(beeping) (upbeat music) - Welcome to Portfolio Rescue. Each week our audience gives us tons of questions and Duncan and I try to get on here, provide some context, research data, maybe a few charts, help people out. Duncan, our Google doc is full of questions. So many so that I don't know how we're gonna get to them.

So we might have to do a Jim Cramer lightning round at one point. - Yeah, yeah, I like that. - And you're just gonna have to put a timer up, 60 seconds and go. Remember if you have a question, askthecompoundshow@gmail.com. I've been writing about finance for almost a decade now and there's certain topics that always get people worked up.

Taxes is one of them. We've mentioned that on the show before. The Fed, you know, my colleagues at the Fed always get people worked up. Crypto of late. Anything with government policy and how it impacts the economy or individual households. Here's one that surprises me. Individual bonds versus bond funds.

People have very strong opinions about this. Maybe we'll get a question about that someday. And finally, housing. And I think that's because housing is by far the most emotional of all assets you can own. And also 2/3 of the country owns a home. So people like have a vested interest there and they have personal experience there.

So I've been writing about the housing market a lot over the past two years 'cause it's been so crazy. So we got a few housing questions today. So I wanted to actually go through it. I pulled out like five of the craziest, five of Ben's craziest housing facts of the last few years that I've written about.

Number one is we haven't built enough houses. So in the 1970s, there was like 200 million people in the US and we were building like two million homes a year. There are now 330 million people in the US. Last year, there was less than 1.3 million homes built. The whole 2010s was the lowest amount of homes we've ever built in a decade.

If you wanna know what's happening there, that's probably why. Here's another interesting one. In 1944, after the Great Depression, there was 114 new single-family homes started to build. By 1950, it was 1.7. So after the World War II, they just built a ton of homes and the government made it happen.

Not really happening this time. Here's a more recent one. In 2015, the summer of 2015, there was 1.2 million homes across the whole country for sale. How many do you think it is now, Duncan? - Wait, how many? - So there were 1.2 million homes for sale, like listed homes in 2015.

- I'm guessing that today it's like 500. - It's like 250,000. - Yeah, no. Yeah, it seems like nothing, basically. I looked the other day around the New York City area and it's insane how few places are on the market. - Basically. All right, I did some research. This is from the US Census data.

They look at new houses built in the 1970s and today. So I think it was like 1973. 50% of new homes had no air conditioning in them. By 2015, it was just 7%. In 1973, 40% of all new homes had 1.5 bathrooms or fewer. That's just 4% of homes today that are new.

In 1973, the median square footage of a house was 1,500 square feet. Today, it's 2,500 square feet. - So our standards are going up. - Yes. - We need more space. - Standards are going up. So if you wanna know one of the reasons houses are more expensive is because they're bigger and better these days.

Obviously, then it's not everything. - You gotta have room for that Peloton, you know? - Yes. Yeah. And by the way, moving one of those is a beast. They are very heavy. - Oh, I didn't realize that. - I got mine delivered in April, I think, of 2020. The pandemic was starting and they were like, "Here, we're putting it next to your garage "and we're out of here." It's like, "We don't want anything." Otherwise, they used to put it in.

So me and my wife had to carry it down to our basement. It was very heavy and awkward, not easy. All right, here's one for you. 2004 to 2006, the height of the housing bubble, right? The subprime mortgage lending. Roughly one quarter of all mortgage originations had credit scores of 659 or less.

So not great credit scores. You know, I like to keep that credit score up. From 2019 to 2021, just 6% had that. So that subprime thing is completely gone. So that's one of the scarier aspects of this if you're a first-time home buyer. The fact that people's finances, it's not like they've been going crazy.

People who are getting mortgages are doing so with good credit scores and good finances. So their finances are in good shape. So it's not like you can hope for all these people to all of a sudden foreclose on their house or something. Like people who are buying houses have the means to do so.

