Should the Bottom 50% Pay Taxes?

Summary

Podcast Summary: Ask The Compound

Episode: Should the Bottom 50% Pay Taxes?
Date: May 27, 2026
Hosts: Ben Carlson, Duncan Hill, with guest Bill Sweet

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Episode Overview

In this engaging and wide-ranging episode, Ben Carlson and Duncan Hill, joined by tax expert Bill Sweet, field real-life financial questions from listeners—ranging from asset allocation strategies and the emotional wear-and-tear of market watching, to deeply debated tax philosophies like Jeff Bezos' suggestion that the bottom 50% should pay no income tax. The trio also dives into the practicalities of retirement withdrawals, optimizing Roth accounts, planning for early retirement, and balancing dynastic 529 education strategies with being present for your kids. The show is laced with practical advice, thought-provoking perspectives, and frequent moments of humor and candor.

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Key Discussion Points & Insights

1. Selling Energy Winners and Portfolio Rebalancing

[03:59 – 10:20]

• Listener Question: Should I sell my big gains in energy stocks now, given market burnout and geopolitical uncertainty?
• Ben’s Advice: Don’t let headlines or geopolitical uncertainty drive your investment decisions. Celebrate your win, diversify to reduce stress, and create a rules-based, automated portfolio to minimize what Ben calls "brain damage."
  • Quote (Ben, 08:02): “One of the main reasons I stopped my discretionary stock-picking strategy is because I was constantly checking on them. Like 5% of my portfolio was taking 95% of my wavelength of my brain.”
• General Principle:
  • Don't try to time the market, especially for commodities like oil.
  • Rebalance by selling overweight assets, buying underweight, and stick to your chosen asset allocation.
  • Simplify so you can focus on what matters—like playing with your kids.

2. 100% Stocks Until Retirement, Then All-In Cash?

[10:41 – 14:24]

• Listener Question: Why not just go all-in stocks until retirement and then flip to cash?
• Ben’s Analysis: The danger is “sequence of return risk” (selling just before a market boom or after a bust) and the reality of inflation eroding purchasing power over potentially decades in retirement.
  • Quote (Ben, 12:57): “You still need to grow your money in retirement. You need to be more balanced about it, but you still need to grow it in some way.”
• Historical Stats:
  • T-bills beat inflation only 50% of the time over 10 years, ~66% over 20–30 years, but that’s not a great outcome.
• Conclusion:
  • A balanced portfolio remains crucial, even late in life.

3. Should the Bottom 50% Pay No Income Taxes? (Bezos’ Proposal)

[14:29 – 22:44]

• Listener Question: Is Jeff Bezos right that the bottom 50% should pay no income tax?
• Bill Sweet’s Take: While it’s populist and “sounds nice,” it risks narrowing the tax base, potentially eroding citizens’ sense of ownership in the country.
  • Quote (Bill, 16:11): "The least disruptive tax bend is one that is broad and shallow. And so… narrowing the tax base is going to be really, really destructive."
  • Quote (Bill, 17:07): “Taxes are patriotic. You should be proud to pay your fair share.”
• Data Points:
  • Bottom 50% earn ~10% of AGI, pay ~2–3% of income taxes.
  • The U.S. tax code is already highly progressive.
  • Most in the bottom 50% pay little or no income tax, many receive credits.
• Philosophical Insight:
  • Participation in taxes ties people to the national project.
  • Political temptation is to keep cutting taxes or shifting the burden, risking destabilization.
• Memorable Exchange:
  • Duncan (20:08): "People feel more connected to the country if they're actually seeing their dollars be put to work… If you make people… no longer contributing at all, that could have some kind of psychological thing where… I'm not really a part of this.”

4. The 4% Rule & Taxes: Withdrawal Strategies

[22:45 – 25:57]

• Listener Question: Is the 4% rule applicable to both traditional and Roth accounts? What’s the best tax strategy for withdrawals?
• Bill Sweet’s Framework:
  • Add up all income (Social Security, pension, dividends, etc.).
  • Use lower tax brackets (10–12%) to your advantage—withdraw from traditional IRAs to fill up these low brackets (up to ~$80,000 per married couple).
  • Then consider Roth withdrawals on top.
  • Manage RMDs (Required Minimum Distributions) as mandated.
  • Plan ahead near year-end to optimize across accounts.
• Quote (Bill, 23:33): “I like the 4% rule because it works. You can’t outspend your assets in most scenarios at 4%.”
  • Taxes in retirement can be quite low if managed intentionally.

5. Early Retirement and Roth Withdrawal Flexibility

[26:20 – 30:30]

• Listener Question: Should we funnel more into taxable accounts for flexibility, since Roth earning withdrawals before 59½ are taxed/penalized?
• Response:
  • Bill: You’re not crazy, and having that taxable bucket is useful for early retirees.
    • Roth IRA contributions (principal) are always available tax-free; earnings are taxable + 10% penalty before 59½.
    • Opening a Roth IRA early (even with a minimal amount) starts the 5-year clock, critical for qualified withdrawals.
    • Taxable accounts offer flexibility for realizing capital gains at 0% in lower brackets.
    • Quote (Bill, 29:09): “There’s nothing wrong with just shoving the dollars into a Roth, ‘cause again, you can get them back at any time before 59 and a half.”
• Lifestyle Note:
  • The importance of having a meaningful plan for post-retirement life ("What is an average Thursday going to look like for you?").

6. Multi-Generational College Funding vs. Being Present Now

[31:43 – 39:53]

• Listener Question: Should we “dynasty 529” and optimize for future generations, or focus on spending to make memories while our kids are young?
• Framework:
  • It’s possible to keep contributing to 529s and change beneficiaries over time, allowing for multi-generational, tax-advantaged growth.
  • There are estate/gift tax complexities to consider.
  • Parents should add successor owners to the account for continuity.
• Behavioral Consideration:
  • There’s never a perfect balance between maximizing future wealth and present experience; it’s normal to ping-pong between guilt over saving and guilt over spending.
    • Quote (Ben, 38:25): “You want to constantly go back and forth between those two. ... That’s when you know you have balance.”
    • Quote (Bill, 39:11): “You don’t get the time back. Like that’s the thing that I’m kind of realizing.”
    • Quote (Duncan, 39:33): “My favorite John Lennon quote: life is what happens while you're busy making other plans.”

