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- [00:00]
A
Welcome to Ask the Compound, the show where you ask and we answer. I am Ben Carlson. Let's say you have a friend who's a YOLO trader. But it's not just speculation this person is into. They're concentrating into a YOLO trade on one stock using leverage. How do you talk them off the ledge? What would you tell them? How do you help them make their money back after they lost it? We're going to help YOLO traders and more on today's show. Please stick around. Our email here is askthecompoundshowmail.com if you're watching live on YouTube or on Twitter, please send us. Send us a question. We'll take it live on the air. As always on today's show, we will be answering questions straight from our compound viewers and listeners on fixing your friends who are terrible investors selling tech stock winners into retirement. When a Roth 401K makes the most sense. From our trusted tech expert. How to pay for home renovation. How to pay no taxes in retirement. People love that one. And how much is too much in an hsa? Today's Ask the Compound is sponsored by exhibit A. Exhibit A was started by our own chart kit Matt, who came to us and said, I got this idea. Advisors love good charts, but they don't have time to make them. They don't know how to make them. I'm going to help make the charts. I'm going to provide the talking points. The advisor just signs in, they put their firm logo, their firm colors. It works great. So if you go to exhibit a for advice.com, you can sign up there. Look at all these great charts. You can do again. Your logo, your color scheme, it's beautiful. He has chart blasts every week. They have explainers if talking points. You send these out to your clients, help them explain the markets, put things into context. And again, you can sign up at exhibit a for advice.com free seven day trial. If you're an advisor, you need this. Your clients will love it. It'll make your life easier. Exhibit A for advice dot com.
- [01:44]
B
It's kind of like we're sharing chart kid Matt with the world, you know.
- [01:47]
A
Really, you get your.
- [01:49]
B
Yeah, you get your.
- [01:49]
A
People love his charts. I got it. I got a message from some guy the other day on LinkedIn. I don't ever check LinkedIn. Messages started. People messaged me there. I checked them for the first time and the guy said, hey, how do I get your charts? Said exhibit A. It's easy.
- [01:59]
B
There you go.
- [02:00]
A
All right. Lots of questions. Today.
- [02:02]
B
Ben, before we jump into that, are you excited about Nvidia earnings?
- [02:06]
A
I don't care.
- [02:08]
B
It's not a make or break moment for the market.
- [02:10]
A
I own Nvidia. I actually own it. This is like one of the few stocks I own, but yeah, we'll see.
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B
All right. I was just trying to get you to say a bite we could use on social media or something.
- [02:19]
A
Yes. No. This is the most important earnings call in history of earnings calls. If Nvidia fails, the stock market is going to go down. They do. Well, it might go up. I don't know. Or it might not.
- [02:31]
B
All right, there we go. Love it. Hey, up first we got a question from mix of names here. So I'm not going to say name. Maybe it's supposed to be anonymous.
- [02:42]
A
This might be an anonymous one because of the information.
- [02:44]
B
Yeah, I see multiple names, so I'm just not going to say one. Okay, let's say I have a brother. Let's say he was on a lucky hot streak this year, yoloing into the most speculative plays in the market, quantum crypto meme stocks, et cetera. And was up 100% year to date. Pressing his luck. He thought it was a good idea to put nearly all of his portfolio into MSTR. That's MicroStrategy. Or now just strategy, right?
- [03:08]
A
Yep. Michael Saylor. Yeah, the bitcoin vehicle.
- [03:12]
B
Okay, so he put put nearly all of his portfolio into MicroStrategy, using margin when it was trading the 3 hundreds. He's now down 50%. I told him not to touch MicroStrategy with a 10 foot pole. And if he was bullish, Bitcoin, to just buy bitcoin. I also told him to never use margin, especially on high risk stocks. He is at risk of losing half of his net worth and has a home purchase on the horizon that's in jeopardy. Now he suddenly wants my advice on how to get out of this mess. I told him that I don't know and I honestly don't. How do you deal with people that consistently ignore your advice and then want your help to get out of a message? I suspect there are many yoers out there facing this situation, but too ashamed to admit it.
- [03:53]
A
Is this one of those fight club things where we get the Edward Norton Brad Pitt and the brother is really the same person?
- [03:59]
B
I mean, that's what I thought. Yeah, yeah.
- [04:02]
A
Wink, wink. Listen, I'm sure he's right. There's plenty of people out there in the current environment who have slowly but surely like turned up the risk dial. From aggressive to degenerate.
- [04:11]
B
And the hardest net worth is a lot.
