How to Live Tax-Free in Retirement

Summary

Ask The Compound – "How to Live Tax-Free in Retirement"

Episode Date: June 11, 2025
Hosts: Ben Carlson, Duncan Hill
Guest Expert: Bill Sweet

---

Episode Overview

In this lively installment of Ask The Compound, Ben Carlson and Duncan Hill, alongside tax-planning expert Bill Sweet, tackle critical questions on maximizing tax-free retirement income, career shifts into finance, effective college savings, and nuanced state tax moves. The focus is on the pros, cons, and complexities of utilizing Roth accounts and related savings vehicles, balancing future tax scenarios, and practical tips for individuals at various stages of life. The tone is candid, wry, and full of relatable anecdotes, suitable for novices and finance aficionados alike.

---

Key Discussion Points & Insights

1. Will the Stock Market Always Go Up?

[03:13 – 09:08]

• Audience Question: What if capital and technology become so abundant the stock market never recovers from a decline?

• Ben’s Take:

  • There’s always uncertainty about the future of the stock market, even with more data. Historically, even after massive losses like the Great Depression, long-term returns have been positive.
  • Quote [07:52]:

    "The only way to ensure yourself to fail as an investor is if you avoid investing over the long term at all." – Ben Carlson

• Historical Perspective:

  • Before the 1960s, broad awareness of long-term stock market returns was limited. Modern data (1926–1959: 10.3% average annual return; 1960–2025: 10.4%).
  • Even in hypothetical catastrophic scenarios, not owning stocks would likely be worse.

• Lighthearted Analogy:

  • If the stock market is flat due to alien attack or similar events, investment worries are moot.
  • "Buy the lasers!" joked Duncan [07:50].

---

2. Should You Convert All Retirement Assets to Roth?

[09:24 – 15:51]

• Case Study: A Wall Street Journal article profiles a family who’s “all Roth,” betting tax rates only go up.

• Bill Sweet’s Analysis:

  • Roth provides clarity and simplicity for retirement planning, especially for DIY investors.
  • Downsides:
    • Potentially forgoes some net worth—Roth requires paying taxes now.
    • Lacks tax diversification; if tax rates fall, could be worse off.
  • Quote [13:56]:

    "You are giving up something by going full Roth. But the ease of planning…makes your life 10 times easier." – Bill Sweet

• Ideal Balance:

  • "A third, a third, a third" across Roth, traditional, and taxable accounts to hedge unknowns.
  • Taxes have historically gone down, not up—future is unknowable.

• Passing to Heirs:

  • Roth accounts now must be spent by heirs within 10 years (unless spouse/special rules).
  • On a "long enough timeline, Roth will always beat anything else—but on a long enough timeline, we'll all be dead." – Bill Sweet [14:46]

---

3. Career Advice: Transitioning from Military to Finance

[15:53 – 20:32]

• Question from Dylan (27, veteran, aspiring to enter finance):
  • Value of certifications? How to break in with no direct experience?
• Panel Advice:
  • Bill Sweet (himself a career switcher):
    • Certifications (like CFP) help you get your foot in the door but offer little practical experience.
    • Emphasize military skills: decision-making under duress, project management.
    • Seek practical experience—internships, software demos, entry-level roles.
    • Quote [17:38]:

      "Credentials get your foot in the door. But the industry values a master's degree in getting stuff done."

  • Ben Carlson:
    • Read extensively, become a “sponge.”
    • Find a niche—a focus (e.g., helping veterans).
    • Find a mentor.
    • Consider tax-specific skills (industry demand, integrates tech skills).

---

4. Best Ways to Save for a Baby’s Future—Are 529 Plans the Answer?

[20:36 – 26:52]

• Ben’s Recommendation:

  • Opened a 529 plan for his children immediately—monthly contributions since birth.
  • 529 plans now even more flexible: unused funds can roll over to a Roth IRA (limit $35,000).
  • Start with securing your own finances first (“oxygen mask” principle).

• Bill Sweet:

  • 529 plans: "A Roth for college"—tax-free growth and withdrawals if used for education.
  • If not spent, rollover to Roth for the child.
  • Notable Illustration [24:25]:
    • One client: $84,000 529 distribution, $51,000 in tax-free earnings—"Would you like the market to pay for two-thirds of your child's college?"

• Alternatives:

  • Custodial (UTMA/UGMA) accounts:
    • Some tax benefits, but full control goes to child at 18–21. Limited benefits over 529 except for specific non-college use cases.

• Notable Quote [23:58]:

  "My general answer would be no, the 529 is the right one unless some truly unusual circumstances exist." – Bill Sweet

---

5. State Tax Arbitrage: Converting IRAs Before Moving

[26:54 – 30:49]

• Listener Question:

  • If you convert a traditional IRA to Roth while living in Florida (no state income tax), then move to North Carolina (which taxes income), can you avoid state taxes?

• Bill Sweet’s Take:

  • Yes, provided you complete the conversion while a Florida resident—saves you 4.5% (NC state tax rate).
  • The timing matters—best to ensure the tax year aligns with your Florida residency. Some states may prorate based on days in each state; NC is typically source-income-based.

