(beeping) (upbeat music) - Welcome back to Portfolio Rescue. We get questions all the time from people on Twitter, email, YouTube, where else? Some people shout at Duncan on the street. Remember our email here is askthecompoundshow@gmail.com. We're gonna try to answer all their questions today. John, throw up our first one, which is just to follow up.

Someone asked on Twitter, actually. I told you to get us from anywhere. Oh no, just the first Treasury Yield one, John. There we go. Someone asked us this. Keeping with the theme that we've had in the last, ah, three or four months. Lots of bond questions, lots of tax questions.

We're gonna get to a lot of those today. Someone on Twitter asked, what are some examples of bond ETFs that would lock in these rates for three-month to two-year time frames? Is there such a thing as an index one for these? So people are trying to figure out, how do I invest in T-bills?

Kind of hard to believe, considering they've basically been zero for so long. You can see six-month T-bills over 5%, 12-month T-bills around 5%. Anything two years and under is looking pretty good right now. The good thing is, Duncan, what did you say your checking account is? Over 4%? You're not willing to go to T-bills yet?

- 4.27% in my checking account. - Okay, see, I think they do the weird numbers just to get people to look at it, 'cause it's different. They don't round up or down. So the good news about T-bills is there's a ton of ETFs. So it's easy to Google them, but iShares has a one- to three-month T-bill.

State Street has a one- to three-month T-bill. Fidelity has a T-bill index fund. Vanguard has an ultra-short bond ETF. Charles Schwab has a U.S. Treasury short-term ETF. There's also this new ETF provider called U.S. Benchmark Series that tries to give you exposure to single-security U.S. Treasuries, so you can get three-month or 12-month or two-year, and it basically just rolls it over every month into one specific security, so you're kind of constantly in that thing.

I think the big thing to remember if you're trying to invest in these is just to look at the average maturity and the average yield to maturity on whatever fund you end up buying, and kind of compare that to what the T-bill yields are to make sure you understand what you're getting at, 'cause some of these, check the holdings by sector, too.

Some of these funds hold all Treasuries. Some of them might have some corporate bonds. So no right or wrong answer in terms of getting exposure, but it's really easy, and also it just shows how much this market has changed over the past two or three years. Before, everyone was, "How do you invest "in three-times-levered technology innovation stocks?" And now it's, "How do I get into T-bills?" - Right, from offering different cryptos and altcoins and stuff to now, "Oh, we offer T-bills." - Yes, they're the sexiest thing around right now.

And it's kind of mind-boggling that we had 15 years of more or less zero rates for a long time, and now we immediately went from zero to 5%, and people kind of are trying to figure out, "What does this mean?" - Well, it also makes me understand the zero-coupon bonds even less now.

I was already kind of confused by those back in the day, but now I'm very confused. - Well, a T-bill is essentially a zero-coupon bond, Duncan. So again, if you buy a T-bill, you're not getting paid an interest rate, 'cause these things are three-months, six-months, 12-months. You buy it at a discount.

So let's say the par value is $1,000. You buy it for 900, and then when it matures, you get 1,000, depending on what the yield is. That's a very simple example. That's how it works. So you're not being paid a periodic yield on a T-bill. You're buying at a lower amount, and then the difference is your yield.

- I see. All right. - Right? - Learn something new every day. - Here we go. All right, let's get into some questions. - Okay, up first today-- - Speaking of bonds. - Yeah, up first today, we have, "Can we get a breakdown of the pros and cons "of long-term versus short-term bonds?

"I like it, short and sweet." - I think this one actually came from another good Twitter question. - Johnny on Twitter. - All right, so again, I think I've received more questions about bonds in the last six months than I have in the last six years. I think part of it is because so many people got wrecked in bonds last year.

If you had any sort of duration on in your bond portfolio, you know, intermediate-term bonds fell 15%, long-term bonds fell 30%. We'll get into that a little bit. Let's look at the little pros and cons for each. So long-term bonds. Remember, just simple math, Duncan. Prices and rates are inversely related, right?

So if rates go up, prices go down. If rates, and if rates go down, prices go up, right? Inversely related. The longer your duration of maturity, the more variability you're going to have to those rate changes. So if rates go up a lot, your long-term bonds are gonna get crushed.

