Should You Buy a House Right Now?

Summary

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Ask The Compound: Should You Buy a House Right Now?

Date: January 7, 2026
Hosts: Ben Carlson, Duncan Hill
Guest: Bill Sweet

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Episode Overview

This episode tackles a broad range of audience financial questions, focusing primarily on whether now is a bad time for first-time homebuyers from an investment perspective. Ben, Duncan, and returning guest Bill Sweet engage in a spirited, practical discussion about home buying, Roth vs. traditional 401(k)s, margin usage, asset allocation in retirement, and young people’s retirement saving. The conversation is full of data, real-life stories, memorable moments, and actionable advice for a variety of financial situations.

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Key Topics & Insights

1. Home Buying in 2026: Is Now a Bad Time?

[02:56 - 09:36]

• Key Question: Should a couple in their late 20s buy a house right now given high prices and low affordability?
• Historical Data: Since 1950, U.S. housing prices have only had 7 nationwide down years—scarce and tightly clustered.
• Time Horizon Matters:
  • 1-year holding: ~90% positive returns (Case Shiller data)
  • 3 years: 92%
  • 5 years: 93%
  • 10 years: 98%
  • 15 years: 100% (housing never down nationwide over this timeline; [04:35])
• Investment Considerations:
  • Market specifics matter more than national aggregates—some regions (TX, FL, Southeast) see real declines.
  • Consider a smaller down payment to maintain liquidity, but be aware of increased leverage risk.
  • The most significant investment gains come from staying in a home long-term (10+ years), not rapid speculative flips.
  • Buying a “forever home” rather than a starter, and planning to stay for at least a decade, can help offset high transaction costs and low potential equity gains in the near term.

Memorable Quote:

“Over 15 years, 100% of the time nationwide, housing prices have never been lower. Pretty impressive… This is much better than the return profile for the stock market.”
— Ben Carlson [05:48]

Practical Advice:

• Don’t Count on Price Appreciation Short-Term: If you might move within 5 years, the frictional costs and flat prices could stall equity growth.
• Be Realistic About Homeownership: Maintenance costs and surprises can hit hard, e.g., "Joys of being a homeowner—a squirrel died in my furnace vent, cost me $1,600." [09:00]

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2. Roth 401(k) vs. Traditional: The Ongoing Debate

[11:00 - 17:12]

• Key Question: Is it better to have tax diversity by using some traditional 401(k), or go all-in on Roth, even in a relatively high tax bracket?
• Bill Sweet’s Take:
  • Go full Roth if you can stomach the upfront taxes: “Nobody goes back and regrets it, because the tax is done. It's over with.” [14:14]
  • People almost always spend the tax break from traditional contributions instead of investing it.
  • The real-world impact: Most people fund Roth and forget, simplifying future withdrawal planning.
  • Reminder to increase annual contribution limits when possible ($24,500 for 2026; [16:43]).

Memorable Quotes:

“Nobody goes back and regrets a Roth conversion or a Roth IRA contribution.”
— Bill Sweet [14:14]

“Increase your savings rate a little bit every year. If you get a 3% raise, take 1.5% and put it towards your savings…”
— Ben Carlson [16:58]

Additional Tip:

• Avoid front-loading 401(k) contributions unless you’re sure your plan offers a “true-up” match; generally, steady contributions every pay period are safer and easier for cash flow.

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3. Is Using Margin for Investing Ever Worthwhile?

[18:59 - 26:53]

• Key Question: For disciplined investors with aggressive contributions and a large portfolio, does limited margin (5-10% of portfolio) make sense?
• Hosts’ Perspectives:
  • Borrowing to buy index funds over long time horizons can theoretically improve returns, but risk is real.
  • The current hurdle rate: Margin loans are expensive (5-7%+), but alternate borrowing via “box spreads” or leveraged ETFs can sometimes be more efficient (3.5%+ implied rates).
  • For sophisticated investors, return-stacking and box spread strategies open up PhD-level opportunities, but these tools require meticulous planning.
  • Leverage cuts both ways: "If you get a 90% loss, you're going to get a margin call. There is risk involved... It's not free." — Bill Sweet [23:15]

Memorable Quotes:

“This is PhD-level stuff. But the pros have been doing this for decades… these portfolios, their technology providers are trying to democratize a lot of the tools of finance.”
— Bill Sweet [24:20]

“Getting a margin call would not be fun. Make sure this is an account you’re probably putting more money into.”
— Ben Carlson [26:32]

Summary Advice:

• Limited, responsibly used leverage may be appropriate—but only if you understand the costs, risks, and mechanics.

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4. Pension vs. Roth vs. Traditional Assets in Retirement

[27:05 - 32:23]

• Question: For a recently retired couple with a substantial public pension and large IRA balances but relatively less Roth, should they convert traditional assets to Roth for themselves/kids, or just draw down the IRAs?
• Discussion Points:
  • Roth inheritance is superior (no income tax for heirs vs. deferred income taxes on traditional IRAs).
  • But, conversions often trigger higher taxes (including IRMAA—Medicare premium surcharge).
  • Large Roth conversions only make sense if coordinated with other strategies, such as major charitable gifting to shelter taxable income.
  • The 10-year rule (SECURE Act): Inherited IRAs—traditional or Roth—must usually be emptied within 10 years, limiting long-term deferral.
  • Consider estate planning and coordination of retirement distributions, Roth conversions, and charity for maximum tax efficiency.

Memorable Quotes:

“If you inherit a Roth IRA, there's no income … The tax is in the rearview mirror.”
— Bill Sweet [29:05]

“Did you accumulate all those assets in one year? ... It works the same way in reverse—either you or your children will pay tax. The question is when, and who.”
— Bill Sweet [29:28]

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5. Best Retirement Saving Path for High-Earning 20-Somethings

[32:29 - 38:10]

• Case Study: Listener’s 22-year-old daughter, making $100,000+ in California, maxes Roth IRA, contributes 10% to 401(k). Should she use Roth or traditional 401(k)?
• Hosts’ Consensus:
  • Go Roth—she’s early in her career, likely to earn more (and face higher taxes) over time.
  • Effective tax rate a bit over 26% in CA at her income; Roth builds in future tax-free withdrawals.
  • Saving at a high rate young massively multiplies wealth by retirement, and establishing good financial habits early is key.

