(beeping) - Welcome back to Ask the Compound. Our email here is askthecompoundshow@gmail.com. Today's show is sponsored by Future Proof. I just did a little video promo this morning for Future Proof. Someone asked me, "What am I most excited about?" I had bullet points, Duncan, 'cause I have so much.

The location, you know, the beach. They have a perfect little running path, a walking path that follows the beach. There's good food, drinks, content is great. We have all these different speakers, live podcasts. Last year, there was professional athletes, your favorite bloggers, social media personalities, financial pundits. You might even see us filming on the beach, movie recreation.

- I thought of a scene, Eternal Sunshine. How about that? There's a lot of beach scenes in Eternal Sunshine. There's also great socializing, ad hoc conversations with advisors, investment managers, even normal, everyday investors. A lot of people who watch our shows come to it. We were just actually talking this morning about what we're gonna do for the live version of this show, to have people who are there ask us questions.

So it's gonna be great. Last year was hands down the best financial event I've ever been to, and there isn't a close second place. But as fun as that was, I think we actually learned a lot about how to make it better, so it's gonna be even better this year.

So get your tickets now. They tell me prices are going up in 22 days. It's futureproof.advisorcircle.com to sign up. So do it now. - Yeah, it's gonna be a lot of fun. Looking forward to it. - Yeah, great. So Duncan, your hat today, is that the value of your brokerage account, or what?

- Almost, you were close. It's the alpha that I have in my account, so. - All right, let's do a question. A lot of questions today. - Today's a rough day. Thanks for picking on me, though. Today's a pretty rough day for my stocks, as you can probably, as you can assume.

Okay, up first today, we have a fan from Japan, so konnichiwa, or maybe it's more kombanwa this time of day, but big fan of the compound from Japan. My 59-year-old mother is one of those people who doesn't believe in putting money in the stock market because she's afraid to, quote unquote, "lose it all." There are a lot of people in Japan who are still traumatized from the stock market bubble collapse in the '90s.

Now she's got about $300,000 in cash sitting in a checking account, literally earning nothing. This year, I was finally able to convince her to open a brokerage account and invest $100,000. I managed this account and decided to allocate 60% to a 2030 target date fund, that's 40% stocks and 60% bonds, and the other 40% to an all-world stock index fund.

I chose this allocation because I want to believe that having an increasing allocation of bonds is prudent for someone her age, but I'm constantly fighting the internal battle to allocate more to stocks so I can improve returns. She plans to retire in eight years, has no debt, and expects to have a decent pension, so this money is largely supplementary.

Should I ditch the prudence and allocate more to stocks? It's kind of a YOLO question, right? - I completely understand where the mom is coming from here as it pertains to being nervous about financial assets, if she's thinking about it from a purely Japanese perspective. John, throw up the growth of wealth.

This is the MSCI Japan index since 1990. $1 invested in Japan in 1990 grew to $1.32 by the end of April this year, and that dollar was underwater for almost 30 years. On the other hand, a dollar invested in the S&P would have grown to more than $23 in that timeframe, so we're talking 10% annual returns for the S&P since 1990, 85 basis points per year for Japan, and this is actually from the perspective of a U.S.

investor. If you were in Japan, it was actually worse when we're talking about in yen terms. So why did this happen? I consider myself something of a financial historian. Others may disagree with it, but this is my opinion. Japan has had the biggest financial asset bubble in history in the 1980s.

There really aren't that many books written about it for some reason. The best one I've found is this "Devil Take the Hindmost" by Edward Chancellor, and it's basically one of the better books ever written on financial manias and crashes, and he has a whole chapter on the Japanese bubble.

It's not a whole book, but I've compiled, through this book and some other sources over the years, some of my favorite stats and anecdotes. I'm gonna run it through to show how crazy things got in Japan in the '80s. 1956 to 1986, land prices in Japan increased 5,000%, even though consumer prices only doubled in that time.