Finally, here's one that kind of blew my mind. The housing market bottomed in 2012 from the great financial crisis, blow up all that stuff, the housing bubble that popped last time. At that point, people had $6 trillion of equity in their home. Right now, people have $26 trillion of equity in their house.

We've added $20 trillion of equity in about 10 years, basically. Just a massive amount of wealth. - It's a good time to be a homeowner. - Yes, a good time to be a homeowner. And the thing is, that actually builds wealth for the middle class too, which that's their main source of wealth for a lot of them, which is crazy.

So all right, that's Ben's five crazy facts about housing. Maybe we could have done a little graphic or something. - We could have done a graphic with sound effects and stuff, yeah. - All right, next time. Let's get to a question on housing here. - Okay. So first up, we have what percentage of a first-time homebuyer's net worth should they put down on their first real estate purchase?

Do you advise buying property before getting, hold on, so it's kind of two very different parts. So the second part is, do you advise buying property before getting married to hedge against the unintended event that you could get a divorce in the future and you want to be able to stay in the property you've owned since before marriage?

So a real romantic one. - First of all, if you do do that second part, don't tell your future spouse that you bought the house in the event of them. I'll get to that one in a minute. I would say, first of all, with that part, I don't know that you'd, I mean, sure, if you want to buy it for investment property, but buying a house and then potentially having your future spouse not like it, that could lead to problems down the road.

So I would say, if you're trying to get ahead of that, and if that's your thought process going in, you're probably gonna get divorced anyway, I think. I don't know. - I feel like you're starting off on a bad note. - Yeah, that's your Great Depression there, because when you get divorced, you lose half of your net worth, so.

All right, so there's this personal finance rule. I don't know who came up with it. It's called the 50/30/20 rule. And it basically states you spend 50% of your money on necessities, this is your budget, housing, transportation, healthcare, food, et cetera. 30% on wants, so that's dining out, travel, entertainment, clothes, et cetera.

20% on savings, so that's retirement, emergencies, debt repayment, that sort of thing. Obviously, these can vary based on where you live. Some people might not pay as much on transportation if they live in a big city and don't have a car. Then you're probably paying more for rent or housing, that sort of thing, but those are the general guidelines.

I don't know if you necessarily need to look at it in terms of net worth, like I have a certain net worth, what percentage should my house be? 'Cause especially when you're first starting out, your net worth is probably gonna be relatively low. I think you think about it in terms of can I service this debt, can I handle the property taxes and insurance on it, and can I handle the maintenance that's involved in a house?

You also, one of the things I did, I moved from an apartment when I first got a house. One of the things I never realized is you have to buy a lot of crap for a house. All the lawn care stuff, shovels and rakes and wheelbarrows and ladders and all this stuff that you don't need when you have an apartment.

You have to furnish all the rooms. We took our time to do that, but you have all these different bedrooms and you have to buy sheets and towels and all these things. Owning a house is expensive, so can you handle all that? I also think how long do you plan on living in the home?

I'd say a minimum five to seven years, because otherwise you pay realtor fees when you move in, you pay closing costs, you're paying insurance, so my rule of thumb is kind of, I tell people don't buy a starter home. That may have looked like bad advice the past few years 'cause you bought one, you got a ton of equity in it, but let's say you have a $350,000 mortgage at a 4% interest rate.

In the first three years of that loan, 2/3 of your monthly payments are gonna go to interest and only 1/3 is going to principal, so you're not really building much equity in terms of your payments. So if you're living in a house for a couple years, so my whole thing is make sure you live there a minimum of five to seven years.

And then I think you have to figure out how comfortable you are, like how much you're comfortable spending, because if you go to a lender, and I would advise on at least talking to a couple lenders, to see what they're willing to give you, right? Because they might give you a range.

We can go to this high and start at this level. You have to figure out like, do I want my housing to be 50 or 60% of my cost? Or can I settle on a house that's much cheaper? Obviously, right now, it's gonna be hard to have a choice in the matter, but I don't think you think of it in terms of net worth.