Memorable Quotes:

“This might be the least amount of money she makes in her entire career ... This is the time to fund a Roth.”
— Bill Sweet [35:53]

“That’s the power of compounding ... doing what she’s doing, if she never gets a raise would mean $5–6 million by retirement.”
— Ben Carlson [33:15]

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Notable Quotes & Memorable Moments

• On Homeownership: “If you go to sell after 18 months, and you’ve put money into updates, the realtor may say: ‘You can’t, you’re not gonna get all your money back on this.’” — Ben Carlson [08:48]
• On Maintenance Surprises: “A squirrel must have decided there was some heat coming out of there and crawled into the tubing and died ... $1600. Joys of being a homeowner.” — Ben Carlson [10:00]
• On Tax Planning: “No one does life on a spreadsheet. They make a quick decision. Once you fund a Roth IRA, you’re done with the taxes and you’re gone. That’s the prison I want to free Ted of.” — Bill Sweet [15:09]
• On Complex Strategies: “If someone says ‘late stage capitalism’, leave the table.” — Ben Carlson [25:04]
• On Good Parenting: “Just great, great job economically, Drew. Mrs. Drew. You nailed it.” — Bill Sweet [37:20]

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Timestamps for Major Segments

• Home buying in 2026 / Historical returns: [02:56 – 09:36]
• Roth 401(k) vs. traditional / tax strategy: [11:00 – 17:12]
• Margin usage and leverage in portfolios: [18:59 – 26:53]
• Managing pension/Roth/traditional distributions in retirement: [27:05 – 32:23]
• Retirement saving for 20-somethings: [32:29 – 38:10]

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Episode Tone & Language

The hosts keep the vibe light, irreverent, and conversational—especially around the pain points of homeownership and the quirks of tax law. Jokes about home repairs, “old man talk,” and art school friends pepper the technical commentary, making complex topics more accessible and fun.

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Bottom Line Takeaways

• Home Prices: Rarely fall nationwide—but stay long-term for investment to really work.
• Roth vs. Traditional: In most cases, especially when young or growing in earning power, Roth is the favored option.
• Leverage: Adds complexity and risk—suitable only for the well-informed and those with strong financial discipline.
• Retirement Drawdowns: Strategic Roth conversions may make sense for inheritance, but only in tandem with broader tax, Medicare, and estate considerations.
• Early Savers: Starting strong, even at a high tax rate, pays off massively through compounding.

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Useful Resources

Full transcript: Ask The Compound | Podcast
For questions: askthecompoundshowmail.com

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For more questions or details on specific financial scenarios, email the show or join the live chat during episodes!

Transcript

[A]

Welcome back to Ask the Compound, the show where you ask and we answer. I am Ben Carlson. Let's say you are lucky enough to be a first time home buyer who can afford a home, maybe married for a few years in your late 20s. Buying a house isn't only about the numbers but is now an absolute horrible time to buy a house from an investment perspective, are you out of luck? What's the scenario where this works out for home buyers right now? I'll answer that question and more on today's show. Welcome back. After a week long hiatus, does that count?

[B]

Yeah.

[A]

Take the last week off for the year. AskTheCompoundShowMail.com is our email hello to everyone in the live chat as always on YouTube and watching live on Twitter. On today's show, a bunch of new questions from our Compound viewers about should a couple in their late 20s buy a house right now? Does a Roth 401K make more sense than a traditional we get a lot of those Roth 401ks now. Those are all the rage these days. Does it ever make sense to use just a little bit of margin in your portfolio? How should you balance a pension versus taxable assets versus tax deferred assets in retirement? And what's the best way for 20 something to save for retirement? We're running the gamut today. Retirement, 20s.

[B]

Is it okay to say Happy New Year or is that going to trigger you? I know you have rules about the last day you can save your life, no later.

[A]

David says it's too late. Okay, January 7th. Way too late. We're always happy to take questions the live chat, so fire away if you will. Today's show is sponsored by Public, the investing platform for those who take it seriously. On Public, you can build a multi asset portfolio of stocks, bonds, options, crypto and more and now generated assets which allow you to turn any idea into an investable index with AI. This is pretty cool. It all starts with your prompt. From renewable energy companies to high free cash flow to semiconductor suppliers growing over 20% at revenue over year, you can literally type anything into a prompt and put AI to work. It screens thousands of stocks, builds a one of a kind index for you and lets you back testing against the S&P 500. Then you can invest in a few clicks. Generated assets are like ETFs with infinite possibilities, completely customizable and based on your thesis, not someone else's. Go to public.comatc and earn an uncapped 1% bonus when you transfer your portfolio public.comatatc paid for by public investing. Full disclosure in the podcast Description AI is doing some crazy things these days. It's going to be another leap forward for investors. That's where I've fallen on it.

[B]

You mean AI stocks or you just mean AI for your investments?

[A]

The ability to use AI to build portfolios and custom things. There's going to be some paradox of choice, but it's going to do some cool things in the years ahead for retail. Retail investors are going to win again. That's my take.

[B]

Yeah, I enjoy asking AI for all kinds of analysis on stocks and ETFs. It's, it's pretty good. It, you know, it makes mistakes sometimes, but it's pretty good.

[A]

Check your work. Yes. All right. A lot of questions. Let's do it.

[B]

Okay. Up first today we got a question from John. Ben shared a chart in a recent episode that shows nationwide housing prices rarely ever fall in the US that makes me feel a little bit better about my wife and I, both 29, buying our first home. That said, isn't today a terrible time to buy a home from an investment perspective because prices are so much higher? What should we be considering when looking at this through an investment lens, knowing full well that there are other reasons to buy a house?

[A]

All right. John and his wife are looking at this in the right way, I think. Perfectly legitimate question for a first time home buyer. Does it count as a not to brag if you are a first time home buyer who can afford a house right now in your late 20s, gotta be borderline, right?