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Notable Quotes & Moments

• Ben, on diversification (01:46): "If you want the rainbows, you got to deal with the rain."
• Bill, on tax psychology (16:37): "It creates this incentive for people not to participate in the American experiment."
• Bill, on social security (22:00): "Ultimately that's a flat tax that everybody pays who's working... those two in combination to me make a ton of sense."
• Ben, on parental time (33:19): "You spend 90% of your time with kids before they reach 18, and then the rest 10% after 18."
• Bill, on regret minimization (38:30): "Sit somebody down, have a conversation about that and have them describe what they would regret more."

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Important Timestamps

• Portfolio rebalancing and selling winners: [03:59 – 10:20]
• 100% in stocks until retirement, then all cash? [10:41 – 14:24]
• Bezos’ bottom-50%-pay-no-tax proposal: [14:29 – 22:44]
• Withdrawal strategies and the 4% rule: [22:45 – 25:57]
• Early retirement and managing Roth vs. taxable accounts: [26:20 – 30:30]
• 529 dynasty strategies vs. maximizing time with kids: [31:43 – 39:53]

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Takeaways

• Investor psychology and simplicity: Don’t let emotional burnout or daily market noise dominate your decision-making. Automate and rebalance.
• Retirement planning is about more than portfolios: Consider longevity risk, inflation, and tax brackets—don’t just flip from all stocks to all cash.
• Tax base breadth matters: Both for public finances and for psychological buy-in to the social contract; narrowing the tax base (as Bezos suggests) is alluring but risky.
• Withdrawal order matters: Fill up low brackets from traditional IRAs, then tap Roth and taxable where strategic.
• Flexibility is key for early retirees: Roth contributions are available; taxable accounts increase flexibility for under-59½ retirees.
• Balance future optimization with present experience: There is no “correct” answer to how much to sacrifice today for future security—real balance lies in wavering between the two.
• Education funding strategies can be multi-generational: But don’t lose sight of the fleeting nature of meaningful time with your children.

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For more nuanced discussions and practical advice, listen to the full episode or visit The Compound's YouTube channel.

Transcript

[A]

Welcome. This is Ask the Compound, the show where you ask and we answer. Let's say you have 100% of your portfolio invested in stocks. When do you start diversifying into more conservative investments leading up to retirement? Then how do you start withdrawing money from your portfolio? The 4% rule. How do you think about taxes? We cover all these questions and more about retirement planning and a lot more on the show today. Let's do it. Our email here is askthecompoundshowmail.com live chat. Ask away. Dave already said. Ben, how are book sales going? We're great for people who listen to this show because I gave away. I'm gonna put them in the mail tomorrow. Sorry, people. The holiday got me back last week. Books are going out today. If you ask a question and got it on, we're gonna reach out for your address.

[B]

As your business manager, I am just saying you are giving away books to like prime audience that would have bought them. But you know, that's just neither here nor there, I guess.

[A]

But just hate these people. Better be using word of mouth. Give them to your kids, grandkids, friends, neighbors. I have faith in our compound community.

[B]

Speaking of Dan throw up. Throw up the book charts. Look at, look at this. You're number one on on Amazon stock market investing.

[A]

All right, Me, Jim Cramer, I mean, Graham, number five. You're in number one collab. All right. I just barely beat out trading in the zone. All right. Our books are exactly the same. I have a whole chapter. Why day trading is impossible. That's kind of funny.

[B]

I do think it's funny. I started your book and you might have incepted this into my brain. So sorry if you already said this on a show, but I think it's funny that you, you quote in one chapter. Dolly Parton, Winston Churchill and Eminem, the three of them in one. I don't think that's ever been done before.

[A]

Right in the introduction, diversification. Dolly Parton, my favorite quote of the book. Yeah, it's a good one, right? If you want the rainbows, you got to deal with the rain. On today's show, we have questions straight from our compound audience in the inbox about when to sell big energy winners, how to rebalance risk heading into retirement. Does the Jeff Bezos plan. Tax plan makes sense. How do taxes impact the 4% rule? How to withdraw money from a Roth IRA, and finally, how to save for the next generation while enjoying today. But first, today's show is sponsored by Betterment. What growth Strategy are leading RIAs using that most Firms don't segmentation. Some clients needs are sophisticated and require deep ongoing planning. Some clients needs are simple, like those in the wealth accumulation stage. The smartest firms. No, planning shouldn't look the same for every client, but the experience should always be exceptional. Now it can be with Betterment Advisor Solutions. It's a platform built for segmenting your book and streamlining those smaller and simpler accounts. The onboarding experience is automated and paperless. The portfolio management is streamlined and tax efficient. The client experience is consistent and modern. And the impact isn't just felt by your clients. It's felt across your entire practice. Imagine a back office that's humming, a team that's thriving in a service model ready to scale. Betterment Advisors Solutions. Your biggest regret will be not doing it sooner. All right, we got a lot to before we get into it, we did a poll from last week. I don't know how you do these. I don't know where they show up, where people vote in them. They're on YouTube.

[B]

How does it work? So go to our YouTube homepage and you'll see the community tab and we do polls on there.

[A]

Okay. So you did one based on a question last week. Would you leave your job you love to work for one you hate for three times the salary? And it was basically split 50 50. So remember last week we had a guy ask, hey, I love my job, but if I leave and go to the family business, I'm going to triple my income.

[B]

And to be clear, he didn't even say he would hate it. He just said that he had his dream job. So I made the poll actually more binary and I was still shocked by the results.

[A]

How so that more people would leave or which one were you shocked by? Because it's 50 50.

[B]

It just makes me think that a lot of people have not had a horrible job before and maybe take for granted having a job that they love.

[A]

That's true.

[B]

Because if you really have had a bad job before, I don't think you are taking taking the down.

[A]

This sounds like it could be the plot of a movie. Like the Ghosts of Christmas Past, Present and Future. Right.

[B]

Right.

[A]

I'm going to show you the other shoe. Here's a job you actually hate. How do you like it now? Yeah, right. I guess they kind of did that with good fortune. That is eastern. Sorry, movie. Oh, well, all right, first question. Let's do it. We got a lot.

