Welcome to Portfolio Rescue, where we're always happy to hear your comments and questions. Remember, our email here is AskTheCompoundShow@gmail.com. Today's Portfolio Rescue is sponsored by Innovator ETFs. This week's Wall Street Journal had a story about buffered ETFs, which anyone who's been watching this program knows about. So here's what they said.

"A popular set of exchange-traded funds that claim to guard against investors' losses up to a point by limiting potential gains. These buffer funds have attracted $6 billion of inflows this year, already doubling last year's record of $3 billion in inflows." John, throw the chart up here. Do a chart on of the assets here.

Just piling in. You can see people want some more defined outcomes. They also mention Innovator ETFs in here. They say, "The J.P. Morgan Hedged Equity Fund won, and the U.S. Equity Power Buffer ETF from Innovator Capital, two of the biggest funds in the space, are easily beating the market this year, down 6.3% and 5.7% respectively." John, do a chart on of the performance here, which kind of shows.

You can see both of these hedged funds beating the equity market this year. They said, "During the first half of the year, both of these funds were down about 11% compared to a 23% drop from the S&P, but then after the market bottomed and rose a little bit, they didn't quite catch up the same," so that's kind of the trade-off here, is that you get a little downside protection, but you don't always go up as much when we have these bear market rallies, at least that's what they seem.

Pretty interesting. Innovator tells me that they're closing in on $10 billion in asset center management, which is a relatively new firm still. Pretty interesting. They've brought in $3 billion this year alone, which is crazy. To learn more, remember InnovatorETFs.com. Duncan, a couple weeks ago, I mentioned that I didn't necessarily want the stock market to race back to all-time highs.

I said, "I don't like this rally very much, because I want people to be able to invest at lower prices." I wasn't making a prediction, per se, but maybe more of a request to the market gods. And it looks like I got my wish. I think sometimes an extended bear market is good.

So, we're on month eight now. It's September, the market peaked the very first day of the year. I think it's pretty safe to say we're on an extended bear market. John, let's do a chart on here. This is every S&P 500 correction since 2008, when one got over. So, you can see, this is the number of trading days that they've gone.

And the blue line you can see here is 2022. The only one that took longer to recover is 2011. So, I guess if we recover in the next couple weeks, we could still beat that one, potentially. But 2011 stocks were already going back up at this point. Right now, they're going down again.

We're in an extended bear market. You can see all these other corrections that we had in bear markets in the past had already made their money back up and gone back to all-time highs. You can see, even the 34% drop from 2020, at this point, at this length of time, had already gone down that 34% and made money back to all-time highs.

So, this is an extended bear market. On last week's Animal Spirits, Duncan, I know a lot of people don't go in the YouTube comments. I put my hazmat suit on and I go into the comments, because I'm a man of the people. Right? I'm not one of these coastal elitists that won't check the comments.

I look at them. And someone said, "You guys are way too bearish lately." Now, this is the first time in my life I've ever been called bearish. I've been labeled a permable before, but never bearish. And I think what we're doing is, we're just kind of reporting what's going on around us.

Because the Fed has said, in the last two weeks, they're openly rooting for the stock market to go down. Interest rates are rising. Inflation's at 9%. There's plenty to be negative about right now. My whole thesis on life, though, is that we get through stuff, and this, too, shall pass.

And I wouldn't even consider myself being bearish, I'm just trying to be realistic. But I think my whole thing on this is, it's okay to be bearish. It's not okay to stay bearish. That's the problem for too many people, is they get bogged down in the negativity and negative headlines, and it seems like there's a lot of negativity these days.

I think the problem is when you get stuck in that mindset and don't realize that we'll get past this. We always do. But I think the longer-term bear market, it's good if you're saving money. Just keep putting money in. I mean, you're pointing out negatives in the market, and the market has a bunch of hurdles to face.

It's not like you're shorting the S&P or anything. No. I'm still following my rules. I'm still following my plan. Same thing. Just kind of trying to point out what's going on. Right. Okay? This is probably the only time I've ever called bearish in my life, so I'm just going to take it.

Maybe I'm going to read Zero Hedge today at lunch. I don't know. We'll see. First time in a while. Let's read the first question. Maybe we have you do the next show wearing a bear suit. All right. First question. Okay. Up next, or up first today, we have a question from Will.