- [04:13]
A
Yes. Here's the thing. It's hard once you've. It's hard to see when you've morphed from I'm a really aggressive investor to I'm a degenerate gambler. When you're making money, when things are going up, you don't realize like, oh no, I'm a degen now. So I think there's people who have taken on excessive level of risk. They've been compensated for it in a lot of this stuff and now it's turned on some of these stocks. And so, man, listen, putting half of your net worth into Michael Saylor's leveraged bitcoin play, right? Using your own leverage on money that needs to be used for a house. This is like, you have a problem. We need to do like the, you know, when they take cousin Christopher and give him like the, you know, intervention on Sopranos because he sat on the dog after doing drugs. This is like intervention level stuff. Okay, so his brother got into the stock in the 300s. Let's do the first chart. It's now sub$200 a share. And I'm not a technical analyst, but this doesn't look like an uptrend to me. This is like a waterfall or whatever we call it. So next one, show the drawdown profile. This is just this year, stock is down nearly 60% from the highs that really weren't that long ago. This is a few months ago. I'm sure he was feeling great. Like this thing's awesome, right? I think it peaked at like $470 something dollars a share. All right, chart off. So this is like a 2008 level crash in a matter of months. So here's the thing. I'm not even going to make a judgment on the stock. I don't know if Michael Siller's bitcoin experiment will work or not. Right? They're getting a premium now. The premium's gone away. I think if bitcoin keeps going up over time, this thing is not going to get crushed at least, right? So I think it really is tied to bitcoin. It's like, but can the leverage play last until then? And will investors still keep giving the money? I don't know. It's already worked better than anyone expected, right? Because like, but this stock has got huge gains followed by huge losses. So let's zoom out a little bit. Go to the past 10 years of drawdowns. So here's what I spy on this chart, you're looking at a 20% drawdown to start. Then we got a 50% drawdown. These are all separate drawdowns. A 90% drawdown after the 2022 bear market, which is insane. And then a 46% drawdown and now 60% drawdown. And the crazy thing is, despite all that volatility. Chart off, please. The stock is up more than 900% in total in that time in the last 10 years, despite all those different bone crushing crashes.
- [06:26]
B
Not bad.
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A
The problem is the brother did not take part in the 900%. He bought near the top, maybe held on for 25%, 30% gains, and he bought on margin. Holy cow.
- [06:41]
B
And he's gonna be buying on margin. A lot of people are watching this show and are completely new to finance. So when people say margin or leverage, they mean they borrowed money to invest.
- [06:50]
A
They're borrowing money. So their page amplifies gains, amplifies losses. This is a dumb and dumber moment for me. Do you realize what you've done? But there's not a bus full of beautiful women waiting at the end of this one. Here's the thing, you could try to offer this kind of person advice. Sell now before it gets worse and you get a margin call. You don't want to do a margin call and throw good money after bad. Invest in something far more reasonable and diversified. When I first started my blog, A Wealth of Common Sense, I had this dream. And my dream was that I'm going to somehow save people from making illogical financial decisions. That's the whole premise of common sense, right? Just use your common sense. Don't be an idiot. And after creating financial content for more than a decade now, I've come to realize that some people cannot be saved. And it sounds like a mean thing to say. Some people are just doomed to make money. Mistake after money mistake. There's nothing you can do about it. You know how you have those friends that you grew up with and you go, man, this person is kind of delusional, but they're going to figure out eventually. And then you hit middle age and you go, oh, this person's never going to figure it out, right? We all have those people in our lives, like, oh, this person's just always going to be going from crisis to crisis, bad decision to bad decision. And listen, some people need to make a big mistake like this to have the realization like this aha moment, like, oh gosh, what was I doing? What was I thinking? Just to change their behavior. That does happen. I know an advisor who runs a solo practice who constantly turns people away, they, he knows will be bad clients. And he tells them like, nope, you're not ready for me yet. Go make some more mistakes, then come back and talk to me. And he says, some people come back. Most people don't. So can the brother here be saved? Maybe. I think he might need someone to take the steering wheel. Like, it's one thing if you're yoloing as a young person without a lot of responsibilities, right? You don't have a lot of money. You're gambling, speculating, hoping to strike it rich on a lotto ticket. I don't recommend that. That's okay though, at a young person. But when, when you are talking about money that's meant for a house, which is a short term thing, and you're putting margin on top of margin on top of margin on top of Michael Saylor, you have a problem. This is like, I don't know what to do. So either you put your portfolio on autopilot or you hand the keys to an advisor or a family member or otherwise you're going to, not going to learn your lesson until you get margin called to death and then you're broke. That's the only thing here. I don't think there's.
- [09:10]
B
The hard thing is he can't, he can't go the opposite direction either though, right? Like, he can't just go into treasuries. He's not going to, like he has no chance of, of, you know, even recovering.
- [09:20]
A
Here's the thing though, you don't, you don't want to revenge trade though, because Obviously you lose 50%, you have to gain 100% to get, just to break even. Everyone knows the math there, right? But you don't want to revenge trade and go like once I break even, then I'll, then I'll chill out. Like maybe you have to take your time to break even and because he was probably, it sounds like he was sitting on big gains anyway.
- [09:37]
B
The answer is not triple levered S and P either.
- [09:39]
A
No, just something more reasonable. Listen, is this guy going to go in a target date fund? Probably not. Should he probably keep us posted. But I'm afraid this is going to end in tears.
- [09:54]
B
Yeah, I mean, so a lot of tax loss, harvesting. Is that the silver lining your net worth?
- [10:02]
A
All right, I hope he, I hope his house doesn't fall through. But. Yeah, but maybe if buying a house, the treasuries are the answer for right now, you know, titles. All right.
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B
Yeah, I, I feel I feel bad for them because I know that it's very easy, personally speaking, to get caught up in this. And there might have been a time when, you know, not that long ago, I was just buying whatever stock was going up the most on the day and then selling it after it went up 10%. And so I've been known to fall into some of these things. But, yeah, the leverage part is, I think.
