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Ralphs. Fresh for everyone. ♪ Q&A show today, and got five questions lined up. Number one, Joshua, I've got a student loan where I owe over $100,000, and I'm paying a 7% interest rate on that loan. Should I pay it off early, or should I invest elsewhere? Number two, Joshua, when I'm sitting down and trying to figure out whether it's better for me to rent or to buy, shouldn't I factor in more costs of renting than previously discussed?

Number three, Joshua, what about the idea of opening up two 529 plans in order to double the tax benefits? Number four, going to go and see a financial planner with my parents, and they're trying to figure out if they should convert some of their traditional IRAs to Roth IRAs.

How do I help them figure out what they should do? And if there's time, what are your thoughts on tax loss harvesting? ♪ Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets, and I'm your host. Today, I'm your guide and your question answerer. I'm going to try to do these questions justice.

I'll tell you, the questions have been getting more and more challenging, so I don't know if you guys are getting smarter or you're just asking me tougher questions, but y'all are a tough bunch to answer questions for. I had to actually pull these out as the easy ones to answer today.

♪ One of the things that I'm finding as the show goes on is just the real challenge of working through and figuring out how to effectively articulate answers to financial planning questions. The real challenge with these types of things is always to figure out how deep to go and how simple to go, because, of course, you can create these long, complex answers to questions, and those can be useful, but also sometimes they're just too impenetrable.

I've been stretched in figuring these out. I really have been. But we'll see how we do. So real quick as we get going, I'm going to start off with a question on student loans, but a quick reminder and a thank you to the patrons of the show. If you gain value from the content of Radical Personal Finance, consider signing up to become a patron of the show.

That means that you directly financially support us in – support me in the work that I'm doing. There's no "us." It's me. Support me in the work that I'm doing here on the show, and you sign up for that at radicalpersonalfinance.com/patron. You can choose different levels of support. One of the levels of support is $5 a month, and in exchange for $5 a month, you get priority access to my Q&A shows, shows like this, the Friday Q&A.

And I've got a whole bunch of patron questions lined up, and the majority of these today are from patrons. And it was their patrons that got them right to the front. So details are at radicalpersonalfinance.com/patron. So let's kick it off with a question here regarding student loans. Edgar says, "Josh, we've just started listening to the show, and I've learned a lot already.

I originally started listening because I have an interest in one day becoming a personal finance consultant, but that's a long way off. For now, I just need help with a crazy student loan issue. I'm currently paying almost $600 a month for a $102,000 student loan at 7%. A couple of key things.

My credit is shot due to a bankruptcy that was filed last year. The loan is with the Nelnet through the Department of Education. My question is, should I pay down the loan, or should I find an investment that will pay me $600 to offset the payment? Right now, the $600 is preventing me from moving forward on anything financial.

I'm expecting a lump sum of money in February, like $60,000, and I'd love to invest it where I can earn $600 or more a month to offset the payment. Any ideas?" Edgar. Edgar, it's an interesting question, and so let's talk about a few different scenarios and give you a couple answers that hopefully will be useful to you as you try to figure out what's the right solution for you.

Let's start with figuring out how long it's going to take you to pay off this loan if you simply make this minimum payment. I always like to do this with debt and just as a starting point and then use that as my, I guess, scenario one, kind of the base level scenario.

You have a student loan. It's $102,000 at 7%. If you're paying $600 a month, how long is that going to take you? So a simple way to do this, take your financial calculator. It's going to be $102,000. Change the sign. Put that in as your present value. So it's $102,000 present value.

Then take your 7% interest rate, turn that monthly, and put that in. That comes out to 0.58% interest rate on a monthly basis. Then put in $600 as your monthly payment. Make sure there's $0 in as your future value. And then hit the N key on your calculator and calculate how many periods.

N stands for periods, the number of periods. The answer here is 733 months. That's the amount of time that if you pay off this loan on $600 a month, it's going to take you 733 months to pay it off. If we want to convert that into years, divide it by 12, we come up with 61 years to pay off that loan.

So let's start with that as a base point. Now, I don't know about you, but I always get scared when I get numbers like that as far as they come out to be so big. So let's do a quick sanity check and see if I'm actually right with 733 months.

There are various ways that we could do this. What I could do is reverse engineer that equation with using and plug in 733 months and see how much my 7% payoff amount would be. But in this case, let's just do some more straightforward math. Let's just figure out what 7% interest is on a $102,000 loan.

This is basically a gut check to figure out if my math is right. So we take $122,000, hit 7%--you can do this in your head-- it's going to be about $7,000 on $100,000. So that on $102,000 is $7,140 of annual interest. Now divide that by 12 and monthly you'll see that that comes out to be $595 of monthly interest.

So essentially what this $600 payment is doing in the beginning is it's barely paying the interest and it's paying down about $5 a month of principal on this loan. So it's a good gut check to see because it has kind of a scary number-- 733 months or 61 years to pay off the student loan.

That's kind of scary, so it's a gut check for me to make sure, yes, my math is right, I didn't mix something up. Now the other thing that would be interesting to know would be how much are you actually going to be paying in interest payments if you follow this course of action.

We can do this in the financial calculator with one of the functions and we can get the answer exactly right, but let's just do this the quick and dirty way to get a rough ballpark idea. Sometimes just rough and quick and dirty math is more useful than the absolutely correct math.