This is a long one, but a good one. What do we need to think about in downgrading to one income? My wife and I welcomed a pandemic baby, which I didn't know that's what people were calling them, but I guess that's the thing. Makes sense. We welcomed a pandemic baby almost a year ago.

I work at home and have some childcare help from grandparents, but we are thinking of having me go part-time or less in order to care for the kid. Work from home with an energetic one-year-old is way different than work from home with a baby that spends half the day napping.

We also hope to be blessed with one more kid before we hit 40. I worry that these are my prime earning years, but watching our child grow up is priceless and childcare is fairly expensive in our area. I can also support my wife's career, which she finds meaningful. My career is in spreadsheets, and while it doesn't make me want to throw myself off the roof, it's not particularly exciting either.

We also started having kids late, age 37, so we are fortunate to have a nest egg, $150,000 income, $40,000 to $50,000 of spending a year, 2.5% mortgage. Look at that. That's pretty nice. That's $50,000 for retirement and a six-month emergency fund. I had dreams of retiring early and this would slow it down.

What are your thoughts? My wife and I went through a similar decision-making process during the pandemic. When we had our twins in 2017, that's when she decided to go part-time because we already had another child, so twins was a lot on our plate. She'd always kind of thought about retiring to take care of the kids from her job, and the pandemic kind of forced her hand because it was so difficult going on and off and on and off with school and all this stuff.

So she quit about nine months into the pandemic. This person's at a different stage in life than we were, but I understand where they're coming from. We've talked about the high cost of childcare on the show before. This is actually the first year all three of my kids are in public school.

My birthday was a couple weeks ago, or last week, I guess, and two weeks ago, and someone had said, "Happy birthday," and they said, "Are you celebrating?" I said, "No, I'm celebrating the fact that my kids are not on daycare, I'm not paying anymore." That was more important to me than my birthday.

I've got to have priorities here. Assuming the grandparents can't stay full-time with childcare, your decision basically boils down to, are we a one-income family or daycare, right? And you said it's fairly expensive where you are, so it's pretty easy to do the cost-benefit there, right? And for a lot of people, childcare can be almost as expensive as one parent's income, depending on how much you make.

And you told us, again, it's expensive where you live, so I mean, this could obviously tack on a few years to your early retirement, but I don't know, are you really going to regret spending more time with your child if you do this? I don't think so. I don't think my wife regrets it.

Here's a few things to consider that we went through in this process. Number one is benefits, right? My wife had really good benefits at her former employer. She had a really solid 403(b) match, and we had to give that up, and so that's kind of tough. So you have to think through what are your benefits, what that change is going to be like if you leave your job.

Do you think you'll be able to get another full-time job when kids go full-time or maybe part-time? Do you want to go back to the working world maybe when the kids go back to school? That's something to consider. Do you even want to go back to work, or is this going to be a full-time thing?

Have you tried living on your wife's income and being a one-income family for a couple months? Try that for a few months. See if it works, and just bank your money for now as savings, because you're going to have to do it someday, right? Might as well start now.

And then the other thing is, psychologically, are you okay giving up on the working world? Because you're going to be asked some insensitive questions, right? You know, "Oh, you decided to stop working and your wife's working." It shouldn't be that way, but it is that way. And for any parent who does this, my wife gets asked all the time, "Well, what are you going to do when the kids go back to school?" And her answer is, "I'll do whatever I want, whatever I need to do to get done," right?

And so I think there's a lot of insensitive and sometimes inappropriate questions people get asked on this, but my answer to that is screw them. You do what works for you, what works for your family. Don't worry about what other people think and if other people are going to judge you.

I think it helps that you already have your finances in order. You obviously have a high savings rate. If you're spending $40,000 to $50,000 a year and you have $150,000 income, you're doing pretty good in terms of your spending-to-income ratio. So it sounds like you're as ready as anyone to pull this off if you can, if you want to, but those are just some things to consider.

Yeah, no, I mean, I think you hit the nail on the head there. It sounds like they've thought it through really well and they're just kind of wanting some encouragement to do what they want to do. But yeah, like you're saying, this is bigger than just the... This is bigger than the financial side of things.