- [10:33]
A
Well, no, the concentration, too. If you want to speculate position, size it correctly, take 10% of your portfolio and speculate your face off. I don't care. But 50% of your net worth, that is. And on margin, that means, guess what, you're doing more than that. Yeah. Someone in the chat says that the margin calls just don't answer. Then they break your kneecaps.
- [10:56]
B
Also, why is it. It's so often people that are into bitcoin that end up. I guess it's just a risk appetite thing. Like people who are really into crypto.
- [11:04]
A
I think people in. That if you've been in that asset long enough, you are more comfortable with volatility.
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B
Yeah. You've seen crazy gains.
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A
So. Yeah, there's a. Yeah, there's 10, 20 time leverage in some of these people. That's why you see people get wiped out when Bitcoin falls 10% or something. It's like, why would that wipe someone out?
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B
Yeah.
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A
All right, next question.
- [11:20]
B
Hey. Yeah. Good luck. Good luck to your brother, though. I mean, I hope. Hope they figure it out. Like, you know, it's.
- [11:26]
A
It's.
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B
There's a part of this. I'm laughing because, like, some of it is funny. Like. Yeah. Putting all your money into something so speculative. Of course, you know, that's. It's kind of comical, but like, in. In reality, I hope. Hope they're gonna be okay. Cause, yeah, it's. That's a lot of money to lose.
- [11:38]
A
Yes. But he. But he's right. There's probably a lot of people who are in a similar boat who've gotten way over their skis. And then a stock falls 50 or 60% and you go, oh, my gosh.
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B
Oh, for sure. Yeah.
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A
What do I do? Yeah, I didn't expect this. Yeah, no one knows, obviously.
- [11:51]
B
All right, up next, we've got another anonymous one. Wow. We got a lot of cagey questions today. Okay. You have to answer my question because I'm a female listener. I love that this is a thing now that we started.
- [12:06]
A
This is extortion. No, we said it. We have to follow through.
- [12:09]
B
Yeah. We said there's so Few women in finance and listening to finance podcasts. So here you got us. You have to answer my question because I'm a female listener. I've also unleashed Bill by saying his name three times. I've spent the last 15 years in big tech sales. I'm 55, have about a million dollars in two big tech stocks with a low cost basis. I never really sold the vested stock, and now over the last few years, it's a significant amount of my net worth. I'm still working and at the highest tax bracket, so I've been reluctant to sell. While I'm. While I am partnered, we keep our money separate. My husband is retired and I would like to retire in the next two years. Part two. How should I think about my. How should I think about asset drawdown and taxes? Assuming I have no income except for what my portfolio casts off, which is less than $48,000 a year, could my capital tax rate be zero? If I want to get out of this heavily leveraged tech position, do I sell most of the tech stock in year one of my retirement? I'm worried ish about a bubble too. I have about 800,000 to a million dollars of cash that needs to be reinvested. Since I have a margin of safety, should I ride it out a few more years and slowly sell?
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A
All right, Beetlejuice rules apply here. Time to bring up Bill. Sweet.
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C
Yeah, I ran so fast to answer the call, my beard fell off.
- [13:31]
B
Oh, my God.
- [13:32]
A
Yeah.
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C
On the way upstairs. So here we go.
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B
Nice.
- [13:35]
A
Looking good, Bill. Okay, thank you. So we've got. It's funny how taxes have seemingly kept a lot of people in these stocks over the years. It's like, hey, if it keeps going up, I know I probably should sell, but I don't want to because I got to pay taxes. We get a million, we've gotten a million of these questions. Again, bull market questions. But still, this one is a little twist on it because it's asking about retirement. Right? How do I. How does it differ in retirement if maybe my income falls to nothing and it's just portfolio income? So what say you? Is there any easy. Because people want to know, like, I want to hit the easy button on this. I want to get out of this. I want to. I want to keep my tax bill minimal and I want to spend the money. What do I do?
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B
Yeah. Love, love, love.
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C
This question from anonymous listener. Thank you very much. But to me, Ben, moving from an accumulation portfolio, which is where we've been, to a distribution portfolio, which what sounds like that is not an event, it's more of a process. So Ben, I don't my argument be there is no easy button. This is the work of an advisor, a CFP type advisor in conjunction with, with a responsible tax team. There are a couple of levers though that you can hit and what I love about where the listener is, there were some additional details you received. There is a larger off balance. So that was one thing that I was very, very excited to hear. But for the purposes of capital gains, the listener hits on something really interesting. If there is no other income outside of some dividends, $48,000 a year for a married flying joint couple, you can take up to $130,000 of total income from capital gains and other sources and, and basically pay 0% on that transition.
- [15:04]
A
Oh, wait, wait, she said they're partnered but keep things separately. What if they file separately?
- [15:08]
C
No, that's a great thing. So I specifically mentioned jointly. Right. So we would need to analyze, hey, are we filing jointly or not? But even if we're filing single bend, then ultimately you're still eligible for half of that. Which limits, I think if we're talking about this is one individual's assets. Right. Filing a separate return. So big picture, it's complicated. But ultimately I like where this is going and it may not be a fact of hey, we want to. Because Ben, you correctly identify capital gains as an obstacle. Right. To a diversified portfolio. If you've been successful investing, taxes are the fruit of that labor. Like you're going to have to trim that tree eventually. And the question is, do you want to do that after a long bull run in the kind of market that we've been in now, I would argue, yeah, this is a great time to look at that versus do you wait for a 20 or 30% drawdown? And then the nice thing about a drawdown like that, Ben, is if you don't have your gains, you don't have to pay tax on that. Right. So give me the taxes. I would arg you in that direction. I would fill up low tax brackets because I think that's, that's the, that's the gist here and that's that like I said, Ben is the work of a competent planner over a five or ten year period.