If rates go down a lot, your long-term bonds are gonna do much better. So the long-term bond pros include, you're gonna get more bang for your buck when rates fall. So that's like recession and deflation protection. You can lock in your yields for much longer. These 5% short-term T-bill yields are great right now, but if we go into recession, they could easily go away tomorrow, right?

The Fed could drop rates back, and those 5% yields are gone with longer-term bonds. You can lock them in for longer. You also should earn higher expected returns for taking more risk, right? You're lending your money for the government for longer. That means more economic regimes, more interest rate movements, more inflation movements.

All these things you should expect to earn higher returns, even though you can't right now. Cons for long-term bonds. They can get crushed when rates rise and inflation rises. That's what happened last year, right? There's way more volatility in terms of inflation. I think we've already seen long-term bonds be up like 10% this year, and now they're flat on the year because rates are moving so much.

- They're the meme stock. - Kind of. Zero-coupon bonds are even worse because that's the longest-duration asset. And then you're locked into lower yields for longer if rates rise, right? Shorter-term bonds mature much quicker, so you can roll those over into new, higher yields. Long-term bonds, you can't do that.

So short-term bonds are the opposite. There's little to no interest rate risk. I mean, if you go one to two years out, there's a little bit, but trucking three or six-month T-bills, there's basically nothing. That's great during periods of rising rates, again, 'cause you can, once they mature, you roll them over and reinvest at higher rates.

There's much less volatility. It's pretty steady-idy, and then there's less reinvestment risk because, again, those bonds mature faster. The cons, you can't lock in those higher rates for short-term bonds, right? Yields can change in a hurry. That's a good thing when they rise, a bad thing when they fall.

You should have lower expected returns 'cause you're not taking as much risk. If you lend your money out to someone for three months, that should be a lower return than lending someone out for 30 years, right? Obviously, the yield curve doesn't reflect that right now, but that's a normal state of affairs.

And then if we have a recession or deflation protection, short-term bonds aren't gonna help as much because if rates fall to the floor, you don't get that price bump that other bonds get that are longer-term. So it kinda comes down to risk-reward and your appetite. Now, a lot of people fell in love with the idea of long-term bonds over the past 20 to 30 years 'cause they generally provided much higher returns, and they cushioned the blow during most market sell-offs until last year, of course.

So John, throw up the chart. This is just 2022, and I looked at a bunch of different durations. So long-term bonds got crushed. They were down 30%, more than 30%. That was worse than the stock market. Intermediate-term bonds, this is talking seven to 10 years. That was down 15%.

Short-term, one to three years were down a little bit, less than 4%. That's like a bad day in the stock market. And then T-bills, one to three months, were up 1.4%. You can see they barely move at all. You're just kind of getting that yield. So this is what happened last year in a very high-rate environment where rates went up really fast.

Inflation goes up, that's what happens. But that's one year, right? Anything can happen in one year. Let's look at the historical performance on a much longer timeframe. So this is, my basic thought is, over the last 100 years or so, we've had three interest rate regimes. So I've got the data, this is 10-year Treasuries.

From the 1920s to the early 1950s, it was basically range-bound from two to 4%. Rates didn't go much higher or lower than that. Then from 1950 to 1980, rates went sky high. We're talking 2% to 15%, basically, in a 30-year period. Ever since then, we've had falling rates. And that's basically the three long-term, like, secular phases, right?

And, okay, what happened in those terms, in terms of performance? John, let's do the next one. So I looked at the returns for long bonds, five-year Treasuries, and one-month T-bills. Basically, the longest you can get, the shortest you can get, and then intermediate term. So in that range-bound market, long bonds did okay.

We're talking 4% per year. They beat five-year Treasuries and one-month T-bills, which gave you 1%. One-month T-bills is basically a good proxy for cash. In a rising-rate environment, 1950 to 1980, when rates went to double digits, now we're talking cash actually was the best performer. It beat intermediate-term bonds and long-term bonds, and it beat long-term bonds by quite a bit.

Then you had the falling-rate environment from 1980 to 2020. Then you had those higher starting yields that happened because they moved so high. Long bonds did amazing. We're talking 7% to 10%, basically, for five-year Treasuries to long-term bonds for 40 years. That might be one of the greatest bull markets we'll ever see, certainly in fixed income.

You'd be hard-pressed to see an environment that would match that. And then the COVID times, you see long bonds, again, get crushed, five-year Treasuries have fallen. Cash has held up well. Over the long-term, long bonds have the best long-term returns, but they don't beat five-year Treasuries by much. So you experience a lot more volatility.