[B]

We should make that movie. Okay, up first day we got a question from Nathan. I bought Exxon Shell and Devon Energy in my Brokerage account back when oil was $0 a barrel. I'm sitting on some solid gains and feel like I need to rebalance my portfolio and lock in some gains. I wouldn't even mind sitting in some dry powder for a pullback. I feel like we're one news announcement away from oil dropping like a lead balloon. What's the best way to determine a jump off point amid geopolitical uncertainty? Will oil go higher if China starts buying from US companies? Am I chasing another 10 to 15% upside before a larger drawdown? I'm 38 with a 4 and 6 year old. I max out my simple IRA yearly and have a 529 for kids. I've always been a long term buy and hold investor putting patience over trends. But I'm feeling burned out with the AI market and logging into my account every day.

[A]

First of all, nice not to brag. That's a pretty good investment. That was great. Let's do a chart on show. This is from April of 2020. This is Exxon and Devon. So we're both, we're up 400% or so over 325%. So really, really good chart off. I still remember when oil prices went negative. It was towards the end of April 2020. People were losing their minds. That was like this wasn't supposed to happen. Right? It was such a crazy market environment. That was also a really contrarian trade because at the time the trailing 10 year return for the S&P 500 was 200%. Okay. The trailing 10 year return for XLE, the Energy ETF was negative 15%. Energy stocks were sitting a lost decade. I think it was even like a loss at the lows in March 2020. It was a lost 15 year period for energy stocks. Like they went nowhere. Lets you chart on this is Since April of 2020, XLE is outperforming the S&P by almost 100%. Like 280% for the XLE, 180% for the S and P. So this chart off please. In a decade that seems to be almost driven exclusively by momentum trades, it's nice to see a contrarian trade that actually worked. Right. Because it doesn't seem to be happening very often. So.

[B]

And for people that are watching this, that are like what in the world are you talking about? This is just because there was so much supply, people had to do something with the oil which cost money. So that's how it technically went negative. Is that, is that correct?

[A]

Yeah. Yes.

[B]

It, it's not just like in in theory, it's not like buying paper. Like you actually had to take delivery of the oil and do something with it, which storing it costs a lot of money. So that's how it went.

[A]

Yes, yes. People weren't like buying barrels. That was a joke. I'll buy a barrel boreal and have it sit in my backyard and just wait.

[B]

I mean you could have, I guess.

[A]

Yeah, there's cost storage and all that stuff. But anyway, I'd say first off, whatever you do, do not make your investment decisions based on geopolitics. I think that's the biggest lesson that people can take away from this year. Don't try to time geopolitical uncertainty. Just think about all the oil analysts who predict $200 a barrel oil and said it was imminent. Throw up my headlines here. I pulled a bunch of them people, I don't know why it's always too hot. Maybe just people love the, you know, round numbers. It's always 200. Just like 55 is their early retirement age. These people are very plugged into the situation of the straight up Hormuz, by the way. And they know way more about it than any of us oil noobs do. And guess what? It's still hard to predict. Take it off. Now look at the price of oil. Okay, it got as high as like 120 a barrel. Now it's back 93. So our guy, I can't remember what got the name of the guy, Nathan. He's worried about oil falling. It already did fall. It spiked, then it fell and it could fall more obviously. Throw my next one. This is same predictions in 2022 when the Ukraine war started. $200 oil. $200 oil. $200 Oil. Like everyone says this, right? Predicting the future is hard. Obviously the energy analysts have no idea what's going to happen, the oil price. Neither do I. Neither do you. Okay, I guess my biggest piece of advice from the way that this question was worded is you need to simplify your portfolio. You have two young kids at home. You shouldn't be burned out from checking your portfolio so often. Like one of the main reasons I stopped my discretionary stock picking strategy is because I was constantly checking on them. Like 5% of my portfolio was taking 95% of my wavelength of my brain. Like it was too much brain damage. I was constantly looking at it.

[B]

Sounds like fun to me.

[A]

Some people do like that. So now I just, I have it. That portion of my portfolio, it's automated. I'm not having to think about it. It's rules based on I don't check my account nearly as much. Guess what's not going to help this situation and make you relax more? Trying to time the market because that's just going to invite more brain damage because you're constantly going to be worried about when to get back in.

[B]

Yeah, I was about to say that what you're talking about. I actually enjoy watching the market, you know, every day. But I would be very stressed about when to allocate a big pile of cash like trying to get back.

[A]

He sells the winners. I mean, the good news is he already won. So whenever, you know, whenever he sells, it's going to be fine. I would say my advice would be diversify out of the energy holdings. If you can do it in tax efficient way, then just pick an asset allocation you can stick with regardless of what's happening with AI or oil prices or geopolitical headlines or any of the other crazy stuff that goes on around us. Right. How do you do that? Listen to last week's episode about the perfect portfolio. We talked about this a little bit, but I think just once you have an asset allocation that you're okay with. You don't need to rack your brain every time there's an investment decision that needs to be made. What should you sell? Well, you sell whatever's overweight. What should you buy? Well, you buy whatever's underweight. What if you have new money to invest? You sold these stocks. What do you invest in? Your asset allocation tells you the proportions to invest in go with your stated asset allocation. That's what makes it so great. You don't have to worry about timing things. You just put it in your balanced portfolio and stop worrying about it and go play with your four and your six year old. You already won. Kudos. Yeah, move on.

[B]

Yeah, that's good advice.

[A]

How stock market should not give you so much brain damage.

[B]

How much of this is self preservation by oil companies though because they solve it. Having it even go to 100 a barrel really has accelerated EV adoption and people getting heat pumps and all kinds of things to try to get.

[A]

Are we getting into tinfoil hat area here or what?

[B]

No, no, I'm saying conspiracy theory, this. No, no, I'm just saying logic. I'm saying the higher you make oil prices go, the more people are incentivized to get off of oil.

[A]

Well, you're right. Billy Bob and Landman said, listen, the perfect price of oil is like $70 a barrel, right? We don't want it to be super high because that you're right, it hurts demand.

[B]

I saw a chart of EV sales since this happened and it's like straight up, you know, so, yeah, hitting $100 already had a big impact. 200 would be astronomical.