- [16:10]
A
Right. So yeah, so ripping the band aid off just means that's the trade off between hoping the stock doesn't fall and then paying the taxes right away.
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C
Yeah, I think that's it. Taxes. Like I said, some people hate paying taxes more than they like making Money. I would take the opposite tack here and I think, Ben, a great time to do that would probably be rolling over the calendar, right? January 1st or so. You realize your gains early in the year and then you can effectively deploy, let's say a tax loss harvesting strategy, some other options that you might have to realize losses to kind of whittle down on that gain as the year progresses. I think that's an excellent way to rebalance over time.
- [16:42]
A
And we've talked to other clients too who have. If they have a huge position, there's other options. There's other strategies you can use, like options to sort of hedge against the stock falling. Right. There's a cost to those options, but there are ways you can do that without completely selling the stock as you slowly but surely get out of it and use tax loss harvesting and all these other things. So there are strategies you can employ. But you're right, it's not something that you take lightly. You need someone to help you with those.
- [17:07]
C
Yeah, and I would go that route, Ben, if there was a very concentration, let's say like half of the portfolio was in a single company. That didn't sound like the situation. This seemed more diversified, maybe concentrated in tech. But Ben, a couple of things that we've been looking at recently, just to throw them rapid fire, we've been looking at options like section 351 exchange. That's something that you've seen a lot of platforms and products coming to market. That might be something to sit down and take a look at. We've been looking at exchange funds as an option. There's a seven year holding period. Right. So it comes with trade offs. But you do get a lot of instant diversification there. Or looking at plain old tax loss harvesting and that using the other assets in your portfolio, build those around those concentrated positions and begin to whittle those down over time.
- [17:46]
A
So someone in the chat says that she should just marry the microstrategy guy. He's going to have the losses, she's got the gains. That could be a dating show on cnbc. We pair people based on their opposites attract, right. We take one person, huge gains, one person, huge losses. Bill, let's say they got married this year before the end of the year. Could they offset each other's gains by filing jointly or does it not work like that?
- [18:10]
C
Well, this listener seems like she's spoken for and I can say her investing acumen is top notch. But in the event that we wanted to roll out a show, the answer is for Other listeners. Yes, Ben, you could effectively take very successful female investors and match them with degenerate gamblers.
- [18:27]
A
I'm making an app.
- [18:29]
B
Sounds like a great deal for the response.
- [18:31]
A
Swipe right for losses, swipe left for games.
- [18:34]
C
Yeah. So just to. But to take it seriously at 12:31 is the date that sets your status. Right. So if you happen to be married on 1231, whether you got married that day or the day before, that's the date that you can claim about it.
- [18:45]
A
This is a dating app where the losers finally win. Like, all these people have huge gains in their tech portfolios. If you're a loser who's got the big losses, everyone's going to be lining up to get paired with you.
- [18:55]
C
Yeah. There are other reasons to maybe consider entering holy matrimony. But, yeah, tax losses are definitely.
- [19:02]
A
It does sound like this instance. She has a lot of flexibility, too, with her other assets. Like you said, she provided us. She has some Roth assets. She's sitting on a bunch of cash. So if there is a tax bill, she's going to be okay.
- [19:14]
C
Yes. So I think the trick for me would be have a plan, obviously. But then. Yes. Those other accounts that you mentioned, Ben, are more flexible. They're more. You can. You can do different things to build around those positions and then sit down with a qualified planner and figure out, okay, what. How do I prioritize these?
- [19:28]
A
And it doesn't sound like she is really, like, beholden to just these two stocks. Like, she has another whole portfolio she can tap. So it's not like these two stocks are nothing. Right. That's because that makes it even scarier.
- [19:40]
C
Yeah. And furthermore, Ben, I think everybody's got this bubble fever right now. And again, I understand the thought process here, but we won't know. Right. What's going to happen until it happens. And the truth, the reality is these companies are highly valued for a reason. Right. And I love. Ben, the point that you've made, and Josh has made this point, Michael has made this point that, like, we're getting better at investing in running companies like CEOs, CFOs, CEOs are better today than they have ever been, and they're better at managing a balance sheet. And that, to me, gives me a lot of some solace when it comes to margin compression.
- [20:13]
B
Sounds pretty toppy to me, Bill.
- [20:15]
C
Yeah.
- [20:16]
A
Just worried Ish. Not worried worried ish.
- [20:18]
C
Famous top tick words. But, hey, if the market drops, great opportunity for Roth conversion.
- [20:22]
A
Speaking of which, let's do another one.
- [20:23]
B
Great job and thank you for the question also, Christopher Flint in the chat says, I feel so poor reading these emails. Yeah, we get that a lot. But larger stakes makes for more interesting questions. And these are most of the questions.
- [20:37]
C
No, we have a service model for every client too.