You don't get a huge bang for your buck. Obviously, you did better than cash. So that's kind of where we are. So the big question now is, okay, what is the next phase? Obviously, we're in an aggressive rate rise right now. I honestly don't know what's gonna happen next.

We could see rates go back to 2%. That wouldn't surprise me in a recession. We could see rates go a little higher if the economy remains strong and inflation remains strong. We could see range-bound rates for a while. I don't know. That's kind of a cop-out answer, obviously. But the truth is, no one really can guess these things.

So, John, put up my next chart. Torsten Slak at Apollo produced this chart. This is just looking at, going back to the early 2000s, the survey of professional forecasters. And the little dots on that graph show what they predict interest rates will do. The bold green line shows what they actually do.

Obviously, they're always off. It's impossible to predict rates. Duncan, this feels a little more like the survey of amateur forecasters. Am I right? Anyway, so I think-- - Shots fired. - Well, listen, I can't do it either. That's the point. So I think my main takeaway is you don't choose your bonds based on your predictions of the path of interest rates, 'cause that's hard to do.

And even if you nail that macro forecast, I don't know, the markets might not react as much as you want them to. So I think it really comes down to understanding the risk and reward trade-off for the bonds. Now, if you're trying to make your decisions based on the macro economy, you might say, "I think a recession's coming, "so I'm gonna put on as much duration as I can "and get that bang for my buck." Personally, I like to take risk where I'm being paid for it.

If we're talking about volatility and ups and downs, and for me, that's the stock market. So I think it's not worth it if you're gonna have this more stable anchor part of your portfolio be bonds. I don't see the need to try to take that risk, especially when you're being paid 5% right now, and you basically completely take volatility off the table in short-term T-bills.

So that's kind of the way I like to look at it. Even in normal times, if such a thing exists, I'm not a big fan of taking out a lot of duration, 'cause again, I think the fixed income part of your portfolio is meant for more stability. Now, if long-term rates got up to 5%, 6%, 7%, now we can talk, but I just think you have to figure out how much volatility you can handle and the kind of risks you're trying to protect yourself from before picking which bonds to choose from.

But understand that volatility profile, especially when you take duration, it sort of works in both directions. - Now, I'm not trying to derail the whole show because I know we could talk all day about this topic, but where do I-bonds fall in all of this now? I haven't heard anyone ask about those in a while.

- True, I-bonds are pretty good, too. You're taking the interest rate risk off the table, and the rate is basically set every six months based on the inflation rate. So actually, I guess inflation remaining a little stronger is probably good for people with the I-bond thing when that rolls over.

So yeah, no, I-bonds are a pretty good deal still. - Have you noticed that those questions have dropped significantly? We were getting a ton of them. - Yes, and I think, honestly, that's because the rates dropped from 9% to 6%, and now you're getting five in a T-bill. And remember how much of a pain in the butt they are for people to open accounts and you can only do $10,000?

- Shout out, Treasury Direct. - So that made sense when T-bill rates were at two and I-bonds were at nine. Now we're talking six versus five, and maybe it doesn't make as much sense. - Yeah, I think that's true. - All right, let's do another one. - All right, up next, we have a question from Sam.

There for a while, we were basically an I-bond show, honestly, you know? - That's true. - All right, so Sam writes, "My wife and I are interested in purchasing farmland "to help diversify our portfolio. "A 40-acre piece owned by an uncle "is being offered to us below market value "to keep it in the family.

"We would buy and hold the land, "rent it out to a local farmer, "and have little to do with the farming operation. "Aside from diversification and rental income, "does farmland ownership have any tax advantages?" To me, part of the benefit would be until I get to be involved in the farming, you know what I mean?

- I've mentioned before on this show, I have an uncle who owns a farm, and when I was young, he would bring my brother and I and some of our cousins out, and we worked the farm for a week. And I think at the end of it, they would take us go-karting or something and pizza.

- Did you wear overalls? - I wish I had some overalls. It's hard, I will say that. If my uncle put his farm up for sale, I would not be the first one to hop on it. It's hard work. So I'm reading Brad DeLonge's book, "Slouching Towards Utopia," and his stat that caught my eye, I was reading this last night, in 1870, 80% of the labor force worked on farms.