So inflation doubled, land increased by 5,000%. By 1990, the Japanese real estate market was four times the value of the real estate of the United States, despite being 25 times smaller in terms of land mass and having 200 million fewer people. Tokyo itself was on equal footing with the U.S.

in terms of real estate values. There were 20 golf clubs in Japan, and this is in 1989, it cost a million dollars to join. The P/E of the Nikkei was, yeah, P/E on the Japanese stock market was 60 times trailing 12 months earning. The CAPE ratio was 100 times, which is more than double what it was in the U.S.

for the tech bubble. Japan made up 15% of world stock markets in 1980. By 1989, it was 42%. 1970 to 1989, Japanese large cap stocks grew by 22% per year for two decades, small cap stocks in Japan were up 30% per year for 20 years. It was just crazy.

Stocks went from 29% of Japan's GDP in 1980 to 151% by 1989. Just real estate and stocks at the same time, just a cluster of a bubble. If you wanna learn more, read the book to figure out why it happened. But there are people who are too scared to invest in the U.S.

stock market, and the returns here have been fantastic for 10, 20, 30, 40, 50 years. Pick your long-term time horizon. In Japan, they haven't gone anywhere for three decades because of how out-of-whack things got in the '80s. Now, side note here, the MSCI data goes back to 1970. If you take the Japan returns going back to 1970 to today, it still returned 8.6% per year despite going nowhere for 30 years.

That's how crazy things got in the '70s and '80s, because things were, so it was almost 9% per year still for the long-term. The big question is, how do you get someone to change their psychology when it comes to the stock market after they've been scarred through something like this?

This is kind of like U.S. investors after the Great Depression. No one wanted to touch the stock market. Stocks for the long run wasn't a thing then. So I think you could walk your mother through historical rates of return, and inflation rates, and compounding, and interest, and earnings, and dividends, and all that fun spreadsheet stuff that I like to pay attention to, but numbers and spreadsheets are essentially useless when we're talking about changing someone's behavior, especially when they've been through something like this.

I think it's hard to change how you do things, especially after you're that old, so I think you have to lean into the emotions here. So remember, Duncan, remember the scene in Shawshank? John, throw this up here, where the inmates are all working on the roof, and Andy Dufresne asks Tapp and Hadley if he trusts his wife, right?

Awesome, awesome scene. And he runs him through the IRS stuff, bought a gift, and he's coming on soon, but I think this would mean Bill Sweet would do amazing in jail, wouldn't he, as a tax guy? That's how Andy Dufresne basically survived jail. I think you have to basically ask your mother the same question, like, "Mom, do you trust me "to handle your finances, and investment, "and prudent matter?

"I'm not gonna gamble, I'm gonna diversify, "I'm gonna invest, not speculate, "I'm gonna manage your money with an eye on the long-term," all these things, so I think you have to try to put an element of trust in there, 'cause sometimes people are so emotionally scarred when it comes to money, or they just have made so many mistakes that they need to just let it out of their hands, let someone else take care of it, and just, if there's an element of trust there, you let them take the steering wheel.

I think you also have to help her figure out what the money's for in the first place. So you said it's supplementary, so is it gonna end up supplementing her pension income at some point? Will she even need the money? Maybe some of this will just be passed down to kids and grandkids, and that's a way to pull on those emotional strings to help her figure out what to do.

So I would appeal more to emotions than the math of it all, and I do like the fact that you're starting out with a target date fund here for simplicity, and diversification, and low cost. - I knew you were gonna love that. - Yeah, it makes, I think that's a pretty good first step as opposed to picking individual stocks for her or something.

So I would go for the emotions of it, but I totally understand where someone in Japan would be coming from in terms of being pretty nervous about it. But I like the fact that if you're handling it for her, that there's an element of trust there, and she can hopefully let go and just go for it.

- Yeah, that was something when I first started working with you guys years ago, I had to get used to was all the comments of, you know, what about Japan? Literally, that was the response to almost everything that we put out. Someone would be like, what about Japan? And the comments, it's just kind of funny.

- It really is an outlier, and the reason that returns were so awful is because the bubble was so enormous to begin with. And I think it really was the biggest financial asset bubble that we've ever had. And the funny thing is if you read this book, "Devil Take the Hindmost," Japan really, as a people, as a culture, they have a very conservative nature.

