ChooseFI Episode 534 Summary: Inherited Account Deep Dive, Barista FI and Saving When Starting a Business | Rachael Camp

Release Date: February 17, 2025

Introduction

In Episode 534 of ChooseFI, hosts Brad and Jonathan delve into three interconnected financial topics: Barista FI, Coastify FI, and the complexities of inherited accounts. Special guest Rachael Camp, a Certified Financial Planner (CFP), joins them to provide expert insights and actionable advice. The episode also touches on strategies for saving while embarking on an entrepreneurial journey.

New ChooseFI Member Site Launch

Before diving into the main topics, Brad announces the launch of the new ChooseFI Member Site—a platform designed to replace their existing Facebook groups. This site offers enhanced community features, including:

• Crowdsourced Development: Jonathan actively builds and updates the site based on user feedback, sharing daily updates on new features.
• Improved Communication: Members receive email notifications for events, ensuring they stay informed without relying on Facebook's unpredictable notification system.
• Scalability: The platform aims to accommodate tens of thousands of members, enhancing community interaction and support.

Notable Quote:

Brad (00:00): “This is the ultimate crowdsourced personal finance website and community. We finally built it.”

Mailbag Section with Rachael Camp

The episode transitions into a mailbag format, where Brad and Rachael address listener questions. This format provides a deep dive into specific financial scenarios, offering clarity and expert guidance.

Barista FI vs. Coastify FI

Listener Question: Can one start withdrawing from their nest egg before reaching Financial Independence (FI), specifically using a Barista FI approach?

Definitions:

• Coastify FI: Achieving a savings milestone where your current investments can grow to your FI number by the time you retire, allowing you to stop saving aggressively.
• Barista FI: Supplementing your income by drawing from your nest egg while maintaining employment, akin to working a part-time job.

Discussion Highlights:

• Health Insurance Considerations: A critical factor in Barista FI is securing affordable health insurance. Rachael emphasizes utilizing the Affordable Care Act (ACA) subsidies for lower-income earners.

  Quote:

  Rachael Camp (05:06): “Insurance can be really expensive. Now we could go into a deeper analysis around subsidies with the Affordable Care Act...”

• Safe Withdrawal Rates: Rachael advises using a conservative withdrawal rate (e.g., 3% instead of 4%) when considering Barista FI, especially with long-term horizons.

  Quote:

  Rachael Camp (08:29): “With a really long time horizon, we start to back off 4% a little bit more and bring it down to the closer to three and a half percent range.”

• Rule of 72 Application:

  • Coastify Scenario: At an 8% return, $187,500 can grow to $1.5 million in 27 years.
  • Barista FI Scenario: Withdrawing 4% annually reduces the compounding effect, extending the time to reach $1.5 million to approximately 14.3 years.

  Quote:

  Brad (15:33): “But since you're pulling out the 4%, it essentially cuts your return in half in terms of what is then actually compounding on top of it.”

Inherited Accounts Deep Dive

Listener Questions: Mark's suggestion for a detailed analysis of inherited account best practices prompted an extensive discussion on the topic.

Secure Act of 2020 and the 10-Year Rule

• Pre-2020 Rules: Non-spouse beneficiaries could "stretch" required minimum distributions (RMDs) over their lifetime.
• Post-2020 Changes: Introduction of the 10-year rule, mandating that inherited retirement accounts be fully depleted within ten years for most non-spouse beneficiaries.

Key Points:

• RMD Continuation: If the decedent had started RMDs before passing, the beneficiary must continue them.

• Exceptions: Beneficiaries under 10 years younger than the decedent, minor children, and those who are chronically ill or disabled can still use the stretch provisions.

  Quote:

  Rachel Camp (08:45): “If the decedent had already started RMDs...you have to continue their RMD.”

• Spousal Inheritance: Spouses can treat the inherited IRA as their own, avoiding the 10-year rule entirely.

  Quote:

  Rachel Camp (24:48): “Most of the time, the simplest approach is just for that spouse to take over the IRA as their own...”