People basically made their own food. It was hard work. Yeah, that's tough. So I think in terms of the tax advantages, we'll have to bring the expert here. So let's bring on Bill Sweet. - Hey, Bill. - Hey, guys, broadcasting to you from my family farm in Warwick, New York.

How's it going today? - Yeah, I was about to say, you're basically a farmer. - Basically, I have to drive through cow fields. But Ben, I'm curious, at the Carlson Family Farm, what crop was being grown there? What were we doing on the weekend? - Huge, huge cornfields, and now they've turned it into more of a fruit farm, but everything.

They had the cows, the pigs, chickens. - Awesome. - It was a fully functioning farm. Yeah, it was pretty impressive. - Wow. - So I guess this is the Bill Gates model, right? He's the largest individual owner of farmland in the country. - I didn't know that. That's fantastic.

- Bill Gates owns 270,000 acres of farmland. That's less than 1% of the farmland in the United States. - Wow, he should be the third Bill on our show. Well, how do we make that happen? - Let's get him on. That's a bar bill, though, right? To have a bunch of Microsoft stock and then farmland?

- Yeah, that's not a bad deal, and then charity, too. - I'm guessing that farmland doesn't have any huge benefits beyond owning other sort of rental properties. Is it basically the same thing as owning a house that you rent out? - Oh, Mr. Carlson, you would guess wrong. No, Schedule F is, yeah, a really fascinating-- - Oh, that's right, 'cause you might get some perks from the government for this.

I didn't think about that. - You can do some really funky stuff, but let's get to Sam's question. Sam, by the way, really strong name, name of my firstborn son. Just couldn't have picked a better name for the family, so good job, Sam's dad. This is an interesting question.

So the tax expenses of farmland really depend a lot on whether you are materially participating or not, and per Sam's answer, "I have little to do with a farming operation," my guess is Sam's not gonna be materially participating, and that, Ben, kind of reverts back to treating it like any other rental property.

You're gonna rent the land out. You're gonna receive cash every month that hopefully the farmer will make a sales and pay you, in which case, you're gonna file a Schedule E, more than likely, or maybe form a 1065 and LLC, but ultimately, you're not really gonna differ at all from owning farmland versus renting an apartment, let's say, outside of that the property's not developed, and the primary benefit you get when you are not materially participating is the tax code really has two kinds of flavors of income.

There's a lot of sub-flavors, like different kinds of ice cream and different toppings, but the two general flavors are active income, which, you know, wage income, partnership income, self-employment income, that's taxed at Social Security at self-employment rates versus passive income. Passive income, like portfolio income, net rental income, like it looks like Sam's gonna participate, that's not, and that saves Sam about 12.4% of Social Security tax and about 2.85% of Medicare tax that he's not going to pay that he would if he were materially participating in the farm, so that's the primary tax advantage that you would get from farmland over another type of income.

- Can he count on subsidies too? Is he gonna get some subsidies from the government? - Yeah, so that's where we flipped the switch, Ben. I'm glad that you brought that up, it was a perfect segue. So the other option, so assuming that Sam is not materially participating, is this program, this method called crop sharing, in which case, at some farmland, some ventures, and I'm picturing the serfs and Marxists involved, and there's British landlords, but you can pay your landlord in crops, right?

I'm growing some good crop, I'm growing lentil, I'm growing sorghum, I'm growing wheat, and basically you can pay your rent in crops, and that has this neat advantage in that you do not have to realize a gain on your net rental income until such a time that you convert those crops to cash, meaning usually you sell them into the open market.

So that's an interesting tax deferral that Sam could go down if, with his farmer tenant, that he's getting paid in crops. I don't know how this works, Ben. Were you paying your rent on the farm in bushels of corn? How does this work exactly? I'm not a farmer, so I don't know.

- Duncan only receives dividends in oat milk, actually. - Oats? - Right, yeah. Actually, I take delivery of oats, and then press it down myself. - In Brooklyn, New York, somehow. Not a lot of storage space, yeah. - Farmland is, I mean, that is the kind of thing that, I mean, I guess until the robots come and they start making fake food for us or something, that's the kind of thing you would assume.

Obviously, there's risks there in terms of weather, and are you running it correctly, or is the person you're hiring out to running it correctly in commodities, prices, all this stuff is a problem, but it's one of the, I mean, people are always gonna need food. - Yeah, exactly. - So it makes sense to me in terms of this more kind of steady-eddy real estate.