Yeah, if you have the financial stuff taken care of, it's probably the emotional and psychological impact is bigger than anything, but I don't think this is something that you're going to regret in the years ahead. So if you have to rip the bandaid off, do it, but I just make sure you can live on one income for a while and try it out and again, bank your money so you have some more savings.

Yeah. Let's do another one. Okay, up next we have a question from Martin. My wife and I just had a baby and we live in one of the nine states that offer a prepaid college plan. By making either a monthly contribution or a lump sum payment, we can walk in the current cost of in-state tuition, which is about $30,000 in Florida.

If our son chooses not to go to college, the money can be refunded. Do you have any thoughts on this type of investment? How do you expect the cost of college to inflate in comparison to potential compounding growth in a 529 or brokerage account over 18 years? This one's triggering me a little bit, right, because we know the direction college tuition seems to...

Yeah, John, throw the chart up here. This is the CPI of college tuition and fees versus the regular consumer price index. This is since the late 1970s. You can see college has basically doubled it up on an annual basis, like 6.5% almost, to roughly 3.5% for the CPI. You can see in the early 2000s it just took off like a rocket ship and went even higher.

I don't know. Can this growth continue? It can't go on like this forever, right? But I don't know. My dad said people said that 20 or 30 years ago, and it still did. There's a lot of financial problems like this that you're trying to plan for that don't have a perfect answer.

How much do I need to save for retirement? Well, I don't know, how much do you spend? What returns should I expect to earn in the market? Well, I don't know. Who knows going forward? What should I set as a baseline for inflation expectations? This past couple of years has told us that we don't know anything about that.

What will my future tax rates be? I don't know. What is the government going to do? What are the politicians going to do? So, this is another one where how much will college cost when my child reaches that age? It's impossible to know, right? And here's the other thing.

College probably isn't going to be as expensive as you think, depending on your situation. So, Ron Lieber wrote this book called "The Price You Pay for College." He had a few stats that kind of blew me away. The average first-year full-time student, this is in 2019 and 2020, got a discount of 52.6% off the list price.

So, we see these huge list prices in the sticker shock you get. Most people don't actually pay that. The average grant for public universities is more than $4,100 per student. 89% of students at private colleges get a needs-based or merit-based discount on tuition. And so, the people who end up paying full freight are mostly international students, very rich people, and then people who want to attend more selective schools.

So, the average price people pay for private colleges, including room and board, is like $24,000 a year. For in-state public universities, it's around $15,000 a year, a couple years old for these stats. So, it's not nearly as bad as you might think. So, I think a lot of this boils down to how much certainty do you want?

Like, how important is it to pay for your child's education? I know for some people, this is a huge priority. Other people say, "I'm going to do my oxygen mask first, and I'm going to save for retirement, and then the kids can figure it out either through working in college, or getting a scholarship, or going to a lower-paying college, or a community college, or whatever it is." It sounds to me like this is probably a priority for these people, so, I mean, I don't know.

One of the worries people say, "Well, what if online education is much bigger in the years ahead, and it's cheaper? And what if your child doesn't want to attend that public university in Florida? And what if the government actually does something about the cost of college?" So, a lot of this depends on how much do you want to plan?

Because no one knows what it's going to be in the future, but if you can lock it in now, and that certainty is more important to you than for your financial planning than anything, and you can get that refunded, if that's a priority, I don't see a problem with it if you're taking that uncertainty, if the uncertainty is a big problem.

Because I know a lot of people say, "Well, who knows what college is going to look like in 15, 20 years, or whatever it is? So I'm just going to roll the dice and see what happens." If you want to take that uncertainty off the table, I can see the appeal of that.

Well, I've never heard of this before, but I'm guessing it's not all or nothing, right? You can put whatever amount you want in towards the college, right? It's not like you have to pay the full tuition price right now, or do you know? I honestly don't know. We don't have this in Michigan, for sure, so that's a good question.

Yeah, I've never heard of this, so yeah, kind of a cool idea. Someone send us an email and let us know if they know us more on this. I honestly don't know. All right, let's do another one. Up next, we have, "Recently, my father passed away, leaving roughly $150,000 to me as an inheritance.

