nuances about doing that and monitoring that so you don't create family strife down the road.

But the kind of Roth versus traditional conversation now effectively becomes what's mom and dad's tax rates and what are the kids tax rates. And I still get to the same principle, which is I want to pay the bill with whoever's got the more favorable tax bracket. So if the kids are more favorable, let's give them a good old fashioned pre-tax IRA and 401k.

And if the kids are financially higher income than their parents, then I want to do as much Roth as I can. Now, not necessarily everything at once because then parents go into the top tax bracket and we have not helped the situation, but I might at least winnow down partial Roth conversions to set this up for higher income children.

And just in general, that also comes up even as part of the strategy when we're spending down our own dollars in retirement. I mean, as I highlighted earlier, the kind of the blended strategies work better than spend all the brokerage first and let the IRA run or spend all the IRA first and let the brokerage run.

The slightly more efficient version though is I don't take part of the money out of my brokerage account and part of the money out of my IRA because I'm still depleting a tax-preferenced account earlier than I needed to. The most optimal one is I take all the money out of my brokerage account, but I don't leave my income really low.

I do partial Roth conversions to fill my income during the low income years while I'm spending my brokerage account that usually has limited tax impact. There's a lot of basis there. The rest is mostly capital gains so I can fill up a lot of ordinary income very favorably. And so I might spend, depending on how many mixture of dollars, I might spend the first one, three, five, seven, 10 years spending down a brokerage account very tax efficiently and doing systematic partial Roth conversions from IRA to Roth so that by the time I get five to 10 years into retirement and I'm running low on brokerage account dollars, now I've got a big IRA and a big Roth that I made a very favorable tax rates because I converted them not while I was working but during the low income years at the beginning of retirement.

And now in the second half of retirement, I can take a blended withdrawal from my IRA and my Roth and continue to stay in low tax brackets all the way through. Wouldn't that taxable brokerage account have gotten stepped up to the children if you left that to them? Yes, the brokerage account gets stepped up if I leave it to them.

But if I'm winding down the brokerage account so I can systematically create tax-free Roth assets, I'm generally doing better for them. It's tax-free anyways. And practically speaking, like, yes, my capital gains get a step up in basis, but there's two caveats to it. The first is most of us don't generate 100% of our return from capital gains.

We get those pesky things called dividends, which from an investment perspective can be very appealing. From a tax perspective means a portion of your growth is dividends that would have been totally tax-free in your Roth and you have to pay taxes to Uncle Sam every year when you own a brokerage account.

And although investment styles and circumstances vary, a lot of us don't actually literally hold the same thing for like 20, 30 years in retirement. At some point, investment circumstances change, investment vehicles change, right? 30 years ago, we barely had ETFs. Now we kind of use them a lot. I don't know what the hot investment vehicle of 2055 is going to be.

So I struggle a little bit with sort of banking on the, well, I'm just going to hold this for 30 years and wait for step up in basis. Because I'm like, are you really sure you're not going to want to like change that once in 30 years? I mean, heck, if it grows well, you're going to have a rebalancing problem and you're going to have to rebalance out of it, which is going to start triggering some capital gains.

If it does badly, you're going to want to sell it, which is going to trigger capital gains on whatever you've got left after the losses. So it's one thing if the retirees or the parents are older, are sadly just our time horizon is not as long. We're now like, okay, then I'm really focused on capital gains, step up in basis planning.

But for sort of like the generic retiree situation, right? 50 or 60 something year old couple in pretty good health, that's enjoying life and wants to live a long and vivacious retirement, even if I've got more wealth than I need, unless there's a really specialized scenario, like I've had this stock I inherited from grandpa, I'm going to hold it for another 50 years for my children.

And we're just, this is like sacred family assets and we never sell them. I just, I get a little bit wary about banking on step up in basis for ultra long-term time periods. A because I still get tax drag from dividends, no matter what. And it's non-trivial over time.

And a lot of us don't really hold one thing for 20 or 30 years. A few of us do. If that's really you, you know, you and you be you. That makes sense. And for anyone who doesn't know, like the concept is that death, if you pass on something, the basis steps up.

So the child, if they sold it right after would not have to pay capital gains tax. But it only works on brokerage or regular taxable account assets. You don't get a step up on Roth. You don't get a step up on, well, Roth tax for anyways, but you don't get a step up on traditional IRAs, only brokerage account assets.

Okay. This has been great. I know we've gone right up to your limit. So if people want to go deeper on either these topics or maybe go deeper and actually get someone to help walk them through this process, because they were like, that's awesome. Whether it's me, the retiree or my parents, where do you want to send people in both those scenarios?

Oh, well, so look, I just, if you want to nerd on more of this, like kitsis.com is our site. Our primary audience is financial advisors. You'll get the over the shoulder look at what the financial advisors read. That's our primary business is doing training and education for financial advisors, but the content's online.

If you're looking on the advisor end, I wear a couple of different hats in the advisory world. Like I'm also head of planning strategy for a national wealth management firm called Focus Partners Wealth. So we do a lot of work with retirees who have reached the point where they're trying to figure out what to do with all the dollars and how to make the transition.

And just, we implement all the tax sensitive stuff we've been talking about here in practice with clients. This all comes from practice. I'm also a co-founder with, for an organization called XY Planning Network or XYPN for short, xyplanningnetwork.com. XYPN is a network of advisors that specifically are focused on working with folks in their thirties, forties and fifties, and primarily build around subscription fee models.

So like no asset requirements. Some of them do subscriptions in asset center management. Most of them do subscriptions only. So if you just want like pure advice from an advisor, advice only is kind of the hot term in the industry right now, xyplanningnetwork.com. And there's a find an advisor page there for just a whole network of advisors that do this, really focus on folks who are navigating all these financial and career decisions in their thirties, forties and fifties.

Focus Partners Wealth, mostly for folks who are already at the retirement stage. So many great resources. I've read so many blog posts that you've written. And so whenever I'm like, Ooh, 72T, how does this work? I'm going to your site. So we're going to link a lot of those in the show notes.

Thank you so much for breaking a lot of this down for everyone. I really appreciate it. Yeah, my pleasure. Thank you, Chris.