So the idea, to me, makes sense for people who maybe wanna own some real estate, but not take as much risk. - Yeah, and then if Sam does materially participate, and that means usually you're basically loaning out more than half of the equipment, the wheelbarrows, the hose, whatever it is, or if you're actually doing some part of the farming, then you're filing a Schedule F, and then there are a lot of neat tax benefits.

Three-year averaging, there's a lot of sharecrop subsidies, like you said, Ben, mentioned before, but that is completely out of my wheelhouse, for example, so I'm going to very comfortably change the conversation, Sam, you should Roth Area convert in the year that you purchase farmland. - All right, that's a good segue into our next question here.

- Exactly. - Doug, let's do it. - Okay, quick follow-up. If you could farm anything, what would you be farming? - Probably hops, you know, for beer. That would be my-- - Yeah, that's a good one. - My cropping choice. - I think for me, Bartlett Pears, I love those.

- Yeah, I get them every year, Harry and David, they're great. - Okay, let's see, up next, we have a question from Randy. - Randy. - I don't think we've ever had a question from a Randy. - Great name, Randy. - Thanks, Randy. I am 55 years old and leaning towards retirement.

Our financial situation is solid, but retirement accounts are 95% of our money. My wife is four years younger and will work for five more years with health benefits. I plan to hold off any retirement distributions until 59 1/2, but qualify for the rule of 55 as a safety net.

We self-manage without a financial advisor. That being the case, can you identify any potential pitfalls that we might not have thought of? Also, if we have existing investments in traditional IRAs, we are not good candidates for a backdoor Roth, given the undesirable tax implications, right? - All right, Bill, I wanted to tell you this one.

I talked to a group of high school students yesterday, based in Brooklyn, on the Zoom, and because they had actually been reading my "Everything You Need to Know "About Saving for Retirement" book in their personal finance class. We're talking 16, 17-year-olds. - Wow, that's cool. - And did a long Q&A, and these kids are way more knowledgeable than I was at that age, and one of them asked me, "When I start my IRA," and I liked how they said it, "When I start it, should I use a Roth "or a traditional IRA?" And they said, "I'm leaning towards a Roth, "but I wanna know," and so I appreciated that one, right in your wheelhouse.

- That's great, I love it, it's a great setup. Yeah, so Randy, let's start with the backdoor Roth question, right, 'cause that's where Randy ended. Ultimately, let's talk about it. Roth IRAs are subject to income limits. If you were earning more than about $153,000 a year, Randy mentioned that he's a joint filer, so that would apply to a joint couple.

You cannot directly contribute to a Roth IRA. Been your student 16, 17, my guess is they're not, they're not pushing six figures yet, if they are, God bless them, and so they can directly contribute. More than likely, Randy cannot. But there's this neat quirk in the tax code in that you can contribute to a traditional IRA, a tax-deferred or tax-deductible IRA, at any income limit, and furthermore, if you get above a certain modified adjusted growth threshold, about $218,000 a year, you're not allowed to take a tax deduction.

So, and the last key to this chain of events here is that there's no income limit to convert from a traditional IRA into a Roth. There's no income limit that applies there. So the process here is you're above the income threshold to contribute directly, you backdoor contribute to a traditional IRA, you wait a day, the next day you convert that to Roth, bing, bada boom, you've got yourself a super Roth IRA.

- Randy didn't really tell us how much of his, he said, you know, 95% of the money is tied up in retirement accounts. He didn't say what the mix is between traditional and Roth, but I get the sense from the question, he's kind of leading us to assume, does it make sense for him to take some of that traditional money he has in like a 401k or an IRA, and convert it to Roth now, and pay the taxes, or do you think he's so close that it just doesn't make sense anymore, and just wait 'til he gets to that point of 59 1/2 and he can start taking those withdrawals?

- Yeah, and that's a great question. So, but Randy kind of hints at the catch. There's a catch to this backdoor Roth problem, which is the IRS treats all of your IRAs as if they're one giant IRA for the purposes of Roth conversion. What that means is, if you contribute $6,500 this year, and you don't take a tax deduction, in theory, if you didn't have any other IRAs, you could immediately convert that and pay no tax.

But the problem is, if Randy has 200,000, 500,000, if he has a large sum of money in an IRA already, he's only able to convert pro rata, and only the small amount that he contributed out of the total pie would be tax-free. So more than likely, if Randy tries to execute this backdoor Roth, he's going to pay tax on most of the $6,500, or whatever amount that he chooses to convert.