So the fact that it happened there was kind of crazy to begin with. And again, there's a bunch of reasons why it happened, but it was just an insane, insane bubble. - Yeah, crazy. - All right, next question. - Speaking of Japan, I'm looking forward to the next season of "Tokyo Vice." - That's a good show.

- I like that one, that's right. - Okay, up next we have a question from Janelle, I think is how you say it. I'm a single 32-year-old woman that makes $70,000 a year in South Florida. I have a net worth of around $220,000. $87,000 of this is cash sitting in a high-yield savings account earning 4% right now.

This savings was originally designated for a home purchase, but with rising home prices, it's been tough to find an affordable home. It's not worth it to buy where I am, so I'm considering moving to a more affordable area. My question is this, is there a better place to part my cash that is still liquid for the long-term if I don't buy right away?

I figure about 50,000 is for a house and the rest is an emergency fund. I think I should just stop saving and continue to invest my future earnings in the stock market through my 401(k) in brokerage. Do you think this would be a good idea? It's a good question.

- A few different things are going on in this question, right? Yes, I agree. First of all, yeah, good on you for saving up for down payment and being realistic about the affordability in your area. I don't know exactly where you live, but if you look at the house price gains in Miami, for instance, relative to the rest of the country, John, do a chart on here of Miami housing prices.

Do the next one, there you go. So this is Case-Shiller Home Price Index for Miami and then nationally. And this is since the start of the pandemic at the end of 2019. And you can see house prices in Miami, they've sort of leveled out, but up way more than the rest of the country.

I know a lot of people don't want to move to a more affordable area of the country because of friends or family or work or just inertia. But if this is an option, I think it's something that you have control over where you could go somewhere cheaper, Duncan. No hints here for you, Duncan.

But John, throw up the next chart. Lance Lambert from Fortune made this one for me. And it shows the typical median home value by region. And you can see the orange there is a median home value of $350,000 to $500,000. And Florida is filling up with that pretty good.

California has more in the 750 and up range, which is kind of tough to stomach. But look at all these other places, even in the Southeast where you could potentially move if you want to stick in that area where home prices are more affordable. It, you know, I think if you have that, that makes a lot of sense.

So as far as the cash investments go, 4% is about average as far as online savings accounts go. I think Marcus up the rate to 4.15% this week after the Fed raised rates. Most of them should be plus or minus something or right around there. They're now matching the higher savings account rate, right?

Yep, about time. You could earn a little more in ultra short-term bonds if you wanted to. One to six month T-bills are yielding north of 5% right now. I think it depends how much that extra 1% or so means to you. So you have 87,000 in cash, she said, right?

1% on $87,000 in cash is $870 a year. It's not bad, but it's not life-changing money. So I don't know, is it really worth it to move it around and buy a short-term T-bill ETF or try to buy T-bills on your own? You could, but I think a savings account and online savings account is probably easier in terms of moving money around and that sort of thing.

Part three of the question is how much you should save. So you obviously have a large cash allocation relative to your net worth because you're saving up for a house. So 87,000 out of 220, we're looking at like 40% in cash. So she's got a really big cash buffer relative to her net worth.

I think as long as you're comfortable with that amount in a down payment, then yeah, future savings should be funneled towards the stock market of the 401k and tax for retirement accounts. So you could do a quick back of the envelope. You said $50,000 for the down payment. If you did 20,000 or 20% down payment, that's a $250,000 house of 50k.

If you did a 10% down payment, that's a half a million dollar house. And if you only did five, that's a million dollar house. I don't know what you can afford, but that's kind of how you can think about the down payment and how far it will get you in terms of how much leverage you want to take.

The good news is you have the ability to save. Like the fact that you've put aside that much cash, I think is a good thing. Now, yeah, I would, at your age and where you are, start funneling more of that into the market. And now that you have that cash buffer, you should feel pretty good about yourself.

But you've already reached the most important first step. So I think you're in a very good place. - You know, something I realized having just moved out of New York City to Connecticut, something that a lot of young people and myself included are guilty of is clinging to like living in a big city for like the name of it.