[B]

Yeah, I think so.

[A]

There's gotta be some awkward friend groups right now between home buyers and non home buyers in certain areas, right?

[B]

Oh for sure.

[A]

That could be. Yeah, that could be a sitcom episode. Listen, housing affordability is not great. We've talked about that a lot because prices have risen so much this decade. But historically housing prices rarely go down. So let's do the chart that I talked about. I think we talked about this last month someone asked about this. So I looked at this going back to 1950 kind of modern economic times for if you missed it last time around, seven down years nationwide for home prices since 1950 and it's really clumped into two periods, 1990, 91 than 2007 to 2011 and that's it. So housing prices in the US rarely fall on a nationwide basis. So I guess the real question you could do chart off is how do we square the current data? Housing prices have risen a lot and pulled forward a lot of gains with the historical data okay, so one of my favorite charts looks at the win rate for the stock market by holding period. So historically I always say the stock market is the best casino ever because the longer you stay in that casino, the better your odds of success. The opposite of a real casino. So over one day, it's almost a coin flip. I think it's like 51, 52, 53% depending on the time frame that the stock market is going to be up or down on a daily basis. Go out one year, it's like 75%, 10 years. Now we're talking 90 some percent, 20 years. The US stock market has never been down on a nominal basis. Okay. I've never done this for housing before, so I want to do it for this one. Just to show him how the time horizon matters in the house. So let's do a chart on chart kid. Matt helped me figure this one out. How often are housing price returns positive? It's way better than the stock market. Obviously the returns aren't as good in the stock market or in the housing market, but so over a one year period, we're talking almost 90% of the time housing prices are up. This is using Case Shiller data going back to the 1950s. Over three years it's 92%, 5 years, 93%, 10 years, 98%. And I found over 15 years, 100% of the time nationwide, housing prices have never been lower. Pretty impressive. You think about it, this is much better than the return profile for the stock market chart off. Obviously these numbers don't include things like the ancillary costs of realtor fees and property taxes and closing costs and insurance and maintenance and etc. Etc. Etc. All that stuff. So I think there's a few ways to think about this through an investment lens. And obviously he admits, I know this isn't the only reason you buy a home. Caveat aside, we're just looking at this spreadsheet only. I think there's some things you can do if you're worried about this from an investment perspective. And obviously the investment perspective is always going to depend on the location. Nationwide, housing prices may not matter if you live in Texas or Florida right now or some places in the Southeast or Southwest. Housing prices are falling pretty quickly, so the location is going to matter more than anything. But let's say I keep an eye.

[B]

On Wilmington, North Carolina and I've seen several pretty decent 5% pullbacks in prices down there.

[A]

I wouldn't doubt it. It's a buyer's market in a lot of places. Right now, if you have the ability and you don't mind the mortgage rates. So a few things. One, you could do a smaller down payment, boost that leverage, not put as much down, keep the liquidity for other purposes, keep it in cash, put it in stocks, whatever that is. Less money going into this investment. Obviously the leverage works both ways. And if housing prices do fall, then you're underwater potentially. Obviously, if we look at my chart, put it on one more time. Just live in the house longer. Right. The longer you extend your period, the less you're paying those frictional costs and the better your probably outcomes are probably going to be. One of the reasons baby boomers have done so well in the housing market you can do chart off is because they live in their house for a very long time. I can't remember what the percentage is. We look at it before. The number of baby boomers who have lived in their house 20 plus years is obscenely high. That's part of it. So I think John, if you're looking at a starter home, if you have the ability, maybe say, you know what, instead of a starter home, let's do like our forever home. And I think forever here is in quotes, call it 10 plus years. Right. We're going to be in this house for 10 plus years, we're not going to buy a starter home. And then five years, try to try to trade up. I think that's a very bad decision right now because if housing prices go nowhere for five years, totally could happen. Or maybe it just matches the inflation rate. Then you're paying the frictional cost, you're not gonna build much equity. I don't think that's a great idea. Maybe move up a little bit, pay a little higher. My first house, I remember my wife and I looking and I told my brother, man, all the houses in our price range are terrible. Like there's nothing here that we like. And he said move your range up a little bit and stay in the house longer. And I think the first house we moved in we stayed in for 10 years. And I think that might be the idea is if you can move up from that starter home, pay a little more now for a house you're going to stay in longer. And that probably makes it better from an investment perspective. Lower down payment, increase your range a little bit.

[B]

With that comes a little bit of stress. Right. It's like, yeah, you have to be sure you want to be in that house for a longer period of time.

[A]

Yeah. It reduces the flexibility. And what happens if something happens to My job or we don't like the area anymore. And I remember buying our first house, and a lot of the stuff that I would think about now I had no idea of then. There's a lot of factors now that I think are very important that I just wasn't even considering back then because I wasn't a homeowner. There's a lot of stuff you don't know. So, yeah, you could get into a situation where you buy a house and you go, oh, my gosh, the neighbors are awful. We're so close to the highway. I want a bigger backyard. I didn't realize it had this. And so, yeah, it's hard. That's the problem with good and bad of buying a house is that you're kind of stuck for a while, probably. Yeah. Like, there's a house in our neighborhood that people moved in. They put a bunch of money into the house. They updated the kitchen, they put a new deck on. They did all the stuff that the house maybe needed, aesthetically needed. I say it in quotes again. No one needs that stuff. But they made it really nice. And then they went to sell the house, and the realtor said, you can't. You're not gonna get all your money back on this. You know, you guys put way more money in than you're get back. And so that's the rub sometimes. And they try to turn it around in, like, 18 months. Guess what? That usually doesn't help. So that I think that's a big thing. How long can you extend your time horizon? Yeah, that's my advice. All right, let's do another one.

[B]

Being a homeowner not all it's cracked up to be. You heard it from Ben.

[A]

Everyone always says the joys of being a homeowner. Ha ha ha. People love saying that. Love it.

[B]

It's true. And people like me find it hilarious.

[A]

It is. That's fair. Take it off. I got one more story. Okay. So I mentioned before, in animal spirits, we had some heating issues, had another heating issue.