I'm trying to figure out if I should save or invest it. I'm 26 years old and served four years as an Army officer. I will be separating honorably soon, where I will go back to school and may need to access these funds. I also may need to use them to buy a future house or get married.

I'm afraid of investing the funds short-term, less than three years, due to market volatility. CDs and some bonds seem like low returns when interest rates are rising. Shouldn't I wait to purchase a CD if interest rates continue to rise? I did purchase IBONS with a 9.62% interest rate, but I still don't like the idea of the rest of my money sitting in a savings account yielding almost nothing.

Is sitting in cash the safest bet short-term? Sorry for your loss, and also, thank you for your service." Two weeks in a row of inheritance questions. Again, I said this was going to be coming, and we got another one this week. This is obviously a follower of Portfolio Rescue, because they're in the IBONS.

They listened to us there. As we know, there's a cap on there. The good news is, this person has their risk profile and time horizon figured out. They know this is short-term money. They don't want to take a huge risk. They want to earn a little bit of yield, but they don't want to risk.

And again, we talked about the emotional baggage behind this. Because this is an inheritance, it could have a little more to it behind it. So, this person sounds like they got the good first step. The bad news is, for a lot of investors, the Fed is raising interest rates, and they're trying to bring the stock market down.

But the good news is, for savers, those interest rates mean higher yields that you can earn. So, John, do a chart on the Treasury yield curve here. You can see, especially on the short end, interest rates have come up a lot. So, at the beginning of the year, we're talking a handful of basis points for 3 months Treasuries, which is basically the short-term T-bill rate.

It's like 3% now. It's gone up almost a full 3% on the year. A lot of short-term yields for Treasuries are now yielding more than long-term. And that is the biggest bang for your buck right now, because the Fed is raising rates, and long-term rates aren't going up as high.

So, the reason this matters is because short-term bonds have much less interest rate risk than long-term bonds. In the past, investors were being forced out on the risk curve. That's not the case anymore. Now it's the opposite. Rates are higher on short-term bonds than long-term bonds, and it's like you're being paid to take less risk.

This is a good thing if you're looking to save cash or cash equivalents, especially if you're looking for safety of principle. So, here's some simple options we've talked about before. SHY, ZI Shares, 1 to 3-year Treasury ETF. I looked today. The average yield to maturity is 3.5% on that fund.

That's higher than the rate you get on TLT, which is a 20-plus year bond market, which is down 20% or 30% right now from the highs. You could also look at muni bonds, like the iShares Short-Term Muni Bond Fund. I think it's SUB. That shows an average yield to maturity of 2.4%.

So, depending on your tax rate, we could do a tax equivalent yield where we back it out if this is in a taxable account. We're talking probably 3% to 3.5% on a tax equivalent yield, depending on your tax rate. Marcus, the one that I use for an online savings account, now yields 1.7%.

I think Ally, I looked today, was more like 1.85%. Capital One 360 is 1.75%. I think those will go up as the Fed continues to raise rates, assuming they do. So, savers can finally earn some yield on their cash. You can't exactly move to the beach and live off the interest on this anymore, but at least it's something, compared to the past, where you're basically getting nothing.

So, you're right, you don't want to put it in a brick-and-mortar bank, where you're still probably earning 10 to 20 basis points, which should, frankly, be criminal, if I'm being honest. The fact that the banks still don't pay anything. They're earning 6% on mortgage rates, and they're paying out 10 basis points on their savings accounts.

Share the wealth. Seriously. I mean, you do still have to deal with a high inflation rate, but compared to the 0% you're earning years ago, I'd say don't accept anything below 2.5% to 3%, if we're talking short-term bonds. And again, you could match up the duration of the bonds now with your actual maturity of when you want to spend this money.

So, like I said, there's a one-to-three year treasury. You can kind of match it up. So, anything below 2.5% or 3% today probably doesn't make sense if you're looking for a short-term something or a CD. My question for another day is, with stocks and bonds both down double digits in the last year, will more investors now start allocating to cash or short-term bonds?

I think that'll be interesting to see. That's a question for another day. But there's another element here. This person is leaving the military. And so, why don't we bring in our favorite former armed service member, Bill Sweet? Because there has to be something else going on here. Bill, any other special considerations for someone who's leaving the military in terms of their finance?