And like kind of, there's almost like a prestige, I guess, of being like, "Oh, I live in Brooklyn." Or, "Oh, I live in Manhattan." You know, and I'm sure the same with Miami and a lot of big cities. And at a certain point, I just got to where I was like, "I don't care about that anymore." Like, I want to go where like it's livable and where things are more affordable, you know?

- And if you're not going to use all the things that are great about a big city, you're just paying up for no, you just take a tax on yourself, right? - Right. - Yeah. So at a certain point, you want to Costco as opposed to a local little bodega, right?

- Right, or drive as opposed to the subway, yeah. Okay. - All right. Next one. - Up next, question three. We have a question from Will. "I run a one-member consulting LLC "and was looking at SEP IRAs. "I saw that there's a new Roth option "as part of the December 22 legislation.

"I need you to remind me what SEP means." We can wait until after. "Can I contribute to both the SEP Roth "and my own personal Roth? "There's conflicting advice out there "about whether the Roth limits impact one another. "Side note, when I started doing research on the question, "I came across a random internet article.

"I started reading the article "and I thought I was reading Bill Sweet "because of the Roth gushing. "It wasn't him, but it was that giant of personal finance, "Susie Orman. "Does Bill get confused for her often?" Don't know, compliment or shade, you know? No way to know. - Let's bring in Susie Sweet now, I guess, and ask him.

Bill, you don't have the bangs of Susie Orman, so I'm guessing not. So SEP is what, Simplified Employee Pension? Employer, is that right? - Yeah, you've got it. Yeah, and I have to tell you, people are always asking me if I know Tyler Durden. This is the first time I've been confused for Susie Orman outside of a New York City draft club, so this is the very first time.

Not a lot of those up in Milford, Connecticut, I'd imagine, Duncan, but I'm not here to judge. - You helped me set up a SEP IRA four or five years ago. I didn't know about this Roth option. - Yeah, well, it's new. - So what's the story? I didn't know about this, tell me about it.

- Yeah, so Duncan, SEP is a Simplified Employee Pension Plan and it's basically a way for small businesses to turbocharge retirement contributions, but they're using kind of a hybrid of the IRA structure. And the biggest difference between your traditional sort of standard IRA that you or I can contribute to are the income limits.

This year, we can do about $6,500 per, subject to income limits, but a SEP IRA, A, is not subject to income limits, and then B, you can do up to the 415(c) limit in 2023, that's $66,000. Now, you have to have a lot of income to contribute that much.

It's limited about 20% of your net income, but that's a big one. And so what Will is taking a look at here before he went down a really weird rabbit hole with who I look like and don't look like is the Consolidated Omnibus Act bill, Ben, in Secure Act 2.0, as it's colloquially known in the industry, basically changed the way that certain contributions could be made.

And he's 100% right. Will is on it. You can do now a SEP Roth IRA as of January 1st, 2023. And ultimately, I think that's an awesome option, right? I think I have the back tattoo, first episode of Portfolio Rescue. Now as a compound, back tattoo says Roth IRA conversion.

I'm into this stuff. So I think ultimately it's a great option. You just need a way to tax pros and cons. And there are some unanswered questions in the legislation, which we'll get to in a second. - All right, so they can do the Roth, so they might as well, right?

- I mean, I think so. You need to know a lot about what's going on. But what Will sort of asked is, does this impact my ability to do a regular Roth IRA, right? Because why not have your cake and eat it too if you can dump in $60,000 into a SEP?

Why not do the additional $6,500 too? And unfortunately, the answer to that, Ben, is we don't know. The omnibus bill was passed I think on December 29th of last year and the IRS, even though it's May now, they haven't gone around to promulgating guidance. So we don't actually know if the SEP Roth IRA contribution is gonna be subject to FICA tax, as another example.

We don't know if you're gonna need to report that income if it's something that's not a single member LLC on a W-2 or 1099. And we do not know if you're able to contribute to a SEP Roth IRA for 2022. Because as you might know, Ben, you can contribute to a SEP IRA up to the extension deadline all the way in October.