[A]

I mean, listen, I actually have some sympathy for the oil analysts because if you would have given me the setup of everything that happened this year, I would have said, yeah, oil is going to be $150, $175 a barrel or something. It'll be very high. I mean, it's already up 60%. But it is surprising. Dave in the chat says a written investment policy statement would help. Yes, Dave, correct. All right, next question.

[B]

Okay, up next, we got a question from Colin. Why wouldn't someone just invest 100% in stocks from the beginning of their career until about five to 10 years before retirement, then switch to 100% cash and stop contributing to retirement accounts? It seems like maximizing time in the market early on would give the portfolio the best chance to compound, while the final working years could be used to build up cash reserves before retirement. I'd also be curious what the data shows comparing this strategy to more traditional retirement allocation approaches.

[A]

So people always ask me, Ben, why do you write about market timing so much? It's because people want to time the market so bad.

[B]

So bad.

[A]

Two questions in a row, right? Everyone just, okay, I know it's hard, I know it won't work for most people, but what about me? I think you just did it.

[B]

It's the Tobias meme.

[A]

Yes, this sounds good in theory. You grow your money for a few decades, you compound it, and then you get an off ramp into cash and you protect your capital for retirement. I'm sorry to say there's some serious holes in this strategy. Okay, sequence of return risk, for sure. Like what happens if you sell all of your stocks at just the worst time? Right. If you go to cash right before a huge boom or right after a lost decade, maybe you get some good luck and you get after you get out of stocks after a good boom like we've had now. But I think the biggest risk here is some combination of longevity and inflation. So the New York Times had this story on longevity a few weeks ago. They said for people who have already reached age 65, the average life expectancy is, is now more than 86. A 65 year old married couple, there's a 64% chance that at least one partner will live beyond 90. So you have to have your assets grow for two, three decades, maybe sometimes longer. For certain People, I have something in my book about this. I say that a 3% inflation rate cuts the value of a dollar in half in 23 years. A 4% annual inflation rate cuts your money in half in 17 years. You still need to grow your money in retirement. You need to be more balanced about it, but you still need to grow it in some way. So you can't just give up on your portfolio because you're worried about nominal losses. That's why a more traditional retirement plan involves a more balanced portfolio. So just for fun, I ran the numbers on holding your money in cash, which is T bills. That's the investment equivalent of cash for 10, 20 and 30 years against the rate of inflation. So how often did cash lose out to inflation over the past 100 years or so? Duncan, what do you guess? Over 10 year period, how often did inflation beat cash or 10 year total returns?

[B]

48% of the time.

[A]

Yeah, pretty close. 50. 50. It was a coin flip half the time. Over 20 and 30 year time frames, cash did okay actually, like it beat two thirds of the time. But that's not, that's not a great outcome if you're, if you're barely beating inflation or losing to inflation. And actually you don't have to go that back, back that far to see inflation beating cash over the past 10.

[B]

Say cash. Is that just cash cash or is that cash earning some kind of yield?

[A]

Yeah, T bills, CDs, money market, high yield, savings account, cash equivalent, something like that. I use T bills here, but that's. Those other things will be close to tilt. Right.

[B]

So not literally dollars under a bed.

[A]

Yeah, no, if it's dollars under a mattress, then it's way worse. Yeah, yeah, it's, then it loses out to inflation over every period. So if you look at the last 10, 20 and 30 years, through the end of 2025, inflation beat T bills by 11%, 17% and 7% respectively. So in the last 30 years, you lost to inflation by sitting in T bills. So a lot of it depends on inflation and interest rate levels, obviously. But that's a dangerous game to play. I think I prefer more balance it. Obviously. Like some people have so much money they could put it in cash and it's not going to matter, but you have to be in like the top 1% for that. Okay, this person didn't say that. I'm guessing you probably still need some growth in your portfolio.

[B]

Yeah, I think a lot of people see retirement as a finish line. It's like, oh, we hit it. So now, now we can go to cash. But yeah, yeah, you.

[A]

You still got inflation to deal with. That's. It's be scary. All right, next question.

[B]

Okay, up next, we got one from Brian. I caught the Jeff Bezos interview on CNBC last week. He wants the bottom 50% to pay no income taxes because the amount they contribute is already so low. I need Bill Sweet's take on this. Are his numbers correct? Would this actually work? I know this is a rabbit hole type question, but it kind of makes sense to me.

[A]

Let's bring in Mr. Roth himself. We're rub the genie bottle. And he appears. Whoa. Look at that.

[B]

Wow.

[C]

Gentlemen, I need 10,000 SPS sunscreen from that populist nonsense.

[B]

Oh, my God.

[A]

Okay. I'm glad we called you in, Bill, because there was a lot of discussion online about this. You know, this guy is a genius. No, he's an idiot. I just want to know based on. So here's what he says, and I've pulled this from Twitter. He says the important point is zeroing out tax in the bottom half. The best way to put money in someone's pocket is not to take it out in the first place. The bottom half is only 3% of total tax revenue, but it's very meaningful to that person. Zeroed out. This is a great way to, like, shield billionaires from getting taxed. Like, hey, listen, don't tax us. Pull taxes away from other people. And, Bill, you always say this. Taxes have nowhere to go but up. But guess what we keep doing? Trying to find ways to decrease taxes.

[C]

Yeah, Ben, this sounds really nice. No tax on the bottom 50%. No tax on Social Security. No tax on tips. No tax on audit interest. No tax on working parents, teachers, police, firefighters. No tax.

[A]

Baby boomers stop paying property taxes. Why do they have to pay property tax?

[C]

Cryptocurrency. No tax on capital gains. No tax on Benjamins Duncan's Daniel Parras. No tax on anyone under 65. When this is all done, Ben, we're going to have one gentleman in New York City named handsome John Grayson who's going to be responsible for shouldering the entire $4 trillion federal budget. The least disruptive tax bend is one that is broad and shallow. And so I do think that people deserve a handout. I would like to give a helping hand to the bottom 50% to the bottom 10%. But I do think that this idea that, like, we need to narrow the tax base is going to be really, really destructive. It will win people political office. I will not take that away from them. But the problem is it creates this incentive for people not to participate in the American experiment. Right.

[A]

Yeah. You're creating teams.