[B]

Okay.

[A]

And was out of town. So the guy had to go look at the issue. And he says, I know why your heater's not working. So there's a pipe that runs from your furnace to the outside where the gas or something leaks out of there. I don't know. I have no idea how this stuff works. I'd be useless if it wasn't for the Internet. And he says, a squirrel must have decided that there was some heat coming out of there and crawled into the tubing and didn't make it to the other side and died. And so there's a dead squirrel that's not allowing the air to release from your furnace outside. And I can't. I'm trying to reach it and get it. I can't reach it. So I got to replace your whole something on here and take the thing out and get rid of the squirrel. Awesome. That's the joys of being the homeowner kind of thing.

[B]

That's like. That's like a. An old ice engine being blocked by a potato in the exhaust, you know, except it was a squirrel for you.

[A]

The guy literally, once he fixed it, it probably took him 10 minutes. And he said, all right, $1600. Guess what? Boom. Joys of being a homeowner.

[B]

Wow. Call me next time. I can clear it out for a lot cheaper.

[A]

All right. Squirrels are little jerks. All right, next question.

[B]

Up next, we got one from Ted. My wife and I are in the 22% tax bracket. We have Roth IRAs and our work 401k plans. For a long time, I was doing the Roth 401k option along with my separate Roth IRA. Then I thought maybe I should switch my 401k to pre tax dollars to have some sort of tax diversification between the IRA and the 401k, especially since we're in a relatively high tax bracket now. But maybe it's better to avoid taxes on all of the gains and go Roth in both accounts, even though the tax rate on the contributions is relatively high. What say you, Bill?

[A]

All right, question directly for Bill. Sweet. Bill is kind of like the guy who lives on the couch at Ask the Compound. Right. He's that friend in. In college who'd come over. He didn't go to the school.

[B]

Right.

[A]

But he came and he slept on your futon.

[B]

He's always there. Yeah, he's always there and waiting. Yeah, he's. He's here on every show. We just only bring him out on certain ones. Yeah, you're muted, Bill, At. On the streamyard level.

[C]

It's absolutely true. And I'm waiting for your questions, like, that's how I get involved.

[A]

You're just waiting a futon, Bill. I owned a futon in college.

[C]

Oh, definitely. Yeah. I mean, who didn't? I don't know if you've lived.

[A]

Yeah, you got to have those these days. I don't know.

[B]

Yeah. Oh, yeah.

[C]

Very popular. Yeah. So, yeah, we're starting the year with a bang. I just got back from a little trip from South America on government business. You guys Might have heard of this over the weekend. Yeah. So I'm feeling a little bit punchy, Ben. I'm ready. I'm ready to take Ted's bait. Let's do it.

[B]

Were you in pursuit of an oil tanker?

[A]

I was going to ask you.

[C]

Nor did.

[A]

Are you. Are you anti New New Year because it means busy seasons are in the corner for you for taxes, or are you. Are you energized because of that?

[C]

Absolutely not. I get. I get fired up. I got my first tax return done, I think, on January 2nd. Do you know that Simpsons meme Ned Flanders wakes up on New Year's Day and be like, well, Neddy, you got to get started on your taxes. Like, that's me, man. I got work to do.

[A]

All right, so this person Again, the Roth 401 questions are coming in hot. I think that's because they're more prevalent now. This is still a relatively new thing for people. I think I know your answer, and I feel like I always do this, but what do you think here? And they give you the tax bracket, which I think is helpful, which we've said before. How many people actually know their tax bracket in the US probably not a lot. So, based on their tax bracket, does the Roth 401k make sense, or should they be taking their savings now and investing it?

[C]

Yeah. So, Ted, I'm feeling punchy today, Ted, and so I'm going to take the bait. Gentlemen, I think you should just always go full Roth in this situation. I have the itch. I got a need for speed. I got a need for Roth IRAs. I don't see the downside. So here's the thing. Let's just think about this in terms of loss aversion. Like, so what if you miss out on paying some extra tax early? Like, that sucks. But you're not going to go back, Ben, and file a tax return. Hypothetically, based on what the difference might have been. It's done. It's over with. Gentlemen, can I get a yes or no from you and the audience on this series of questions? Are you the type of guy that will bite the bullet?

[A]

What am I biting the bullet for?

[B]

Well, yeah. What's the context?

[C]

There's no context. Are you the type of guy that's going to rip the band aid off?

[A]

Yeah.

[C]

Are you the type of guy that's going to pull the trigger?

[A]

Yes.

[B]

I like a little bit of procrastination.

[C]

What about. Okay, a little bit. A little bit, but not a lot. Maybe till your mid-30s. Yeah. Are you the type of guy that's going to cross the Rubicon, jump in both feet. That's Ted.

[A]

Listen, Bill, I'm a context kind of guy here. I need some context before I'm going to rip the bandit off.

[C]

The context is in Ted's question and it's like, look like, are you going to hypothetically look back and regret a Roth conversion or Roth IRA contribution? My answer to you gentlemen is no. Nobody, nobody goes back and regrets it because the tax is done. It's in the rearview mirror. It's over with. So I would go full Roth on this. On this one.

[A]

I do think the fact that the Roth IRA, the limit is so much lower than a 401k. I just think the benefit is the fact that we have these Roth 4 1ks now is amazing. It's a wonderful step forward. Yep.

[B]

I think where, where this gets confusing, though, is if you're saving enough on taxes by lowering your taxable income in the year, but if you invest that money, it pays off in the long run. Right. You know, because of all those years between now and retirement for a younger.

[C]

Person, maybe there's an argument for that. But, Duncan, if you, if you took take a look at actual human behavior, not life on a spreadsheet, you know what people do with that tax savings? They spend it. They always spend it. They spend it 100% of the time. Right. So that, that's what happens. And I know this because Fidelity did a really, really good study when they took a look at how they roll out Roth 401 plans. They did an academic study and they said, do people contribute more to Roth plans than they do to traditional or vice versa? And the answer is they contribute exactly the same. So people don't live lives on a spreadsheet. They don't sit down and do the math. What they do is they make a quick decision. And once you've funded a Roth ira, you're done with the taxes in the review and you're gone. That's the prison I want to free Ted of. Let's go forward, Ted.