I think you would think in terms of, is this a debt I'm willing to service, and maybe can my income grow to meet that debt in the coming years? 'Cause I think that's one of the great parts about a fixed rate mortgage is that technically you can grow into it over time.

- Do you think, is it a flawed assumption? I feel like a lot of people think, oh, I can't get more than I will be comfortable with paying back. Is that like a false premise to base your home buying off? - I don't know, because I mean, how many people really live in their home for 30 years and pay it off?

And how many people end up refinancing and extending that loan? And I think there's, so a lot right now, the biggest worry is, mortgage rates are getting back to like 5%, which does seem worrisome, especially with housing prices so high. Your monthly payment is gonna be way higher. I mean, are we gonna see 3% mortgage rates again in three or four years after the Fed lowers rates and we go into a recession?

Probably, I mean, I don't wanna like, don't quote me on this, but-- - Is that a call? Should we timestamp that? - I mean, guess what? Do you really think the government's gonna be allowed to relieve rates at 5% or 6% for an extended period of time? I would be shocked if mortgage rates aren't at 3% again in the future.

So I think it's something you can, I mean, people in the '80s, my dad's first mortgage was like 12 or 13%, and then they refinanced all the way down. So yeah, think of it in terms of long-term, but I think if you're thinking 30 years, it's, for most people, that's probably unrealistic.

- Cool, good advice there. - Let's do another one. - And yeah, one that, people have commented on Animal Spirits recently that you guys are really depressing them about like their home ownership prospects. - I really feel for people because it's luck. Like if you would have started your housing hunt 24 months ago and got a house, you're doing in fantastic, you're in a fantastic position financially.

If you're starting now, you're in a world of pain. - Right. Okay, so up next we have a question from, oh, I don't see a name. Okay, so I'm 35-year-old, about to have my first child, born and raised around Grand Rapids, and I moved to Boise after grad school 10 years ago, bought a small house in a desirable neighborhood shortly thereafter.

The Boise housing market has boomed. I've been slowly purchasing real estate and have two cashflow properties in Michigan, as well as two in the Boise area. I would love to continue to invest in rentals or venture out into something bigger like storage units or apartment complexes in the future.

I'm currently close to closing on a cash out refinance on my personal home, and this brings me to my question. This is a really long one, so we had to do a two-part. I owe just north of $100,000, bought for 176,000 in 2012, and my appraisal came in at $822,000.

So, 4.5 times their money, which allows me to acquire up to $375,000 in cash at 60% LTV with the idea to reinvest the vast majority of the cash. Our incomes have increased enough that the increase in mortgage payment is not an issue. I feel that I'm on track for my goal of retiring early, hopefully in my 50s.

What would you recommend putting that money into? I will certainly be funding a 529 with some of it, as well as continuing to look at local real estate, but don't want to waste this very unique opportunity. I have to be honest, I have no idea like what's in that stuff, is LTV, that kind of stuff.

- Okay, LTV is loan to value, basically, because he has so much equity in his home. So, this guy's in a very good place financially for a mid-30s person. I'm guessing that's because of his West Michigan upbringing. He grew up in a flyover state, so he's doing pretty well for himself.

Listen, we get a lot of questions like this from people saying, "Hey, I have $5,000 or $10,000 "or $100,000 or something bigger "because of home equity or inheritance or something. "What do I do with it? "I have no idea what to do with it." I want to start this with a story, and I pulled this story from my book, "Organizational Alpha," which is a book I wrote for foundations and endowments people, so no one really read it, actually, besides those foundations and endowment dorks, so I feel like I can talk it because no one actually read that book.

Went into a meeting a number of years ago with an institutional consultant, and he was kind of a heavy hitter, and he started off the meeting bragging about all his contacts in the industry and all these really heavy hitter investors he's worked with. Side note, the kicker was one of his biggest clients was Fred Wilpon, the former owner of the Mets, who, guess who he invested money with?