- [20:39]
A
Yeah, yeah, we do. But, but the thing is too, like with a lot of this advice, take a zero off here or there. Like I used to say when I work in the institutional world, just for institutions, I'd say it's just a couple extra zeros. Like the, the, the building blocks are still the same. Exactly right. And so it's. So it's the same thing if you've got a million dollar tech portfolio or $10,000 tech portfolio. Right. Just think through things the same way, just a little more or less money.
- [21:03]
C
That's exactly it.
- [21:05]
A
All right, do another one.
- [21:07]
B
Okay, up next, we got a question from Eric. My employer is adding a Roth 401k option starting in 2026. Right now, I only contributed enough to my traditional 401k to get the full employer match. My plan is to keep contributing up to the match in the traditional 401k, about $3,000 a year, and then put the rest of my contributions toward the 401, the Roth 401k to max it out. My net worth is about 1.5 million. I have 550,000 in pre tax retirement accounts, traditional 401k and traditional IRA, and about $80,000 in a Roth IRA. I ultimately want to roll Roth 401k contributions into my Roth IRA as I believe it's a bit light. Does this strategy make sense? Any issues I should consider?
- [21:53]
A
All right, so first of all, good on the company for issuing the Roth 401K. I don't know what percentage. Bill, do you have an idea like how many actually do it? It can't.
- [22:01]
C
I want to say it's somewhere in 15 to 20% today, Ben.
- [22:04]
A
Okay. Luckily, Ritholtz Wealth Management does this, which I'm sure you're happy with. I am too. And you, you forcefully made me do this.
- [22:12]
C
I'm a company man, put the gun.
- [22:13]
A
To my back and said, no, you're doing a Roth 401K. So I think it seems to me that his Roth IRA is a bit light and going for the Roth 401k option makes a ton of sense. I can't imagine you would disagree here.
- [22:26]
C
Yeah. Eric, I want to welcome you to the dark side. I went with Ira Rothmax as my screen name here for a purpose. Be it might not surprise you. I fully endorse Eric's plan. Let's think about this for a second. Let's live in a world where Eric does not pursue this strategy. So he's not putting an additional $21,000 a year or so in addition to his matching contribution. Traditional, that money's going to hit his checking account, correct? Right. So if he puts it into the retirement plan, he's probably going to invest it and be successful. But if it's going into a non qualified account, he's going to pay interest on the dividends, taxes on the dividends and taxes on the interest. And then if and when he liquidates that asset 10, 20 years from now, he has to pay a capital gain. So, Daniel, can we chart on. I did a quick analysis and this is not advice you need to consult with your tax professional. But the difference here, if you focus on the right side of this chart, it is about a 30% gap between what you would realize if you rolled 20 years of $21,000 contributions into a Roth IRA from a Roth 401. You would roughly have a million dollar balance completely tax free, assuming you're taking qualified distributions after age 60 versus roughly $715,000 on an after tax basis if it was a non qualified account. So Ben, I ask you, is 30% tax savings, is this worth it for Eric?
- [23:41]
A
It's pretty good to me.
- [23:42]
C
Yeah. And that's it. And again, back to Roth. This mega super 401, this is a huge opportunity to get funds into this space. And then we're going to answer a question later on what you do on the back end that even ripens this. So when I probably Roth, it's exactly for people like Eric.
- [24:01]
A
All right. And I got to do a PSA here since we're talking about retirement plans. So throw up my chart here. I looked at this. This is the annual 401k contribution limit going back to 2000. And Bill, I always complain to you, why don't they index things to inflation, like the losses that you can use on your taxes, but with retirement contributions, they actually are doing a very good job. And this thing, this century has more than doubled. And so now for 20, 26, we're talking 24,500, I think if you're 50 or older, what do you get? Eight grand extra?
- [24:30]
C
Yeah, it's initial 7,750.
- [24:32]
A
Yep. And if you're like 60 to 63, you get an extra 2,000 bucks.
- [24:36]
C
Yeah, that jumps up all the way to 12,750.
- [24:39]
A
Yeah. So chart off here. So like this is a great thing. And then if you do it with a Roth 401K. Right. Yes. You're paying the taxes up front, but you can actually, I look at it as you're able to put more in because It's a Roth 401K. I know it's not really that way because. But no one ever invests the difference.
- [24:57]
C
Yeah.
- [24:58]
A
Right. So you can put 24,500 in the Roth or the traditional. Right. But that Roth is after tax money. I think to me, in my brain, it means I'm putting more money in because It's a Roth 401K.
- [25:10]
C
Yep. And then you can even do. Ben, these really crazy plans have these ability to fund all the way up to the 414 limit, which is. Last year was 70,000. I want to say it's 72,700.
- [25:20]
A
Yeah. So that's like a SEP IRA. $72,000.
- [25:22]
C
You can do it that way. But again, what you can do is contribute dollars on an after tax basis. And then if you can convert those after tax dollars to Roth, you effectively can supercharge that up to like, like I said, in excess of $70,000 a year per year. So that. That's a great way to do it.
- [25:37]
A
Dave in the Chat said that IRAs have not kept up. Throw my next chart in here. I got IRAs in here, too. They have not kept up, but they have kept up this century, Dave. So not since the 70s, but look at the increases this century. They've gone from $2,000 in the early 2000s to $7,500 now. And you can see there's a lot more plateaus in the IRAs for some reason. I don't know why that is, but they have increased it a decent amount this decade. And so we're doing better. We're getting there.