• If Moving Mid-Year:

  • Check both states’ residency/tax rules. Consulting a CPA is recommended.

• Broader Question: Is moving to no-income-tax states a tax-loser elsewhere?

  • Often, you’ll pay higher taxes elsewhere (property, vehicle, sales).
  • Only truly advantageous for those with high incomes.

---

Notable Quotes & Memorable Moments

• On Roth vs. Traditional:
  [11:57]

  "They’re trading a vacation to Hawaii now for a vacation to Hawaii in the future."
  — Ben Carlson

• On Predicting Tax Rates:
  [13:29]

  "The future is not just unknown, it’s unknowable. I have been predicting tax rates are going to go up and I’ve been wrong since 2012!"
  — Bill Sweet

• On Kids and College:
  [24:52]

  "If the kid wants to go to Vegas, spend it all in hookers and blow south of the border, you have no say in it."
  — Bill Sweet (on custodial accounts)

• On State Tax Moves:
  [27:44]

  "Go ahead and accelerate a Roth conversion rather than wait. It'll save you 4.5%."
  — Bill Sweet

---

Timestamps for Key Segments

• Stock Market Returns & Doomsday Investing: 03:13–09:08
• Should You Go ‘Full Roth’ for Retirement? 09:24–15:51
• Career Advice for Finance Transitions: 15:53–20:32
• 529 / College Savings Options: 20:36–26:52
• State Tax Arbitrage on Roth Conversions: 26:54–30:49

---

Tone and Language

• Conversational, humorous, informative.
• Frequent use of personal stories, inside jokes, and analogies to make complex financial topics approachable.

---

This episode delivers a practical, nuanced look at “tax-free” retirement strategies, the folly of market pessimism, and actionable planning tips—always considering the unpredictability of life, markets, and government policy. Listeners are encouraged to ask thoughtful questions, diversify strategies, and when in doubt, consult tax professionals for personalized advice.

Transcript

[A]

Welcome to Ask the Compound. I'm your host, Ben Carlson. The Roth IRA was created in 1997, named after a senator named William Roth. Wonderful innovation for retirement investors, right? So should you try to convert all your retirement accounts to Roth dollars? Could you essentially live tax free in retirement? We answer those questions and more today. Stick around. Welcome back. This is Ask the Compound where we answer all of your questions. We are live as always. Welcome to everyone in the chat. YouTube, Twitter, Twitter, you are free to fire those questions away. We answered a bunch of them last week. Bring it email. Here is ask the compoundshowmail.com and today's show we'll be answering questions about what if the stock market stops going up over the long run? Should you have all your retirement assets in Roth dollars? We'll bring in Mr. Roth himself to answer that. What's the best way to make a career shift into finance? Let's say you just had a baby. What's the best way to save for their future? And finally, what are some considerations if you're moving for a tax with no income tax? A lot of taxes from Florida to North Carolina. Can you arbitrage that situation?

[B]

Also email us, of course. But also, Ben's pulling a lot of questions from YouTube and Twitter these days.

[A]

So as always, Dave said, must be summer based on my shirt. Yes, it's Hawaiian shirt day. I am dressed as Magnum PI Today. Didn't wear my tiger hat, but I'm close.

[B]

Nice.

[A]

Today's show, sponsored by our friends at Public, Invest in more at Public. Almost everything. Stocks, bonds, treasuries, options, crypto, ETFs. They have a bond account. They have a high yield cash account. They have a Treasury account. You can create your own investment plan. They have IRAs there. Depending on how much money you transfer in with your IRA, they will give you a bonus of up to $10,000. They will also match up to 1% of the amount you put into the IRA. Pretty good deal. Discover why NerdWallet gave public 5 stars for its ease of use and investment selection. This is a website that was actually created recently, not like 30 years ago like most of them from traditional finance firms. Leave your clunky, outdated platform behind. Check out public. Go to public.comatc to learn more. That's public.comatc paid for by Public Investing. Full disclosures in the podcast Description. Duncan, last week you bragged to me on Slack and you said, listen, I know you give me a lot of crap over the years about Oatley, but check it out. It's flying this year. It's like quadrupled off the bottom, something like that.

[B]

I don't know if it's quite done that, but yeah, it's up a lot. John hit us with the one month. Look at that.

[A]

A one month.

[B]

Okay, that's a one month chart. It's up I think around 25% over the last month. So.

[A]

Yeah. So you're feeling pretty good about yourself.

[B]

Yeah, I mean, you know, they did a reverse split, which never feels great a while back, but yeah, not a great sign.

[A]

So how long have you actually held this stock for?

[B]

From the first day of trading.

[A]

So you wanted. Okay. Oh, there's the IPO chart. Okay.

[B]

Damn it, John.

[A]

All right. Yeah, you can, if you squint hard enough, you can kind of see that 25% increase in the last month. But oh my God, you average the whole way down, right?