So let's just take $600, multiply that times 733 because that's the answer that we have of 733 months, and the total payments here are $439,800. And if we subtract $102,000, we wind up with the total interest payments of $337,800. So let's just use some quick and dirty. Let's just convert that to $300,000.

We'll drop off some money. And just in your mind think, "I owe $100,000, and if I pay the student loan at this current rate, I'm going to pay an extra $300,000 of interest on it over the next 60 years as I pay it off." So that should give you a – hopefully a straightforward look at what the situation is here.

With regard to student loans, this is a pretty serious situation. Seven percent is not a low interest rate, especially given the fact that this interest that you're paying, you can't ever get out of it with bankruptcy as you now well know, and there's no way to ever escape it unless you just simply pay it off or move to China and just drop off the grid somehow, take up residence in the beaches of Thailand and escape the US system.

But if you're going to live a normal lifestyle on the grid in the United States of America, you've got to get this thing paid off. So you've got a serious scenario here. So back to the question, trying to figure out, well, should I pay off the debt or should I invest elsewhere?

Now, obviously, a couple of ways to answer this question. Let me start with a way that many people wouldn't start and then we'll answer it with the nuts and bolts of the numbers. Let's start with, okay, assume for a moment that I could make an investment that would result in paying off the debt.

This debt that you have is an unsecured debt. There's nothing connected to it that has any value other than hopefully the diploma that you have, and that diploma only has value in the marketplace based upon what you do. So there's no collateral that exists as support for this debt.

It's not the kind of thing where there's a house you could sell. You could sell the house, pay off the mortgage, and be cleared of it. So this debt is a completely unsecured debt. Now, you mentioned receiving a $60,000 lump sum of money in February. If you could receive that $60,000 in money and if you could use that and make an investment that's going to have ongoing value, and if that $60,000 could pay this debt, would that be a better move?

My answer to you would be simple. Yes, it would be. If you could find something that would do that for you, that would be a better move. The reason is that you would keep all of your options open. If you could have an investment that would be there and pay you money, hopefully that investment could theoretically grow in value.

But if the investment were guaranteed not to go down in value, then you would always have the $60,000. As long as the investment can pay off and pay those debt payments over time, then, yeah, that would be a better move. Now, is that type of investment possible to get?

Well, in order to figure it out, let's figure out what the rate of return we would need on the $60,000 investment to match this $600 monthly payment. And let me just use a very simple calculation here. Knowing that we need $600 a month to make the payment, let's turn that into an annual number so we can think in terms of annual return.

So take $600, multiply that times 12, and you come up with $7,200 of annual payments. So our investment needs to produce for us $7,200 per month – excuse me, per year of income in order to pay the student loan payment. Now, we divide that into $60,000 and we wind up with a 12 percent rate of return.

That's the amount of rate of return that we would need on the $60,000 in order to make those payments. So if you could find that type of investment, you could make some kind of investment that would pay out 12 percent per year, and what would be even more ideal is if it would not only pay off 12 percent per year but also grow in value, then it would be better to invest in that option rather than to invest in paying off the student loan.

And again, follow my logic here. The reason it would be better is because at any point in time you could just simply sell that investment, recoup your money, and pay off the loan. So the amount of debt that you owe on an asset doesn't necessarily affect the value of that asset, and that's essentially what you would be creating in a scenario like that.

Let me give you a different example that might be more intuitive. You go and you buy a $200,000 house and you put a mortgage on that house of $190,000. Now, that house goes up in value by 10 percent. It doesn't matter how much money you owe on the house with regard to what your rate of return on the property is.

If you owe $190,000 on the house or if you owe $0 on the house, that doesn't affect what happens to the value of that investment. So if the house is worth $200,000, goes up 10 percent, that means you now have $20,000 of gain there on the house, and the mortgage balance that's associated against it doesn't matter.

That mortgage balance is still going to be there and is still going to – that's not going to affect what the actual value of the investment – what that does to it. So that's the same principle that I'm drawing here is I'm saying that you already owe this $102,000.

If you could go and take the $60,000 and if you could invest it and take a 12 percent rate of cash flow off of that property to pay the loans off, yes, you should do that because at any point in time, you could go ahead and just sell the investment and then do whatever you wanted with the money.

And at the end of that loan, you're still going to have the investment there. That's the benefit to you. If you take the $60,000 and put it directly into the student loan, the money is gone because you've already spent the money and there's no asset associated with it. So you're taking a $60,000 asset that you have and you are putting it into something that's an unsecured debt, and now the money is gone.

The only benefit of that is it removed the $600 a month or whatever the portion of the $600 a month would be associated with that $60,000 that you paid off. Now, here's the question. Can you actually do that? Can you find an investment that could pay that rate of return?

And that's the tough part. So it's not that the concept doesn't work. It's that actually making the concept happen is very challenging. Do you have an investment opportunity that is guaranteed to put out 12% on its value, a 12% dividend every single month reliably and consistently without exception or any missed payments so that you can make that debt payment?

That's a real challenge in today's investment market. It's a real challenge. Almost any investment that you would choose would have some higher level of risk than the payments that you've signed up for. So take the simplest example. You're able to go and invest that $60,000 into a rental house and you calculate that net of repairs.

You could buy a $60,000 rental house for cash, and you could then clear on that $600 a month. And then you're going to take that $600 a month and you're going to go and put it into your student loan payments. What's the problem? You need an allowance for repairs.

You need an allowance for vacancies. And so you need more than $600 a month of income in order to match the guaranteed outflow coming out from the student loan payment. So that's the real challenge is can I invest in a way that's going to exceed the interest rate that I need to cover, the payments that I need to cover for the debt payment?