Bernie Madoff, of all people. - That's rough. - Anyway, this guy walks in, and before he even asks us any questions, he says, "Listen, you need 15% of your portfolio in timber, "and how are we talking on the mezzanine private market, "middle market private equity, "and lower your allocation to LBOs, "and what's your hedge fund manager?

"We can get you, and how long is it gonna take you "to move your entire portfolio with us, "and here's what you need to do." And we were blown away, 'cause the guy didn't ask us one question about our organization, our time horizon, our risk profile, nothing about our goals, any of that.

And that's kind of the thinking here, is that you need an investment policy to understand what to do with any sort of new money you're thinking about, right? 'Cause I think there's plenty of wonderful investment opportunities out there, but they might not be right for you because of your personality, or you don't understand them, or you simply don't have the stomach to invest in them, or they just don't fit with your investment plan.

So, and there's nothing wrong with that. You don't have to invest in everything. But I think most of the time, the stuff that you say no to is gonna have a far greater impact on your performance than the stuff you invest in. But the boring answer here is you need an investment policy, right?

So, Charlie Ellis, who wrote the famous book about avoiding investment mistakes, I've mentioned it before, he said, "Investment policy does not enjoy much popularity. "Almost everyone agrees it is a good thing, "but almost no one does anything about it." Basically, why are you investing in the first place, right?

How can you align what you're investing in with your stated goals? Like, how are you gonna measure success in your investments? What are you gonna benchmark it to? What's your risk profile and time horizon? You know, what do you own and why do you own it? Like, these are the things you have to ask yourself, and it's really boring to do all this heavy lifting up front and understand that stuff, but if you just have a pile of money and you say, "I just wanna make some money with it," or, "I wanna do something interesting with it," like, that's fine, but if there's no overarching plan in place, then no one's gonna be able to help you.

If you can't tie your money to your goals, it's impossible to offer advice. So I think that's the first step, is having some sort of investment policy, and if you don't have that or can't figure it out yourself, you're gonna have to probably find a professional to help you work through those goals and understand what you can invest in.

- With the real estate stuff, too, we've gotten a lot of questions over the years about this, where it's like, why would you buy an actual property as opposed to a REIT or private REITs versus publicly traded REITs, all that kind of stuff. So it seems like with real estate, it's a little confusing 'cause there are so many ways that you can get exposure with varying levels of-- - Yeah, this person has some rentals.

I think the fact that they know what that entails probably helps a little bit to think. That's fine. There's many different paths you can take as an investor. If this person's whole investment philosophy is based on real estate and that's what they wanna do more of, that's great as long as they know what they're getting themselves into, and obviously they do if they already have a handful of rentals.

The problem is if you've never done it before, then you get into it, that can be tricky because it's not as easy as it sounds. - Granted, owning an apartment complex sounds like a lot more work than just a single unit place. - Yeah, but obviously the ability to raise rent these days is probably looking pretty attractive to some people.

- True, true. - All right, let's do another one. - Okay, so up next, question three is a question from John who writes, "I'm 22 and have been an investor "for four years now. "Having just started my career, "I'm beginning to build wealth steadily, "but I know little to nothing about taxes or tax law "as it pertains to being an investor.

"How would you direct young, beginner investors "to start worrying about tax law? "Do you have any big tax-related mistakes you've made "or that you've seen too many people make?" - Look at John, starting out at age 18, that's impressive. - Yeah, yeah. - That's good to see these young people.

Well, let's bring in my personal tax advisor. He's been on the show a number of times, Bill Sweet. I think he's our-- - The tax man. - He's our number one guest here, I think, right? He's like the Ed McMahon. - Yeah, yeah. - If Duncan's the Ed McMahon, no one's gonna get that.

- Lately, I've felt like the second Bill. It's hurting a little. - I've joked that at some point we're gonna license the Beatles song and have that play whenever Bill joins us, the tax man. - So, Bill, what's the low-hanging fruit here? My first thought is just take advantage of tax-deferred retirement accounts.