[B]

Yeah. I was gonna say, I think Bezos has been reading about the French Revolution

[C]

and that did not end well. Right. So, like, at a very minimum, I think the argument I would make for folks is, look, the taxes are patriotic. You should be proud to pay your fair share. I understand that there's an incentive to point your finger and say that other guy should be paying more tax. And I, I'm a hardworking American and I get that. But again, this experiment is ours for 250 years. And I think having some sort of minimum tax, a fair share, is a good instinct. And I, I would, I would argue that is the more patriotic flavor of populism.

[A]

I agree with that. Let's, let's look into the numbers though, before we get into, like the, the outcome. So, like, the bottom 50% is what level of income?

[C]

Yeah, let's take a look. So can we chart on broader chart for this. So if you take a look, then the bottom 50% is receiving about 10% of the share of adjusted gross income. This is tax year data from 2020, a couple of years old, but the theme doesn't change too much. And they're paying roughly 2 to 3% of total income taxes paid. And you can play this populist game if you want, but the reality is the US Tax code is very, very, very progressive, meaning that the higher amounts of income you can take a look do shoulder more and more and more percentage of the tax. And I think that's generally a good thing. I understand. Bezos point.

[A]

Right.

[C]

Somebody that is earning roughly the median household income this year, Ben. Making about $88,000, they're paying about $5,000, $6,000 of income tax. Right. So that's not nothing. But again, in terms of like, what you're getting in cost benefit analysis, you're getting the patriotism, you're getting the best.

[A]

I was thinking the bottom 50% already pays little to no tax as it is.

[C]

Yeah. And furthermore, it is very regressive. In fact, the bottom, if you kind of do the EITC math, there's a lot of benefits from refundable child tax credits, from the earned income tax credit that do help working families out, particularly that are in the lower end of the tax curve. Is our tax system perfect? It is not. It's nowhere close. I just do think it's pretty good. And there is a danger of narrowing the tax base.

[A]

Hang on, throw that same chart back up Again, so this is the one that people always point to is that the top 5% pay what, 60% of the taxes or something?

[C]

Roughly.

[A]

This is the one that always gets people all riled up about taxing the rich more. The rich people say, no, no, we're already paying most of the taxes.

[C]

Yeah, yeah. And I don't, I don't think there's a right or wrong answer to this, but it depends on where we go. Can we flip to the next chart? Because there were two more. I just want to go over. The other point I would make, Ben, is that income tax rates have gone down in the last six or seven years relative to where they were. And if we take the chart back even further, on the left side, on the yellow is where we were in 2017. You can take a look and find out where we are. Taxes have decreased up and down the tax spectrum, but depending on where you are in the tax range, taxes have decreased. And again, this doesn't include the most recent round that came out in 2025, which, you know, the tax on tips and no tax on Social Security. So there are a lot more changes, too. The next chart, for me, the other just thing to look at is I think there's this expectation, well, if we tax the rich more, we're going to get more out of it. And I don't think that's necessarily true. There's been a disconnect, Ben, since 1997 on federal spending versus receipts. And these two things haven't been correlated for nearly 30 years. It has been a very long time where the revenues coming into the federal government have not matched the expenditures going out. So I wonder, what is this for? And I think, again, it's a political pandering, and I don't think it's good for the country.

[A]

All they need to do is open up some museums and libraries and people will be happy. Just do the Rockefeller, Andrew Carnegie. Yes. That's all they need to do.

[B]

I think there is some truth, too, to the fact that people feel more connected to the country if they're actually seeing their dollars be put to work. And I think a lot of people complain about how tax dollars are used and say, like, why are there potholes on my street? That kind of thing. But I could see us finding some happy medium where, okay, so we give tax breaks back to the lower earners based on if they want to volunteer in their local community or something. Right. Something that helps people feel like they're connected and a part the country and a part of their community. You know, because I, I do, I, I hear the argument that, and I think there is some value to that, that, yeah, if, if you make people to where they're no longer contributing at all, that could have some kind of psychological thing where, like, oh, I'm not, I'm not really a part of this. I'm not a part of this, you know, country or.

[C]

Well said.

[A]

Last time you, last time you're on the show, we talked about value added tax. This time we talked about the bottom 50%. My biggest takeaway is we're never like solving, quote, unquote. No, the tax system. We're never fixing it. It's never going to happen. It's always going to make little sense. Yeah.

[C]

And what's really weird, again, to advocate, I think the US Tax system is relatively fair from this standpoint. It is very progressive. Like we outlined. The more income you make, the higher tax you pay. I mean, up to folks in California, New York City, above 50% if you're including your states. Right. So that, that quote, unquote is a good thing. The Social Security, the FICA system, I think works really, really well, Ben, because ultimately that's a flat tax that everybody pays who's working. And it is very regressive. Meaning that if you end up at the lower end of the income curve, really all you need are 40 credits to qualify for Medicare, and then you get health insurance for life at age 65. And then it does pay more to the bottom of the income curve, the Social Security system. Those two in combination to me make a ton of sense. And I think there's a lot of reasons why the US has beat Europe, has beat China, has beat the Far East. I think we have a really, really good system. And I think, Ben, stuff like this, to me, it throws sand in the gears. I don't think it's the country.

[A]

Social Security is such a good system. If we tried to create it today, it wouldn't happen.

[C]

Yeah, that's right.

[A]

Good ideas like this don't get passed today.

[C]

That's right.

[B]

What's the highest income tax that this country's ever had?

[C]

Highest, I mean, like 90 plus 90% coming out of World War II.

[A]

Yeah. But no one actually paid it. Right.

[C]

That was the issue.

[A]

Right.

[C]

And the junk in the US Is much, much, much, much, much wealthier today than it really has ever been in our 250 year history. And therefore people are paying more, which is why the sting kind of hurts so much. But I think that what we're seeing is a lot of Folks that are, let's say, 65 or older, those are the folks who are voting. And guess what they're voting for, right? They're voting for tax rates to themselves. Which, which, yeah, which makes a lot of sense. So if you don't like any of this stuff, hey, go out and vote. I mean, that's, it's funny.

[A]

Everyone hates the boomers, but millennials will do the exact same thing when they're older. Same thing.

[C]

We'll see. We'll see. Time will tell.