So there's a couple of unanswered questions here, but I think all things being equal, more Roth, better than not enough Roth. So I would say go for it, Will. - See, this is why, did you become a, Bill, did you get into accounting and tax because of Andy Dufresne?

Is he your hero? Because I rewatched that scene today and you survived prison pretty well, I think. - Well, I appreciate that. I didn't know if that was a compliment or an insult. I can't tell. Same thing with Susie Orman. Again, I'm not sure what exactly is going on here.

Or is this an insult to Susie Orman? I don't know. But no, what was going on backstage was, I love that movie so much. It's a foundational film for me. I was so upset when Forrest Gump won the Oscar. I guess I understand, but come on. In the annals of film, give me a break.

Looking backwards in hindsight, which one would you rather watch on a Tuesday night with your kids? The prison scene, obviously, is awful. It's the worst part of the film. But that said, you didn't see backstage. I was trying to smash the unmute button 'cause I wanted to chime in and comment.

But John blocked me. He prison blocked me at the time. - I'm not gonna get that by John. - Nope, nope. - Never. - All right, let's do another one. - Also, Sean says in the chat, you keep talking about this tattoo, but no one's seen it. (laughing) - I did, I was putting my shirt on when the camera turned on today, as you guys know.

- It's like a Tupac on Roth Life as opposed to Thug Life. - I wanna make a shirt that says, "When in doubt, Roth it out." And have people wear that. - I like that, I like that. - All right, up next, we have a question from Colin. I got married last year, and after doing our taxes, it turns out that my wife and I have been phased out, annoyingly, by only $1,000 or so, of being able to contribute to a Roth IRA.

I had already maxed out my contribution for 2022 and was on my way for 2023. I have a rollover IRA from a previous employer, and Vanguard is saying that if I don't wanna pay taxes on the total account amount when I transfer, I need to move that rollover IRA to my current 401(k).

To do this, I would need to liquidate everything, which I don't wanna do because I like the ETFs I have and I don't wanna give up on the compounding interest. What is the easiest way to move Roth IRA contributions to a rollover IRA while minimizing taxes and not having to sell?

- This gets back to my idea that we should have one mulligan. You get to make one mistake within reason, plus or minus some percentage of your AGI, and the IRS calls it good, right? Especially when you get so close to the Roth thing, right? It's like playing, I played Operation with my kids this weekend, where you get to the side and it buzzes you, you know?

- That's a classic, yeah. Yeah, so, the other thing is the rollover process from a 401(k) to IRA is a nightmare in this country. You have to sell everything, then they send you a check two or three weeks later, then you have to deposit, it's so antiquated, and I know why they do this, because they don't want you to move money from them, but what is going on here if he's over the limit because their income came in a little higher than expected, and he's doing a rollover, what's going on here?

Because I'm confused. - Yeah, so Collin forgot to say the magic words, not to brag, this is only a problem if you're earning more than $214,000 a year of taxable income, so good for you, Collin, congratulations, yeah, good on ya. So, I think what he's getting at, Ben, is I think he's thinking he wants to set the conditions to do backdoor Roth IRA contributions going forward, because as we've discussed many times on the show, there's no income limit to contribute to a traditional IRA, and there's no income limit to convert that traditional IRA to a Roth IRA, but Collin's gonna run into a problem known as the pro rata rule, that if he has a large IRA balance, anything that he hasn't paid tax on is gonna be taxed when he goes in that conversion pro rata.

So, if he has $60,000 set aside, he contributes 6,000, 90% of that conversion is gonna be taxable, and that's obviously not advantageous, it kind of defeats the whole purpose, right, of doing that backdoor Roth. So, the solution, Collin already figured it out, use your employer-sponsored 401(k) plan. He mentions a fantastic company, Vanguard, and they have a lot of great ETFs, Ben, some of which we are very familiar with here at our company and elsewhere, and I think a very reputable company.

