Mailbag: Bond Funds, Roth Conversions, Advanced FI Strategies, Solo 401k and Backdoor Roth

Summary

ChooseFI Podcast Episode Summary: Mailbag #9 with Rachel Camp

Release Date: July 21, 2025
Episode Title: Mailbag: Bond Funds, Roth Conversions, Advanced FI Strategies, Solo 401k and Backdoor Roth
Hosts: Brad and Rachel Camp (CFP)

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Introduction

In this engaging ninth installment of the ChooseFI Mailbag series, host Brad welcomes financial expert Rachel Camp, a Certified Financial Planner (CFP), to address a variety of listener-submitted questions. This episode delves into intricate topics such as bond funds versus individual bonds, Roth conversions amidst market fluctuations, advanced financial independence (FI) strategies in the presence of pensions, Solo 401k plans, Backdoor Roth IRA strategies, and the implications of Restricted Stock Units (RSUs) on Social Security benefits.

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1. Bond Funds vs. Individual Bonds

Listener Question:
Stephen asked about the efficacy of bond index funds (e.g., BND) versus individual bonds in mitigating sequence of return risk as one approaches retirement, especially considering recent volatility and price drops in bond funds.

Key Points Discussed:

• Inverse Relationship Between Bond Prices and Interest Rates:

  • Rachel (03:15) explained that bond prices and interest rates move inversely. When interest rates rise, existing bond prices fall because newer bonds offer higher yields, making older bonds less attractive unless sold at a discount.

• Duration and Interest Rate Risk:

  • Rachel (04:00) introduced the concept of duration, emphasizing that bonds with longer maturities (e.g., 30-year Treasuries) exhibit greater price volatility in response to interest rate changes compared to short-term bonds like T-Bills.

• Individual Bonds vs. Bond Funds:

  • Rachel (10:20) clarified that individual bonds can provide psychological comfort as they mature and return principal, whereas bond funds continuously reinvest by purchasing new bonds, which may expose investors to ongoing interest rate risks.

• Psychological vs. Actual Risk:

  • Brad (14:26) highlighted that while individual bonds offer stability by maturing at set intervals, bond funds allow for quicker capture of rising interest rates through reinvestment, potentially enhancing interest income despite short-term fluctuations.

• Strategic Use of Bond Funds:

  • Rachel (13:03) advised aligning bond strategies with cash flow needs. For instance, short-term bond funds or cash equivalents are preferable for funds needed within a few years to minimize volatility impact.

Notable Quotes:

• Rachel (03:15):
  “There is a relationship between the price of bonds and interest rates. It's an inverse relationship. So if interest rates rise, bond prices fall.”

• Brad (14:26):
  “Even if your bond fund is going up and down on paper, the manager's strategy to reinvest is capturing higher interest rates much quicker.”

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2. Roth IRA Conversions and Pensions

Listener Question:
Jen inquired about how Roth IRA conversions and advanced FI strategies apply to individuals with pensions, particularly federal employees concerned about tax bracket impacts in retirement.

Key Points Discussed:

• Three Stages of Retirement Planning:

  • Rachel (25:53) outlined a three-phase approach:
    1. Stage One: Pre-retirement with no income sources like Social Security or pensions. Here, aggressive Roth conversions can maximize tax-free growth.
    2. Stage Two: Introduction of pension income, which fills up tax brackets and potentially limits Roth conversion opportunities.
    3. Stage Three: Introduction of Required Minimum Distributions (RMDs) and Social Security, further constraining tax-efficient strategies.

• Importance of Early Roth Conversions:

  • Brad (30:53) emphasized leveraging low-tax years before pension income begins to convert traditional IRAs to Roth IRAs, benefiting from the standard deduction and lower tax brackets.

• Tax Arbitrage Considerations:

  • Rachel (33:33) discussed balancing current versus future tax rates, advocating for Roth conversions when marginal tax rates are low compared to anticipated higher rates during retirement.

Notable Quotes:

• Rachel (25:53):
  “When you have a pension, it speaks to the importance of Roth conversions even more.”

• Brad (30:53):
  “These are the years where you can just massively benefit. You don't want to leave any money on the table.”

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3. Timing of Roth Conversions Amid Market Volatility

Listener Question:
Doug raised a timely query about the optimal timing for Roth conversions, especially when market valuations are low, questioning whether converting at market lows maximizes net worth benefits.

Key Points Discussed:

• Market Timing vs. Tax Optimization:

  • Rachel (35:56) interpreted Doug's question as leveraging market downturns to perform Roth conversions, thereby potentially acquiring more shares for the same converted dollar amount.

• Psychological vs. Practical Considerations:

  • Brad (37:57) pondered whether market conditions should influence the conversion strategy or if the focus should remain on overall tax efficiency.

• Strategic Flexibility:

  • Rachel (43:00) advised maintaining a bucketing strategy to manage sequence of returns risk, ensuring that short-term needs are met without being overly influenced by short-term market movements.

Notable Quotes:

• Rachel (35:56):
  “During a market downturn, you can convert the same $50k and get more shares for your Roth account.”

• Brad (39:07):
  “We are not prognosticating on what's going to happen in the market. We couldn't possibly know.”

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4. Managing Inherited Retirement Accounts

Listener Question:
James sought advice on handling a sizable inheritance from a traditional IRA or 401k, which must be withdrawn within ten years, potentially disrupting existing FI plans.

Key Points Discussed:

• Strategic Withdrawal Planning:

  • Rachel (47:14) recommended assessing the next ten years for potential income needs and distributing withdrawals to avoid large tax burdens in any single year.

• Avoiding Lump-Sum Withdrawals:

  • Brad (49:13) cautioned against taking a large inheritance in one year due to significant tax implications, advocating for spreading withdrawals to manage tax liability effectively.

• Tax Efficiency and Flexibility:

  • Rachel (49:05) emphasized tailoring the distribution strategy based on individual circumstances, such as upcoming retirement phases or expected changes in income.

Notable Quotes:

• Rachel (47:14):
  “Look at your next 10 years and see if there's any strategic withdrawals you can make within that period.”

• Brad (49:13):
  “Taking it in one year because it's going to hit you is probably not ideal.”

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5. Restricted Stock Units (RSUs) and Social Security Benefits

Listener Question:
Betsy questioned whether RSUs are included in Social Security benefit calculations, noting that her Social Security statement only reflects her salary.

Key Points Discussed:

• Inclusion of RSUs in FICA Taxes:

  • Rachel (50:46) explained that RSUs are considered part of "covered earnings" and are subject to Social Security (FICA) taxes upon vesting.

• Grant Date vs. Vest Date:

  • Rachel (50:46) differentiated between the grant date (no immediate tax impact) and the vesting date (taxed as income), clarifying that RSUs become taxable when they vest.

• Wage Cap Considerations:

  • Rachel (50:46) noted that earnings above the Social Security wage cap ($176,100 for 2025) are not subject to Social Security taxes, which might affect how RSUs are reported in high-income scenarios.

Notable Quotes:

• Rachel (50:46):
  “Restricted stock units are included in covered earnings and are taxed as Social Security income when they vest.”

• Brad (53:00):
  “You've never heard an expert say we're going to get less than 60% of what we're anticipating as current projected benefits.”

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6. Solo 401k and Backdoor Roth IRA Strategies

Listener Question:
Josh inquired about converting a pre-tax IRA into a Solo 401k to facilitate a Backdoor Roth IRA, particularly for individuals with self-employment income.