So theoretically, if you could, that would be the best thing. But can you? Which brings me to my part two of the answer, which is the actual answer of should I invest or should I pay off debt? My answer to that question is simple. You should always put your money wherever you can get the highest rate of return.

So if you can get the highest rate of return by paying off debt or you can get the highest rate of return by investing your money, then you should always put your money into whichever of those two is going to give you a higher rate of return. But you need to measure rate of return with two factors, a financial rate of return and a lifestyle rate of return.

Financially, any time you can invest in excess of the interest payments on your debt, you should. Mathematically, that will always win. If you could get, say, a guaranteed 13% rate of return as a dividend rate on a $60,000 investment, and this were your decision criteria, I can get a guaranteed 13% rate of return as dividends – excuse me, 13% dividend payout on my investment no matter what, then on my $60,000 payment, then you should always do that instead of the other financially speaking.

But the question is can you invest and get that guaranteed payoff? That's the tough one. But that's only the financial component. The other component and how I've decided to talk about it is within the context of the lifestyle rate of return. So will you get closer to your goals without the debt or farther from them?

So if you bring those two things in and you figure out where do I get the highest rate of return from my money and include in that rate of return the financial rate of return and the lifestyle rate of return, then invest wherever. Let me give you a couple more examples to fully illustrate this.

If you pay off the debt and you choose to pay off the student loans at the 7% interest rate and assume for a moment that you pay off all of it through income and through the use of this money, you will receive a 7% guaranteed rate of return on that money.

It's the financial rate of return because that's the interest payments that you won't be making. And in addition to that, the lifestyle rate of return that you will gain from that is you will have rid yourself of an obligation that you would never get rid of in any other way.

You can't bankrupt student loan payments, so you've rid yourself of an obligation. You've also lowered the amount of money that you need to earn on a monthly basis. So that might give you some more lifestyle flexibility. And there may be some other benefits such as an emotional sense of satisfaction, a sense of freedom.

Perhaps that would give you the courage to follow your dreams and build something that you've wanted to build or take the job that makes less money but has more meaning and more impact to you because you no longer need to generate the $600 a month. So that might be the benefit of taking it and investing it in the – in paying off the debt.

There's the financial rate of return and the lifestyle rate of return. But flip it around and say what would be the financial rate of return and the lifestyle rate of return of another option? Well, perhaps you were going to take this money and you were going to start a business.

So you calculate that your rate of return from the business – let's just for the sake of example, let's keep it at 7%. You calculate that your profit potential is 7%. And so on a financial rate of return to a financial rate of return, they're about the same. You actually would always want much higher than that to take on the risk of private business, but let's just for the sake of illustration keep them the same.

But the business gives you a higher lifestyle rate of return because say for example, it allows you to be your own boss. It allows you to go to your kids' soccer games and be there for them. It allows you to do work that you find more meaningful. It allows you to be active in your local community and helping to build things in your local community.

And so you would weigh the impact of the lifestyle that you could gain from operating the business and you would look over at the lifestyle that you would gain from paying off the debt. And in one example, paying off the debt, you no longer have to pay the $600 a month, but you also don't have any capital to start a business.

But in the other column, you have the business and the business is able to make you the $600 a month and then also to make you a living wage is what we're assuming in my example. So you decide, "Well, in this case, I'm going to go ahead and take the $60,000 and invest it over here because I've got the higher lifestyle rate of return." So it's all a matter of rate of return, but we need to think of that in a way that carefully includes the financial analysis, but that also includes the lifestyle analysis.

So if your investment can beat that 7% guaranteed return on a risk-adjusted basis and/or give you a greater lifestyle freedom than clearing that debt, you should invest the money. If it can't, then you should pay off the debt. So practically speaking, what kind of investment could you make? I doubt that – I don't know of any investment that can or will exceed that – the return that you get from paying off the debt.

That would be an investment in paper assets. There's no mainstream paper asset investment strategy that's going to beat that. There's really not. Not when the 7% is guaranteed and not when you can gain the additional lifestyle freedom by clearing that debt. The only business that I could come up with would be – or excuse me.

The only investment that I could come up with would be private business or a leveraged investment opportunity, something like taking the $60,000 and buying six rental properties, putting $10,000 down on each of them. There you create a part-time business and an investment together. If you are a skilled investor, then perhaps that would be a solution for you.

But do you have those skills? The concern here for me is what did you get a degree in with $102,000 of debt? Hopefully, you're in an occupation that's going to be your best investment. If you got the $100,000 and now you are a high-powered attorney or now you are a surgeon or a dentist or any kind of highly paid opportunity and now you can earn a lot of money, well, that's going to be your best solution.

Just focus on your career. In that case, paying off the $100,000 is just going to be – probably going to be the best use of your time, focusing on building your income and your occupation and then paying it off is going to be all you have time for. Now, on the other hand, let's say that you're making say $50,000 a year as a rank-and-file government employee, maybe a manager of – in a government opportunity office of some kind.

You spent the $100,000 on a master's degree in social work. I actually had a client in that situation one time. Well, in that case, you're sunk in that situation and you're never going to pay off the debt unless you dramatically change something. So in that scenario, your best use of the time would be to go off and create income and get out and start a business.