So I would separate that question from whether he should Roth convert or not. His other questions were, is there anything else that I'm thinking about retiring at 55? And Ben, where I wanted to go with this, just to completely segue, retirement, in my opinion, is trading money for time, right, ultimately.

And the ability to retire near 55 and enjoy potentially 40 years, right, maybe more than your working lifetime of being retired and being able to do what you want to do with your time, that to me is a beautiful thing. And so the things that I think that I would think about are things like health insurance.

And it sounds like his spouse is going to work for a couple of years. That's awesome. If you have benefits through the spouse, that's probably going to cost you 2,000, $3,000 a month on the open market. Great, let's ask our employer to pay for that. Other things I might think about, Ben, Randy mentioned the rule of 55.

If you retire after age 55, you can waive the 10% penalty if you take a distribution from your 401(k) or other tax deferred retirement plan early and not pay the 10% penalty. And that was the other question that Randy had. I think the ultimate thing to think about there is you do not want to roll those funds out to an IRA, 'cause IRAs do not participate in the rule of 55.

But I think Randy's thought about everything that I would think about, Ben, thinking about retirement. He's got a lot of bases covered. - I think the biggest thing is what are you going to do with your time, too? If you're retiring early, like, are you going to get bored?

Do you have, you can only sit on the beach for so long. Maybe some people can't, but I think you need to have it figured out if you're going to do, what are you going to do? - You've got to get really good at golf. - Well, yeah, do you have hobbies?

Do you have, are you going to volunteer? What are you going to do with your time? I think that's probably the biggest transition for most people that they don't even plan. You have all your finances planned, but then it's like, what do I do? How do I stay social?

How do I keep my brain functioning at a high level? How do I do all these things so I don't become depressed in retirement when I start doing what I'm doing? - Guys, we know the answer. It's hot farming. You call Sam a call. Yeah, get yourself on a farm.

- Duncan, I thought about this. I thought about this. I would definitely farm coconuts and strawberries so I could have my own Miami Vice production. - Wow. - You know, I've literally just said in the chat, I said that Batnick would grow Miami Vices and Tropical Brothers shirts. - If you plant a Miami Vice tree, does it, how long does it take to grow, guys?

So is it-- - All right, next question. - Okay, up next, we have a question from a name I recognize, Hadley. This is the second question that we've answered on the show, so good job, Hadley. - Is that our first, second time questioner? - I don't think so, actually.

- Okay. - But yeah, so thanks for the question. - Made the clip. - I have a question about the best way to diversify out of large, single-stock positions. Much of my net worth is in long-term positions of Apple and Amazon in a brokerage account. I no longer feel comfortable with this asset allocation and would like to move into more diversified ETFs or target date funds.

I'm maxing out my 401(k) this year to lower my income so as much of the gains as possible can fall under a 0% capital gains tax rate. What's the best way for me to diversify my concentrated positions? - We get a lot of this at Rituals Wealth, don't we, Bill, from people coming in, someone comes to us from Amazon or Google or Exxon, they've received a bunch of stock options, maybe that makes up 70, 80, 90% of their wealth in some ways.

They know that they kind of won the lottery if they were in a company that did well and the stock that did well, but now they have these big tax bills and they wanna figure out, I know I need to diversify, but I'm also staring down this huge tax bill.

How do I balance that mix? And so your point has always been, listen, if you have a big tax bill, that means you won, that's a good thing, but then how do you transition from that, and obviously we have some ways that we do, but what are your initial thoughts here?

- Yeah, so what Hadley is kind of hinting at and trying to thread the needle on is the mythical, the magical 0% capital gains bracket, and for an individual in 2023, an individual filer, I'm baking in a standard deduction for this. You can earn about $58,500 this year, and after a standard deduction, if that happens to all be capital gains in qualified dividends, your tax, your fed tax rate is zero.

So hypothetically, if you're earning $50,000 a year, and Hadley mentioned, hey, I'm gonna max out my 401(k), I'm gonna take $22,500, you could potentially realize another 20,000, another $22,000 of capital gains on top of your ordinary income, assuming that you're max funding a 401(k) because the taxable income bracket is what matters.