Key Points Discussed:

• Eligibility and Setup Requirements:

  • Rachel (55:42) confirmed that individuals with genuine self-employment income can set up a Solo 401k, provided the plan accepts rollovers from IRAs.

• Maximizing Contribution Limits:

  • Brad (58:59) highlighted the significant additional contribution limits afforded by Solo 401k plans, enabling substantial tax-advantaged savings.

• Compliance and Strategic Implementation:

  • Rachel (56:50) advised ensuring that self-employment income is legitimate and not merely nominal to qualify for Solo 401k contributions.

• Unlocking Employer Contributions:

  • Brad (58:59) elaborated on the dual nature of Solo 401k contributions, allowing both employee deferrals and employer contributions, potentially reaching up to $46,500 annually.

Notable Quotes:

• Rachel (55:42):
  “If you have self-employed income, you could open a Solo 401k and clean up your IRA for Backdoor Roth strategies.”

• Brad (58:59):
  “The employer side allows you to contribute a significant percentage, unlocking tens of thousands of extra dollars each year.”

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Conclusion

This episode of ChooseFI's Mailbag provided a comprehensive exploration of advanced financial strategies crucial for individuals striving for financial independence. Rachel Camp's expert insights into bond strategies, Roth conversions, handling inherited accounts, the interplay of RSUs with Social Security, and maximizing Solo 401k benefits offer listeners actionable advice to optimize their financial plans. By addressing both the psychological and technical aspects of these topics, Brad and Rachel equip the FI community with the knowledge to navigate complex financial landscapes effectively.

Final Notable Quote:

• Rachel (60:08):
  “Thank you, Brad, everyone.”

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Additional Resources

• Rachel Camp's Website: RachelCampWealth.com
• ChooseFI Local Groups: ChooseFI.com/local
• Financial Independence 101 Course: ChooseFI.com/fi101

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For more insights and detailed discussions, subscribe to the ChooseFI podcast and join the vibrant community dedicated to achieving financial independence.

Transcript

[Brad]

Hello and welcome to Choose A Five. Today on the show we have another mailbag episode with our good friend Rachel Camp. She's a CFP and this is now her ninth visit here to Choose a Five to do these mailbag episodes with me. And they're always a blast because we really, we cover a wide range of topics. Rachel always picks great questions and these come from you, the community. So we touch on a lot of things here. I'm going to just bomb through a couple of them. Bond funds versus individual bonds, Roth conversions in a down market, advanced FI strategies and the interplay with pensions, Social Security calculations and what gets included in income solo 401k, backdoor, Roth RSUs and Social Security. All of these things in one episode. I think this is going to be a really useful one and I was especially interested in our conversation about, about bonds because I think this is something that is top of mind for a lot of people. And I know Rachel is getting this from many, many of her clients in her CFP practice. So I think you're really going to enjoy this episode. And with that, welcome to Choose Fi. Rachel, you're back for mailbag number nine. This should be fun.

[Rachel Camp]

Yeah, I love it. Love to be here. Brad, I'm excited.

[Brad]

Yeah, you are the best. I really appreciate you, you doing this consistently. So you, as always, have picked the questions you. Of all the hundreds of questions we get, we toss on this one Google and you pick out six or seven each time and we're going to get started. So you have told me that a lot of your clients are asking you about bonds and that was top of mind for you when you went through the question list. And one came in from Steven. So this is a bit of a long one, but I'm going to try to read it as much verbatim as I can. So I have a question relating to bonds from this week's mailbag episode with Rachel Camp. So this is a prior one. When discussing asset allocation as you approach retirement, you talked about the importance of having cash and bonds to help deal with sequence of return risk. At the beginning, this all makes sense, but it brought up a question relating to bonds. I subscribe to the simple path to wealth philosophy. So most of my bond exposure is in a bond index fund, in this case bnd. Over the last few years, the price of the bond index fund has dropped significantly and has been somewhat volatile. I hope this question makes sense, but in terms of positioning yourself well to deal with sequence of return risk, it seems like owning a bond fund may not accomplish that. Does that only work if you buy actual bonds that pay you interest and return your principal upon maturity and therefore aren't really subject to pricing risks? Am I missing something? Any clarity about when to buy specific bonds versus a bond index fund would be very helpful. Thank you for all the great content. Truly life changing. So, hey, thank you, Stephen, that's really, really kind. And Rachel, I feel like we could probably talk about this for 20 or 30 minutes if we were so inclined. So we're going to give it the best answer we can and as thorough as possible because frankly, we don't really talk about bonds all that often on the podcast. So I would actually ask you to take a step back for people who just don't understand even just the premise of Steven's question with like, hey, what happens to bond pricing when there's interest rate volatility? Because this is not intuitive to people and I think it's really important to set the stage.

[Rachel Camp]

Yeah, and I told you, Brad, before we got on here that I was excited to talk through this one because we have so many questions on it. And I do think it's funny because the equity side seems almost simple now compared to the bond side. But that's because for most of history, bonds are just this, the stable source, and we rely on them for interest coming in. And that's our, like he mentioned in the question, that's what protects us in sequence of returns risk. What I think a lot of people are starting to learn is about duration and interest rate risk. So this is something that's not talked about often, and we're talking about it a ton now because of what happened in 2022 where bonds acted like stocks. I think a lot of people said that was actually the worst year for bonds ever. Wow. Ever. Which is crazy. But that's also why a lot of people don't have a lot of trust in bonds anymore. But it's important that we understand why that happened and then also start to understand duration and interest rate risk. So to your point, Brad, there is a relationship between the price of bonds and interest rates. It's an inverse relationship. So it means they do the opposite. Right? So if interest rates rise like they did very suddenly in 2022, when we had Fed interest rate hikes that were really aggressive, bond prices fall. And that's for a very simple reason. Right? So if you have a bond, you own a bond and it's paying 2% interest, and then all of a sudden interest rates rise, let's say 4%. Well, now, no one really wants your bond at 2% interest when they can go out into the market, get a brand new bond paying them 4%. So that really discounts the price of your bonds because in order for anybody to buy it, you have to discount it because otherwise a 2% interest rate on a bond is just not attractive. So the opposite happens as well, right? So if you have a bond that is paying 4% and all of a sudden interest rates drop to 2% now your bond becomes really valuable, you want to hold onto it, other people are willing to pay a premium for it. So that's what we mean when we say there's an inverse relationship between the prices of bonds and interest rates. The component I think everyone has to really understand about this is that bond volatility is really dependent on the duration of the bond, right? So it's if you have short term bonds, if you have T bills, which are treasury issued bills from the US Government that are less than one year in maturity, it's going to have a very little, very small volatility compared to a 30 year bond, 30 year treasury. So the more the duration is increased with bonds with Treasuries, the more volatile that reaction in interest rate changes is going to be. This is what I mean when I say I think this is kind of a wake up for us to understand duration and interest rate risk and how that interacts with bond prices. There were some people who felt very comfortable just holding on to long term bonds, not understanding that there was a lot of underlying risk there, especially in 2022. So I'm curious how you think about it Brad, because I also have a philosophy on how I approach this duration risk with bonds. But I don't know if you have.