- [26:02]
C
Yeah, it's great. It's great. But I think, Ben, you and I are on team. Yeah, Team tsb, opening that up to the masses. And frankly, like, I don't Understand why your $70,000 contribution limit for this year, last year, should be tied to your employer.
- [26:14]
A
Right.
- [26:14]
C
Why not open that up to everybody?
- [26:16]
A
Yes, exactly. All right, got another one.
- [26:19]
B
Okay. Up next, we got a question from Travis. I'm 47, and we have $45,000 left on our 2.875% mortgage. We would like to tap some of our $500,000 of home equity to complete substantial home improvements, kitchen remodel, basement remodel, and lots of landscaping. I'm thinking we'll need around $250,000 to do everything we want to do. I hear a lot on your show about HELOCs, which is home equity line of credit. And of course your stance is to never touch a low interest mortgage. Here's my question.
- [26:52]
A
Someone's paying attention.
- [26:53]
B
Yeah, here's my question. Instead of a 7.25% HELOC or a 7.5% HE home equity loan.
- [27:02]
A
Yep.
- [27:02]
B
What about a cash out refinance? I would be exchanging a 2.875% rate for a 5% rate for a refi. Is it a no brainer to do a cash out refi? Maybe when my 2.875% loan is almost gone, like less than $10,000 left instead of a HELOC in that situation. You know, I noticed that this math. So this is on you guys.
- [27:23]
A
We got it. So people who have a low rated mortgage will happily bring out to three decimal points. Instead of saying 2.9%, he had to say 2.875.
- [27:32]
B
Yeah.
- [27:32]
A
The one a few weeks ago is 2.625. That's, that's when you've got to use all the death. Just. That's a total. Not to brag like, hey, I got 2.875. I'm way lower than three. Okay, so here's the thing. Great. Congratulations on the renovation. That's a lot of money. I guess it's, it makes sense. These things are not cheap. But are they building a golf course in Mario, this is your forever home. Landscaping is expensive, are expensive. This actually does not surprise me that it's that much. And listen, if, if they have this low rate and it's almost paid off and they want to stay in this, make it a forever home. I get it. I understand why people are doing this. So here's the thing. HELOCs are floating rates, so that's one thing to consider. So taking out a HELOC. Yes. It's like 7.5 now. I looked at mine this morning. Mine is 6.75 and it was way more than 8% at the Heights of. So if the Fed keeps cutting, I would imagine that these things will fall. So that's one thing to consider. The HELOC could fall. Whereas if you do a cash out refinance, then you're locking it in. But you said it's like a 5% rate right now, so that's not terrible actually. So I don't really mind that. Plus, you know, with that one, you're locking it in, right? You're locking in the rate. You're locking in the payment with heloc, it could fluctuate. If inflation comes back and rates go back up, then your HELOC payment could go up. The the one thing I do like about the HELOC is it offers you a lot more flexibility because you have, usually the way it works is you have 10 years of interest only, you have no principal payments and then from that point on then you have 15 years to pay off the principal. Right. So it gives you a little more flexibility on when to pay and how much to pay. Anything I'm not thinking up here Bill, that they could do. Obviously we haven't talked about like a borrowing against a stock portfolio or something, but is there anything else that you would consider here in terms of getting this done?
- [29:10]
C
Yeah. No Ben, I think you hit it all. Travis, this is a time value of money question. I think Ben, a cash out refinance is a great option. It allows you to lever the asset. A lot of equity is tied to that house. Your loan to equity value is like 10% which is fantastic. And ultimately you got a couple of options. You could just take out a brand new loan and roll your existing balance into the new one. I did some quick back of the envelope math on for a 15 year loan we're looking at about $2,300 a month. So that's going to be about $414,000 over the life of the loan which would start at roughly 295 because keep in mind we have that existing balance or we could go all the way up to $1,600 a month for a 30 year payment. Right. And that would increase the total effectively.
- [29:49]
A
Taking out a new mortgage. And the thing is that's the whole point of the house is that like if you're putting this much money in, hopefully you're increasing the value of the home while you're adding equities. It might not be a one for one.
- [29:59]
C
Yeah.
- [29:59]
A
Deal but you're hopefully adding some value usually, isn't it?
- [30:01]
C
But yeah, but I think there would be some reasonable expectation as you share house, you get it back on the back end. But I think Ben, you correctly identified if we're planning on staying this house forever, like I probably would sit down and consider the 15 to 30 year option just based on your cash flow needs because ultimately I'm guessing the mortgage just where you are. Like you probably don't have a large mortgage payment. So if a sixteen hundred dollars a month mortgage is kind of shocking, like I don't know that I would go all the way, you know, go all the way out and then you can.
- [30:26]
A
If rates go back to 3% for some reason, if we get a nasty recession, you can refinance. Yeah.
- [30:32]
C
And you can even start out with the heloc. Right. To get everything paid and financed and then ultimately talk to the bank afterwards. So, yeah, you've got a lot of flexibility here. I don't think any of these options are bad. They're just trade offs.
- [30:43]
A
Yeah. I think you're thinking about it the right way. I think they're approaching this in the right manner.
- [30:46]
C
Correct?
- [30:47]
A
Yeah.
- [30:48]
C
But I don't see any reason, Ben, not to lever the house. I mean that sometimes people like you said, borrow from a stock portfolio. Something else. You are introducing a little bit of risk there. And particularly like I said, with a 10% loan to value, why not, why not use the equity that you already have?