I would take a hard second look at that, Collin, about that. And further to me, I understand, you don't wanna liquidate your investments, you fell in love with your ETFs, you got married, you don't wanna let 'em go, I get it, but you kinda need to balance that versus what you could get on the other side, and Ben, you're right, it's probably gonna take you two to three weeks to make this happen, but two to three weeks in the time span of 40 to 50 years, probably not a big deal in my opinion.

I'd take a second look at it, Collin. - It's annoying, but yes, it's annoying, but it's not gonna be the end of the world. - Yep, yep. So probably the only other thing I could throw at you, Collin, if you have any self-employment income, you could set up your own solo 401(k), so that's something that you can always consider if you do happen to own a business.

Unfortunately, if you have a single employer, that's not an option, but Vanguard, to me, is among the upper echelon of reputable providers, so I'd look at it, 'cause then you could have your cake, you could eat it, too. There's just some confusion. He says something about easiest way to move Roth IRA conversions to Roth rollover IRAs.

That's not a thing. If you over-contributed for a prior year, yeah, you have to take an excess distribution. You had to do it by the tax deadline, unfortunately. Hopefully, you filed an extension, and if you don't, you're paying a 6% excise tax, and the IRS can come slap you with up to now a 25% penalty for any excess contributions.

So Collin, talk to your tax professional about this, but for what you're gonna get what it's worth, it's free advice, but I would take a strong look at doing an excess distribution, get that out of your account as soon as possible. - And so I'm looking at the live chat here.

Did I see Duncan's mom is in the chat today? - Whoa! - My mom is often in the chat, to be fair. - Your mom is proud of you, Duncan. - She is? - She wants to see you at work. I think that's beautiful, man. - All right. - Miss Hill, you raised a fine son.

We're very proud to have Duncan as part of our team. - People in the comments aren't paying attention to the show, they're just talking to your mom now. - It's a family affair, yeah. What does she think about rollover Roth IRA conversions? - Well, I think that one thing I was gonna ask you about is the thing about compounding interest.

I mean, that doesn't stop just because you rollover, right? I mean, your accounts are still- - No, let's assume that he's able to replicate. - Yeah, you might miss out a little bit. Yeah, it's like you go to cash for a couple of weeks, then you get back in.

So it's not like the- - Yeah, I think that's what Ben highlighted at the onset. That's what he's worried about. This process takes, unfortunately, a month for some providers. Again, I think Vanguard's a very good company and I would take a second look at it. - Also, you can time the transfer, right?

No, I'm just kidding. - I could work in his favor. I mean, that's true. Unfortunately, we don't know. It's easy for me to tell what's gonna happen three weeks from now in three weeks. - All right, next one. - Okay, up next, we have a question from Brad. I'm 34 years old and I live in a state with no income tax and my salary is in the 22% bracket.

I started a new job that has a 401(k) with a Roth option. I can max out my 401(k) contribution by splitting my contribution between traditional and Roth. My employer's plan has a safe harbor match after a year that would add 4%, but I'm not currently receiving a match. Am I better off maxing out my 401(k) in multiple buckets or saving a lower percentage by having it all in Roth?

Can you guys explain safe harbor? I don't know what that means. - How about it, Bill? - Yeah, I think so. - Bill runs the 401(k) at our place, basically, so he can take this one. - I'm your plan administrator. No, the safe harbor, Duncan, is simply that it allows for a certain type of contribution, specifically kind of toward executives, that ultimately, if you give everybody a free 3% or 4%, the safe harbor minimum is 3%.

I guess they're a little bit more generous like us. They're doing 4%. If you're doing that and matching contributions, if actually you can sort of tilt the dial, you don't have to go through some of the really complicated Department of Labor high-compensated employee tests. And so the 401(k) plan is a people's plan.

Most plans are, and ultimately, there's a test that applies each year that says, hey, if you have too much money in your highest-paid folks, we're gonna declare this plan not valid, and they're gonna make the distribution happen from the higher-compensated folks. So if you go safe harbor route, everybody gets 4% or 3% minimum, but you don't have to go through some of the more stringent tests.

- It's a pretty good deal. So my guess is as much as you like a Roth IRA or 401(k), if they, for whatever reason, have to split this and gives them a bigger match, you would probably recommend splitting because you can't really get, even the tax benefits of the Roth in the future are not gonna be better than 100% return on the match, right?