[Brad]

Yeah, this is complex because yeah, there's a lot of, a lot of different factors that come in and also like psychology of buying bonds too. So for me, and this gets to Stephen's question actually about like individual bonds versus bond fund. And of course I'm not going to steal your thunder in this, but this is pertinent to what you just talked about is if I were buying a bond, I'm basically as I kind of see it loosely, like I'm buying into a contract. So if I buy a thousand dollars bond at 3% interest at that point and it's a five year bond, I'm basically saying like I'm putting my money down and I'm content with a 3% annual interest on that bond basically for the next five years. I bought into a five year contract. So at the end of those five years. And this also gets to Steven's question is I get my thousand dollars back. That's how this, and you can correct me if I'm wrong, obviously, but that's how the contract of course works on these things. I'm kind of kidding, but in case there was something ridiculous that I missed. But I'm buying into that contract. If I bought into a 30 year contract, my anticipation, maybe in my own simplistic head or just how I think about contracts like this is I'm literally buying into a 30 year contract. So almost Warren Buffett style with prices of equities. I don't really care, frankly what the prevailing interest rate is because I bought into this contract with eyes wide open and I said, all right, I plan to own this bond for this time period, I'll get my money back. And yeah, I understand the spot price. The current price of that may go up or down depending on the prevailing interest rate, the interest rate, as if I were to buy a new bond today. But I made that contract again with eyes wide open and that's just what I'm content with. So maybe that's different, frankly, Rachel, than how a lot of people look at it. But I don't know, I mean, you talk to many, many hundreds of people and clients and such like, is that a common sentiment or is that rarer than not?

[Rachel Camp]

Yeah, it is common. I would say with individual bonds, the reason people are attracted to them is because there is some psychological comfort there, right, compared to bond funds. And it really depends how you're using the bonds. So if you are somebody who is actually creating a bond ladder where you're saying, in one year I'm going to need this much cash, I'm going to buy a one year bond, two years, I need this much cash, I'm going to buy a two year bond. And that can work really, really well. Right, because you are probably not going to care about the price fluctuations in the next few years. You know that that return on the price of the bond is coming to you and that's what you need to cover your spending needs. On the other hand, you have people who are say five to seven years from retirement and they don't really need the cash, but they are wanting a stable part of their portfolio. So that's where I get a lot of questions on should that be a bond ladder, should that be a bond fund? And I think where people get confused is they see this comfort with individual bonds and that they mature and they feel like bond Funds don't ever mature, which is technically correct. Right. They're continuing to reinvest. It's a rolling maturity. And that only really matters if you need and are relying on that cash at a certain date. Right. Which is why when we create a bond strategy, we have short term needs, intermediate term needs, and, and then long term needs we can get into, because that could technically just be equities if it's long enough. So the difference between a bond ladder and a bond fund is really only important if once those bonds are maturing, you need the cash to spend. Otherwise, if you are creating a bond ladder and you are just continuing to reinvest the bond when it does mature, there's not a difference between what you're doing and what a bond fund is doing. And if it's the same credit risk, if it's the same duration, or between the two strategies over a long enough time period, there is not really a difference in performance. It's the exact same thing. It's just either you are running it or you're giving it to a bond fund manager to run. Does that make sense?

[Brad]

That does. So right on a long enough time period, what you're saying is Steven's concern, which is basically the spot price of that bond fund will actually ultimately smooth out because it's really just, hey, this is discounted in theory, or there's a premium based on the current prevailing interest rates. But if these underlying bonds are held to maturity, then we are getting our full principal back. So that begs the question though, are these bonds all held to maturity in these funds? And I don't know if you could possibly answer that, but I don't know if they're trading strategies what a bond fund manager does. That's something I've never even contemplated before.

[Rachel Camp]

Yeah, that's something that depends on the manager. Some of them are just holding to maturity and then reinvesting. Some of them say, hey, in order to hold this duration, we have to sell and then we have to buy a new bond. That does speak to technically, if interest rates are rising, right, and you've got this bond fund and the bond fund manager is reinvesting and buying new bonds, whether it's coming from coupons, coming from just bonds maturing, coming from new dollars, from new investments, they're actually capturing that rise in interest rates much quicker than you could in your own bond ladder. What we saw in 22 happen was that the increase in interest rates was so aggressive, it was such a sudden spike that it was hard to capture those higher interest rates as quickly and the current bonds took a dramatic hit. And what people are concerned about is that there was that period of time and we're still seeing this, a little bit of the increased correlation between stocks and bonds. Right. So you hold bonds because when stocks fall you want that portion of your portfolio to hold up. People are rightfully concerned that in recent years they have been more correlated than they have in the past. That's the concern and the fear with bonds right now. But again, it speaks to like a bond fund like bnd. You have to look it up, see what the duration is. I think it might be like six point something years and understand that if you're going to buy bond fund like that, that should be for money in 6.7 years. Then if you need money in three years, you can either look for an ultra short term bond fund, you can buy individual bonds you can keep in cash or cash equivalents. But I think that's the confusion. When we buy these bond funds, we assume that they will always stay stable. That speaks to, there's just nothing that is actually a risk free investment. So that lack of stability I think was really shocking to people in 2022. But that is exactly how bonds can act in a environment just like that. Like what we saw in 2022.

[Brad]

No, that makes, that makes a lot of sense. I love that point actually. Right. So it's almost like a perceived lack of volatility in a sense and really capturing the interest rate increases in many cases. Right. So as you described, like, okay, you might have a bond ladder and you might just have literally one bond that's coming due each year. And yeah, you have some stability and lack of volatility. But like you're saying if you're in a bond fund, and this is one of the potential values of that, even if it does look like your bond fund is going up and down on that spot price, but really they have thousands, I'm just making tens of thousands, whatever it is, of individual bonds. And because those maturities are coming due on a very frequent basis and in that period of rising interest rates as you described, like they can capture that larger interest rate and therefore you're getting more interest income much, much quicker. So the phrase that comes to mind is like the weighted average interest rate, I'm just kind of, I'm not sure if that's the precise technical definition. But like as that's rolling, that can happen on an almost daily basis, that it's inching up on your bond fund as opposed to, hey, I Just have one bond that, that's coming due each of the next five years. Like, well, you have to wait an entire year, maybe, maybe 11 months and 28 days if you just bought your last bond to capture any of that interest rate increase. So that's a really interesting point that I would have never considered.

[Rachel Camp]

Well, you have to think about it too. Where you're holding an individual bond that matures, say in five years, it's at 2% interest, it's bad. And all of a sudden interest rates go up to 4%. You're still holding a bond that is paying you 2% when there are bonds out there paying 4%. So, so you're still losing in that sense. It just might not feel like it because you know that maturity is coming, you're going to get that return that you can rely on. So there's a lot more transparency, I guess you could say, within a bond fund. And that's what could be the downside. But I, I do think it's a psychological comfort that people kind of fall into with buying individual bonds. Nothing wrong with it. Like I said, if you have short term cash needs can be great to know that that's coming due, especially if you're in retirement or about to retire. But outside of that, if you're just managing a bond ladder because you think there's some advantage with that over a bond fund, I think that's just a psychological comfort that doesn't actually hold up. You're just now the manager of the bond fund with less bonds. Right. And you're continuing to roll them into the next bond. Those bonds are technically never maturing, which is the criticism of bond funds as well.

