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.