- [31:00]
A
Exactly. That's what it's there for. What else is it going to do for you to stay in the house?
- [31:04]
C
Exactly.
- [31:05]
B
So I got something from the chat. Going back to the previous question. They say, I still don't understand the benefits of a 401k. Qualified dividends are already taxed at a beneficial rate. Why roll that into a 401k when it counts as ordinary income when it.
- [31:18]
C
Comes time to withdraw a traditional IRA? Duncan, we were talking about Roth IRAs. Do you gentlemen know what's the distribution tax on a qualified Roth distrib? It is zero. So I understand the qualified dividend rate is 15%, but you know what beats that? Zero. Zero beats 15 just about every time.
- [31:35]
A
All right, we got more Roth stuff in the next one, of course, and a local Michigan question too.
- [31:40]
C
Yeah, yeah, I love the curveball.
- [31:41]
B
This next question is called Cracking the Roth Code. I've always wanted to submit a not to brag question and a Bill sweet question. So I'll check both boxes with one. I'm a 50 year old surgeon, married to a 45 year old surgeon living on the shores of Lake Michigan. Combined we have 2.5.
- [31:59]
A
This guy won the game of life.
- [32:00]
B
Yeah, it sounds like it. Combined we have $2.5 million in tax deferred accounts, 1.5 million in a traditional taxable account, 600,000 and 529s for our young boys, and surprising even to me, we have over $600,000 in Roth accounts. We should have well over a million dollars in Roth accounts by the time we retire. Here's the plan I've been contemplating and I would love to hear Bill tell me where I'M wrong. If we supported all our initial retirement spending from our Roth account with appropriate dividend planning, we would have almost no taxable income. This would allow us an enormous buffer, $96,000 in today's dollars for Roth conversions from our 401s with essentially no tax implications. We would then simply rinse and repeat every year, partially refilling the Roth bucket until we have to take mandatory distributions from our 401ks or start Social Security at age 70. Have I cracked some kind of code or am I completely wrong?
- [32:57]
A
People love to figure out how to not pay any taxes in retirement.
- [33:00]
B
I'm picturing always Sunny. You know, Charlie, like with the math like this.
- [33:04]
A
That's my picture here. So, Bill, you're a big Roth guy, but does it make sense for these, to do these conversions in retirement? Is that just like. Is that too much? Ben.
- [33:13]
C
Ben. And the questioner is Ben, too. So, Benjamin, I don't like this idea. I love this idea. This is brilliant. This is winning the game. As we said before, gentlemen, the tax rate on assets that are, let's say, your first, $130,000 for a married flying joint this year, that's taxed on ordinary income rates at 12%, right? So we're not talking about capital gains. It won't be zero, but 12%. The effective tax rate up to around that amount is about 8 or 9%. It's actually very, very low. It's less than double digits. Furthermore, one of the things that Benjamin didn't do, his analysis, he mentioned $96,000. That doesn't include a standard deduction, right? Which this year is jumping up for 20, 26, even higher. So I love this because ultimately what Benjamin could do with Mrs. Benjamin is sit down at the end of each year and decide, hey, this is, let me total up all my income, right? I got this amount from bank account, this amount from whatever, and ultimately do that Roth conversion every year and then just spend down from the Roth, right? Because the first thing you get back, Even pre age 60 qualified distributions, is your tax basis, which for Benjamin and Mrs. Benjamin are already $600,000. So effectively what you're doing is you're paying the lowest possible tax rate on a guaranteed amount of conversion every year that you can pre calculate, you can predetermine, and then you just draw money out of the Roth portfolio to effectively live your life. And you could do that almost up to your basis, completely tax free at any age. And then once you hit 59 and a half, completely tax free. I'd love To.
- [34:35]
A
So he cracked the code.
- [34:37]
C
This is great. Yeah. In fact, I'd even say. I'm not sure. Ben, Shores of Lake Michigan. Where are we when you say that? Because Lake Michigan is a relatively large lake.
- [34:44]
A
Lake.
- [34:44]
C
What state are we in?
- [34:46]
A
Dave, in the chat after Wisconsin or Michigan. He's definitely in Michigan. Come on.
- [34:49]
C
Okay. Michigan, I was gonna say. Yeah, I'll take a look at Wisconsin. But the nice thing about Illinois. Illinois does not tax Triumph distributions at all. Like, they have a. They have a complete exemption. So if we're talking Lake Michigan, north of Chicago. Yes. You could effectively do this completely state tax free. This is a brilliant idea, Benjamin. I've never really sat down to consider this, but I. But I love it.
- [35:08]
A
So I need to retire in Chicago.
- [35:10]
C
Yeah, we have people there. We have good people there.
- [35:13]
A
Yeah. That's fantastic. All right, we got one more question.
- [35:16]
B
I wonder if they're like, I'm picturing Todd. That was his name on Scrubs, right? The surgeon. I wonder if they have a lot in common with Todd.
- [35:24]
A
Good pull, Duncan. All right, we got one more.
- [35:26]
B
Last but not least, we got a question from Paul. My wife and I are 38 with kids ages 19 and 7. We've been on high deductible insurance plans for a while and have been paying expenses out of pocket to allow the balance in the HSA to compound. Our income is high enough that paying out of pocket is not a strain on us financially. We have $74,000 in the HSA today. Sorry, I'm just laughing because it is dawning on me. What, like one percenter show? Today's show is okay, assuming no major medical issues. Further contributions.