So take the $60,000 and I don't know, buy a Dunkin' Donuts franchise or start a carpet cleaning business or just about anything that gives you more income potential than what you're making as a mainstream employee. I mean Dunkin' Donuts franchise and carpet cleaning business as a metaphor for any kind of business that is appropriate for you.

And in that scenario, you could go bust obviously. Many business people do. But at least there, you have the very real possibility of making a rate of return in excess of the 7% that you need and you have the possibility to escape the 60 years of student loan payments.

In business, you may be making the minimum payments for a couple of years just kind of scraping by. But then by your fourth year, maybe you can clear $100,000 in profit and boom, pay off the debt and still have your business, your asset, which is why I spent so much time on that.

Which is why I spent so much time on the first example. It's all about the specific opportunities that you have available in your situation given your background, your interests, your skills, your experience, and your life goals and your money, how much money you have to invest. And what type of lifestyle is going to meet your goals.

$100,000 student loan debt is in some ways a big number. But it's really only a big number if you're in that situation that I described of making $50,000 a year. You got three kids and you're making $50,000 a year. It's tough to really get ahead substantially. In that scenario, it's a big number.

So there, if that scenario is unacceptable to you, you're going to have to make a dramatic difference. If you are a surgeon making $800,000 a year, $100,000 of student loan debt is no big deal. Or if you own a Papa John's franchise and you're making $100,000 -- you own three of them and you're making a couple hundred thousand dollars from each of them.

I don't know the profit numbers on those franchises but use it as a metaphor. Then the $100,000 is no big deal. So you've got to adjust your scale of your thinking to get rid of this $100,000 of debt. The final thing I would just encourage you with is be very aware of the fact that in your situation you've already declared bankruptcy.

And that is concerning to me and it should be concerning to you because the fact that you declared bankruptcy demonstrates an inability to effectively manage money and to manage risk. That's what the facts would say. So that doesn't inspire a lot of confidence in me of your investment prowess.

Now, obviously, I don't know the reason for the bankruptcy. It's possible that you were pursuing an aggressive real estate strategy and that destroyed you. And maybe you learned what you needed to learn and so it's behind you and you're doing well now. Maybe it was a medical emergency for you or a family member that wiped you out.

You had a close family member that had cancer and the medical bills piled up and you took time off work to care for the person that you love because that was what was right. And so now it's behind you. Or it could have been simply that you never paid attention.

What's the famous quote by Ernest Hemingway, "How did you go bankrupt?" His response, "Gradually, then suddenly." Those would all be very different symptoms. And you should look carefully at the reason for the bankruptcy and make sure that you've learned what you need to learn from it. Now, interestingly, you're not stuck at all by bankruptcy.

If you start studying entrepreneurs and wealthy people in the United States of America, you'll find that many of them have declared bankruptcy or been completely broke. And many of those have been on multiple occasions. So you can certainly overcome this and it sounds like you are in the process of doing that.

Even your goal of becoming a personal finance consultant, you can use the bankruptcy as your launching point. Most personal finance gurus need to have a story to create relatability. One of the formulas that you'll see if you watch the guru business is you need a story. And so Robert Kiyosaki talks about when he and his wife were living in their car when his Velcro wallet business failed.

Or was that the one that succeeded? The point was they were broke and living in their car and got kicked out of their friend's house. Or Dave Ramsey tells of his stupidity with his real estate financing portfolio. And they made all these mistakes but that's what gives him the authority to be able to help you.

We love in the US American culture, we love underdog stories in our culture. You're doomed if you want to be a personal finance consultant or guru who comes in and says, "I've always done the right thing and I've just made perfect decisions with everything." You're doomed. You're going to have no market at all.

So carefully consider the reason for the bankruptcy and make sure you've learned lessons from it. Hopefully, this is helpful to you and I wish you the best. I'll be interested to hear what you have done with this and hear which path you pursue. Next question here comes from – I think the name is Bharat.

Bharat, forgive me if I'm mispronouncing your name. It says, "Joshua, I recently stumbled across the podcast and I've been listening to it from the very beginning. Your approach to each podcast has been from a very practical point of view and I appreciate that and I enjoy listening to it.

Keep up the great work. At the time of writing this, I just finished episode 9, Why Your House is a Terrible Investment. I'm in the process of having just signed a contract on a house and I'm waiting for a closing date. All through the show, Jim Collins and you made many, many valid points.

I, myself, have already tracked down my costs, also factoring in an average monthly maintenance expense to owning a home in an Excel spreadsheet. And even though more often than not, one usually tends to buy a home which is slightly bigger in area than the one that one was renting, same with me, the numbers for buying a home versus renting still look better to me in the long run.

I live in the slightly expensive northern Virginia area. I've been renting for the last 7.5 years in various capacities from being a full-time student to a full-time employee to full-time employee and part-time student. And I can definitely say that annual rent increases add up over each year. In order to keep the rents at reasonable rates, you have to move every two or three years.

This would add moving expenses, cleaning expenses, security deposits, and a pieceless mind to your rent calculations. But this has not been factored into Jim Collins' calculations. Yes, when you own a home, your property taxes may also go up as the home appreciates. But this won't be as much as how much the rent would increase year in, year out.

Also, the home may or may not appreciate every year for this to happen. I'd love to know what your comments are in this regards, Bharat. Bharat, the answer to the question is it's personal to each person. The biggest misconception that I'm against and that also Jim Collins is against is the idea that you always need to own a home.