[B]

I've been buying, yeah, I've been buying it like clockwork the whole time. So it's a little. I mean, I'm still down, to be fair.

[A]

I mean. Yeah, just wait till it breaks even. It'll happen anytime. You never know.

[B]

There you go.

[A]

All right, let's do a question.

[B]

Okay. Up first. We got one from Sam from Twitter. 100 years is just a heartbeat in the context of human history. What are the chances that capital becomes so abundant and technological process so rapid that the stock market could decline and never recover? I never hear mainstream keep buying advisors even consider this possibility. I don't quite understand this one. Why, why would the market. I'm curious to hear what you have to say on this. Why would the market not recover because of this factors?

[A]

All right, I'm guessing it's a Star Trek like situation. I never watched Star Trek personally, but I gather that the genesis of Star Trek was technology made things so abundant and everything had. Everyone had everything they could possibly want because they put whatever the machine was, they pushed it and it gave it to them so then they could just explore galaxies. And I guess that's the case. I've had plenty of people ask me over the years, what if the stock market has a Japan like situation? So this is a new one. But I've heard this question a lot, like, what if the stock market doesn't go up over the long run? I don't know why an abundant technology world would cause this to happen because I don't really see corporations willingly causing their businesses to self destruct, but who knows? And I can't remember the piece that I wrote, but it was some long term market Data that I usually use. So I get variations like this all the time. But I have plenty of thoughts here. But let's do a history lesson first. And I'll use the following example at a lot of my public speaking gigs for financial advisors. So compound audience is in for a treat today. This is free on the house, guys. So stocks for the long run as a concept is still relatively new, right? For the simple fact that no one really knew what the long term returns were in the stock market before, like the 1960s era. So investors before then mostly cared about dividends, which were just a lot higher back then. And they kind of just bought and held stocks. They didn't really know what the historical returns were. So then this guy named Lewis Engel, who was a VP at Morgan Stanley at Time or Merrill Lynch. Sorry, I get those confused. They tasked him with figuring out what are the actual returns. So we can bring these to our brokers at Merrill and then they have ammo to talk to clients and prospects because they were trying to get people to sign up for the stock market. Because not that many people were involved in the stock market. It was like 4 to 5% of households were invested in the stock market by the 1950s. It wasn't that many people. So Engel contacted the Chicago Graduate School of Business and they said they performed this historical study if Merrill introduced pay for it. So in the early 60s, this group of professors took this historical data set of all New York Stock Exchange stocks going back to 1926. They looked from 1926 all the way through 1959. Took them four years to complete this, which is kind of insane today. It's a snap of a finger. Right? And this is now known as the center for Research and Security Prices. Crsp. Right. This is like the gold standard in data. So for the first time, they basically provided the long run average in stock market. And once and for all, these brokers finally had something like some ammunition. And the returns were way better than anyone thought. So the Great Depression saw stocks fall 86%. Right. Duncan, from 1929 to 1932.

[B]

Rough.

[A]

Despite that gargantuan crash. What do you think the average annual return was for from 1926 to 1959? What's your guess?

[B]

7%.

[A]

All right, throw the chart up here, John. 10.3%. I looked at this. The average annual return before and after, they knew what the returns were. So from 1926 to 1959, the average annual return was 10.3%. From 1960 to 2025, the annual return has been 10.4%. It's kind of interesting. My knowledge didn't really change all that much. And again, because of the Great Depression, no one thought, oh, stocks for the long run because they got decimated. But it was still much better. So we have about 100 good years of stock market data, but we've only really known about it for 65 years. And let's be honest, not that many people actually knew even then. Right, right. It was, it was much fewer. And so the knowledge is just much greater these days. So would you feel much more confident about the stock market and those relationships if we had a thousand years of data or 10,000 years of data? Of course. Like, then you could say, listen, we've proven this out. N equals 1000 versus n equals like 1 or 2 for a lot of these things that have happened. But even if we had a much longer history, you have the same exact level of uncertainty about the future. Right. Even if the stock market was around for 10,000 years, we could still have the alien attack that causes something to go bad. Although I always say if we had an alien attack, the infrastructure spending would be amazing. We'd probably have a boom. Fed would cut rates. Yeah.

[B]

I was about to ask who that would be bullish for.

[A]

Oh, yeah, for infrastructure. I mean, I think the stock market would actually handle an alien attack. Not bad. I mean, you know anyone who got taken out by the lasers and pulled up in the spaceship.

[B]

Yeah, buy the lasers.

[A]

That's more stocks for us.

[B]

You gotta buy the lasers.