Because I have to imagine there's a lot of stuff that I don't even know about. So, what do we got here? Yeah. A lot of great, great things that could potentially help. I want to start, though, saying I was decked out for this show, pre-show. And Duncan made me change my shirt.

He told me I can't wear white before or after Labor Day anymore. I don't want to get canceled. So I changed. You had like three days. You could have still stayed in white. I know. And again, Ben, I know you claim to be a man of the people, but maybe you've got something going on there with Duncan.

Duncan runs a tight ship here. I mean, just don't mess with him when he gets in your wardrobe. I know. Duncan, I'm not going to call you what Michael said yesterday. Oh, my God. Yeah. I'm not going to do that. But I'm also happy. So, yeah. So, thank you very much for your service.

Do we have a name for this listener? I didn't catch it. Actually, it got lost in the copy and paste. Yeah. Sorry. So, but thank you very much. And again, my brother, for taking on arms, especially the last couple of years. I think it's been a very difficult time.

But no, I think the number one thing that popped in my mind was post-9/11 GI Bill benefits. And Ben, I don't need to get too much into details, but I did about six years active duty. And I'm qualified for like 40% of tuition to a public university, and they can subsidize some things.

The really neat thing about the GI Bill is that you also qualify during your school time for BAH, Basic Allowance for Housing, which is this tax-free benefit for military personnel. It's a very powerful thing. So I definitely look there, but I do want to give the listener credit. They're prepared.

They're thinking about all the right questions. Ben, I love your answer. If you're getting 5% for corporates and taking corporate risk and about 3% for munis, it's really hard to argue there. And I would say for any taxpayer, if we're going back to school, I'm guessing there's not going to be a lot of income in that year.

Standard deduction this year is almost $13,000, right? And so if you're putting that 150K and you're earning 3%, that's about $4,500 a year. And in theory, if your income is low enough, that comes all tax-free, right? Treasuries are completely state tax-free. The only other thing I would mention is about IBONs.

I know that you guys did this in the past, but one of the things that's interesting about them, the limit is $10,000 per person per year, right? We're about four months today from the end of the year when you can refund that with another 10,000. If you happen to be married, you can have one for your spouse.

You can have a spousal account. If you have two kids, you can have a child's account too. And the really interesting thing is for LLCs, trust, basically anything with their own EIN, you can also fund up to $10,000 for IBONs. So there's a bit of cost-benefit analysis. Is it going to cost more to put up an LLC just to invest in IBONs?

But there's nothing that we can tell that would prohibit you from doing so. Obviously, consult with your legal and tax advisors. But Ben, I think you pointed them in the right direction. One other thing I want to add here that I can't believe you didn't do because it's a layup.

So they have 150 grand. I think they're not going to spend it all. I think you take, what is it? What's the max limit for IRA? 6,500? 7,000? No, 6,000 this year. So take 6,000 of that and max out your Roth IRA, right? Yeah, 100%. Yeah. Because if you realize later you need all that money for the wedding, you can still take your contribution out.

So I think you should probably, especially as a young person, max out that IRA for a year and at least get that out of the way and help yourself there get that started on the right foot. Yeah, I think you're right. And the other nice thing, so Roth IRAs didn't pop into my mind, Ben, because that's more of a long-term vehicle, right?

There's no qualified distributions until age 60. But if you get a little bit over your skis, A, out of the total inheritance, that's a small amount, right? That's less than 5%. It's about 5%. And then you can take non-qualified Roth distributions, get your basis back tax-free. So if you get over your skis, you find the perfect house, you can take that distribution early from a Roth.

So I think that's a great answer, Ben. Yep. All right. Duncan, one more. OK. Up next, we have a question from Dave. My mom is retired and receiving about $1,100 a month from Social Security. She has about $50,000 saved and is interested in investing the money. Unfortunately, she doesn't have an IRA, and I read that she can't open a Roth as a retiree without any earned income.

I was looking at opening a brokerage account for her, but I have some questions. Will the investment income from this account be tax, dividend, and equity growth? I read that if her Social Security benefits plus additional income don't exceed $25,000, she doesn't have to pay taxes. Any advice would be greatly appreciated.