[A]

Make that. I think you can make that claim for a lot of things. Like when you sell a stock and you have a taxable gain or a loss on it, you kind of think through those decisions. But I think most people have separate thoughts that I do at least. Like, I don't think these are the same thing, even though they are like it.

[C]

Yeah.

[A]

This doesn't impact my investment performance. That's for the tax guy.

[C]

Exactly.

[A]

He's another person.

[C]

And do you know why you think that, Ben, because you're a human being, right? And you have a life. You have kids, you have, you have stuff to do. You have rental property. So you, Ted, you have full permission to do this. And if and when the market declines by 50%, you can write to Ben Carlsondcompound.com you can make that, send all complaints in that direction.

[A]

Twice in your life, it's going to happen. Two times. That's, that's the baseline.

[C]

Yeah, but my broader point is I don't think you regret a Roth conversion or a Roth contribution. You don't look back and say, geez, I wish I hadn't done that.

[A]

I think you're right.

[C]

Yes.

[A]

I'm not going to regret the Roth 401k someday. No way.

[B]

All Roth all the time.

[C]

So, quick, public service announcements. January 7th. You got about a week till your first pay run. Gentlemen, quick, quick pop quiz. Do you know what the maximum 401k 42g contribution is for this year?

[B]

23.

[A]

I'd ask you the other day because I changed my up and up for the max.

[B]

Is it 23?

[C]

It was 235 last year. This year is $24,500, which is a lot of money. Right. Not, not a lot of people can make that, that type of contribution. But if you have not sat down to take a look and maybe think about, you know, dialing up your contributions this year, I would do it. And Ted, I would do it in a Roth IRA or a Roth 401K.

[A]

I always tell everyone, increase your savings rate a little bit every year. If you get a 3% raise, take one and a half of it, one and a half percent and put it towards your savings. Yep. Pay yourself the other half. Something like that.

[C]

You're stealing one of my points for later, for question four or five.

[B]

Well, on the note of derailing things for a second, what are your thoughts about someone at the beginning of a year front loading their 401k? I heard there's something called like a true up that a lot of companies do where you still get the match even if you. Is that something worth the average person thinking about? Because we know that lump sum being better than dca, do you, do you.

[A]

Have the money upfront to do that? That's, that's a question.

[B]

This is a hypothetical. I'm not doing this.

[A]

But I think the other question, I think the bigger question is, should you, if you are, know you're going to sell something throughout the year and you have a gain, should you sell it now so you can tax plan better for it or is that just, is that too much tax tail wagging the investment portfolio dog?

[C]

Yeah, I think it's, I think it's a good thing to do, Ben, because then you have some certainty.

[A]

Right?

[C]

And you can plan around that. I think the instinct unus those cases is to defer. There is a time value money argument to deferral. But having made that decision then you don't have decision fatigue on it from.

[A]

A financial planner perspective. Like hey, I can plan to try to find some losses elsewhere to offset those gains to the rest.

[C]

Exactly, yeah. You have a lot of time to basically work that down. So conceptually I like that, Duncan though, to go back to your question, I usually steer people away from doing large 401 contributions early in the year. It really does mess with your cash flow per bench point. But also there's no clear tax benefit. You could miss out potentially on some match. Not all plans, Duncan, have a 401k true up like your trusty CFO does it Ritholz Wealth Management LLC. So I would usually just say no, just, just take the total. If you want to try to hit the max, do it, do it in equal pay periods.

[A]

If you're a time value money person though, maybe you're, maybe you got a bonus at the end of the year and you say I'm going to max my IRA out January 1st. Right. I don't have a problem with that.

[C]

It's not a bad thing. I just. Like I said Ben, I usually steer people away from it.

[A]

All right, let's do another one.

[B]

Okay. Up next we got a question from Mike. I wanted to get your perspective on margin usage in my situation. I'm 37, married with two kids ages 5 and 2 with household income around $350,000. We have no high interest debt. Yeah, not to brag. We have no high interest debt. Just a car and a house. And I'm already making pre tax 401k. I'm close to maxing. I'm already maxing pre tax 401k. I'm Close to maxing after tax. Mega backdoor and ESPP employee stock purchase plan. Is that what that is?

[A]

Nailed it.

[B]

And they get a 15% discount with their employer, which I omitted from this, you know, for their anonymity. The majority of my taxable investments are in broad index ETFs along with a long term horizon. I'm not looking to speculate, but I've considered whether limited margin usage, for example 5 to 10% of portfolio value and index ETFs only meaningfully improves long term outcomes versus simply continuing aggressive contributions. From your experience, is this a reasonable tool in a disciplined setup like mine or does the added risk generally outweigh the benefit?

[A]

So I guess I got a few questions here and I'm glad he gave us all this information. It seems like a lot, but he's saying, listen, I'm a responsible person. I'm not an irresponsible speculator. It's index funds and ETFs. I don't have a ton of debt. I make good money. I max out my retirement accounts. I think a lot of economists in their research papers would say, yeah, over a very long time horizon, borrowing money to buy stocks is probably a good deal. The question is, what's the hurdle rate? How much does it cost to borrow right now? The thing I like to ask people all the time is what happens if this goes right? What happens if it goes wrong? So I think you have to look down those two paths. I think it matters, like how you're borrowing through a margin loan right now. What's the rate on that? Bill, we've talked about box spreads. I don't think we've talked about it here yet, but it's all about portfolio borrowing. So I'm curious, what do you typically advise for people when it comes to using marginal loans? When does it make sense?