[A]

Yeah, yeah. Not the picks and shovels, the lasers and. Yeah. So, I mean, no one knows for sure if history is a useful guy, but there's the old saying that I would rather be approximately right than precisely wrong. So my baseline assumption again is the world's biggest corporations aren't going to willingly put themselves out of business. It's kind of like this worry that everyone is going to index fund, right. And everyone's going to be an index investor. Then what? My guess is the active portfolio managers, the hedge funds, the private equity investors, they're going to still keep trying to earn and charge the high fees that they do because people like money. So I'm guessing not everyone is going to index. And I don't know if the thing that I always tell people is if the stock market stops going up over the long run, you're going to have a lot bigger worries than your stock portfolio because it's not going to matter what your investments are. Right. What does it matter how you're invested if the Stock market stops going up, then we have way bigger problems to worry about. And what's the alternative? Bury your money in the backyard? I always say that the only way to ensure yourself to fail as an investor is if you avoid investing over the long term at all. So I get kind of thinking through these hypotheticals in a doomer way or whatever. It's kind of fun. But my stance is the only way you can guarantee the lack of success is just, okay, I'm not going to invest. So what you want to do.

[B]

So you're saying you got to be in the game. You can't be on the sidelines.

[A]

Exactly. And if the alien attack happens, we have Will Smith. He's still here. He still got it. We saw what he did to Chris Rock. He beat up the alien just like Chris Rock, right?

[B]

Oh my God.

[A]

All right, let's do another.

[B]

Fair point, fair point. Maybe we can throw a besant in there too, you know. Okay, up next, we got a question from Jeff. I'm curious to hear Mr. Roth. IRA Bill Sweet's take on the family in the Wall Street Journal article that went full Roth. Having $2 million in tax free retirement accounts seems like a no brainer on the surface, but should we, should that be the goal? What are the downsides to going full Roth on all of your retirement assets?

[A]

So I recall reading this article when it came out and I immediately thought of Bill Sweet. So let's bring him in here.

[B]

Get in here, Bill.

[C]

Yeah, it's a great read. In fact, my two visuals. Can we pull up the first visual here, Dan? John. Yeah, I mean, Roth forever, right? Ben, this is a missed opportunity on my side to rep it hard with Rothking for life.

[B]

You should have added a fifth knuckle so you could spell out ever.

[C]

I mean, I'm just.

[A]

Because I'm sure you did this on AI and AI is not very good with the fingers yet. So you could have snuck another one in there and no one would have known.

[C]

Yeah, yeah, yeah. No, but it's a great read. But to take it seriously, I mean, Ben, just. Duncan, like if you could have a million dollars in an IRA account at 65, would you rather have that be all Roth or all traditional?

[B]

Well, I guess Roth, Right.

[A]

Hang on, let me read from the article real quick because people didn't read it. So the family is the Rosses, and it says the all Roth strategy is about the tax rates.

[C]

Rosses.

[A]

The Rosses, Yeah. That tax rates will be the same or higher when they take money out of the account. So I think they're in their 50s. Paul thinks because of the US government's deficit spending, tax rates are probably only have one way to go up for the long term, and that is up. Roths are a great hedge for that. So it says they have $2 million in retirement accounts. Spending it down will require a dollar in taxes. They've reached the highest level among the growing number of savers who paid a Roth individual retirement accounts and four 1Ks. Now, my only pushback here is for my entire career, I have heard taxes have nowhere to go but up. And guess what? They've done only gone down. Yeah, right. And I know you've said this over time, like taxes, really, honestly, we have no other choice but to raise taxes, and taxes just keep falling. So that's my only caveat. But is there. Can you poke? Because you've, you're obviously a big Roth guy. Can you poke? You have a Roth tattoo on your back as big as Ben Affleck's dragon.

[C]

It's true.

[A]

Can. Is there any downside to this in terms of just lack of flexibility, do you think? No, no. Even if you lack the text diversification, whatever it is, the fact that you are free and clear and the planning is easier, it just. If you can do this, and I'm guessing I can't remember the whole article, did they. They just converted everything or paying the taxes now? Like, is that the downside that you're giving up flexibility in the present for flexibility in the future?

[C]

I think that's it. I mean, the headline answer is you would have like, if you were to choose a $1 million Roth $1 million traditional, that would be a $1.5 million account if it was traditional. Right. Because all the tax savings you'd accumulate along the way. The other big one is in distribution bend, married filing, joint taxpayer gets a $30,000 standard deduction, and they're only paying 12% up to the first $120,000 or so. And so if you think about, like, where your median earner is, they're probably tax rates on the marginal side, probably 30, 45% somewhere in that territory. And so it's this compounding effect of the fact, okay, your taxes are in the past. That's great. That's where I want to be, certainly. I think that's the choice. But you are giving up something. And what you're giving up is a higher net worth. Right. Maybe not pre tax, maybe after tax, but that to me is the big downside to.

[A]

Right. But they're pulling forward and they're converting those dollars and they're paying them now so they don't have to pay in the future. So you could realistically say they're trading a vacation to Hawaii now for a vacation to Hawaii in the future, right?

[C]

Correct. Yeah. It's the taxes you would have saved along the way and essentially long time. Ask the compound listener and participant, Dave Airey. He asked in the chat, what would be your ideal balance of Roth brokerage account? And in traditional, my answer, Just because you can't predict the future. A third. A third. A third. I think that's a reasonable way to play it all Roth seems to me insane. All traditional also seems to be insane. Nick Magi's thing of let's just forego the 401k outside of the match entirely. That also seems.