Is that the simplest thing a young person can do and think about taxes? - Yeah, that is simple, but first I wanna address the elephant in the room, and that is this Midwest bias. Grand Rapids, Boise. Duncan, I feel like Ben's just looking down on us from his ivory tower in Grand Rapids at us hardworking New Yorkers.

- Hey, these questions come straight from the viewers. I have nothing to do with it. My hands are tied here. - But no, but for listener John, good for you, John. That is great. Most people, like we've talked about before, they hate paying taxes more than they like making money, and so for me, the first step to getting help with tax is admitting you have a tax problem, and if you're a U.S.

taxpayer, we all do. So for me, Ben, and jump in, please, if you disagree, but I think the gateway drug is doing your own tax return. That is something I think every U.S. taxpayer should give a try. It doesn't mean that you have to file it. I mean, there are plenty of software platforms, just ask Google, that will help you file a tax return, and what is their harm in taking the inputs, taking your W-2, taking your mortgage document, taking your real estate taxes, taking your HSA docs, and just tinkering around, take a look.

I would strongly-- - Especially when you're young, and it's not gonna be that complicated, depending on your situation. I think when I got my first job-- - Hey, guys. - It's '15 or '16. Hey, Michael. - Oh, my God. - Big fan of the show. - Just wanted to come say hi.

- Yeah, first time, long time. - When I was '15 or '16 and got my first job, my dad wanted me to do this, and he showed me, and obviously, I had two inputs or something, you know? I didn't have much, so I think starting it at 22, you may not have a few more, but it's probably gonna be pretty easy, so I agree.

Getting to understand that is huge. - I think that's the way to start, and you can tinker around with the online platforms, too. Take $50,000 of tax-qualified dividend income instead of wages, play around, see what that does to your income. Is it a higher or lower tax rate? It's a great, interesting thing to think about.

What happens if you plug in $12,000 of rental income? Messing out inputs and then gauging is a really great way to kind of test it out, and it really figures out how do you get to know what's actually on that pay stub that we all get every two weeks?

Take a look at it. What is OSDI? What is SSI? I can explain these things ad hoc, but I think, John, if you have that thirst and you wanna check it out, that's the place where I'd go. Most importantly, do not file that return that you just created at a thin air.

- Bill, I can't believe we've been talking about this for five minutes. You haven't mentioned that Roth IRA yet. - Well, I've been trying. I've been told it's too much. The listeners can't handle it. But the listener also asked a couple of big mistakes that people make. I just have four that I would avoid at all costs.

Number one is early retirement income distributions. Do not pay that 10% penalty from an early IRA, 401(k) distribution. It's better to have not funded the 401(k) than to have taken a penalty later on. - Right, let that money ride. Don't take it out. - Exactly. 'Cause that money, set it and forget it.

You're gonna touch it after you're 60. Secondly, another big mistake people make, filing a tax extension without making a payment. Filing an extension extends the time to file. It does not extend the time to pay. And so you kind of have to have an okay idea of what you may owe.

Typically, the most common reason that people extend is 'cause they owe money. They don't wanna pay it. But that to me is a big mistake because you basically end up increasing, at least doubling the penalty that you're gonna end up paying. Number three-- - What do you pay for a penalty if you pay your taxes late?

I don't even know that. I didn't know that. - It depends. It depends on the amount. At the worst case scenario, Ben, a 20% accuracy-related penalty of whatever's due, and then roughly 5% annualized interest. - 20% they charge you? - Yeah, well, for accuracy-related. - The US government is like the mob.

- It ain't good. (laughs) - Yeah, that's like Amex level on this. - I would rather have them break my kneecaps, I think. - They're not Comcast, which I would argue is actually evil, but it's not far away. - Oh, yeah, yeah. - They're more indifferent. Number three, I think not filing during a bad tax year.