[C]

Very typically, from my perspective, I would say no. But I think Mike has a lot of good points. And I think Mike ultimately ends in his last sentence on what I would recommend, which is if you're going to do it, do it lightly, have a light touch. And I think, Ben, you hit the observation. On average, capitalism worked really, really well from 1776 to present. Investing in markets has done very, very well. And so on average, like 8 out of 8 or 9 years out of 10 markets go up. So yeah, on the average, I think he's going to be better off. I was listening to a Freakonomics episode over the weekend with Stephen Dubner and asset compound friend Morgan Housel and he said the most common reason that a lot of taxpayers, a lot of folks, let's say lower on the income spectrum, do not invest in the market, is that they're too pessimistic. They think that if I invest in stocks, I'm going to lose all my money. And this is kind of an inverse thought of that, which is, hey, how do I get a little bit more exposure to things that are going to appreciate? And I think doing it responsibly with 10% leverage is a great way to do it. And then, Ben, I wanted to talk a little bit about box spreads, which you brought up a second ago.

[A]

Yeah. And I think the other way you can do it too, before we get the box spreads, because it's kind of a complicated topic, is we had Corey Hofstein on here before. He said there's funds now that you can use. Can use leverage. Right.

[B]

That's what I was about to ask about. Yeah. Why could you not just buy levered.

[A]

ETFs instead of using a margin loan, do you want to use futures to decrease your borrowing costs? And you could do something like that where you use one of these, what is it called, Return stacking. Return stacking funds that allows you to take on some leverage and then put it into something else. And so that's maybe another option that's probably a little simpler. So bill, box spreads, those are all the rage. There's a huge profile on Bloomberg recently. We've talked about using them. I'm going through the process of signing up for one right now. The rates on them don't seem real, but maybe you can explain what that is.

[C]

Yeah, Ben, we could do a whole episode on borrowing from a box. But ultimately what you're doing is you're taking your portfolio and you're taking a loan against it in small portions. You could easily get a 10% margin loan against a portfolio of stocks and bonds that was well diversified and you're putting that money to work. So basically you get the cash up front, you owe it later, but you're going to owe more than you borrowed. And that implied interest rate, zero coupon bound.

[A]

Right.

[C]

It's meant to mimic the risk free rate of the treasury, which is like three and a half to four and a half percent. And Ben, that's the magic of it is that ultimately you're borrowing from yourself. Right. If something goes wrong, if you get a 90% loss, you're going to get a margin call. So there is risk involved. It's not free, but it's a relatively efficient way to borrow because again, you're borrowing, you're borrowing from the options market, but really your portfolio is the collateral. And so that's what, that's what makes the interest rate relatively favorable. There's a really, really neat tax angle I mentioned that you're going to pay back more than you borrow, for obvious reasons that is not paid monthly, it's not paid annually, it's based on the loan. But ultimately what you do is you pay back more and then you get to book a capital loss, 60% long term, 40% short term, and you can use that to offset some other gains in your portfolio. Back to your question, Ben. When do you want to realize a gain if you're using a complex strategy like this? Maybe on the year does make a lot of sense. Because if you know you're going to have to pay back your box loan at the end of the year, hey, I'm going to have a guaranteed capital loss that can help offset some gains that I realized earlier. Yeah, yeah. This is PhD level stuff. But the pros have been doing this for decades. Right. And so what's different, Ben, is that these portfolios, their technology providers are trying to democratize a lot of the tools of finance. And that's, that's what's changed. And so that's what you're seeing. You're seeing the cost get pushed down. I think it can't hurt as long as people are being careful and responsible.

[A]

Yes, it wouldn't, it wouldn't shock me in the years ahead, if we're going to see a lot of new strategies come out for borrowing against your portfolio and borrowing into equity in your house. Yep, yep. It's just sitting there. People want to use it, they don't want to sell and take the taxes. That's going to happen. Yep.

[C]

And when our friend Duncan hangs out with his art school buddies and they're twirling their mustaches about the end of capitalism. Like, we have had a really good run here for the last, I don't know, 20 years, really, since the great financial crisis. And so, yeah, you're going to see people ask about leverage in this market. If we fast forward two or three years from now and we have, we have a 20%, a 30%, God forbid, a 50% drawdown, this is all this is all going to be if someone.

[A]

Says late stage capitalism, leave the table.

[B]

Have you been following me?

[C]

I just, I might know friend and colleague Duncan Hill. Yeah, but no, but, yeah, but I think that the key point, this is where I was like, no, absolutely no way. Reading the question. And at the end he's like, 10%. Yeah, 10% is perfectly fine if you know what you're doing.

[B]

It sounds like the TLDR vote is this adds risk and complexity. Both things that, Ben, you're typically not a big fan of.

[A]

There.

[C]

That's a summary. Yeah. Duncan, bring that knowledge back to the art school.

[B]

Well, because I've thought about margin myself before and every time the math, I just, I end up Being like, whatever, I'm not, it's not worth the, like.

[A]

Someone who's against like the leveraged ETFs. I think the return stacking ETFs using futures. That makes way more sense to me if you really want to do this.

[B]

Well, and keep in mind, I'm not a financial person, so maybe this is very easy for other people, but for me it's much easier to look at a three time levered ETF and be like, yeah, I see what I'm losing. Right. Like, I know my cost basis. But with margin, it becomes complicated to me. I can't keep track of, oh, I'm down this much based on the interest I'm paying. And when you factor in the leverage itself, because you're renting the margin.

[A]

Right.

[B]

You're paying like what, 5, 6, 7% alone just to have it.

[A]

Yeah.

[C]

Three and a half with that box spread thing. But ultimately the key point to emphasize is the leverage cuts both ways. It's great if you on average, like if markets, if returns go up, but it really, really stings if, if markets go down like that.

[A]

Getting a margin call would not be fun. Make sure this is an account you're probably putting more money into. How's that sound? Yep.

[C]

Or. Or you have a large amount of.

[A]

Assets so you can sell if you need to.

[B]

Yeah.

[C]

It's not, it's not for amateurs, but this audience doesn't strike me as amateur investment audience. So like the key is just contained.

[A]

Just contain the thing. We have a lot of DIY people who are very into the weeds and details and they can handle this more complex stuff.

[C]

And you have to have a plan. Yeah. You cannot wing that type of thing.

[B]

Maybe I should get into it. I think Ben would have a lot of fun with me if I got margin called. I think it'd be good content.

[A]

If you got margin called oatly. Yeah. My head would explode.

[C]

Do it for the content. Exactly.