For a marriage filing joint couple, that's about $117,000. I'm gonna really annoy Duncan here, I made a little chart for you guys. So for a married couple-- - I did a poll, I did a poll today, and a lot of people thought you were gonna bring it. - Oh, great, well, here it is, the napkin.

So for viewers, let's say a married couple, $117,000 is that threshold, so that's my dotted line that runs across the page here. And so let's say the couple's earning $80,000, again, they can realize these gains on top of that and still thread the needle. Let's assume that we're deducting a standard deduction here in 23,000, let's assume that we're deducting a 401(k), as long as you're below that taxable income threshold, your wage income's gonna get taxed at roughly 12%, but your capital gains are gonna be taxed at 0%.

Ben, that's a great way to thread that needle. - If you are someone who has a variable income, and your income could go up and down for whatever reason, and you wanted to take these taxes, it might make sense to sort of slow down your income this year if you could massage it in a way.

- Yeah, in a way, cash basis, taxpayers have that option, right? You send out your invoices on December 30th, right? Nobody's gonna pay you the next day on New Year's Eve. But the other thing to think about for Hadley is last year or this year, depending on when we're executing, I mean, this year, obviously, there's carnage, right, in some of the same investment accounts, right?

If you happen to have a cryptocurrency account, if you own Bitcoin or anything, and you've held it for two to three years, you're probably down 50% there. So this matching, let's say you have Amazon and Apple, great, I'm sure that you had other stocks that didn't do so well.

So realizing those capital losses to help offset the gains, that's another strategy. - Duncan, maybe you can donate something beyond meat shares to this person and kind of help them out. - Yeah, on a gift basis transfer. - I actually, I don't have many left, so I don't have many left to give.

- You bailed, huh? - Yeah. - And obviously, the way that we kind of try to do this is through direct indexing, where you can set like a tax budget and do some tax loss harvesting. But you're right, that requires a lot more planning and being thoughtful about where those losses are coming from in execution.

Yeah, it's a little hard. - Is that a segue, Ben? - Sure, let's do another one. Well, no, not quite, but let's do one more. - Okay, so last but not least, we have a question from Ben. This is a long one, but a good one, especially the first part.

Love Portfolio Rescue, love the compound. No pressure, but if you answer this question on the podcast, there will be a case of assorted California wine headed your direction. - Ben knows the way to my heart, through red wine. - Flattery will get you everywhere. - I'm sold. - I recently started a backdoor Roth IRA because I've run out of other tax, other savings vehicles that make sense.

After the lesson of Peter Thiel with the $6 billion in tax-free gains, I'm thinking I should use my Roth IRA for the speculative end of my savings barbell. Between a DB pension, which I learned is defined benefit, right? - Yep, correct. - I thought it was Deutsche Bank. Between a DB pension and pre-tax savings, my retirement income is already safe.

I was thinking of going for riskier stock bets in the Roth IRA, but it seems that any stock that goes to zero is a hard loss with no tax loss harvesting available. Is that correct? What else should I take into account when it comes to allocating money in my Roth IRA?

I just wanna make sure I don't chase a tax-free return and end up losing a capital loss I could take in my brokerage account. - So the typical rule from my voice heard, Bill, is that you want your sort of income-producing assets in your tax-free account, so bonds and REITs and that sort of stuff, maybe in the Roth or traditional IRA.

Maybe your more indexed funds and ETFs that are more tax-efficient in the brokerage account if you're gonna separate it out that way in terms of asset location. But I have heard a number of people say, "Well, I'm taking a swing. "I wanna have some home-run swings. "I wanna invest in venture capital "or some other sort of crypto or whatever it is." And if there ends up being this huge gain, I want it in a Roth, so that way it's just tax-free when I get out of there.

They see the Peter Thiel thing. In theory, that kind of makes sense to me, but do you think it's unrealistic for most people to think, "I'm gonna hit a grand slam"? - Yeah, I think this would work. This would work, Ben. Great name, by the way. Good guy, I noticed, named Ben.

This would work to the extent that you can predict accurately which assets are going to outperform and which are gonna underperform, right? And so if you have the ability for foresight, like I guess our zero-to-one guy, Peter Thiel, to accurately forecast which those are, then yes. Then you can asset locate and pick and choose, and definitely, from the theoretical standpoint, there's no better account for massive gains than a Roth because all the gains come out tax-free, assuming you can make it to age 60.