So anytime you're responding to something, you probably overstate your case a little bit. For me at least, I often find that I will begin in one situation, one scenario. And let's just say I'm at a place of zero on a scale of 1 to 10. And then all of a sudden, I get exposed to something and I go from zero and I go all the way to 10.

And at 10, you're basically attacking everything. And then over time, you kind of mellow and pull back a little bit to point number six. The problem is – or let's just say five. Five is the right place. Five is the middle ground, reasonable, rational perspective. The problem is being at a perspective of five doesn't get people to click on your article if you're writing a blog.

Being at a perspective of five doesn't necessarily make for interesting podcasting because everybody just listens and says, "Well, I agree with that. I agree with that." And so oftentimes, you get to be a little bit extreme. And so what we tried to do in that show was bring out all of the discussions that aren't talked about, pointing out the benefits of renting.

But at the end of the day, you've got to put that into your spreadsheet based upon your actual costs and in exactly the same way. That's why I started with student loan scenario. You've got to bring in the financial aspects of your decision and also the lifestyle aspects of your situation.

And make sure that you're looking at your options and judging them in light of your goals. You do raise a valid point that in your situation, in your town, rents might go up every year such that to keep them at reasonable rates, you need to move every two or three years.

You will have your own moving expenses. You'll have your own cleaning expenses. And you've got to assign a dollar value to your own lack of peace of mind of knowing where you're going to live. Those exact same things for me might be very different. If you have a lot of furniture and you have a small car and few friends with pickup trucks and strong backs, then you might need to hire professional movers to help you move every year.

That will add up. Now, I, on the other hand, might not have many possessions. I might have a big car or a pickup truck or friends with pickup trucks and many willing backs that if I buy a six-pack and a pizza, then I can get some help with them coming over and helping me move.

So the answer is calculating each individual decision for you. And only you are going to be the one that's actually going to be able to put a value on what is peace of mind. For example, in my household, my wife and I, we own a house. In my value calculation, especially for my wife, I'm not so – I don't have such the connection to a piece of property, although I'd certainly like where we live.

But I don't quite have the same connection that she does as far as lifestyle. For her, it's a big deal. She really likes the lifestyle of owning a house. She has plenty of room, plenty of space. I dream of – I'll just live on a sailboat. She doesn't. So for her, she's going to assign a much higher value to having a larger house, and that is important.

Because life is not just all about money decisions. The only point of money is basically to fund lifestyle. That's it. Money is going to be used to fund the things that we think are important. It's not necessarily all going to be consumed. But what is going to be consumed is – it's a valid consideration.

When you die, you leave all the money behind. So life is not about a spreadsheet where the only goal is to arrive at the end of life with the most numbers on the spreadsheet and the most miserable life. Rather, depending on your worldview – let's just keep this with a simple primarily secular approach.

The goal is to arrive at the end of life with maximum satisfaction from life. I have a few more factors on my worldview that I would add into that spreadsheet. But one of those satisfactions – but for the sake of simplicity, I'm just keeping it with the secular worldview at the moment.

It's overall life satisfaction and which of these decisions are you going to value more and which are you going to value less. The people that say, "I want to move in and rent," or the people that say, "I want to move into a tiny house," or "I want to move into an RV," or "I want to move into an off-grid house," the reason they do that is not necessarily only financial.

It's because of the higher total quality of life. So you sound like you've made the right decision, to me at least, that you've tracked it and you're making a careful decision. And probably the only wrong consideration – excuse me, the only wrong decision is the one that's not considered fully.

Sounds to me like you've considered it. Except the only thing is you may or may not know how much that actual maintenance expense is. I certainly think sometimes longingly about the value of being able to rent an apartment and not have to deal with the maintenance on my house.

But your mileage may vary. Next question comes in and it's a question on 529s. "Joshua, I have a one-year-old son and I'm married. My wife is in school earning her PhD. Can my wife and I create two separate 529 plans to double our tax benefits, one in my son's name and one for my wife?

Indiana's tax benefit is a 20% tax credit with a $1,000 maximum credit. If not, should we create a 529 anyway? We have the money to pay for her $30,000 education already saved to be spread over the next three years." So I forgot to write down the name here. This was one of the patrons on the Patreon page.

And so the answer is this. I looked up the Indiana benefits and just did a quick web search, did a little duck-duck-go search. And I found here on a site called College Choice CD, which is evidently one of the plans that is being offered in Indiana, their analysis which says this.

"The tax credit is available to an individual filing a single return or a married couple filing a joint return. The amount of the credit is the lesser of the following." And there are three things. One, 20% of the amount of the total contributions to the College Choice plan during the taxable year by the taxpayer.

Two, $1,000. Or three, the amount of the taxpayer's adjusted gross income tax liability for the taxable year reduced by the sum of all other credits allowed. So in a simpler language, you get up to 20% of the amount that you contribute as a credit up to a cap of $1,000.

But you don't get – if your income tax liability is less than $1,000, then you're limited to whatever your state income tax liability is. Now I did try to corroborate that with a couple of sites. But in short, my answer is no. You don't get any benefit by funding multiple accounts in your state.

Now, of course, another state might be different and you should further investigate with your tax advisor whether or not there might be some way to file as married filing separately and see if there's any wrinkle in the tax rules. My guess would be no and there are other major penalties for filing as married filing separately.

Or you should also check to see, well, if we did an individual return, is there going to be substantial benefit? My guess is it's probably not going to outweigh the cost. I wouldn't rule it out. But just if you and she file married filing jointly and create two different plans, you're going to be capped out at $1,000.