[B]

Okay, up next, we got one from Cheryl. I'm a female listener, so I heard. That puts me at the top of the list. You'd be right, Cheryl.

[C]

Welcome.

[A]

Our female listeners have found a loophole in the compound system.

[B]

It's true. Like all 17 have. Really?

[A]

Listen, ladies, we are men of our word here. Will put you on if you. We'll put you to the top of the list if you ask a question.

[B]

It's true. Okay. I'm 62 and have a generous public safety pension of about $120,000. I have 1.3 million in a traditional IRA and 140,000 in Roth. My husband is 60 and has just retired. He has a traditional ira of about 1.1 million and Roth of 200,000. We also have brokerage accounts that are worth about 300,000. I don't like our balance of traditional to Roth. I also rather have Roth IRAs for our children to inherit over traditional because I have the pension and will also need to take money out of one of the accounts to supplement our retirement, spending around $50,000 a year. Anything other than really small conversions creates tax bracket creep and IRMAA issues. No idea what that is. Should I forget about the conversions and just take distributions from the traditional IRAs over the next 10 plus years? Is it worth doing a bunch of tiny conversions each year?

[A]

You know, we usually get rid of some of the data because there's too much. But she said her pension too is indexed to inflation. So she has a really great. I'm guessing that's like a state or something. But her and her husband are a very good spot. You know, I didn't think of the inheritance.

[B]

Yeah, Public safety pension. Do you think, is that a foreign police officer? Is that what she would be?

[A]

That could be, maybe.

[B]

Okay.

[A]

Yeah. If you're inheriting Bill, would you rather inherit a Roth? Does it matter?

[C]

Look at the name. What do you guys think? Yeah, what do you guys think?

[A]

Yeah, but are there a lot of big because you get the step up basis or whatever?

[C]

No, not with a Roth. Yeah, so inherited or any inherited ira, whether Roth or traditional, there's no basis adjustment. But this is key. With a Roth, the tax is in the rearview mirror. So like if you Inherit a Roth IRA, there's no income.

[A]

You want a Roth IRA?

[C]

Yeah.

[B]

Okay, I see 100%. That makes sense.

[A]

Yep, yep.

[C]

No, this is great. And I guess I'd spin it back for Cheryl. And thank you, Cheryl, very much, because this is a very detailed, interesting question. But did you, did you, Mr. And Mrs. Sherl accumulate $3.2 million of assets and a $3 million, you know, NPV. If you do the NPV on that, it's worth two and a half or $3 million. Right. If you get 30 years out of.

[A]

That pension, that's worth a lot of money.

[C]

It's huge. Yeah. So like total net worth, if you assume that is 6 million, not even counting house or anything else. So like this is, this is, this is 1% problems. But ultimately, did you accumulate all those assets in one year? Right. Did you wake up one day and say, geez, this is, this is what I'm going to do, and it's kind of works the same way in reverse is that, you know, Mrs. Sheryl and Mr. Sheryl accumulated these assets, 40 years of hard work and with small semi monthly contributions, doing, doing good work in public service, whatever they did. And this, that's the way it works now is that either you or your children are going to pay tax on the assets. The question is when? And the question is who? And so they're totally right. Like you are going to face irmaa, which is a Medicare adjustment. It's additional tax that applies to folks that cross certain income thresholds that they might already be above and you are going to pay more tax. But if you have a large amount of assets, maybe that's worth it because ultimately the question is, do you want to pass that on to your kids. Final point for me, if there's any estate tax issues, there's not any federal estate tax issues that I'm aware of. But if in New York State, for example, the estate tax limit is roughly $7 million. And so ultimately, if you're going to pay 12, 16% to the state, you might as well get it out early with reduce your federal state tax. I don't think it's a bad thing to consider, all things considered.

[A]

So we've gotten a few questions lately about people who say, hey, listen, I wish I had more Roth assets head into retirement. Should I rip the band aid off and start doing conversions now, later in life? And I think a few times you've said maybe that doesn't always make the most sense.

[C]

Yeah, yeah, because there's time vary money component. And the new Secure act, the ten year rule means even with a Roth, you're only going to get 10 years after you pass. Right. And again, hopefully that happens 30, 40 years in the future. But Ben, I want to leave Sheryl with something to think about which is, hey, like how do you reduce taxes? I'll give you a really good way to do it. And that's to think about maybe being charitable, depending on what your charitable tent is. Large estate. Right. So one thing to consider was maybe consider a large taxable conversion all in one year, let's say $500,000. And you pair that up with a large charitable contribution that effectively reduces your taxes. It allows you to be super generous to a charity of your choice. And ultimately if you do that with highly appreciated securities, you can pass on those capital gains tax free too. And then the church or library or whatever it is you want to support, they will get a Large charitable donation. Your kids will get a large IRA on inheritance. And I think everybody wins in that scenario.

[A]

Right, that, that's a great point because something a lot of people don't bring up. But yeah, that's the big part of, can be a big part of your tax planning is money away.

[C]

Yeah. I asked Bill Arts, Everett Dom, Dan on the tax team, what's the, what's the most common mistake that they're seeing in doing tax planning? And one of, one of the items that came up is people aren't integrating their, their taxable income with charitable planning. That's a key, key thing I think that we can bring to the table.

[B]

Akbar in the chat said, with the Roth you inherit, you must use within 10 years, I think. Is that right?

[C]

Most typically, yeah. There are some exceptions to that rule, but very generally. But that does apply to traditional IRAs too. So it's a universal rule now.

[A]

And let's talk about the 10 year rule before, I believe.

[C]

Yeah, yeah.

[B]

Okay.

[A]

Yep.

[C]

I will now give you guys a 45 minute lecture on the Secure act rules. Yep.

[A]

Oh my God. One more question.

[B]

Hey, last but not least, we got one.

[A]

Might be the biggest not to brag of the day.

[B]

Yeah, I think it is. Yeah.

[C]

We were flabbergasted.