[A]

He's a total taxable guy. Right?

[B]

Yeah. I was about to say he was just going on and on about using your brokerage account.

[C]

Yeah. But the reality is there probably isn't a right answer. The future is not just unknown, it's unknowable. Ben, you brought up a key point before. I have been predicting that tax rates are going to go up and I've been wrong since the ACA in 20, 2012. Right. I've been 13 years wrong. And it looks like based on this big, beautiful bill, it's working its way through the Senate right now. Tax rates are probably going to go down again. Right. No tax on overtime, no tax on tips. So ultimately, we don't know. I think diversification makes a lot of sense. And that would be the downside. You are giving up something by going full Roth.

[A]

But I mean, the one thing is, is that there is a lot of tax planning, as you know, that goes on in a financial plan for retirement. So I think the ease of use is maybe one of those things where, especially if you're a DIY person, it just makes your life 10 times easier to not have to plan any of this stuff out and make the calculations. And I think that's part of it. It's just it makes your life way. Yeah.

[C]

Way, way easier how much brain damage you want to have. And that's why I think if you just take my thesis. A third, a third, a third. The question is not, do you want to have a large Roth balance? Yes, I do. The question is, when do you want to. In my career, when my earnings are the lowest relative to where they're going to be in my 40s, 50s, 60s, that's the time to superfund. And that's why I don't mind early on in a career, fund that Roth and fund it hard.

[A]

What about passing it on to heirs? So let's say you're not going to spend it all because we know from experience most of these people don't spend all their money in retirement. What is the difference there? Is that better for the heirs?

[C]

Yeah. To quote famous philosopher Chuck Palonik of fight club fame, on a long enough timeline, Roth IRA will always beat anything else. But in a long enough timeline, gentlemen, we'll all be dead. Ben, you bring up the interesting point. You now have 10 years basically after your passing, where your heirs have to take a distribution from a Roth or a traditional asset, unless it's your spouse, unless it's your younger brother or sister or something like that. Therefore, there is a timeline. Right? And so I'm 45 right now. I hope to make it to 90. That's where Grandpa Suite made it. So I can see like I've got like 55 years of compounding wealth before I pass it on to my kids. And that's about the limit. And I'm right at the cusp where I would recommend shifting over to more traditional balance.

[A]

Bill, you're literally at midlife. Literally.

[C]

Yeah, compared to Ralph Sweet who passed unfortunately in 2016. Lived a good life, but yeah, I'm halfway there. Had a good ride. I hope to be with you guys for the next four decades.

[A]

Time to buy that convertible.

[B]

I'm trying to picture a 90 year old bill.

[C]

Wise beyond his years. Let me put it that way.

[A]

All right.

[C]

There was no Roth in 1955, I can say that.

[A]

So it's still relatively new, you know.

[C]

Yeah, 30 years. That's it.

[A]

All right, let's do another one.

[B]

All right, up next, we got a question from Dylan. I'm a 27 year old military veteran. I currently make $118,000 a year as a defense contractor. Because of the unpredictability of DoD contracting, I've always worried about my job security and have tried to put myself in a position to change my line of work if need be. Over the last three years, I've taken advantage of my GI Bill and have about a year left. I'm majoring in business management and have developed a lot of interest in finance and wealth management. What career advice can you give me as someone in your line of work? How can I position myself to enter the world of finance? Are there certifications or courses that I can take to develop a valuable skill set?

[A]

All right, I just had. And thank you for your service. We get all of these veteran questions, which is great. I always appreciate that. And I always say that the fact that these people are thinking so far ahead, especially in their 20s, is great.

[B]

I think we have a big enough military audience. I think we should do, like, a show on a base. I think.

[A]

Yeah, we'll do an army tour.

[C]

I would love that, guys. That'd be awesome.

[B]

That'd be cool.

[C]

Yeah, go to West Point. That'd be great.

[A]

That'd be fun. I just had a conversation with someone this morning who's in a similar predicament, and now they're not a veteran, but they're looking outside of finance, looking to break in. And I have a lot of these conversations, and I have plenty of thoughts here, but I want to hear Bill first, because he's the living embodiment of what Dylan is trying to achieve here. Bill, you first. You went into, like, computer science first.

[C]

As a computer engineer. Yeah.

[A]

Rensselaer Finance, then made the transition to finance. So what. What advice would you have for Dylan here?

[C]

Yeah, I think it's relatively easy from the respect that it's simple, but it's not easy to do. Right. Simple advice, but it's not. It's. It's. It's actually quite difficult to execute. And I was relatively frustrated, gentlemen, when I went through the CFP course for the credentialing thing. Credentials are one thing, I think, that basically gets your foot in the door. It's a great thing to have. I think it's a.

[A]

It proves that you care, right?

[C]

Correct. It's a bar to entry. However, almost zero practical knowledge. And again, I don't mean to demean at all the CFP coursework, but it was very academic. It taught me very little about the actual work of financial planning and working with people.

[A]

But if you are outside looking in and you want to prove to employer, I care about this stuff, I'll put in the time and effort then. I think the credential helps.