All right, Bill, this is your time to shine. This can happen. You mentioned that standard deduction. It was someone who has a low income and not a lot of assets. She could potentially pay zero taxes in retirement. Is this true? It is true. It is true. And I think that they brought Social Security to the top of the question.

I think that's a smart place to start. And the listener is correct-- Dave is correct-- that if your income is below a certain threshold, I believe, for individuals around $30,000, $40,000, your Social Security benefit is 100% tax-free. And so that ends up being a pretty powerful thing. Average Social Security benefit in the US is about $1,200, $1,300.

And so ultimately, if you can get $12,000, $13,000 tax-free, and then stack other income on top of that to take advantage of that standard deduction, which is actually higher for seniors, it's about $15,000, $16,000, you stack those benefits up, and ultimately, mom's in a great position for that. So even if we're talking 5% to 8% on that $50,000, and she's getting that back in capital gains when she sells, or in interest income or dividends, probably with that standard deduction, still not going to be paying any taxes in retirement, right?

Yeah. I would think so. And the listener's specific question is, what should I do with mom's assets, right, because I don't want to mess up this really perfect tax picture. I think where they're going is the right thing to do. You probably don't want to generate a ton of current income.

And so I think some sort of-- I mean, the IBON is perfect for this, because ultimately, all that interest compounds until the year of distribution. So therefore, you have a little bit of control over when that income gets realized. But I think the absence of that, which is just-- it's this perfect sweet spot of Treasury-protected high interest income, I think some sort of brokerage account where you can control when the income gets realized makes a lot of sense for this listener.

And for $50,000, that $10,000 limit is going to be 20% of the account, right? Correct. So it's actually a meaningful amount here. Correct. Yeah. And going back to the prior question, that popped in my head too. Like, so let's say the individual's going to school. They don't have any earned income.

You cannot fund a Roth IRA. You cannot fund a retirement account if you don't have earned income in the present. So I think the suite of options is kind of limited for this question, listener. I would, again, point to IBONs. I think that's a great place to start. And then after that, look at a brokerage account.

This could be just the government does weird things. Here's something I don't understand. So we pay into Social Security taxes. Why is it taxed when we get it back? Why do they tax it again? Yeah. Logic and reason need not apply when it comes to federal benefits. Don't ask these questions, Ben.

Come on. I'm just a simple man here. Yeah. I think the concern is that if you're below a certain income-- so it's this means-tested thing, right? The federal government in the last three years, I believe, has spent somewhere in the neighborhood of $3 or $4 trillion more than it's taken in.

So that's part of the answer. I think the other part of the answer is, like, why not police? Why not firemen? Why not folks that work for the government? Why is their income taxed? It's all part of the same system. And I think the general answer is you probably don't want to create a lot of privileged classes within society, right?

I think that's probably the right answer. And ultimately, it is tax-free if you're below a certain income. I don't really philosophically have a problem with the means test on tax. It doesn't hurt me. Progressive taxes are a pretty good thing for society, I think. Bill Sweet, a man of the people.

All right. Duncan, another question. Also, Bill just said the name of what his podcast would be if he was doing options trading. I think you said the suite of options. Suite of options? I like that. Would that be good? I bet. Yeah. Not my thing. I'm a low-cost index fund.com guy.

OK. But God bless you, day traders. Yeah. I think we have some watching, usually. So yeah. Love it. Shout out day traders. Great work. Yeah. All right. Great to be back. I was listening to your episode on real estate being an inflation hedge, and I heard Bill Sweet talk about the tax advantages of doing a 401(k) rollover into a Roth account during a market downturn.

If I were to do a rollover with my self-directed 401(k) and I currently have unrealized capital losses, how would those losses be treated on my taxes? Could I use that loss to offset any capital gains I might have from other investments? If so, would offsetting be treated differently for short-term or long-term capital gains?

All right. Bill, the people are listening here. They want that succulent tax-free withdrawal from a Roth. Now I assume people who have just started making contributions in the last couple of years, those are the people who are going to have some losses, and they're the ones who want to roll them over.