So you shouldn't – there shouldn't be any reason to establish multiple plans for that benefit. Now, you already have the money to pay for her $30,000 education and you've saved it to be spread over the next three years. If you are getting the full state income tax benefit from Indiana for your contributions to your son's account, you're getting up to that $1,000 maximum credit or if either of those other scenarios apply, then there's not going to be additional benefit for you by putting the money through the 529 plan.

If your wife's education were much farther off in the future, say it's ten years from now, she's going to go and get a higher degree of some kind. Well, then in that situation, the deferral on the tax might be worth considering. But when she's going to school over the next three years, there's no benefit because you're not going to be able to make enough interest on money invested over the next one, two, or three years.

You're not going to be able to have the money invested substantially to where it's going to make any difference. So that's my answer. The only other exception to that is check to see just as far as expenses, fees, discounts. Look for any way to pay the money with discounted dollars but I've covered that in another Q&A show with another listener.

So I won't go into it anymore right now. Next question comes from Jeff. Jeff says, "My parents just recently started working with a fee-only financial advisor after their recent retirement. She's been doing a nice job with them so far, helping them come up with their financial goals. Seeing if they are able to achieve them with their current assets and choosing the most appropriate social security choice for their needs and goals.

I've been attending the meetings with them." Jeff, I'm glad to hear that. That's a good balance. I always liked it when – that's good for multiple reasons. Number one, you're able to help them and protect them in case you have a predatory advisor or an unethical advisor. Number two, it gets you involved as the child in your parents' financial situation.

That is very important for later on, the ability to have a healthy, reasonable discussions about money. So I really like it when you can have that kind of relationship. So I'm glad you can do that. "Either in the next meeting or the meeting after, the question of converting their traditional IRA to a Roth IRA will come up.

Other than their paid-off house, most of their portfolio is in traditional IRAs. She," the financial advisor, "is of the belief that it doesn't make any sense to convert any of the traditional IRA to Roth because they don't have the taxable funds to pay the necessary taxes. I am of the opinion that since the income they currently receive from their IRAs is well under the $74,900 limit, filing jointly, keeping them in the 25% bracket, that they should convert some of it and pay the 25% tax rate before they have to start taking much larger RMDs in the future at higher tax rates.

Of course, that also ignores future potential tax hikes. They understand the benefits of having some flexibility for the future, as well as the benefits of passing a Roth to me and my sister on their deaths, which is another one of their goals. The question I have is, what are the appropriate questions to ask the financial advisor as to how to look into whether converting makes sense outside of the generalities that you shouldn't because you don't have taxable funds?

How do you run the numbers, so to speak, to determine if converting is in their best interest? And also, how do you come up with that sweet spot amount in order to stay inside the 25% tax bracket and not pay taxes outside that bracket? Is that a question for a tax accountant or should a financial advisor be able to answer that question as well?

Thanks for all you do, Jeff. Jeff, you just asked me this question is so intimidating to answer. This was the question I was thinking of at the beginning of the show when I said how difficult I find it to figure out what's the right tone to answer with these questions.

I haven't done a Roth versus traditional show yet, so I had planned to – I'd like to have that resource out there. But that in and of itself is a monstrosity because this is a very difficult – it's a tough question to answer. No matter what you read as far as just simple scenarios, simple things in US news or simple things on a financial blog about this is always better, they're wrong.

All of the simple answers to this question are wrong because there are many variables at play here. Obviously, you're not asking for a specific analysis to your situation. But about the best I can do is give you a few guidelines and refer you to your advisor. This is a very complicated question to answer and it's very – I find it very difficult to calculate.

In fact, I don't think I've ever actually successfully done it as particularly as I would like because there are so many moving parts. It's just a tough thing to do. You can calculate it specifically if you have excellent software. But I didn't have that software when I was doing this – previously when I was doing financial planning.

I was reviewing software when I was in the process of setting up my own firm because I wanted to be able to answer this question. I've also reviewed that software in an effort to answer this question on the show and try to create some scenarios. But it's really tough.

And so I don't know whether the financial advisor will be able to calculate the answer. If they have an accountant, I would ask both of them. And don't press too hard on this as far as it is a difficult question to answer. I'll try to put some articles in the notes that might help you.

But it's really tough and the financial press is very inadequate here. I will link to some articles by Michael Kitsis and he has done the best job of this. But just as a simple example, it's much simpler to think through should I open a Roth IRA or an IRA.

Back in 2009, he created an article. It's a 17-page single-spaced article all about some interesting back and forth, back and forth, back and forth, back and forth on which one would be better to do, Roth or traditional IRA. And even though there are substantial benefits to the Roth, there are also disadvantages.

When you bring in conversion, it's tougher. So I hate hedging and always going with this back and forth, back and forth scenario. But it's the only way to give an accurate answer. So one of the articles that I'll link to as background for you is an article by Michael Kitsis on the factors, the four factors that will help you determine whether a traditional IRA or a Roth IRA is the best.

And you need to start with these factors and read them. The four factors are current versus future tax rates and that is the – going to be the biggest factor and that's actually in many ways the only factor. What I mean is we're basically trying to figure out which of these is the optimal strategy and the only difference between them is how they're taxed.

So we've got to deal with taxes. But the question is what are the current versus future tax rates that they're going to be subject to? Number two is what are going to be the impact of the required minimum distributions of the RMDs? Number three is a discussion of contribution limits and the embedded tax liability.