[Brad]

Okay, so, right. So to get to the heart of, obviously we've talked about the heart of Steven's question, but even to just answer it precisely. So as you just said, there's a large psychological component to this, but there also is like a real dollar figure in a sense in that if you wanted to just value your net worth, you would take the number of shares of the bond fund you had multiplied by the current price, and that would be the number that's staring you in the face. And if you had, let's just say Hypothetically, you had 30 or 40% of your net worth in bonds. You were, you had made that decision and the bond fund had just went down fairly considerably again, on paper, you're going to see your net worth drop. But I guess the real question ultimately is, okay, has that actually impacted anything in my strategy and, or more importantly, in my actual day to day, how much interest income am I getting from this bond? Has this, has this really negatively impacted me in any, any discernible way? And even though I've heard you talk about this for the last 15 minutes like it still is, I suspect it's very unclear to some people as to like, okay, are we actually saying that on a long enough timeline with the bond fund that none of this day to day fluctuation matters, that I'm still getting the interest rate that I expected and maybe even higher because in the case of hey, interest rates went up. So again, inverse the bond prices of existing bonds because it's only prior existing bonds have just went down. So I see my net worth has gone down a little bit, but maybe my interest income has actually increased. So it's this funny, it's this funny side by side thing, right, of like, oh wow. Like hey, bonds are part of my strategy in this case and I'm maybe I'm getting more interest income but I see my net worth go down. So I don't know if I should be happy or sad. Basically.

[Rachel Camp]

Yeah, well again it matters like if you need money, if you need income, and if you do, then hopefully part of your strategy was having cash and short term bonds that are not going to be that volatile to interest rate changes. This is why I said I think this is a really important question right now. And for the first time people are starting to understand what duration means with bonds and that the risk of having all of your money in a bond Fund with the 6 year duration is that if that bond fund does take a big hit like it did in 2022, where are you going to draw income from? And that's where a cash account or savings account that can't lose money is important, or a short term, ultra short term bond fund that is not going to be that affected by changes in interest rates is important as well. We have to match up when you need the money with the investment. So again, if we're going to need the money in one year and you're in a bond fund with six year duration and you're taking on some risk there that I really think is unnecessary. And then beyond six years, beyond intermediate bonds, you know, there were people in 2022 that were holding 30 year bond funds, which to me was extremely risky for an interest rate environment that was paying so little to be holding onto a bond fund with that duration. I think personally, if I were about to retire, the only way you can convince me to buy into a long Term bond fund is. If we were in like a 1981 type situation where we were getting. Yeah, something like that, then you could probably convince me. But there is a risk return trade off with bonds and bonds are meant to be the point of stability in our portfolio. I tend to personally think that the long term bond funds aren't worth the volatility that comes with them.

[Brad]

Yeah, I totally hear you. You want to hear a funny little anecdote and maybe shows just quite how old I am is that my parents were able to stock away some money for a small amount of money for me for my college fund in the early 80s at those absurd interest rates. And it was able to compound fairly significantly to the point where, you know, by no means was my college paid for, but they did a wonderful job by seeing these crazy interest rates. I forget what it was. 15, 18%, something like that. And they would have put a couple thousand dollars in there and that doubled certainly a couple times in the 16 and 18 years that I had left. So. So I actually was one of the beneficiaries of that crazy period. And who the heck would offer. I don't know if it was what it was. I don't know the exact term, but maybe it was a bond. Maybe it's some type of, I don't know, CD or something. But like they had a contractual locked in for 15 years and it was like, oh, wow, this is remarkable.

[Rachel Camp]

That's where you'd convince me, that's where you'd get me.

[Brad]

Total no brainer. But right. Seriously, any I would literally every dollar I had. But to your point, like yeah, when the interest rate environment is 2%, 2 and a half percent, like do you really want to lock yourself into a contract for 30 years? It doesn't make any sense. So I think final word on this, and this is ultimately a statement, but really a question to you just to confirm. I'll act as Stephen here is. Okay, I could buy individual bonds that are going to mature. I will get 100% of the face value back on this. It's guaranteed. It's contractually obligated, obviously, unless there's some default or something insane, but we'll put that aside. Or I could buy a bond fund. And now if we assumed, and this is a big assumption, but in many cases, if that bond fund held every bond to maturity, if then they will get 100% of the face value back as well. And it almost doesn't matter what the day to day daily fluctuations of that bond fund price are. If on A long enough timeline, if it eventually ran out to its, it, it stopped and they did. Every single bond to maturity, you would get a hundred percent of the face value back. So these fluctuations are only, they're temporary. They're just market fluctuations. And again, if they're not selling the bonds, then those underlying bonds act the same way as the individual bonds that you're buying. Is that a fair summation of this?

[Rachel Camp]

Yes. If the way you are running your individual bonds is that you, as they mature, you are reinvesting them back into bonds, you are doing exactly what a bond fund manager is doing. There is no difference. And like I said, with similar credit profile, similar maturity or duration, the exact same thing is happening within the two. There's very little difference in performance. It's only when you are buying a bond, it's going to mature in one year. You need that to spend the money where I can see an advantage there. Otherwise, you're just acting as a bond fund manager.

[Brad]

Brilliant. I love it. And that's. Yeah. So you've introduced duration and interest rate risks. I think we nailed this. Rachel, this is, that has been very helpful.

[Rachel Camp]

I have a friend who is a bond expert. He'd be better to answer all these questions than me, but I'm seeing it a lot. And so hopefully that is, that's clear now.

[Brad]

You nailed it. Okay, let's move on here to our next question. All right, Rachel, so the next question came in from Jen, and Jen said, my question is how does your advice related to Roth IRA conversions and other advanced FI strategies to minimize taxes apply to those of us fortunate enough to have pensions? I'm a federal employee and I'm sure there are a ton of Fed listeners, but this could apply to others as well, for sure. Will that bump us up into a higher tax bracket in retirement? That would negate the tax benefits of some of the strategies discussed on the show. I'm 42 and I don't yet have a separate IRA outside of my TSP, to which I've consistently contributed 10%. But I am considering opening one if it's not too late to take advantage of some of these strategies. So, yeah, there's, there's a lot here. Tsp, I guess that really is just like the federal government's 401k, so nobody should get too terribly confused with that. Or if you've never heard of a tsp, you don't have one. Just think of it as a very similar thing, but advanced five strategies. Timing lots in here, for sure.

[Rachel Camp]

Yeah, I, I get this question a lot, especially I. I mean, I work with a lot of people who are retired now. And while most of them do not have pensions, a lot of them will have like a small pension or it will be a portion of their retirement income. So the question I get obviously is, you know, I've got this beautiful tax strategy, but how does a pension fit into this with Roth conversions with all my other income sources, is that ruin the opportunity for Roth conversions? But I actually think when you have a pension, it speaks to the importance of Roth conversions even more. Right. And the way I like to see retirement is if you retire early, there's really three stages to the retirement. Stage one is before any of those income sources start. So before Social Security, before pensions, before any fixed income sources, you've got this stage where you are completely creating the paycheck for your retirement. So typically that's a brokerage account or cash buckets where you're drawing from that and you have no other income sources coming in. And that's the stage where we can be really aggressive with Roth conversions. Right. Because we're filling up that 0% capital gains tax bracket with the brokerage account for your income. We're using the standard deduction for Roth conversions. We might be filling up the 10 or 12% bracket there too, depending on what makes most sense for you. And I actually think, again, that speaks to the importance of doing Roth conversions even more if you have a pension. Because stage two, when that pension turns on, now that pension is starting to fill up some of that room in the standard deduction in the tax bracket. Yeah, it's crowding out some room for Roth conversions. So if we were really aggressive in stage one, we got a ton of money over to the Roth side and we can do a little bit less right. In stage two, because we have a crowded tax bracket now. But stage three is when RMD start and then we have way less room. So again, the importance was starting Roth conversions early, before pensions kick in, and then maybe doing a bit more when the pension does start, but before RMDs. And then by the time RMD start, we just have very little control. Right. Depending on what we did. Because you've got your pension, that is the floor there. It's always going to come in, it's never going to go away. You can't turn it off. So you have to account for that. But now you've got Social Security stacking on top of that and RMD stack stacking on top of that. So while it throws in a little bit of a wrinkle. It's obviously not a problem. Right. We're going to take the free money. We're not going to let the tax tail wag the dog here. But I really think for all FI strategies, in particular Roth conversions, it actually becomes even more important for anybody that has a pension.