I've seen this a lot where somebody says, "Hey, I took an IRA distribution," and they just ignore it, right? That's really bad news. Even if you can't pay the government, if you just file the tax return, usually cutting your penalty by like 80%, and last but not least, do never, never, never have short-term capital gains.

There are very, very few reasons to have a short-term gain, and that's on an asset you've held less than a year. Tax rates are just brutal there, so don't do it. - Yes, if you're 22, don't become a day trader. - Amen. - All right, next question. Okay, so up next, we have another long one, but a good one.

We are 43 years old and maxing out our Roth IRA and 401(k) accounts. House is completely paid off, we have a good taxable brokerage going, and 529 plans for both our boys, 11 and seven. One of the best things we ever did financially was set up a UTMA, no idea.

- Utma, Utma. - UTMA custodial accounts for our kids when they were babies. They have now grown large enough that I am having to file taxes for them. Our 11-year-old's account in 2021 had over $5,000 in capital gains from dividends. They are mostly in mutual funds, which I now realize are not the most tax-efficient investment.

How can I maximize the tax efficiency of these accounts now that they are starting to get big? Will rebalancing to index funds, I'm not sure if they mean ETFs specifically, but will rebalancing to index funds be a taxable event? Could I maybe transfer to a 529 plan without tax consequences?

- All right, Duncan, we got another one for you here, another abbreviation, the UTMA account. - Yeah, yeah. - All right, Bill, let's explain first what an UTMA is, maybe how it differs from a 529 and what some of the tax ramifications are here, 'cause I've never used an UTMA, actually.

I've used a 529 and funded it, but I'm not as familiar with the UTMA either. - Yeah, so UTMA, just the word salad here, UTMA's a uniform transfer to minors account. You may also see them referred to as UGMAs with a G in there, and that just differs on the state.

What is it? It's an account that you open for your child or grandchild. The child owns it. That's the important thing to understand. But you, the T is you're the trustee. And so you as the adult, the parent, whoever funded it, you have control over that account until the child reaches age of majority, which is 18 in most states.

So UTMAs are pretty powerful in tax planning, but they come with a couple of problems. Let's start with the good. The good thing is you get $2,000 tax-free. So that's the nice thing. And this listener, $5,000, they were over the threshold. That's no good. I wanna talk about that in a second.

But basically, you get a $1,000 exemption. You get $1,000 at the child's rate, usually zero. Kids typically aren't earning any money. And so that's the benefit. - Freeloaders. - But once you go above that threshold. - Freeloaders. - Yeah. (laughs) So start charging them rent. Once you go above that threshold, things start to get ugly.

And Ben, I think that's probably the reason that you, me, and I'm guessing Duncan, too, do not have an UTMA, and we're not given an UTMA because they're potentially problematic in other ways, which I wanna get to in a minute. - So if you get too much money, and then they become a hassle, basically.

- Yeah, basically. - I hate having too much money. (laughs) These are good problems to have. So let's not weave too hard. But a couple of problems. Number one, I mentioned it before. When the child is 18, that's their account. It's no longer yours. You no longer have custodial access to it.

So if the kid walks into the bank or walks into custodian and says, "Hey, I want this money," and they drive up to the Canadian border and they buy a bunch of maple syrup or whatever you guys do in Grand Rapids these days for fun, whatever the kids are doing, you can't stop them legally.

I mean, you can yell at them and you can kick 'em out of your house, but you can't stop them from doing that legally, and the bank has to do it. So that's problem number one. Problem number two comes in taxes. Once you go above that $2,050 threshold, which is not indexed for inflation, it's been there as long as I'm aware, back to 1986, then you're stuck paying taxes at your rate, not the child's rate.

And so until they're actually free and clear out of your house and free of college, which can happen all the way out to age 26, you end up paying the taxes on any gains in that account. So unless you're willing to hand over that account to your kid after they're out of your house and after they're done with college, you're gonna eat the tax burden.