But Ben, like spilled wine, tax losses within a Roth IRA cannot be recovered. That is the downside of tax-qualified accounts. You get this benefit of appreciation and deferral, but you do not get to realize any gains, and so that, to me, does not lend itself. So to these types of investments.

The frame I like to use when I'm thinking about this is distribution of returns. Ben, I know which image is coming to your head, right? It's this VC image of a concentrated bet of, let's say, 20 or 30 investments, and in the kind of the VC private equity model, in order to get those excess returns, those really good returns, you really only need a small number of those companies, but they need to be moonshots.

They need to go absolutely insane. And that's the problem, that if you're trying to do that within a Roth IRA, I'm not certain that's the right vehicle in order for you to realize that kind of distribution of returns. I think, Ben, you hit a key point. Roth IRAs, traditional IRAs, those are much better for income-producing assets.

I'm not certain that they're good for this type of moonshot because of what Ben is getting at. So, Ben, what would you want? What would you want the perfect kind of investment to be? You would want it to have a couple of conditions from a tax perspective. You would want it to be able to deduct any losses, right?

So if it didn't work out, you want to offset gains from elsewhere, and you want gains to realize completely income tax-free, is there any investment from a tax perspective that fits that mold that you're aware of? - Sounds familiar, Bill. - It sounds familiar. I would point Mr. Ben to a Section 1202 kind of stock, a qualified small business stock that has that feature of ultimately you're able to spread your bets, you're able to do all this sort of planning.

And if those companies don't work out, let's say you pick out 10 or 20, you'll be able to realize the losses to offset gains from elsewhere. And Section 1202 is this neat benefit that allows them to be completely income tax-free up to a gain of about $10 million, which again, we're not talking Peter Thiel money.

- If you're going to have this home run account, whatever it is, whatever percentage of your portfolio, it's going to be your fund account, your speculative account, you're probably going to have some losses to offset those gains. So if you do hit it big, yeah. Even if you hit one out of 10, the other nine are probably going to either do nothing, or especially if you are speculating.

So that, yes. - So basically what you're getting at though is if you're going to put a bunch of speculative stocks in your Roth, you just want to make sure they're ones that go up. - Yeah, that would be the key. - Okay. - But if we could talk really quickly, the Peter Thiel, Mitt Romney is the other individual in bank capital who pulled this off in the '90s with IRAs.

The way this happened, as far as I can understand, is it was mostly, it was options, and it was these sort of deep in the money options that they were able to contribute, basically, and buy within the IRA, and having some, I wouldn't say foresight, but the ability to basically plan out five to 10 years in the future that these things were going to go insane in hog wild, due to their efforts, by the way, which is somewhat problematic, and might open them for some IRA scrutiny in the future.

That's how these things got really insane. I'm not certain that type of option is really open to us that can't afford high-priced lawyers to kind of fight the IRS if this goes south. So I think a more traditional approach to me would make more sense. I would, if you can see connection, I'm not sure that this kind of corporate pirate strategy is something that's available to us, but maybe we're talking about the wine farm, you know, the vineyard here.

- Yes, I hate to be a Debbie Downer, and I don't want to lose out on my wine here, but just start with the baseline assumption that you're probably not Peter Thiel and Mitt Romney. I think that's a pretty good starting point. - Yeah, yeah, and I'm hoping it's Maybach.

I mean, honestly, California wines are, in my opinion, top of the world, big fan. Stag's Leap, and what's your favorite California red? I don't know, where are you at? - Any, any of them, anything. - Any, any of them. - I'll take a Pilsner, yeah. - Ben's like, I like wine.

- Yeah. - Pretty much, I'm not a wine snob. - Equal opportunity employer. - Our audience has been loving the tax questions. We may even bring on both tax bills at some point in the future, because we've got so many. - Don't forget about Bill Gates. - You can ask us a question at askthecompoundshow@gmail.com.

You don't even have to promise us alcohol. We'll do it for free, we promise. - I know, his comment, no pressure. I don't feel any pressure, this is fun. I'm happy to be with you. - All right, if you're watching on YouTube, remember, leave us a comment. Thanks to all the people in the chat.

As always, we always appreciate your comments and following along. If you want some compound merch, idontshop.com. Tomorrow, Compound & Friends, right Duncan? New Compound & Friends tomorrow. - Right, very excited. - Keep those questions and comments coming, and we will see you next time. - See you, everyone. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music)