- Yeah, I think you're right. And Brad says he's not getting a safe harbor match, so I don't know that it really comes into play. Most plans would allow for a match on either traditional or Roth, so I don't think that's necessarily a factor. But his real question is, should I split this?

Should I have a split? Brad, if we could see in the future and know exactly what your tax rate is gonna be at 64, like we kind of know at 34, we'd be able to answer that question very specifically. I've got no problem. If you don't know the right answer, just diversify, right?

I think, guys, I've got the back tattoo. We talked about Roth. I'm pushing Roth. I think the audience of asset compounds skews relatively younger. I could be wrong about that. I think early in our career, let's say 20s, 30s, Roth is gonna be the way to go. But there's a big case, a huge case for traditional contributions.

And if you're not sure, if you kind of think that my tax rate might be lower in retirement, traditional contributions could be the best option for you. And so, Brad, I think if you can't, in the inability to see the future, splitting the baby in half doesn't make a, that makes a ton of sense to me.

I'd keep doing what you're doing, Brad, in the absence of perfect information. - It's funny you mentioned the age of people in the chat because the other day, or it's been several weeks, I think, David Wysocki, who's often in the chat on our shows, said something about being 72 years old.

- That's great, I love it. - I just assumed that he was, I was just picturing like a 30-something year old. - He's a young man at heart. I mean, God bless him, he's got 30 years left. So yeah, I'd urge a Roth contribution for him as anyone else.

- Bringing up the averages. All right, we got one more. - Okay, last but not least, we have a question from Tom. I'm married filing jointly with $150,000 income. I have four to five years of short-term capital losses from 2022 of $13,000. I used $3,000 of the losses against our 2022 income.

If I have $3,000 of long-term capital gains in 2023, do I pay the lower rate on the long-term capital gains while still deducting $3,000 against our income with the short-term capital losses? Maybe a small potatoes question compared to some of the not to brag questions. - There's no small potatoes on "Ask Joe" now.

- No, this is a show for the people. - All right, so Bill, I got a question about the carrying losses over. So you have a certain amount, you have $10,000 of losses. This year, you can carry over 3,000 from that couple of years. Does the IRS just hope that you're gonna forget about those carryover losses?

Is that why they do it? Why can't we just take them all in one year? - It happens sometimes. My partner in crime here, Bill Arzaroni in CPA, who I have not spent any time in jail with, but he's my battle buddy. He would correct you on that, Ben.

He would say that you can deduct $3,000 against your ordinary income. And so then the remainder carries forward. And the reason I mentioned him is we see a lot of bad tax work, to be honest, Ben. And one of the more common things is they miss some folks. Unfortunately, when they pick up a new client, they don't catch that carry forward number from last year or the prior years.

So if you're meeting with a new tax professional and they haven't in detail reviewed your prior year's tax return, massive red flag that they're not doing their due diligence. But Ben, to your point, no, they do carry forward indefinitely. I mean, I imagine there's some people that lost a lot of money during COVID or maybe in the dot-com era, they're still deducting their capital losses, let's say from 20 years ago, because if you're only able to deduct $3,000 a year, that doesn't go very far in the context of some of the larger losses.

So let's talk about ordering. So Ben, to answer the question just directly, this is the answer. Any losses that are carried forward into a future tax year are considered long-term in nature by the time that next year rolls around, which kind of makes sense, right? If you have a short versus long-term loss, you hold that for a year, anything that you've held a short-term, a year later, is gonna be long-term, right?

Because the holding period is a year and we're talking about a year periods here. So the ordering rules work like this. Short-term losses offset short-term gains on the tax form. Makes sense, then you get a net short-term number. Long-term losses, less long-term carry forward losses, less offset long-term gains.

So again, from the prior year, that number is magically transformed into a long-term loss because it happened more than a year ago. Then you get a net long-term gain. Then, net short-term losses or gains. - I got the Zach Galifianakis numbers going on right now. (laughing) And this is why I just let you do my taxes, Bill, because I'm lost.