[Brad]

Yeah, I love that. So, okay, these three different stages. So, right. Stage one is the one that, though a lot of our listeners are familiar with some of these strategies and concepts, I think we should slow down on that just real quick because that's more the. The fundamental underpinning of really everything we're talking about here. So you mentioned the standard deduction, Roth conversions, and then the 0% capital gains bracket as well. And these are maybe two of the most powerful arrows in our quiver here for fi And a lot of people, A, because it's not really relevant to them at the current time. Like, maybe they just kind of it's back burner or they just frankly don't listen. But that's why I like to really dive in on this. So, okay, 20, 25, if you are married, filing joint for your tax return, you get a $30,000 standard deduction. Okay? So how that works is basically, if you have $30,000 of taxable income, regular wages, let's say, or just ordinary income is the most broad way to put it. But regular W2 wages would be a perfect example of that. If you have 30,000, you put that on your return and you say, hey, government, please tax me on this. But you get this standard deduction and of 30,000, and it just reduces it to zero, your federal tax liability is zero in that case. Now, as Rachel saying, if you're in a period where you're in early retirement and you haven't reached that stage two yet, where your pension might come in, in the case of, if you did have a pension, well, you have $0 of income. Now, one of the greatest strategies we have in the FI community is this Roth conversion. Roth IRA conversion. So you basically take, let's say, your traditional Roth IRA, or if you had a 401k, you can roll that into a traditional IRA. And what's cool is you can convert some of that traditional IRA into a Roth ira. So what happens is when you try to convert some of this, it's similar to, like when you take a distribution from 401k or an IRA, every dollar that you pull out is taxable. Okay? So you are doing, let's say, a $30,000 Roth conversion. So what you do is you take $30,000 out of your traditional IRA and you say, okay, this is obviously a taxable event, so $30,000 goes on my tax return. And now that money gets converted into a Roth ira, which you never have to pay taxes on again. So when you pull that money out years from now, it is completely tax free. That's the beauty of a Roth ira. You pay the taxes up front. And, and that's in essence, Rachel, what's happening when you're making this conversion is you've put that money in tax deferred into that 401k or traditional IRA, but what you're doing is you're paying the taxes at that moment when you convert it, and then it turns into a Roth ira. Okay, but what happens, as you know, of course, Rachel, but is the $30,000 goes on your tax return as taxable income, but because you have that $30,000 standard deduction, again, your tax liability is zero. And now you said you might even consider upping it to the point where you're in that 10% or 12% bracket. So this could be another 10, 20 plus thousand dollars very easily that you could convert and only pay a tiny, tiny, tiny little bit of tax on that. So that is an incredibly valuable strategy. And I think one of the strongest things we have in the FI community generally is, hey, you can put this money in tax deferred at your highest marginal rate when you're making a lot of money in your job at your, your highest earning years, and then get it out, pull it out years later at virtually zero tax or very low effective tax rate, which is marvelous. And then final word, and I'll let you, you jump back in here, is those long term capital gains at 0%. This is one of the wildest things because it's not an insignificant number. I know for 2024 is 94,050. And I think I'm seeing, or AI, Google's AI is telling me it's 96,700 for married filing joint for 2025. So these are massive amounts that if your taxable income is up to that and you have capital gains as part of that 96,700, the long term capital gains, that's very important. They are taxed at a zero percent tax rate. So in this case, you could have unrealized capital gains, long term capital gains in your normal brokerage account, your taxable brokerage account, and you can say, oh, I don't need this money right now, but I'm actually going to sell these and realize the capital gain Put it on my tax return. Please tax me. But as long as my taxable income is below that 96,700, then I pay $0 of tax. I can then just buy other stock securities. I could rebuy that fund, whatever it is. And I paid zero tax. So I've increased my basis on this and I that tax, that unrealized tax that I now realized is zero percent. I never pay a dollar on it. So everyone listening like you're seeing, hopefully light bulbs go off in your brain of these are the two most remarkable things we have going in the FI community. So Rich, I love this concept of this stage one.

[Rachel Camp]

In this stage one, if you are pulling from cash for your income and brokerage accounts for your income, a mistake I commonly see is, is we're not filling up the standard deduction at all. One thing we don't want to leave on the table is that standard deduction, the $30,000 that you get zero taxes on. So an important part in this stage is to make sure that you do fully fill up the standard deduction with a Roth conversion. And what might happen is say you need 80k in income, 50% of your brokerage account is gains. We'll say so what happens on the tax return is you've got four 40k realized gains as long term capital gains. That's going to be taxed at that 0% tax rate because you're under the 96, 97,000 threshold. On top of that, you can do a $30,000 Roth conversion and pay no taxes on it. And at that point you've got a 30k Roth conversion over, no taxes paid, you've got 40k in long term capital gains. Now you actually have even more room. We're going to want to go back and either harvest some gains or do more Roth conversions or fill this up a little bit more. That's really the beauty of stage one is we have so much room that we can play with with Roth conversions. And with your income we have this really sweet spot of being able to take out a lot of money at a low taxable income and make sure to get those dollars over into the Roth account.

[Brad]

Yeah, I like that. I like that a lot. So yeah, these are your years where you can just massively benefit. Massively, massively benefit. So before, in this case of Jen, a pension comes in or like you said before, other income, RMDs or Social Security, which impacts it also. So yeah, I think we all just need to be very, very aware of standard deduction and 0% long term caps, gains brackets, those are the two things that in the years you can take advantage of it. You don't want to leave any money on the table. This is literally free money. You can take these taxable events very purposely and say, please tax me on it. And then the government in their infinite wisdom says I'm going to text you at 0% because I mean they are incentivizing certain habits. Right. So I do understand it and it's wonderful and we can take advantage of it. So why not do it to the fullest extent? So okay, that'll make sense. And yeah, like you said, stage two, stage three, those tie in to the larger question. We don't need to adjudicate them. But I guess just finally on Jen's, she said something about like a separate ira, is, is it too late to take advantage? Is there any reason not to do this? I don't know if this is necessarily all that pertinent. I think if you can benefit from it and you're in a period where you have a higher marginal rate, you're still earning some money. I don't see any reason not to personally, but yeah, it just seems like mostly a side question.