Number four is estate taxes. Let me go through these quickly with an explanation to help you grasp a little bit of framework. Essentially, as you laid out in your question, we're trying to figure out when are they going to pay the lowest tax. So we've got to figure out what is their current tax rate as you've done and what's their future tax rate going to be.

This is obviously going to be driven by how much income they have. So if they have a lot of money and they're not going to be spending very much of it and they're going to be taking RMDs out of the account that they're not using for lifestyle, then we've got to figure out and calculate that in.

So we've got to predict what their current tax rates are and what their future tax rates are by the RMDs as you started. But one of the keys to just to point out, if they're going to spend the money from the RMDs, it's a very different calculation because they're going to spend the money anyway.

So we're not necessarily just focusing on the tax rate. We're trying to figure out – I'm kind of blubbering. The Roth IRA is only valuable if you're going to pay the tax, if you're going to stretch it out over a long period of time. So read this article and start with that and think through, OK, what are going to be the current rates?

What are going to be the future rates? What are these RMDs are they actually going to use? And then look through the other scenarios. Another thing you need to really do is you need to consider their life expectancy and this is also going to be a major factor because whatever decision you make, you need to have time.

You need to have time either for the tax strategy to grow and to be worth it or you need to have – that's the core of it. So to illustrate the complexity here, I'm going to read a short excerpt from a different Michael Kitsis article and he has an entire article on this talking about how to evaluate your client's current and future marginal tax rate.

Essentially, what I'm trying to do with this answer is give you a little bit of an appreciation for how difficult it is to answer and give you just a couple of things to consider that hopefully you'll be able to talk about with a planner and together figure it out.

Kitsis article goes like this. "The basic concept of the marginal tax rate is relatively straightforward. It's the tax rate that will apply at the margin to the next incremental amount of income or deductions. In other words, if some base income amount is filling the lower tax brackets such that earning an extra $1,000 of income will trigger an extra $250 of taxes, the marginal tax rate is $250 over $1,000 which would equal 25%.

Regardless of how much in taxes was or wasn't paid on the underlying base income up to that point. While an effective tax rate might tell you what portion of a client's overall income is being allocated to taxes, the marginal tax rate is the guide for, at the margin, what the benefit would be of a particular tax planning strategy.

In practice, though, determining a marginal tax rate is far more complex because the factors that cause additional taxes as income rises go far beyond just looking up a client's current tax bracket. For instance, with larger amounts of marginal income, the client could actually be forced into a different tax bracket by income itself.

Example 1. A married couple with $130,000 of taxable income after deductions is in the 25% tax bracket. If this couple decides to do a $30,000 Roth conversion, their taxable income will rise to $160,000, putting them into the 28% tax bracket. However, the reality is that the marginal tax rate on this Roth conversion is not really 25% nor 28%.

It's actually 26.1%, as the first $18,850 of income will be taxed at 25% to the top of the 25% bracket, and the next $11,150 will be taxed at 28%, for a total additional tax liability of $7,834 on $30,000 of income, which comes out to a 26.1% rate. However, the reality is that in today's environment, tax brackets are a poor estimate of marginal tax rates, not only because large amounts of income may span multiple brackets, but also because brackets alone fail to account for the impact that changes in income can have on deductions themselves.

Example 2. This one's three paragraphs, and we're done with it, but recognize here the challenges. A married couple has $230,000 of ordinary income from wages and $50,000 of long-term capital gains, and is trying to understand what the marginal tax rate would be to determine whether to contribute $10,000 to a traditional 401(k) or a Roth 401(k).

The couple pays in $20,000 of mortgage interest, $15,000 of investment management fees, and will claim two personal exemptions for husband and wife. With a traditional 401(k) contribution, the couple's ordinary income will be reduced to $220,000, and their adjusted gross income will be $270,000. Against their ordinary income, they will be able to claim a $20,000 mortgage interest deduction and $9,600 of miscellaneous itemized deductions, the excess of $15,000 of investment management fees over the 2% of AGI threshold, and $3,950 times 2 equals $7,900 of personal exemptions, resulting in ordinary income of $182,500 and a tax liability of $38,347.

On top of this, they will pay 15% in capital gains taxes on $50,000 of capital gains, or another $7,500, and because their AGI is $270,000, they will owe a 3.8% Medicare surtax on the last $20,000 of long-term capital gains, an extra $760 of taxes. Ultimately, this means the couple will pay $38,347 + $7,500 + $760 for a total of $46,607 of taxes.

If the couple contributes to a Roth IRA, excuse me, to a Roth 401(k) instead, their ordinary income will still be $230,000 and AGI will be $280,000, resulting in another $2,800 of taxes, given their 28% tax bracket. In addition, given their higher AGI, they will only be able to deduct $9,400 of investment management expenses, with a higher 2% of AGI threshold, resulting in $200 of lost deductions at their 28% tax bracket and another $56 of taxes.

Furthermore, with a $280,000 AGI, they will now face $30,000 of long-term capital gains over the 3.8% Medicare surtax threshold, leading to another $10,000 x 3.8% for a total of $380 of Medicare taxes. Thus, the net result of their extra $10,000 of income is an extra $2,800 + $56 + $380 = $3,236, or a marginal tax rate of 32.36%.

The end result of this example is that even though the couple is in a 28% tax bracket, their marginal tax rate on another $10,000 of income is actually 32.36%, given the impact of more income on the miscellaneous itemized deduction, 2% of AGI threshold, and also the amount of capital gains that cross the 3.8% Medicare surtax threshold.