So how does this work? Because it's all-- you think it's segmented, but it's all one pool. So how does this work for offsets and other stuff here? Yeah. Very succulent. Again, this is a dangerous episode here. We're hitting some really uncharted territory when it comes to taxes. But Ben, we've got to back the truck up.

When we're talking about tax accounts, there's really two different types in the world, right? There's tax-qualified, and your Roths go in there, your 401(k)s, your traditional IRAs go in there. The theory there is any income, any distributions, any capital gains, anything that's going on in the account doesn't get taxed until you distribute the asset.

Meanwhile, you have a non-qualified account in your second bucket. Non-qualified is what we were talking about a second ago. You open a brokerage account. If you sell or gain at a loss, you have capital gains, you have losses. But the difference is everything happens in a current tax year versus before bucket one is deferral.

So again, bucket one, deferral, bucket two, taxable. I believe what Zach is asking about is 401(k), and a 401(k), there's no capital gain to be discussed there. More than likely, Zach took a tax deduction. He did not pay on any tax when he funded that 401(k), and so any distribution, including unit conversion, is going to be taxable based on the value of the conversion, not based on the gain in the account.

That's a very important distinction to keep in mind here. And then ultimately, what we get from that is tax-free growth in the Roth, right? So there's a trade-off. But the ability to-- Right, so the taxes are paid either way, whether those gains or losses. That's what I'm getting at.

Yeah. So I don't think capital losses in a 401(k) are a thing at all, because the benefit there, the benefit of using these tax-deferred vehicles, including Roths, is you're not paying tax when the income's received. Therefore, the capital gain is probably moot, and therefore, this question is not terribly relevant, unless we're talking about funding a Roth IRA from non-qualified assets, which I don't think was the question.

Right. So the point is, if you're going to do that rollover, you're just going to want to make sure you're having the ability to pay the taxes that you already deferred in the first place. That's it, 100%. And point of privilege, when you're doing this, if you are doing a conversion from a 401(k), from a traditional IRA to a Roth, you really want to make sure that you're paying the tax from outside the account.

Because ultimately, if you're paying tax, if you're doing a tax withholding on the conversion, that just means you're not converting the whole balance that you possibly can. Just do a smaller amount, right? So if you're thinking about, "Okay, $10,000 is what I can afford, I'm going to pay out $2,500 in taxes." Convert over $7,000, do the lower conversion, and then pay for that with non-qualified assets.

Do not tax withhold on a Roth conversion, if you can help it. Also, credit to Duncan here. He's paying attention. He asked, he said, "I think this person's thinking about it the wrong way when they're doing this rollover." Duncan spotted this one beforehand. He did. He smelled it. Yeah, I know.

We're proving Michael wrong. He's 50,000 miles away. Nice work, Duncan. All right. One more question. I took a practice. What is that intro exam that you have to do for finance, the S-I-E or something? I can't remember. I took a practice one recently. I got like a 50. Wow.

That's great. All right. Three years. Three years at the firm. Last week. Yeah, exactly. Congratulations. We're getting there. Okay. So last but not least, we have a question from Kendall. And this one is going to make a lot of us that live in very expensive places very jealous. "I'm 22 and live in rural Missouri, one of the cheapest places to live in the United States.

Not to brag, but my rent for a studio apartment is $300 a month. I max out my Roth IRA, which is my sole retirement account, and will fulfill my retirement goals. No 401(k) option at work. While it is great to think of all my retirement money that will be tax-free in 45 years, should I be setting aside part of my IRA contributions into a traditional IRA?

My thought behind that question is if I have no taxable income in retirement, my deductions/credits would be going to waste every year after I retire. Would setting aside, say, $500 on my max contribution for a traditional IRA be something to consider?" They've kind of lost me on this. So I'm curious to hear what you have to say.

The impressive thing here about them maxing out the Roth IRA is that their Roth IRA contribution every month is bigger than their rent. Yeah. Right? This is impressive. It's amazing. Pay yourself first. I love it. This is the second person that's looking to minimize taxes in retirement. This is a big Roth guy.

We've already established that. But what do you think about diversifying your tax base if this person wants to have some diversification in retirement? Does that ever make sense in your mind? It does. However, let's talk about Kendall's situation. So just like Ben, Kendall's looking down on us with his Midwestern bias and his low rent.