[Rachel Camp]

Yeah, it's a tax arbitrage issue. Right. We're trying to pay the least amount in taxes over our lifetime. So with the same argument of the Roth conversions of do we want to fill up the 10 or 12% brackets? Well, that depends on what you anticipate RMDs being. If they're large enough, they could bump you up into 20 to 24%. Now all of a sudden, 10 12% brackets look really attractive. So it'd be the same concept. When you're contributing, what bracket are you in? Do we want to take advantage of that? Do we want to defer taxes? That's what how I always look at it, it's a lifetime tax rate today versus the future.

[Brad]

Yep, love it. That's exactly right. Where I usually fall down on, on putting money into pre tax vehicles. So think traditional IRA, 401k, et cetera, is control what you can control. And if, yeah, if you're in a high marginal tax bracket now in your earning years, I like to fill those up as much as possible because I think with many of these advanced five strategies, I will be able to pull the money out at a dramatically lower effective tax rate. So that's kind of just my broad view. Of course your situation may differ. You might have different, different needs, etc. Yada yada yada. But that's a pretty high level. The general concept of what we talk about at Choose. Thanks for listening to Choose a Vi and for all your support of our mission here. The absolute best way to support Choose a Buy is when you sign up for your next rewards credit card to use our cards page at choose a buy.com cards. I keep this page constantly updated, so it should always be the top resource for you. Thanks for being part of our community and for your support. All right, Rachel, so let's move on to Doug's question. And this is another one of my Roth conversions, but this is actually a more time timely one. So Doug's question. One thing I haven't heard you talk about, though, maybe I missed it, is the timing of Roth conversions, specifically the idea that if you have a mindset that the market is heading higher from here, now is the time to do a conversion. Had you converted a hundred shares of, let's say, spy at the recent high of 613, you would be taxed on $61,300. If you had converted at the recent low, you would have only been taxed on about $49,000. Just thought it may be worth pointing out to listeners. So, Rachel, I know you identified this as something that is a very timely B you're getting questions from. So I'm a little uncertain as to the actual question. So I'd love to hear your thoughts on this.

[Rachel Camp]

Yeah, I mean, the way I interpret it is, okay, so of course we think the market's going to be higher in the future. Right. But if we go through a market downturn, is that an opportunity for a Roth conversion? If he points out the fact that share prices dropped dramatically, which means with the same dollar amount, we can actually get more shares over, which is a valid point. So the reason I was excited to talk about this question is because in April of this year, with the tariffs, with everything that was happening, we obviously experienced a big downturn in the market. Talked to a lot of clients, talked to a lot of people about Roth conversions at this time. The way we approach Roth conversions, right, is we figure out what's the dollar amount we want to convert this year. So sometimes we have to finalize that at end of year when we figure out what all the other income sources were. But if you are in retirement, you know, you want to do a Roth conversion, say you've earmarked $50,000 with your tax strategy for a Roth conversion, and then all of a sudden, middle of the year, a huge downturn happens and you're wondering, should I be doing this now, should I be doing half of it now? Should I be more aggressive right now? Because the idea is when the market is suppressed and when your account value is down, that same 50k is now a larger percentage of your pre tax account that you are converting than it was when it was at market highs. So that's the idea. We can phrase it two different ways. One way to phrase it is it's a larger percentage of your IRA that you're getting over. The other way to phrase it is, now we can get more shares over at that same time, same $50,000. That's the idea. And then now it's in the Roth account where those shares, where those dollars can recover in a tax free account. So I think that the heart of the question here is if we see a opportunity in the market where it drops, is that a time to be more aggressive with our Roth conversion strategy or just to just jump on it and do the Roth conversion at that point?

[Brad]

Yeah, this is fascinating and this is where personal finance is just so interesting because there are things that some people consider. Obviously you've heard this from other people, not just Doug here, but for me, Roth conversions has always just been about the tax liability. So for me, I almost am agnostic as to what just happened in the market, et cetera, et cetera. I'm just trying to move dollars over to convert dollars in essence. And how can I fill up my buckets like we just talked about with the standard deduction and maybe, maybe inch into the 10 or 12% bracket. But yeah, that is a fascinating thought of like, okay, but what I'm actually looking to do is get shares over for my long term net benefit of the like net wealth, net worth benefit of this. It's really interesting, Rachel, and I still, I don't know if I'm convinced that this ultimately matters. I, and I don't mean to make light of it, but I, I'm not a hundred percent convinced. But yeah, I mean if you have like Doug saying, if you have that mindset that the market's heading higher from here and like you said, and I want to be clear to everybody, we are not prognosticating on what's going to happen in the market. We couldn't possibly know.

[Rachel Camp]

No idea, right?

[Brad]

Like if you put a, you know, a truth serum to us, like what are our thoughts over the next three to five years, I suspect it would be very different than what's going to happen over the next 50 years. Over the next 50 years. I am pretty darn sure. Approaching a hundred percent. That chart of the market is going to look like it's looked the last hundred years. It's going to be up and to the right now. Are there going to be periods of volatility? You bet there will be. There obviously will be. There always have been. There always will be. But barring a zombie apocalypse or some AI takeover of the world, which is now my updated version, Rachel, of the zombie apocalypse, I'm pretty sure that's going to be up into the right. So, yeah, I mean, it's, it's vaguely convincing to me, but I think at the end of the day, like, what we're really doing with these Roth conversions is how can you do this and get that money out of there paying very, very little tax? So, yeah, I do want to take a quick step back and of course, let you respond to that. But are there any other things that clients are coming to you with in terms of market volatility, in terms of, hey, what. I'm worried the market's going to go lower. What should I do? Like even down to like nuts and bolts and, or psychology. Is there anything that's. People are scared right now and I'm curious if people have been coming to you with anything in particular.

[Rachel Camp]

Yeah. And to an earlier question, a lot of it does deal with that sequence of returns risk. Right. So some people will even delay retirement because of fear around the market. I'm not going to discount anybody's fear right now. I think everybody who has some concerns is certainly valid. I will say this is something I have been hearing for my entire career of this can't continue. When's the downturn going to happen? And to some people's point, I understand the concern. The market has looked expensive for a very long time. But this is why we have certain strategies within the FI community and why we have plans in place for sequence of returns risk. This is why we don't, when you're retiring, don't put everything in equities. We have a cash bucket, we have a bond bucket. And that's, I know, the other concern as well. But if you understand how to set up the portfolio to protect you in that first 10 years of retirement, then we're really talking about time horizons of 10 to 15 years for the market. That's the thing I always remind people. So there are people who are retired and are rightfully more concerned because now they need this money. But the way that we, we do this from a psychological standpoint is create like a bucketing strategy. Right. So we've got your money for the first one to three years, the next amount of money for the next five to ten years, and then we've got your long term money past that. So when it comes to equities, whether you're retired or you're approaching retirement, you have to reset what your time horizon is. Right? So if we're concerned about the price of equities, well, if we've got short term money and if we don't need to touch our equities for 10 years, then we have to worry about it in the time span of, well, where do I think the market is going to be in 10 years, 15 years? And if we look at history, often it is up and is up by quite a bit. I always put myself in the position of if we have a market that is down for 10 to 15 years, well, we're all in terrible positions. We're, we're in a very bad scenario. We've got probably a lot, a lot bigger problems. But I completely understand it and this is what I talk to people about every day. This is why we have these strategies in place to protect certain portions of our portfolio. I know people are concerned about the US market as well, especially with the recent downgrading of the US credit. We can look at international options for that, but for the most part, I like to just think of it, we're all in this together and if we have a brutal few decades, we're all going to have a lot bigger problems. I don't know if that's comforting to other people, like it's comforting to me, but that's how I, how I think about it.