[C]

It gets you in the door. And particularly the veteran thing, you know, do not be afraid to use that, because I used to say when I was making my pitch, I may not have the credential, I may not have the experience, but I have a master's degree in getting stuff done, and that is something that any employer would value.

[A]

So, Dylan, I think making decisions under.

[B]

Kicking ass and taking names and breaking down doors.

[A]

Yeah, but making decisions under stress, I agree. If you see that on someone's resume, I think you totally play up to that. I have a degree in acting cool under certain situations. And I think it's a big, big positive.

[C]

Yeah. And beating down hippies that are blowing up cars in Los Angeles. Yeah. I've got a master's degree there. But the hard thing to do is getting that experience. So I know this is nearly impossible with a full time job, but pursuing some sort of internship, maybe a summer program, something like that, I know how difficult that is. I'm not taking that lightly. But even if it's like demoing some financial planning software. Right. Some practical application of how to do it, to me that, that's the way, that's the way to at least add something of that nature to your resume. It's not academic, it's something relatively practical, but that's the type of thing to do. But ultimately I think it's, you're going to be looking for an entry level position, probably coming out of the military, and you're going to have to plan on working your way up. Right. Because that's ultimately what needs to happen, making that transition.

[A]

What I always tell young people is just read as much as you can and become a sponge. I remember one of the very first job interviews I had. The guy asked me, what are some of your favorite investment books? And I had just been reading a bunch of them and I gave him a camera. What exactly I said. But he said, that's a really good answer because a lot of times I'll ask people that and they've never read anything or they don't know any. And I think these days it's easier than ever. So you read all the blogs, you read all the newsletters, you listen to all the podcasts, you read all the classic investment books. I think finding a niche is helpful. And maybe for you, that's helping military members or veterans with their financial affairs.

[C]

As a start, Ben, you hit it. You hit it on the nail. Nobody likes doing income taxes, guys. The industry is falling apart. So yeah, that was a place, Ben, exactly to your point, where I felt I could add some value. I had some software training. I took a look at what CPAs are doing. It was moving into a software base. Right. And that's something that I was actually good at. A way to leverage a skill that I had.

[A]

And the other thing I think is just finding a mentor. So learning from people who came before you, I think is a wonderful way to get ahead. One more question from the chat they asked. Nearly everyone will have a lower tax rate in their 50s and 60s. No mortgages, no kids. Isn't that a big argument against a Roth. Fair point.

[C]

Because again, your tax rate when you're working is almost certainly going to be higher than it is in distribution phase in retirement. Unless you're sitting on a very large pension. That is a great argument.

[A]

Okay, fair enough. All right, let's do another one.

[B]

Okay. Up next, we got one from Alan. I was looking back through the archives for the episode where Ben talked about alternatives to 529 savings plans. I couldn't remember if it was an ask the compound episode or talk your book episode on Animal Spirits, so I figured I'd go straight to the source. We had our little one arrive seven weeks early recently. Congratulations. She and mom are healthy and doing great, which means my focus can shift to the task I thought I had until July to figure out. So, Ben, what sort of savings options have you used for your kids? And why would you Recommend against a 529 savings plan?

[A]

All right, congrats on the new chat. 7 weeks is very early, as far as I know.

[C]

Yeah, we're still. We're still in the not sleeping at that phase.

[B]

Also, just for anyone that doesn't know, just briefly explain what a 529 is.

[A]

Sure. We actually get a lot of questions from new parents, and a lot of them are like this. And I like the fact that people are thinking ahead. I started a 529 plan for each of my three kids immediately after they were born. I know you can do it before kids are even born, then change the beneficiary or whatever. I've made monthly contributions to them ever since. I think we actually had a guest on Animal Spirits who made the case against 529 plans. I'm not going to hear to name any names, Tony Stick, but I don't think I've ever made the case against a 529 plan. That's just a college savings plan. And Bill, correct me if I'm wrong, but they've changed the rules enough that a 529 plan is actually even more beneficial now because you can. What's the conversion to a Roth if you don't use it all or something?

[C]

Yeah, 100%. Ben. I was going to highlight four big benefits. Can we pull up a slide from Q3 real quick? So to me, it's tax free. Compounding along the way, you get tax free distributions in retirement. A529 is a Roth, except it's only for college. State tax deductions if your state offers it. And then ultimately, Ben, you just mentioned it new for 2024 last year. We can now convert five to nine assets to Roth. Stepping in for the Roth IRA contributions is basically a way to start funding a Roth IRA at birth. Right. At seven weeks old, you could begin a Roth IRA that your child's not going to touch for 60 years. That's a pretty powerful thing if you don't need that money for college.

[A]

So my oldest daughter.

[C]

A lot of downsides there. This would be my go to move unless there's something crazy going on.

[A]

So my oldest daughter is the teacher's pet one at school. And she gets, you know, really good grades. She gets a full ride to Michigan someday. All right. I don't have to pay for any of her college. I can convert that 529 for her into a Roth. And then it's in her name or.