But leaving that aside, I love this idea. I would advocate for diversification in tax, diversification of portfolio. But talking about tax, there are three types of accounts you can have. And I would argue for you want all three of these. When you hit your 60s, you want to have a traditional IRA bucket, right, or 401(k).

You want to have some taxable income that you can manage. You want to have a Roth bucket that's tax-free. And you also do want to have this non-qualified bucket that we just referenced a minute ago. You want tax diversification in retirement. But Ben, man of the people, Ben, when you were 22 compared to where you are now around your 40s, right?

So I'm guessing that was a full 18 years in the rear view mirror. Are you earning less or more today than you were at age 22? Not to brag, I'm earning more money now than I was at 22. God bless you. Nice. I wish that for Kendall, too. I would say on average, people's incomes tend to increase through over time, right?

Unless you're an NBA player, Kendall, unless you're a Jenner, more than likely what we're talking about here is your career earnings are going to increase over time. I wish that for you. Therefore, Ben, are you paying more taxes or less compared to age 22 today? You're my tax guy.

You know I'm paying more. A lot more. I would advocate that your tax rate is exponentially higher. And therefore, I would argue in your 20s, your income is the lowest, your tax rate is the lowest, the Roth is beautiful, right? Because you're paying tax on that income before you contribute it.

Now let's fast forward. Let's get into our 30s. Kendall is no longer paying $300 a month rent. He's paying $3,000 a month rent for like those of us. And that's a bargain, by the way, in New York City right now. And now at that point, when you're making 60, you're making 70, you're making $100,000 a year.

God bless you if you can make it that far. Now your income is being taxed at 30%. Maybe you move to New York, it's getting taxed at 40%. That's the time when you want to do this traditional IRA because your tax rate's higher. Do the Roth early. Kendall, you're doing it right.

Max fund that puppy to the extent that you can. Focus on traditional IRA contributions later in life when you can take that tax deduction, when the tax deduction- And if you have some extra money, put it into a taxable brokerage account, maybe start building that up. Yeah, I love it.

I love it. Especially if it's like an index manage. Let's say it's something that's doing taxless harvesting for you, absolutely, Ben. The buckets matter, but now's the time to do the Roth. Duncan, I'm telling you. You have the beard. It fits in Brooklyn, but it also could fit in Missouri too.

Just think about it. Yeah, I'm considering it. All right. Bill, we have one more question to you from one of us. I'm not going to say who. One of us on this show completely paid off their student loans. One of us- Wow. No, one of us had some of their student loans forgiven.

That person wants to know, is this a taxable event for them? That is a great question. Per the CARES Act law, which I'm going to detect in 2021, any student loan forgiveness abatement at the federal level, and this is important at the federal level, is not taxable through, I believe, year 2025.

The answer is no. Assuming this Biden program survives the courts and legal challenges, then no, it will be not taxable. However, and there's always a catch, there are a bunch of states that de-conformed with the federal law, and so it's possible in up to 14 states right now per early analysis that the state may apply tax unless the legislators change- How about New York?

New York complies generally, and so I believe that New York will not be taxable as income, but follow up with me on that in December. I'll be back- Score it down. ... on a rescue. Okay, cool. I've already spent that 10K on a Ford GT. That's great. That's why I was making sure.

I love it. I love it. Let's move to Missouri. Also, I found out- What are we doing here? God. Our question three, our army officer is Richard. Richard. Thank you, Richard. Richard, thank you very much. I'm sorry. Sorry about your dad. Sorry to hear about that, but Richard, thank you for keeping us safe.

All right. Thanks, everyone. Thanks, as always, to everyone in the chat. We appreciate you guys following along, making comments. Thanks to Bill, as usual. Like Ben's dad. Honest Dave is here with me in New York. Big Abe Lincoln fan. Happy Labor Day to those who celebrate, too, and are bringing kids back to school.

I am. It's good times. Perfect. Yes. Is that what it's for? That makes sense to me. It is. If you're watching on YouTube, subscribe button, podcast, leave us a review. Keep those questions and comments coming. Askthecompoundshow@gmail.com. New Compound and Friends should be out tomorrow, and we will see you next week.

Happy Labor Day. Thanks, everyone. Bye.