Last problem with these comes into college and financial aid. These are the child's assets. And so when you go to apply for college, you go to apply for a grant, a needs-based scholarship, or something like that, the EFC contribution is 50% of this per year WAD account can be used for college.

So it does kinda screw up some college planning sometimes if you're looking for aid. And that's why I think the 529 is just generally a better account if you can deal with the lack of restrictions. - So are they gonna be paying a lot of taxes if they try to roll this over, basically, either way?

- Yeah, that was the question listener asked. And it's a good question, but ultimately, no, you cannot directly contribute to a 529 from an outlet. You gotta pay the tax in order to do that. I think, basically, the listener, again, these are good problems to have, so let's focus on that, but has one of two options.

Number one is they eat the tax in one or two years, maybe they spread out over a couple of years, and move the money into a 529. If the 529 account is used for college, it generally comes out tax-free. So that, to me, is a better thing to do.

Bite the bullet now, or take door two, which is you just leave the assets alone, and you plan to give these to the kids once they reach past the age of majority, past college. And maybe the thing to think about there is because you really can't rebalance, if you rebalance within your account, sounds like this listener had a capital gains distribution which was not under their control, so that stinks.

They're kinda stuck with that. But what they can do is, as they add assets to the account over time, use that cash to rebalance. So effectively, you're stuck with the assets you have if you don't wanna pay the tax, but you just rebalance within the account with cash going forward.

- All right, I got it. Sounds very complicated to me. I'm glad I never used it. - Yeah, I think there's a reason why. - All right, we've got a bonus Duncan question. Did a heap on Slack yesterday. I said, "Duncan, save it for the show." - Finally, East Coast bias, let's do it.

- So basically, I just wanted Bill's take on, and yours, Ben, but especially the taxman's take on HSAs. I know we've talked about 'em a little bit before. I still find them confusing. We still get questions from people who are confused about them. Is it a retirement savings vehicle?

Is it a health savings vehicle, truly? Why do they exist? I just don't understand. - I gotta be honest, Bill. I don't use one, and maybe I should, but to me, it sounds like a huge pain in the ass. Am I wrong? Like, saving the receipts, and to me, that sounds like a pain in the butt.

Or am I off base here? - Is it a pain? Yes, but back to the government is the mob. You get with an HSA something you don't get with any other account, and that's triple tax exemption. So you fund an HSA. You get a tax deduction for doing that.

Comes from your paycheck. You don't pay tax on it. Awesome, right? So that can be worth up to 40% of the value for a high-income taxpayer. Then, if the asset grows, let's say you invest in the stock market. It grows, I don't know, 10% a year, 5% a year, whatever we're doing here these days for math.

Let's say it doubles over 10 years. All that gain can come out tax-free in the future if you're using it to pay medical expenses. So that's the key, is that you get a tax deduction up front. You do not have to pay tax on the back end, kind of like a Roth, but the triple comes in in the respect that any gains that develop in that account, those are tax-free, too.

And so, Ben, you mentioned hoarding receipts. It's kind of like a neat thing because when you get your dental work done or when you get some medical expense, the year that you take the HSA distribution doesn't have to be the year that you get the work done, which is crazy, and I have no idea why the tax code is written this way, but that allows you to effectively incur expenses today, leave the money in the account, let it grow, and basically use your future gains to pay for medical expenses in the past tax-free.

It's really wild stuff. - So if Duncan funds an HSA today and then in 10 years, he surgically has a hat placed on his head that can never be taken off. - I thought that was it, yeah. - He can use that as his HSA and use that as a tax break, basically.

- It kind of sounds like "Financial Inception." I'm just having trouble remembering. - Yeah, in this wild version of hat surgery, then yes. So the reason that most people don't know or use these things is you have to have what's called a high-deductible healthcare plan. This isn't universally open.

You have to have what's defined as an HDHP healthcare plan in order to participate. But Duncan, you asked, "Are these retirement vehicles?" Well, yes. If you happen to not have any medical expenses, which God bless you if you don't, if you make it to age 65, I think it is, yeah, 65, you can take the distributions penalty-free.