[Brad]

Yeah, it's funny, that's my joking zombie apocalypse thing. It's like you can't plan for the 0.00001 edge case because listen, if the zombie apocalypse comes, we're all going to be screwed, right? Not to be too crass about it, but so within the range of normal and understanding that outlier events happen all the time, nobody can predict Morgan Housel talks about this. Nobody can predict a lot of the things that have actually moved the market. But still, you look at that graph, over a hundred years, through world wars and everything in between, it's still up and to the right. So barring the actual civilization ending thing, I don't see anything that's going to end that up and to the right over a long enough time period. And that's not to say that like you said, we could have a decade, we could have 15 years where things are flattered down and we just have to be prepared that that conceivably could happen. So it's not fear mongering, it's just, it's just reality and understanding. Over a long enough timeline, I think we're all going to be pretty darn happy with, with investing and our strategy. And like we always say, like with a significant savings rate, 30, 40, 50 plus percent, even 20 plus percent, you're going to do okay. And I think that's the thing that we all need to come back to and just kind of take a deep breath.

[Rachel Camp]

Yeah. I like to remind people at this time what investing actually is. It's investing in companies. As we hold stocks, we are all partial owners, very small owners of all these different companies within the US and abroad. For bonds, we might be investing in the US government. So when I think about the largest companies in the world, when I think about large governments, if those things aren't doing well, we're going to have a lot bigger problems. But that's what investing is, right? We are owners within companies. We are maybe putting our safe money in government. So to me, I don't know what the alternative would be outside of something like that, that's not safe or if that's not something that we think is going to do well, well, what's the alternative? And I don't have a good answer for that.

[Brad]

Yep, I totally agree. All right, Rachel, I think this next one can probably be a fairly quick answer, but I suspect this is something that, that will impact some people. So James, written and said, let's say one retires early, manages one's income to maximize HCA, our subsidies in the healthcare.gov and whatnot, and also some of these Roth conversions. And then one inherits a sizable amount of Money, let's say 401k or traditional IRA from a surviving parent. That money must be taken over no more than 10 years and has the potential to as taxable income screw up one's five planning. What then what strategies are apt? Do you take it all during one year or instead of over 10, do you spread it out? And, and I think my editorial on this is we are optimizers. And I think that's, that's true or false. Right, right, right. And that, that jumps out in this question. And I know James, I love the question, let's be clear. But it's like, okay, I have all these cool strategies and like a lot of us are planning on these Roth conversions and the 0% capital gains and we have our Phi number and Everything's golden and then boom, boom, boom. Like James is saying, like, I just got, who knows, a million dollars from this inherited money and now it screwed up all my cool FI stuff. But you know, the subtext is, oh, but I just got a million bucks. Right. So it's a very good problem to have, clearly. But nevertheless, James may have planned for this for 15 years on his FI journey and, and now he has some other considerations. So someone who receives a large inheritance, someone in the FI community who received a large inheritance, what are the real high level things that you tell them as far as, as this goes?

[Rachel Camp]

Yeah. First off, this is a great way to screw up the tax strategy. Right. More money, not going to say, just like the pension, we're not going to turn that away. And just because we have to pay taxes on it doesn't mean it's, it's a problem. Right, Right. This is just additional income. I think we can get tripped up in our perfect tax strategy and forget that taxes is not the final picture here. The final picture is what's that income coming in? And if I have to pay more taxes because I'm getting more income, good problem to have under the context of, of course, this is not a fun way to get more income with inherited accounts.

[Brad]

Of course.

[Rachel Camp]

But what I, what I do with inherited accounts, and we did a super deep dive in this on a previous mailbag because of all the changes with inherited accounts. So that's what I would recommend everybody go back to if you want to really understand the nuance of who this affects, who it doesn't affect. But for inherited retirement accounts, for most non spouse beneficiaries, yeah. The new rule is you have to take it out within 10 years. So just like you would do any retirement income strategy, I would just look at your next 10 years and see if there's any strategic withdrawals you can make within the next 10 years. Right. So if you're retiring, but you've got a good five to seven years before you, you're going to turn on Social Security, maybe you advance the withdrawals and take out more in the next five to seven years. On the flip side, let's say you are starting the Affordable Care act, you're jumping on Marketplace for health insurance, you need subsidies, maybe you're careful until you hit Medicare age. And then, you know, if you're working right now and you inherited an account but you're retiring in five years, maybe you delay withdrawals to five years. There's no perfect way to position this without knowing your very Specific situation. But the way I do it with every client, the way I would do it for myself in this situation, is I would look at my next 10 years, see if there's any lumpy income coming in and maybe avoid that year for withdrawals or do minimal withdrawals that year and see if there's any years where income is really dropping, like retirement. If nothing special or unique is happening in the next 10 years, then, yeah, maybe we just take a portion of the account every year as equally as we can. The risk, of course, is that we do nothing for nine years and then we have that 10th year. And if it's a massive account, you're going to have a big tax bomb. But that like any retirement income strategy, you now just have to add this as a layer to your income and see where it fits.

[Brad]

Yeah. And of course, you need to look at how much this inheritance actually was and such. But, yeah, like taking it in one year because it's going to hit you.

[Rachel Camp]

Up if it's really low, it's usually not a good idea.

[Brad]

Yeah, that's not your greatest strategy. So, yeah, I cannot personally envision a scenario where I would ever want to take it in one year. Just Google marginal tax brackets and you're going to see real quick. That's probably not ideal, but yeah. Okay, Rachel, I like this. Thank you for the answer on that. I think that was very helpful. So. All right, let's move on. We've got a couple more. We'll do. Betsy's question. I have a question about the recent episode on Social Security. My wife and I have both worked in high tech where a significant portion of our compensation is from RSUs, which is restricted stock units. I looked at my Social Security administration statement, and it appears to only reflect my salary. Is RSU compensation not counted for Social Security benefit calculations? Now, Rachel, there is probably a decent percentage of the community that might have some RSU's. So this is not uber niche here. But I guess the maybe larger question is, are there other things that might not count in Social Security benefits that people might be missing? Is this really maybe much ado about nothing? Because the, like, the income limits to get your full Social Security are pretty low and we really shouldn't stress too much about. I suspect your advice might be to look annually at your Social Security statement and to log in and just kind of make sure nothing egregious is happening. But, yeah, I just threw a lot at you, but these are the things that I consider when it comes to Social Security. So Betsy's question. But then, yeah, maybe the step back at the larger question.