[B]

Go. Yeah. Yeah. So this is from Drew. My 22 year old daughter lives and works in California. Her salary is a little over a hundred thousand dollars. She contributes the maximum amount to her Roth IRA. She contributes about 10% to her 401k. Do you think her 401k contribution should be Roth or traditional? Chad, GPT and Gemini suggest that they be traditional, assuming she invests the tax savings in a taxable account. But after listening to the last few shows, I'm wondering if Roth is the better way to go. See, I did some foreshadowing here. Right.

[A]

AI is not a cpa.

[B]

It's true.

[A]

I will say that first of all, the daughter is doing amazing.

[C]

Yeah.

[A]

22 years old, she's already max, making six figures max out of Roth and double digit percentage to her 401k. I think the numbers are if she just. If she didn't save any, if she never increased her savings again. And she will because her money's going to go up over time. So she's saving $17,000 a year or something. If she did that from age 22 to age 65 and made 8 to 10% per year, we're looking at like a 5 or 6 million dollar portfolio by retirement. Just saving the amount she's saving. Today and never stopping. That's the power of compounding. When I graduated, $50,000 was considered an awesome starting salary. I had a handful of friends who got it. I think my first job, I made 36,000.

[C]

I made 20, $24,000. Digging a ditch ain't making you rich.

[A]

Yeah, 36. I think my first bonus was $400 for my boss. A little stingy.

[C]

This is some old man talk here in the new year.

[A]

I was too naive to feel poor. I was way too naive to feel poor at the time though. I didn't even know any better. There was no social media to compare me to anyone else. I had no clue how behind I was.

[C]

Hey, if you adjust my salary for inflation, she still beats me by three times.

[A]

So good for her. I used to tell my wife, my fiance at the time, listen, I'm learning not earning okay, Gotta do one of the two. Throw up the chart here. I looked for making 100 grand at 22. She's in the 98th percentile of her age. So doing pretty good. She's got to be working for Facebook or Google. I'm guessing it's got to be it. Unless she's an influencer. So obviously, Bill, we know where we're going here. You're going to be a fan of putting as much money in the Roth as she can.

[B]

No, no.

[C]

Yes, yes, I am.

[A]

But then that's $6 million when she's 65 is no taxes. Right. She's.

[C]

She's. Yeah. And furthermore, like median household income in the US is like $88,000. And she's like in the 85th percentile for California. Right. So like, which is a relatively high income state. Yeah. So I put a couple of charts together. Ultimately. Can we, can we chart those on? So the first one, just, just to, just to talk numbers here, gentlemen. Tax on $100,000, she's looking at take home pay of roughly $74,000 this year before the 401 contribution. So to emphasize the point, like, this is awesome. And I think too this to me, because ultimately I think people tend to like overstate the impact of taxes. This is effective. This is a 26% tax rate by the time you bake in federal FICA, which is Social Security and Medicare and the state of California taxes, along with other wacky local taxes, the People's Republic of California have her take home pay is tremendous. And this is awesome for somebody who's single.

[A]

However, devil's advocate, people go throw that back up. People would look at that number and go, man, That's a lot. I'm paying taxes because I live in California. Why wouldn't I take the traditional and lower my taxable income? Because it feels like I'm paying a lot in taxes.

[C]

I'm so glad you asked. Travis. Can we flip over to the next chart? Because of the time value of money. And so ultimately this is somebody. Ben, you hit it. This is somebody who's 22, $100,000 for Alex's daughter, for Drew's daughter, Mrs. Drew. This might be the least amount of money that she makes in her entire career. Right. And again, we're all indexed on the state tax, but like it's 5% of her income. It's not make or break. It's not life or death. Yes. Would it be in the, in the near term less expensive for her. But what happens in two years when she gets a raise? What happens in five years when she's getting bonus? What happens when she's running the company and running the state of California? So I think this is the time to fund a Roth, because somebody starting with $100,000 salary ain't going to take a job that's going to pay them less. So I would, I would go full Roth.

[A]

I also like if she's. You can do chart off now. If she's doing this now and living on what she's living on, I'm sure for a 22 year old, plenty of money. Assuming she doesn't have a whole responsibilities.

[B]

Unless she's going on a quarterly European vacation.

[A]

Yeah, but, but placing those limits now and having a high savings right now and living on that lower. If she started living on a high amount at first, it'd be harder to go back to the savings. The fact that she's doing the savings now, and I agree, maybe not getting the tax benefit, but still living on what she's living on, it's just going to go up over time. Even if it like tracks inflation over her career. Yeah. Making that much money at such a young age, assuming sets the bar for things to come for jobs like she's going to do. Amazing.

[B]

Yeah.

[A]

Tell her to keep doing what she's doing. Yeah.

[C]

And as a dad of a certain age. Drew. Mrs. Drew.

[A]

Wow.

[C]

I mean, you nailed it. Just great. Great job economically.

[B]

I didn't have a retirement account until I was 28, so I might have.

[A]

Made my first IRA contribution at age 25. My first job did not have a 401k plan.

[B]

Yeah, that's what I'm saying. Yeah.

[A]

My first job.

[C]

Hey, hey. My namesake here. I mean, the Roth IRA was new in 1997, right. When I was enrolling into, into college.

[A]

So, yeah, harder to start an account. Yeah. Yeah.

[C]

This is great. And again, it just, the quality of our listeners never really ceases to amaze me that this is, this is fantastic parenting and great, great for Drew's daughter, who I'm sure worked very, very hard to get to this place.

[A]

Yes. Yeah. Kudos to her for doing what she did. Again, I think it's got to be, got to be stocks. And if she, maybe she's getting stock compensation, too at some point. Maybe, maybe she's going to be set. Yep. Great stuff, running the world someday.

[B]

But the cost of living in California, right? I'm just kidding.

[A]

Yeah, I think a single person is going to be okay. All right, email us. Ask the compound showmail.com if you have questions. Thanks to everyone in the live chat, as always. Thanks to our tax expert, Bill Sweet, coming to us live. Leave us review on Apple Podcasts. Leave us a comment on YouTube and we will see you next time.

[C]

I'll give you guys a call from Caracas next time. I'm there.

[B]

Happy New Year, everyone.

[A]

Sam.