- [36:02]
A
I'm just trying to make young people really angry.
- [36:03]
B
Yeah, there you go. Further contributions and compounding seems to save. By the time I'm 65, we could have a million dollars in this account, assuming I stay covered with my employer. My max family out of pocket is $15,000 a year, and eventually Medicare would cover a lot. How would you advise me to balance ensuring adequate funds for the future without overdoing it? How much is too much in an HSA account?
- [36:26]
A
So they're going to make some decent. So they're going from 74,000 a day to a million at retirement. I don't know what's going on.
- [36:32]
C
Compound math, Ben.
- [36:33]
A
Yeah, yeah, compounding and then making additions like. Not an HSA guy. Okay, one too many accounts for me. I've mentioned this before. Is there any. Is there any downside to having too much in this account?
- [36:46]
C
I don't see it, Ben. I think at a minimum we have a tax shield. Any assets for Paul and spouse would compound there completely outside of taxation. Paul would have the opportunity to take distributions for major surgeries. I'm not sure if we have any, you know, family stuff going on, but two kids need some braces maybe. Two kids, a seven year old maybe, you know, something could happen surgery wise.
- [37:09]
A
Maybe I could have used an HSA because my son George has broken his braces seven times a month.
- [37:15]
C
Oh, that hurts. Yeah, so I don't, I don't see.
- [37:17]
A
The whole metal thing just falls out.
- [37:18]
C
I don't see the problem with building up a bucket because the worst case scenario is you hit a 65. That HSA effectively comes your traditional IRA at that age. So I, I don't see any problem having that amount of assets in an hsa. I think I just treat it as part of my retirement plan. I'd be no rush to take any distributions. It's there if you need it. It's a great, great compounding device.
- [37:38]
A
Right. And obviously I'm assuming he's filling up the other buckets already too.
- [37:41]
C
Yeah. And Ben, you mentioned in prior episodes there's this neat thing of HSAs that the year you take a distribution does not have to match the year that you have a qualified expense. So let's say you do sit down with young George and you need a $2,000 distribution for medical bills. You just print that invoice stick into a tax folder. You can take that distribution 10 years.
- [37:59]
A
From now, save those receipts.
- [38:01]
C
Right, exactly. And so like, yeah, Rule 7, like $10,000, 5K turns into 10. You effectively had the market pay half of your orthodontist bill in the future. So that to me is a great use of an hsa. I would be in no hurry to wind it down.
- [38:13]
B
And now you're stuck with the HSA your employer provides. Right. Because like my wife has an HSA and there's a lot of fees. Like I look at the statements that come and there's a lot of fees, but there's like nothing we can do about that. Right?
- [38:25]
C
Yeah. So it all depends on the employer, Duncan. But ultimately what I would recommend for a situation like that is take a look at the fees, ask if the plan has a rollover option. Can I roll this money out while I'm still working? You have to make the contributions to that plan, particularly if your employer is providing support. But you don't have to remain in that account forever. It's not a death pact. And ultimately you can set up an HSA roller to a lower cost provider. Major providers have HSA options.
- [38:50]
B
Public and Robinhood don't though. Do they? Now that I think about it, I don't think they have hsa.
- [38:53]
C
I'm not certain. Yeah, the major custodians we work with at Ritholtz do. Okay, but. Yeah, but they're both bespoke and plan specific. But yes, if Duncan, if you're paying a lot of fees, you know, you're there in Connecticut, I would definitely look at a rollover option. Like, what if the plan allows it? And I know the CFO over there. Let's make it happen.
- [39:11]
A
So Sean in the chat says his back hurts. What over the counter meds do Ben and Bill use? This is not medical advice show. But I say rub some dirt on it and drink some whiskey. That'll make you feel all better.
- [39:22]
C
Whiskey's a good one. I'm a couple of beers guy. A couple of beers. A couple of beers will take care of that one.
- [39:28]
A
Yeah, yeah, that's. That's my only health. Health advice for.
- [39:31]
C
Yeah.
- [39:32]
B
Wow.
- [39:32]
C
Not. Not medical advice. I. Yeah, I skipped over that.
- [39:35]
A
That.
- [39:35]
C
That episode.
- [39:36]
A
All right, so we cracked the code for Roth retirement today.
- [39:39]
C
Yeah, big ups.
- [39:40]
A
Thanks to Bill, as always.
- [39:42]
B
Nicole asked me to. To promote our. Our new animal spirits mug. So I'm gonna get that right up.
- [39:47]
A
I don't shop dot com.
- [39:48]
C
Yeah, there's a bunch of them in the office. Yeah, we're repping hard.
- [39:50]
B
They're nice.
- [39:51]
C
Holiday party tomorrow.
- [39:52]
B
They're very nice. They're like diner style. That really thick kind of ceramic.
- [39:56]
A
Yeah, I don't drink coffee, so I don't have one yet. Email us ask the compound. Showmail.com. thanks to everyone in the live chat, as always for bringing it. Thanks to Bill, thanks to Duncan, all, the whole production team, and we'll see you guys next time.
- [40:07]
B
See everyone.
- [40:10]
D
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.