[A]

Next question.

[B]

All right, up next, we got one on the 4% rule. Is the 4% rule good to follow for both pre tax accounts and post tax accounts? If not, what would be the most reasonable approach?

[A]

So we get a lot of retirement withdrawal strategy questions here in Asset Compound for good reason. Like, saving and building up a portfolio is relatively straightforward. Taking money out of a portfolio is a little more complicated, actually, a lot more complicated. So, Bill, you know, we don't even have to get into the 4% rule of it. Just how do you think about withdrawing from a portfolio from a tax perspective? Now, I will say part of this is kind of easy for the RMD piece, right? Because that you're forced, you know, what you have to take out.

[C]

It's required.

[A]

Yeah, right. So that piece is kind of easy. But how do you think about taxes in terms of withdrawing money? Like, are there certain accounts that you think it makes sense to take from earlier or later? Or like, how do you think about this from a perfect world?

[C]

Yeah, Ben, I like the 4% rule because it works. You can't outspend your assets in most scenarios at 4%. Right. So that's a pretty good rule of thumb. And Ben, I would take the opposite point, that a lot of our clients at Ritholtz, they run out of time faster than they run out of money. And that's something. But I think the 4% rule makes a lot of sense the way I would order it for most folks, Ben, I would four kind of orders of operation. Number one, I would sit down towards the end of the year, add up all of your income. So you had Social Security, you have a pension, just add all that stuff up. Because if you're working part time, you would need to know what that number is and then add in your dividends and interest and taxable income, right. From non qualified accounts and take a look at that number. And then at that point, I would look at my traditional IRA and I would fill up low tax brackets. The 10% bracket is very, very low. 12% is very, very low. Standard deduction this year for married couples is in excess of $30,000. So if you're not taking advantage of those free or low tax rates, that's the place to attack.

[A]

How much could you take out of your IRA and still have pretty low tax rates?

[C]

That's a good question. I think somewhere in the neighborhood, depending, again, depends on your Social Security, depends on your pension, but somewhere in the neighborhood of like $80,000 in total, assuming you're married.

[A]

Right.

[C]

So cut all these numbers in half if you're not. And then. Ben, what I would argue.

[A]

So before you get. So it is kind of funny, people worry about taxes in retirement, but like, there's ways to do it for a really low tax rate.

[C]

Oh, yeah, definitely. Because keep in mind, your Social Security income, your pension income, your traditional distributions, that's not FICA taxable, so you're not paying employment taxes on those. So really you do have to just worry about income tax. Back to the Bezos point. So, Yeah, I think 12% bracket, and that kicks in around $118,000 for a married couple. Right. So I think you can safely quote, unquote, distribute amounts there. And the next thing to look at, Ben, would just lump on Roth distributions on top of that. And if you really want to war game this correctly, you're looking at the end of the year, you're doing this in November, December, you're distributing the cash and sticking it into a non profit account. And you're doing that towards the end of the year when you have some certainty as far as what happened throughout the year. Add in RMDs on top of that too, and you get a really, really low tax rate.

[A]

The Bill Suite Guide to Return Withdrawal Strategy.

[C]

There you go. There you go. I'm not writing a good ring.

[A]

Nice ring.

[C]

Because nobody would buy it. That's why. That's why we keep them coming to us. Compound.

[A]

All right, I like it. But again, this is a question. We get a lot of people like, oh my gosh, I have to start taking money out. It's scary.

[C]

It's a good problem to have though. Argue that.

[A]

Yeah.

[C]

Can't take it with you. Yeah.

[A]

Goes to your point. Yeah. If you're paying the taxes, you won the game. Right, Exactly.

[B]

We triggered poor Chris in the comments. He said he just Bill. And so, yeah, he's. He's not having it. He's not.

[C]

Well, Chris is a hardworking American. He deserves a tax break.

[A]

Chris, people are usually very calm about taxes, right?

[B]

It's true. Yeah.

[A]

We always say, Bill, like, people hate paying taxes more than they like making money.

[C]

It's true. You know who I think deserves a tax break? Ask the compound commenters in our YouTube.

[B]

There you go. That's a great idea.

[C]

Great American. That's all of them.

[A]

That's how you sell books. Bill, another question.

[B]

All right, up next, we got one from Ethan. My wife And I, both 36, have $1.25 million in retirement accounts. About 2/3 Roth, 1/3 pre tax. And we want the option to retire early. We recently learned that pulling roth earnings before 59 and a half triggers taxes even when we can avoid the 10% penalty. We're considering routing all contributions above our 6% company match into a taxable brokerage account for flexibility. Are we crazy?

[A]

36 years old and they already have over a million dollars. That's that in retirement. That's crazy. Yes.

[C]

Yeah. Congrats, Ethan. My brother's name is Ethan. Very, very strong name shots, Ethan. Sweet.

[A]

I like it. Flexibility for early retirees. Another big trend here in Estecompound. Yeah, we get this question all the time. So it's funny, all of these early retirement questions are definitely bull market questions. You do not get questions about early retirement during a bear market. That doesn't happen. No one was asking this in like 2010, hey, how do I retire? No, you don't get those questions.

[B]

When I came out of college, I don't think that this was a thing anyone ever thought about.

[C]

No work to 95. Exactly.

[A]

Right. So they're asking about your favorite account, the Roth, and they, they listen, they just learned about that. The earnings. Right. You can't take, you can though take out the contributions. Right. So maybe they're actually going to be okay if, if they obviously have a lot of contributions. Unless they just had some crazy stock pick in their Roth IRAs. Right.

[C]

Yeah. This is a great place to be because you're looking at time value of money. This is a long time horizon. I wanted to just hit pause really quick though, and reset because you're exactly right. Earnings. If you take a non qualified distribution before age 59 and a half, you would pay tax on the earnings. But Ben, to your point, there's a couple things that happen first. Can we chart on and let's just talk through this really quickly. If you're taking a non qualified distribution, a non qualified distribution early, you would end up taking your earnings first. And that's from a Roth IRA, not a 401k. Got to get the dollars into a Roth IRA, which is easy to roll over. And you're able to reclaim that basis bend, really at any time. And that's what makes it so powerful. So, yes, Ethan, you would have to leave your earnings alone.