And so effectively, you can use this as kind of like a super IRA, and it's not just your medical expenses. It's your spouse's, it's your kid's, potentially anybody that you're providing for. It's a very, very powerful thing in the tax code. I wish that there were higher balances. You can only do like $6,000 or $7,000 a year, and I wish this was open to more Americans 'cause it's a really, really powerful thing.

- So does the reason this exists, is this essentially a way for companies to not spend as much on healthcare plans, though? Is that the idea of the high-deductible plan being? - Yeah, that's part of it. I mean, not just companies, but yes, you can generally get a less expensive plan on a higher deductible for obvious reasons.

I think if you're kind of a health policy person, that does make sense. You probably don't want somebody going to the doctor for every little silly thing, right? So that's why these high deductibles do make sense. But if you're interested in covering catastrophic insurance, they're really perfect. If you're relatively healthy, if you don't have a lot of health concerns, if you don't expect to, your genes are good, they're a really powerful thing because it effectively allows you to put away $6,000 a year and deduct it fully, and then use that for some future expense.

They're very powerful things. - Are you sold, Duncan? - Like I said, I wish there were-- - I can see the wheels turning there. - Yeah, no, I mean, this makes sense. It makes sense. I mean, I asked the chat, and so it looks like 36% of the chat has an HSA.

- Wow, that's awesome. - That's actually higher than I thought. - Yeah, good for you. - All right, actually, I saw a few quick questions from the chat. Someone asked, "Is the 50/30/20 rule pre-tax?" I would say it's probably net of taxes. That's what I would think, because you're taking anything you have to spend, basically.

Someone else asked-- - Yeah, you don't need pre-tax returns. - Yeah, someone else asked, "Hey, I just got my mortgage. "How long do you have to wait until you refinance?" The rule of thumb is typically 1%, but you could also basically calculate the break-even between if you're paying $4,000 in closing costs, or if you live in New York, you're paying like $27,000 in closing costs.

How long is it gonna take you on your monthly payment that you save to break even? I think the rule of thumb is like, yeah, if it's less than two or three years, go ahead and do it. - I've seen a two-month cycle. Taxpayer or listener signed up, client signed up.

Two months later, there was a big rate drop, and they did. They just went back to the bank and said, "Hey, can we refinance?" So they did. - I'm just saying, 3% mortgage rates by the end of the decade, timestamp that it's happening. - Wow, that's a call. Yeah, I don't know, I don't know.

- That's what I think. All right, thanks again to Bill. We wanna mention real quick, this was great, was some help from Duncan and John. John is our producer off-camera. They put together these awesome graphics for us that they've been in Animal Spirits before for NFTs, so John, show what they look like here.

Michael and I are minting NFTs, which I still don't know how it happened. Luckily, we had someone who knew what they were doing, did this for us, a company called Audiograph. Michael and I are selling these for charity. All the money's going to No Kid Hungry, so if you haven't heard about this yet, take a look, check it out.

It's on my website. All the information is there. You get access to a Discord channel with us, and you get all these benefits. You get to ask us questions. We answer with videos and all these things, and we're giving all the money to charity. - It's off to a great start.

- Yeah, it's off to a great start. We've already raised like $50,000. It's 0.1 ETH to do this. All the money's going to a good cause. Duncan and John did an awesome job putting the NFTs together. They're really hilarious, funny, and really well done, so take a look at that if you haven't.

Keep those questions and comments coming. Again, maybe one of these times we'll do a lightning round. Thanks again to Bill for his tax expertise. Thank you to Duncan, as always. Like his questions as well. And if you have a question for us, askthecomboundshow@gmail.com. Thanks, everyone, in the chat. I love all the questions and comments, and we will see you next week.

- Thanks, everyone. - Portfolio rescue. (upbeat music) (upbeat music) (upbeat music) (upbeat music) (upbeat music) you