[C]

My name, it's in her name up to $35,000. A lifetime rollover. Right. So there are limits. It's not totally, you know, perfect. It's not the full balance. But in that case, Ben, I mean, a, you won the game, so let's start there. Then secondly, you happen to have two other kids. I know it'd be a great idea to reallocate those assets elsewhere or carry them forward to a grandchild. Right. There's a lot you can do with a 529 now that you couldn't even two years ago.

[A]

Yes. And not to sell my other kids short. Hopefully they get scholarships, too.

[C]

Exactly.

[B]

In sports.

[A]

Exactly. But do you. Are there any. Is there anything beyond. He's asking here, Alan, in the question, is asking any other sort of options you'd recommend? My whole thing is I like the idea of thinking ahead and saving for your children, but make sure your own finances are in order first. Right. Put the oxygen mass on yourself first and worry about the kids. So I would make sure that you're maxing out your 401k and putting some money into a taxable account and your IRA or whatever before you worry about putting extra dollars aside for the kid. They've got plenty of time to figure it out. Worry about yourself first. And you don't want to have to be on their budget someday because you didn't save enough.

[C]

True, but my general answer would be no. I think the 529 is the right wing. Can we pull up my last chart here? I want to show you guys the single best 529 distribution I have seen in my career. This was an individual going to a large private school that took an $84,000 distribution in 2024. Took a look at the basis. And take a look at the earnings. Would you like the market to pay for two thirds of your child's college? If so, a529 is the thing for you.

[A]

Oh. So the cost basis is in the bottom. How much they made is in the middle There.

[C]

You got it. $51,000 of earnings. Two thirds of this year's tuition for tax year 2024 was paid for by the market, and it came out completely income tax free. This is a $20,000 tax savings.

[A]

I don't think that's someone who obviously started saving early. Right?

[C]

Correct. Yeah. Mid 2000s. And this individual is 18 years old, the child. So. Yeah, but that's what's possible with the 529. I don't see this in other types of accounts, guys.

[A]

Okay. I've been asked this before, too, in the chat. Is there any advantage for a custodial account? So that's a brokerage account that's in the kid's name, but really under you, I guess.

[C]

Yeah. Pros and cons, the biggest thing you get is you do get some tax benefits. The child gets $1,000 standard deduction, basically, and then the next thousand dollars. So up to $2,200 is taxed at the child's rate, which is usually zero. Right. And so income dividends, stuff like that, that accumulates along the way in a UTMA or UGMA account that is usually tax free. The problem, then there's two problems. One is that anything else above that are taxable, fully taxable. Right. You don't get any tax break. The second problem is when that child turns 18 or 19, depending on the state, that is the child's asset. You no longer have any control over what happens with that money. If the kid wants to go to Vegas, spend it all in hookers and blows south of the border, you have no say in it.

[A]

All right, Dave made a great point here. Did this person where you showed the tax return, they really paid $84,000 in one year for college. Where were they going?

[C]

Hey, I don't know if you guys are keeping an eye on things, but. Yeah, that is not inexpensive. Yeah, that's about market rate. I mean, for a private school.

[A]

Yeah. When.

[B]

When I was teaching at American University, it's been, what, like seven, eight years ago? I think it was 50, 55,000 a year.

[C]

Yeah.

[A]

I will slowly be hypnotizing my children into going to state school. Please. State public university.

[B]

Yeah.

[A]

Yeah.

[C]

Not a bad idea. But no, be prepared because, yeah, those numbers are going to keep Escalating.

[B]

Also, someone is asking in the chat, can you trade a 529 account?

[C]

What do you mean, trade it? Like buy and sell?

[B]

You can hold it.

[A]

Heaven Durant, two first round picks.

[C]

Yeah, exactly. And move them for a fantasy asset.

[B]

No, no.

[C]

Can you.

[B]

Can you trade stocks in it or is it limited to certain things like a 401k?

[C]

You know, it depends on the state, Duncan, but I've never seen a 529 at a state level that allows anything outside of low cost index mutual funds or maybe some active managed American funds is about as crazy as you can get. But I think the answer is no.

[A]

This will be a shock to a lot of people here, but I actually have all my children's money in a target date fund in their 529. I know it's pretty shocking, but it's.

[C]

The way to go. It's the way to go.

[A]

All right, we got one more question.

[B]

All right, last but not least, we got a question from Greer. I think this might be right up Bill Sweet's alley. I'm currently a resident of Florida, which means no state income tax, and I want to convert a chunk of my traditional IRA to Roth. If I complete this conversion while still living in Florida before moving to North Carolina, which does have income tax, will that income be entirely free of state tax? Or is there some sort of tax rule where I'll have to pay income taxes on this conversion? I'm converting because my wife is going to stop working for a few years until our kids are old enough for school. So we should be in a lower tax bracket.

[A]

All right. I feel like the tax tax authorities would have figured this loophole out. But, Bill, I can't imagine there's an arbitrage opportunity here. But you tell me you're moving from a tax, a state that pays no income taxes to a state that does pay income taxes. I got to imagine that there's no loophole here.