Tax Implications and Step-Up in Basis

• Traditional IRAs: Withdrawals are taxed as ordinary income. The new rules change how distributions are handled but do not trigger estate taxes for most.

• Brokerage Accounts and Real Estate: Beneficiaries receive a step-up in basis, meaning the cost basis is adjusted to the fair market value at the date of death, potentially eliminating capital gains taxes on existing appreciation.

  Example:

  • Pre-Inheritance: Purchase price of $100/share, current value $200/share.
  • Inherited Basis: Adjusted to $200/share, eliminating capital gains if sold immediately.

  Quote:

  Rachel Camp (26:57): “With traditional IRAs, you're not going to receive that tax free... But a brokerage account is a great account to pass on because of the step up in basis.”

Best Practices for Managing Inherited Accounts

• Correct Titling and Beneficiary Designations: Ensures accounts transfer smoothly and avoids unfavorable tax treatments.

• Avoiding Trust Complications: Assets held in certain trusts may not receive the step-up in basis, leading to potential tax liabilities.

• Verifying Account Transfers: Ensure that the cost basis is correctly adjusted during account transfers to avoid unexpected taxes.

  Quote:

  Rachel Camp (28:34): “Make sure that the cost basis does in fact step up to the correct basis. It should reflect the value on the date of death.”

Life Insurance Inheritance

• Tax-Free Inheritance: Life insurance proceeds are typically received tax-free, offering another avenue for asset transfer without tax implications.

  Quote:

  Rachel Camp (46:43): “From a tax perspective, yeah, we get life insurance tax free.”

Saving While Starting a Business

Listener Question: Ann in Brooklyn seeks advice on how to continue investing during the uncertain early stages of entrepreneurship, characterized by fluctuating income.

Discussion Highlights:

• Reframing Investments: Viewing business investments as an alternative form of saving can alleviate pressure to continuously invest in traditional index funds.

  Quote:

  Rachael Camp (53:36): “I had to really give myself permission to see my business as an investment and see that the savings...are going into the business.”

• Flexible Savings Goals: Entrepreneurs may need to adjust their savings strategies to accommodate income variability, prioritizing business growth over aggressive personal investing in the initial phases.

  Quote:

  Brad (56:00): “It's nice to know that all you need to do is coast on in. You just need to cover what your life costs.”

• Coastify as a Strategic Advantage: Achieving Coastify FI provides the financial flexibility to invest in one's business without jeopardizing long-term FI goals.

  Quote:

  Rachael Camp (57:48): “We are trying to live the best lives we can. In this case, you've made a very intentional decision to leave your safe job and build something for yourself.”

Final Takeaways and Resources

• Beneficiary Designations: Regularly update and confirm beneficiaries on all financial accounts to ensure smooth transfers and optimal tax treatments.
• Health Insurance Planning: Utilize ACA subsidies to secure affordable health insurance when adopting Barista FI strategies.
• Consult Professionals: For complex inheritance scenarios, consider consulting a CFP to navigate tax implications and optimal asset management.
• Community Engagement: Join the ChooseFI community through local groups or the new member site to stay informed and supported on your financial independence journey.

Notable Quote:

Brad (60:35): “It's the ultimate crowdsourced personal finance show...”

Resources Mentioned:

• Rachel's Website: rachelcampwealth.com
• ChooseFI Member Site: choosefi.com
• ChooseFI Cards: choosefi.com/cards
• Financial Independence 101 Course: choosefi.comfi101

Conclusion

Episode 534 of ChooseFI offers a comprehensive exploration of advanced financial topics crucial for those pursuing financial independence. From understanding the nuances of Barista FI and Coastify FI to navigating the complexities of inherited accounts, Rachael Camp provides invaluable insights that empower listeners to make informed financial decisions. Additionally, the advice for entrepreneurs underscores the importance of flexibility and intentionality in achieving both personal and financial goals.

Note: This summary is intended to provide an overview of the episode's key points and is not a substitute for professional financial advice. Listeners should consult with a financial advisor to address their specific circumstances.