[A]

Bill, did you not have a backup napkin for your chart?

[C]

I don't, I don't. But I can make Mark Zuckerberg hands and we can do it that way. Okay, So I don't think it's crazy, and I think it's a great idea to begin to fund up that third bucket then, which you have a traditional asset, which is about a third of Ethan's assets and Mrs. Ethan, two thirds in Roth. And there's nothing wrong, Ben, I don't think, at all in funding that other bucket because what that would allow you to do, realize capital gains. Right. In the future at a really low tax rate. Back to our previous discussion. Anything in the 12% tax bracket or below, you're getting 0% taxes on capital gains. That's awesome. And there'd be no reason at this point not to think about that. If you're planning on retiring, let's say in your 40s, why not do that ahead of time and fill that bucket?

[A]

Now, see, I thought you were going to say keep doing the Roth, but you're saying the flexibility actually helps by having that tax diversification.

[C]

I wanted to answer Ethan's question, which was, am I crazy? And my answer would be no. However, to take your point, I would also advocate there's nothing wrong with just shoving the dollars into a Roth. Cause again, you can get them back at any time before 59 and a half. So if you think about a world where you're just putting the money, let's say you're able to save for the next five years $50,000, $10,000 a year. If that's in a Roth, you just pull that money out tax free and you can live on it. If the money's in a non cooperative account, you can also get it, but then you're paying capital gains. I don't think it's the wrong answer, but I think both are perfectly fine.

[A]

All right. And either way, they're in a great position.

[B]

The 10% penalty they reference, that's if you take out the money before 59.5%,

[C]

you get 10% penalty before 59 and a half. But it's really important to understand that only attacks to the earnings, right? So ordering rules. You're getting your basis back tax free. And any dollars you put into the Roth at any time, you can get that back. And then any earnings are going to be ordinary income plus a 10% penalty until you hit 59.5%. Another quick planning point. Very, very important actually to mention if you're only funding retirement accounts at work, a Roth 401 that is not a Roth IRA. There is another five year clock that starts the minute that you fund any Roth ira. And it's just a one time thing you have to do. There's no reason in your 20s or your 30s, per Ethan, if you do not have a Roth IRA already open, just put $100, $1,000 in there and get that clock running so you can get qualified distributions later.

[A]

And we've mentioned this before, but the biggest thing to think about when early retirement that no one thinks about is we talked about the longevity piece earlier. What are you gonna do? Yeah, what are you gonna do? Everyone wants to retire early, but I don't think a lot of people spend enough time thinking, what am I gonna do? To stay intellectually stimulated, to stay social, to stay active. You can't just say I'm gonna travel. That's the thing. Everyone says, I'm just gonna travel. You actually have to have a plan of what you're going to do with your life. What's an average Thursday going to look like for you?

[C]

Yeah, that's a good point. Yeah. If I could go back, then one of the things I would think about is maybe we had kids kind of late in life. But there's no more brain damage than I have in my life than my two children. Like, they definitely hurt my head and it would be awesome.

[A]

See that skunk streak on my hair? My gray. My kids always go, why are you going gray?

[C]

Because you kids on here. Yeah, my hair's falling out. So it would be great to take a step back to maybe take a lower stress, lower octane job during those years when you can do really meaningful stuff with your children. I think it's a wonderful thing to think about. And the opportunity, opportunity that Ethan and Mrs. Ethan have worked for. If they don't have kids. It would be an awesome thing to think about. Maybe in your late 30s, early 40s. Right. Starting the clock, then people are having kids later in life. Why not join the club?

[A]

All right, great segue into the last question, because this is about kids.

[C]

Let's do it.

[B]

Okay, last but not least, we got one from Mike. As a fellow CFP with a 3 and 7 year old, my brain is hardwired to mathematically optimize every single dollar hearing bill. Sweet. Rave about aggressively front loading 529 plans on a recent show got me thinking about taking it a step further into a Dynasty 529 strategy to fund multiple generations. But your writing on the 18 summers philosophy always rings in my head. How do you draw the behavioral line between maximizing a multi generational tax shelter and the pragmatic reality of using that cash right now to make memories while the kids are actually young? At what point does optimizing for the future start stealing from the present? Very good question. Very, very well written. And then. And then they give you some book praise. Congrats on the launch of the book. I already bought a copy. But winning a signed version would be even sweeter to pass down to my daughter to read one day. She already enjoys doing her green my app on the weekend, so maybe this can take her knowledge a step further one day. What's the green?

[A]

Micah starting starting his kids young. I must be like a Kindle for kids or something. I don't know.

[B]

I was thinking the Matthew McConaughey book.

[C]

Yeah.

[A]

Mike, send us your address and your daughter's name and I'll sign the book towards her. We'll definitely send it out. It's funny. I asked my kids if they would ever want to read my book and I got it. Ew, no. Boring. Dad. God. What? Thanks, guys. So my 18 summers thing is that you really don't have a lot of time to spend with your kids. Someone said this when our kids were like 4 years old. Like, hey, we have like 14 summers left with our kids and they're gone forever. I think the stat is a ballpark figure. You spend 90% of your time with kids before they reach 18, and then the rest, 10% of them after 18

[C]

is picturing that chart from Sahil Bloom's book where it just. Yeah, it decreases.

[A]

And that definitely rings true to me. I would like to help my kids as much as I can, financially speaking someday, maybe with their first house down payment, try to ensure they don't come out of school with student loans or something. But I'm not thinking about dynastic wealth and inheritance at this stage of life. I would rather leave more memories than money. That's the way I'm thinking. I talked about it on the show before. I bought a lake house for this exact reason. And it's funny, I have a guy who lives who's two houses down from me on the lake, and his kids are older, like out of the house. Graduated college in the working world. And we were talking about why he decided to buy and he said I bought this house honestly, so the kids would have a place to come visit me. And he's like, I talked to him about it and I said, you can either have an inheritance later or a place to come make memories. And we all decided memories was the thing to do. So I'm really big on that.

[B]

What do you do if they pick the other option there?

[C]

Son of a cfp.

[B]

Yeah.