[C]

I did the math on this one, guys. I want you to bear with me. State income tax in Florida this year is 4.5%. So that means per $10,000, you pay 450 bucks for a conversion. State income tax in Florida on individuals is zero. I think I'll have to check, but I think zero is better. So the answer would be, yeah, if you're moving from Florida to North Carolina next year, I would go ahead and accelerate a Roth conversion rather than wait. It'll save you 4.5%.

[A]

But what about the year when you're moving? Like, does it matter? If you live in Florida for longer than you live in North Carolina or is there a cutoff somehow?

[C]

I'm so glad you asked this. Different states treat it differently and you have to look at both the receiving and the sending state so we don't have to worry about could I move.

[B]

To Florida for a month and then move away?

[C]

I mean, you could, but it wouldn't help you. Yeah, 184 day rule for those of us in New York and Connecticut and other northeast states. But no, North Carolina falls based on North Carolina sources income. And so I guess you could make the argument if you move mid year that my ira, when I converted this back in, in May and then I moved in July, that was a Florida conversion. I'm not sure it would work. So some states say, hey listen, sorry, you know, you're part year resident. It's based on pro rata. Right. If you spend 180 days in Carolina, you've spent 100 days in Florida. Half of that should be taxable. Other states apply, all or none. North Carolina. So the best of my knowledge is North Carolina sources. So I think you probably would have been that argument. The best thing to do though is wait for that move to next year if you're considering this. And don't, don't mix up the states. I think that's a really just.

[A]

So this is probably a CPA question then. This is, this could be kind of convoluted and confusing.

[B]

Also, Michael in the chat is asking what if you have dual residency or dual citizenship? Did we always, Bill?

[C]

Nope, I'm back. Yeah, domicile is a big deal. I didn't hear the question though, so I'll just continue.

[B]

Michael in the chat is asking what if you have dual residency or dual citizenship?

[C]

Yeah, so dual residency is not really a thing. It's domicile is the rule that matters. And very generally, if that's the case, both states would attack.

[A]

Yeah, because this is the kind of thing where the hedge fund managers go have to live in a certain state for a certain amount of days. Right. And it's really convoluted, but they actually do track, especially if you live in New York or California, I guess.

[C]

Very typically, yeah, your home state will give you a credit for taxes paid in another state. So it just gets super complex flex in a big gobbledygook soup. Unfortunately.

[A]

I have one more question for you, Bill. Is it really more advantageous to live in states like Florida or Texas from a tax perspective because they have no income taxes or do you just end up paying higher property taxes or something else. And does it all end up wash as a wash in the end? All right, Bill's having technical difficulties. I am.

[C]

I'm in and out. But for income tax purposes, I would say yes. But the states make their money, right?

[A]

And so they have to make it somewhere.

[C]

Exactly. So you pay for it in vehicle registrations, you pay for it in ad valorem taxes, you pay for it in property taxes. Very generally it works really well if your income is high. But that's not the only tax that you pay.

[B]

Bill, do you have Verizon Internet?

[C]

I do not know. I switched to fiber.

[B]

Having issues with Verizon today. So.

[A]

Great fiber. Fiber does sound great until you use it and you realize it's just the same as the other stuff.

[C]

Yeah, no, this is the first time. I'm afraid it's going to get me kicked off the show.

[A]

Come on, Duncan. It is my fiber. Always.

[B]

We're uploading like 20 gigs of files a day. Fiverr makes a massive difference. Yeah, I'm long.

[A]

Fiverr.

[C]

Starlink. Starlink for the world.

[A]

I remember the days in the 1990s when I used to have to do dial up and then if someone called, it would break it up while I'm trying to download songs on Napster and I have to start all over again. So I'd have to tell my sister to hey, stop having your friends call. I'm downloading songs here.

[C]

I still owe my dad $380. Cause I was dialing the Poughkeepsie into the modem. Didn't realize that was long distance in 1994. $2aminute.

[A]

All right, Bill, I hope that you are still dollar cost averaging back into the market.

[C]

Yes, I went full back. I went full back at the end of May, I think.

[B]

Yeah, he snip snapped. He went.

[A]

Oh, good. I thought you were dollar cost. All right.

[C]

No, yeah. Alex Palumbo, he shamed me. He shamed me back into the market. Maybe made a band out of me.

[A]

Good. No one in the chat likes Verizon, everyone. Not great. Remember, email us ask the compoundshowmail.com with a question. Thanks to everyone in the live chat on YouTube and Twitter. As always, thanks to Duncan and the entire production team for keeping the show up and running. No thanks to Bill's Internet provider today. Thanks to you, the listener, for tuning in and sending such thought provoking questions every week. We appreciate it. Subscribe, rate, review, all that good stuff.

[B]

Over 2,100 people watching live right now.

[A]

All right, thanks everyone.

[B]

Thanks.

[C]

I'LL be back.

[B]

Thanks for listening to Ask the Compound. All opinions expressed by Ben Carlson, Duncan Hill, and any of their guests are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.