- Well, this is why I let the software handle it, right? So I don't even do in this calculus. I'm not Galifianakis in this stuff here. So ultimately it all goes into a blender and then you pay tax on what's left. And so to give you guys an example, stick with me here for a second.

Let's say that I have a $3,000 short-term gain. I'm not drawing this down. Duncan, don't laugh at me. A $3,000 short-term gain, a $3,000 long-term gain, and I have $5,000 loss carry forward. So the net gain I have there is 1,000. Is that short or long? Duncan, which one is it?

Based on what I've told you. - I wasn't paying that close attention. - Okay, that's fine. That is gonna be a short-term gain because as I said before, the ordering steps are the long-term carry forward offsets, long-term gains first, and then they get put in a blender. So in that instance, in that case, that would be a net short-term gain.

Does that answer the question, Ben? - Yes. - We do need a whiteboard. - I think so. - On the next Ask the Compound, we'll do this on a whiteboard. - I do have a little bit of a follow-up question. I think you basically just answered it, but just to distill it down, I have a friend who I was talking to recently who was telling me he lost quite a bit in the market last year.

And I was telling him about this very thing, being able to write off up to 3,000, and he was like, "Oh, I don't think my tax guy did that." Is there anything you can do after the fact to like, or is it just too late? Can you amend your return?

What are your options there? - Great question. So ultimately, take a look at Schedule D, page two, and if you see a loss on that page two at the top, and then a $3,000 number that flows up through Schedule 1, and then on the front page of the 1040, you'll see negative $3,000.

If that number ain't there, you're right, Duncan, your buddy, something went wrong. To answer your question directly, yes. You can amend a tax return up to three years after the filing deadline. And that means right now, tax year 2020 returns are up for amendment. But as you remember, it was all that COVID weirdness.

The amendment deadline is actually July. July 15th, 2023 for tax returns filed in 2020. So I would advise him to take a look. - It seems obvious, but some people think I lost a ton of money last year. It depends if you actually locked in those losses too. It's not just a paper loss.

- Very good point. - I think some people might misunderstand that, but it has to be something that you sold for a loss, not just you were down last year. - Yeah, back to the question about CompHunter's interest in ETFs. If that's in an IRA, it just keeps compounding, right?

I mean, your gain just rolls into your account. You don't have to realize any gains on it. So yeah, Ben, I think that would be something to look at. Duncan, get your friend a copy of his 2022 1040. We'll take a look at it. - Cool. - See, this is why we have our own Andy Dufresne on staff here.

- That's what I'm here for. - Exactly, yeah. - I'll see you at San Juantaneo. I'm on vacation this week, so I am actually heading to the beach. - Just waiting until how exciting this all gets when we start taxing and taking into account unrealized gains and losses, right?

That's gonna be fun. - Yeah, and that's the nightmare, right? And that's always the thing that gets thrown in my face on Twitter. It's like, "What if the IRS taxes your Roth IRAs?" Well, okay, what if they start taxing my back tattoo, right? I mean, yeah, we could plan for anything.

- My comment this morning was, people in the finance world spend 95% of the time worrying about stuff that could happen 5% of the time. - Right, and what about-- - Let's focus on what's actually happening, not what could happen. - I like that. - Focus on what drag queen Susie Orman's into.

- Go enjoy the beach. - Thanks. - Yeah. - Thanks, guys. - All right, remember, you can email us, askthecompoundshow@gmail.com. But also, if you wanna send us a voice memo or a video from your phone, feel free to do that. We will play it right here. If you wanna personalize it a little more, if anyone wants.

- We're gonna experiment with that, yeah. - Yeah, if anyone wants to do that. We were thinking about sending them a voicemail, but you can easily do a voicemail. Send us that, or send us a video of yourself, if you're willing. Thanks to everyone in the live chat for showing up, especially Duncan's mom.

We always appreciate it. - She did a great job. - If you're listening in the podcast form. Yeah, leave us a review. Hit like, subscribe, all that stuff. And we'll see you next time. - Thanks, everyone. - Bye, guys. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) you you