[A]

Write them out of the will. I don't know. So I guess let's first start with how this dynastic wealth would work and then we'll talk about should you do it. So what is he talking about here? About aggressively front loading these fighting 29 plants. So I guess that would be putting way more money in here that they're going to need and then turning on a Roth IRA eventually. Is that the idea?

[C]

That's one option, Ben. I read it a little differently. What I was thinking was, look, if you just aggressively fund 529s, I'm in the state of New York, I get a tax deduction for doing so. And you just on purpose, you keep adding dollars even when they're in college, even when the kids are after college, because there's no limit to annual contributions to 529s. And as you, the account owner, you can change a beneficiary at any time.

[A]

Wait, I never thought of this. So you can keep putting money into 529even after they graduate from school?

[C]

That's correct.

[A]

I thought about that, yeah.

[B]

There's no limit.

[C]

There's no limit to the annual contribution. There are limits per plan document at the state level on what the total balance can be. Right. So you can't just keep shoving dollars forever. But the idea is you build up this bucket and it's like thinking multi generationally. Right? So we talk about, about tax free compounding and Roth think about tax free compounding with a 5 to 9. If you, if you see a 5 to 9 with $10,000 today, fast forward 30 years, it's going to be worth 90,000, $80,000. Fast forward another 30 years from there. Now we're talking, you know, very high six figures. And the idea is you just do this. Think of multi generationally and think about seeding it that way. Couple of things to think about. You can change a beneficiary at any time, but there are some really funky estate tax questions that come in. I have not been able to get a clear answer from a tax attorney. What happens when you make that contribution and then change a beneficiary to the Next generation, it's not clear that there's an answer. You could probably file a gift tax return, but I have no idea what that means. That's second point is you need to add a successor beneficiary or successor account owner, excuse me, to your 529. Because if something happens to you along the way, usually that's your spouse. But if you're thinking about a 60 year time horizon, you would want somebody else to understand the intent. Why did you do this? What happened? Just in case something happens along the way. But again, Ben, the idea would be really to leverage the tax free, compounding, multi generational and get 50, 60 decades of compounding. Very, very powerful concept.

[A]

The reason for this is because you can't open a Roth in a kid's name unless they have earned income.

[C]

That's correct, yeah. So a 529 gets you around that and then you can convert that to 529 later or, excuse me, Roth later. There is an interesting angle. We talked about Trump accounts maybe six episodes ago. And so that's a new take on this. But Mike, I like this idea. I don't know, Ben. I think you're just a much better guide on how to balance the two.

[A]

Right?

[C]

And I don't know, I guess for me, Ben, what is holding me back from giving my kids a good life is not money. It's really time. Like I find that I don't have really enough time in my life to spend during these early years with them on the weekends riding bikes and we do all this stuff. But I just, I don't know, I feel like I fall short and it's not the money. I think to your point about legacy, I have no desire to leave them any money. And I think that's the benefit of an education. And it's like, hey, you've got this law degree, you've got a doctorate degree, go get yourself a job. If you want some money, that's on you.

[B]

Giancarlo is asking, does it matter who opens a 529, parent or grandparent, et cetera, for financial aid calculations.

[C]

For financial aid, it gets very, very strange. But very generally the 529 is the parent's asset. It's not considered the child's asset. For grandparents, it does get really complicated for financial aid purposes. So I don't actually know the answer. Top of my head, I believe something like 50% counts towards EFC, but I'm not sure. I don't know what needs to be disclosed or not because I don't think it's the child's asset for EFC purposes.

[A]

And my whole thing about the optimizing for the future versus stealing from the present, which Duncan said, very well written, is like, I always want to have a balance. And the same thing with time management, Bill. There's times when I'm working when I feel like, oh gosh, I should be doing something more with my family. And there's times with my family where I think like, oh my gosh, I should be working more. And it's the same thing with money. Like when you're saving a lot of money, you go, man, I could be spending that now. And when you're spending a lot of money, you go, I could be saving this. I think you want to constantly go back and forth between those two. You know, you want to ping pong back and forth between having those feelings. I think that's when you know you have balance. When you're constantly feeling one or the other, you're never gonna, you're never going to get it perfect.

[C]

That's a good point.

[A]

No one has it, no one has it figured out perfectly. Yeah, you want to like go back and forth a little bit.

[C]

You only know in hindsight. I, I try to. Joey Fishman, our friend and colleague in Bend, Oregon, he has this thing about regret minimization with clients like his. His job is to sit him down and say, what are you going to regret more? Like not having the money saved for college and needing to borrow and paying interest on the back end. Or to your point, Ben, we did this wonderful vacation and we have a lifetime of memories attached to it. Clearly the answer is both, but I think you can get some truth in vino veritas. Sit somebody down, have a conversation about that and have them describe what they would regret more.

[A]

Yeah. As much as I hate going to Disney, sorry, Disney, people taking my kids there is going to be, they're going to be talking about that for the rest of their lives as opposed to when they're 60, getting money from us. What's going to be more meaningful for their lives? Probably the trip.

[C]

Yeah. And I hate to get too sappy on you gentlemen here, but you don't get the time back. Like that's the thing that I'm kind of realizing. I'm at that stage where I see the parent pushing the kid in the little baby stroller and I get a little misty eyed, a little smoke gets in my eyes when I think about that time.

[A]

That bill, is called a midlife crisis.

[C]

Welcome, my friend, I'm there. Yeah. Shave my head, get a convertible, change my name to Duncan. I'm done.

[B]

It also it reminds me of my favorite John Lennon quote, the life is what happens while you're busy making other plans. It's true.

[A]

I like it.

[C]

It's good. That's good. But no, Ben, I really like the idea of Dynasty 529. I think the few things are going to compound through the generations, like a quality education. I think that's a great way to set your kids up for success and grandchildren.

[A]

Yeah, there's some optionality there. I like it.

[C]

Exactly.

[A]

Okay. Thanks to Bill for helping us figure out the tax code. I think we've got it all figured out now. Nothing else to do.

[C]

Always a good time.

[A]

Askthecompoundshowmail.com Everyone who sent a question in today is going to get a signed book by me. We're going to do it one more time next week, so send us your address. We're gonna reach out. Thanks everyone in the live chat. As always, thanks to Duncan and the team behind the scenes and the production staff and we'll see you next week.

[B]

See you everyone.

[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 on upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.