We're done with the numbers, but stay with me here. In fact, the reality is that additional increases in income can trigger taxation far beyond just the tax bracket itself, including the impact of income on deduction thresholds, for example, medical expenses and miscellaneous itemized deductions, the phase-out of itemized deductions and personal exemptions at higher income levels, the phase-out of various tax credits as income rises, for example, the premium assistance tax credit, the impact of the AMT, and the phase-out of the AMT itself.

We're done with the phase-out of the AMT exemption, the introduction in 2013 of two new Medicare taxes, a 3.8% tax on a net investment income and a 0.9% tax on earned income, and the special rates that apply to long-term capital gains and qualified dividends, which now have their own 0%, 15%, and 20% three-tax bracket system.

For older clients, higher income levels can also phase in the taxation of Social Security benefits and trigger higher income-related adjustments to Medicare Part B and Part D premiums, which are also indirect increases in the marginal tax rate. Because of all these overlapping effects, in some cases, the best way to estimate a client's marginal tax rate is simply to use tax planning software, enter the client's existing details, and then simply add $1,000 or some other modest amount of arbitrary income and see how the tax rate changes.

If adding $1,000 of income increases the tax liability by $313 in the software, which takes everything into account, the end result is that the client's marginal tax rate is 31.3%. And you can add in additional amounts and try to find the transition points. So, in order to actually do it, you have to truly calculate a current marginal tax rate, best practices really requires calculating a client's total tax liability twice, once without the marginal income and once with it added in, to ensure that all these factors are properly accounted for, especially since having several factors overlap at once can lead to a significantly higher marginal tax rate than just what would be implied by the tax bracket alone.

So, you can read the rest of the article. That's just the beginning of the article. And I wanted to do that even though I probably lost 95% of the audience and all those numbers. It doesn't translate well to audio. But just to demonstrate how, A, ridiculously complex our tax code is, but B, how difficult it is to actually answer the question, which is why I was hemming and hawing and blubbering earlier trying to answer your question.

Another added difficulty of this that Kitts doesn't necessarily bring in this article is you've got to predict future investment values of the accounts. Because if you say, let's say they have a million dollars and you're trying to figure out a million dollars and that grows to four million dollars versus that growing to two million dollars at their death, there's going to be a major, major difference there.

So, at the end of the day, we can do some calculations. But any time we get out, we're basically just doing some guesswork, which is why most financial planners will come back to rules like, "You don't have the money outside of it." So, you don't have the money outside of the account.

So, therefore, don't do it. This is an incredibly complex area. I'm out of my element here even just getting into it because I don't do it every day and because you need some very sophisticated tax planning software to be able to do that. So, in this meeting with the financial advisor, start with an appreciation of how difficult the question is and then just kind of look and try to figure out how big and meaningful some of these calculations are going to be based upon the scale of their situation.

And then, hopefully, they probably won't have the tax planning software that you need. She, the financial advisor, probably doesn't have it. Your accountant might be able to do it. There is one piece of software that I trialed in the past and I actually had learned about it from Kitsis when I was trying to find this out called BNA Income Tax Planner.

And you'll see it linked in this article that I'll put in the show notes where he recommends that as being the tax planning software. But this is very sophisticated, very specialized to answer that question. And I don't know if she knows it or if your accountant knows it. So, just make sure before you dig too deep, try to figure out the scale of it.

You may need to consult another advisor that's specialized in this area. I don't know who to refer you to. I don't have the software to be able to answer the question. Or just simply look at it from big picture, broad brush strokes. Or maybe you could do it yourself.

Start with a balance sheet. Build an income statement for scenario one. Project the accounts forward for a period of time and then model the differences. And then look at their tax returns and try to model the tax returns. And for that, you need some pretty sophisticated tax software to be able to do it.

So, I know I'm kind of avoiding the question as far as by not directly answering it. It's not an easy question. And it's not an easy question in any way, especially without details. But hopefully, at least by linking to a couple of these articles, this will give you some resources that you can dig into.

And it will help you to appreciate the complexity of the answer. That's it for today's show. I'm going to skip this last question on tax loss harvesting for another day. And get this one out today. It's been a busy couple of days and I wasn't feeling well yesterday to be able to get this out.

So, I'm just going to go ahead and ship today's show. Thank you all so much for listening. Thank you all very much for your support. I love getting these questions, especially those of you who are patrons who've asked questions. I've got the list and I've got you guys right at the top of it.

So, thank you all for the questions. If you've got feedback for me, I'm happy to hear from that. If you value this content, you'd like to support the show financially, I would really appreciate that. You can find details for that at radicalpersonalfinance.com/patron. Let me give you a quick update here.

I can't get there in time before I run out of music. So, we're doing well as far as contributions. We're almost at $2,000. So, we're not going to be, I don't see, unless a bunch of you guys jump forward, which I'd love that. But I don't see our ability to hit $6,000 by June 1.

So, I'm still in the process of working through and trying to figure out exactly what I'm going to do to adjust things going forward. So, if you have any input on that or any thoughts, I'd be glad to hear from you. If you'd like to contribute to the show, you can find details at radicalpersonalfinance.com/patron.

Thank you all so much for listening. Be back with you soon. Thank you for listening to today's show. Please subscribe to the podcast with our free mobile app so you don't miss a single episode. Just search the App Store on your device for Radical Personal Finance and you'll find our free app.

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