[Rachel Camp]

Yeah, with Social Security we just, we don't have much control here. Right. We have a Social Security tax. It's taxed on our covered earnings. Restricted stock units are included in that. And covered earnings, the way you can see if it's being taxed is it's a, it's called FICA tax. Right. So you'll see that percentage coming out for Social Security, you'll see that percentage coming out for Medicare. Where you might get tripped up with RSUs is when it comes to equity compensation, which I think is like the new pension, a lot of people are now getting. Equity compensation with RSU is it's actually one of the simplest forms of equity comp, but it still can be a bit confusing. So you have a grant date. That's when your employer says, hey, I'm going to give you these shares, but not yet, right? They're going to invest in one year or two years. So you have the grant date where nothing happens from a tax perspective. So if you're looking at it and you're thinking, oh well, I got this many shares on the grant date, why didn't I get taxed yet? Is because there is no tax impact on the grant date. The tax impact happens on the vest date and that's when you actually receive the shares and then you can decide what to do with them from there. But the point where they vest, that's when they are taxed and that's where if you are under the Social Security wage cap, they are going to be taxed as Social Security. The other thing that might be happening here is just that you have hit the Social Security wage cap in 2025, it's $176,100. So if you make more than 176,000, not all of it is going to be taxed for Social Security. They do cap it at that point. The only time really where we can be strategic with Social Security is if you're self employed and you're paying yourself a salary and you're thinking, I'd really like to max out my Social Security. That can be part of, of how you think about the reasonable salary, but for everybody, for all employees, for everyone who doesn't have much control over, over that or compensation, it's very simple. Whatever you make under $176,100 or up to $176,100 is taxed as Social Security. Everybody here can log on to SSA.gov, grab their Social Security Statement. If you'd like to take a look at what your Social Security is projected to be, see what they have for your. Your earnings in previous years, make sure it looks good. And that's about it with Social Security. It's simple.

[Brad]

Yeah, nice, nice, straightforward answer for sure. And yeah, I definitely advise people to create that account and just take a look at it every year. Just. I know I have that as something in todoist that I do once a year and just log in and kind of eyeball it. Like you said, one of the coolest things is you can see your projected benefits, which is really nice.

[Rachel Camp]

But be careful with that. They usually project it higher because they're. They're projecting whatever you're earning as you're going to continue earning that. So that's the only thing that gets some people in trouble. If you are retiring next year, but Your earnings maybe 10 years ago weren't that high, your benefit might be inflated a bit. So you do want to make that correction.

[Brad]

That's a brilliant point. Brilliant, brilliant point. And yeah, of course, just like always, we cannot prognosticate what's going to happen with Social Security. But I think most. I've never heard an expert, an actual expert on Social Security say that we're going to get less than 60%. You always hear these horror stories of, oh, Social Security is going bankrupt, blah, blah, blah, blah, blah. And it's like, okay, let's all take a deep breath. It's really not going bankrupt. It's just the definition of bankrupt is a little different than what we think, which is bankrupt equals paying $0 of benefits. I've never heard an expert say we're going to get less than 60 or 70% of what we're anticipating as current projected benefits. So, of course, I'm not saying that definitively. Don't come back to me in 20 years and say, brad, you got this wrong. I'm not saying that. I'm saying this is what the experts are saying right now. So even if you wanted to take. Okay, here are my projected Social Security, because, Rachel, a lot of people in the fight community get into, oh, I'm expecting zero from Social Security. That's ridiculous. That's as ridiculous of a thing as you can possibly think, frankly.

[Rachel Camp]

There would be riots, right?

[Brad]

Imagine the scenario, right? Like, it's very hard to imagine that scenario. So that's another one of those, like, okay, let's actually game this out. So take a 20, 30, 40% discount on it, okay? At least I can make the case for somebody Plausibly doing that and then just move on with your life and don't stress about this again. So. All right, Rachel, we got one last question. Josh said. I listened to the most recent mailbag episode with Rachel and the last question made me think of a follow up regarding rolling the pre tax amount of an Iraq into a 401k. If one has any self employment income on a 1099 and can therefore set up a solo 401k, could this same strategy be used? Assuming the plan chosen was one that allowed transfers in. My wife is in this situation where she doesn't have a 401k at work and she also can't do a backdoor Roth conversion because she has money in a pre tax ira. This would help solve that. But just wondering if I'm missing something. So Josh's question. I'm going to let you run with this because yeah, I think there's certainly some nuance here. I'd love to chime in after you give your real answer.

[Rachel Camp]

Yeah, this might seem like a really specific question. The reason I picked it out though is because I noticed a lot of people in the FI community do some type of consulting work on the side or they're transitioning into retirement so they do consulting. So a lot of them actually end up with some self employment income. And for anybody that does and they're wanting to clean up their ira, their pre tax IRA because they're wanting to utilize the backdoor Roth strategy, this is something you have available to you. If you have self employed income, you could go ahead and open up that solo 401k, make sure that it accepts rollovers from IRAs. That's, that's a very key point here, although a lot of the large providers do. But make sure that's set up into the plan and then you could take that IRA, roll it into the solo 401k and and then at that point do the backdoor Roth strategy. It's important that your wife does have self employment income. You don't just open it up under an LLC and she no longer has that self employment income in order to open this up. That is a key component to this. But yeah, it's to answer it very quickly. It is something you can do to clean up the IRA if you want to.

[Brad]

Yeah, this is very interesting and I think for a lot of us we look at that back to a Roth IRA and let's be clear, this is very different from the Roth IRA conversions that we were talking about before and say there's just Like a lot of nuance and things that are just like, oh, if I have as, as the question asked, like if I have traditional IRAs, like, can I really do this? Is the juice worth the squeeze ultimately? And Josh, in this scenario is trying to come up with a way like is there a workaround where instead of putting the money into an ira, which would further complicate the backdoor Roth conversion, could I just get this into this solo 401k in the, in this scenario and then just clean up any of this possible concern? So yeah, I mean it's, it's a, like you said, Rachel, it's a pretty cool strategy. But most importantly, make sure she can actually open up this solo 401k. There's no, there's nothing untoward going on here. This is like a legit thing you can open and then. Yeah, that's a pretty cool way to get around that. I like it.

[Rachel Camp]

Yeah. And if you, like I mentioned earlier, if you have consulting income on the side, or if you have a transition period into retirement where you do full time consulting and you've got some self employment income, Solo 401k is a great way to get more money into 401k accounts. You also get to, as a self employed individual, you get to contribute as the employee and the employer. If you have a W2 job and self employment income, that does not increase your overall 401k limit. So be careful of that. But it does unlock the employer side if you have enough income and can justify that.

[Brad]

Right. And that can be tens of thousands of dollars extra. The, the limit we all know about. I think it's what, 23,500 maybe is the, is the employee side of a 401k. But yeah, there's this employer side which you think of as like your match in this scenario. But when you are the employer, you also have the ability to do that and you don't have to set your limit at a, of a match at like 3%. I think at last check it was somewhere around 25% or something. You can do up to a very significant percentage. So of course do your own research, consult your tax advisor, et cetera, et cetera. But yeah, that's something that could unlock additional tens of many tens of thousands of extra dollars each year you can put into those 401s.

[Rachel Camp]

Yeah, just like the mega backdoor Roth unlocks that extra limit, which is your plan has to have it set up through your employer to allow for the mega backdoor Roth. This is the same thing that we're talking about where you're unlocking the employer side because the Overall limit is 70,000 7 0. So there's a lot untouched if you're an employee.

[Brad]

Right. So it's literally $46,500 actually. So it's, it is massive. Massive, massive, massive. So, all right, Rachel, we bombed through our six questions, plus a couple other things that I threw at you. So as always, this is a lot of fun. Thank you for bringing your expertise and yeah, I really enjoy this. So, okay, as always, I asked you, where can people find you?

[Rachel Camp]

Yeah. So Camp wealth on Most social media, rachelcampwealth.com is my website. I'm sure it'll be in the description, but I spell Rachel a little differently. So make sure to click that link and not just type it in.

[Brad]

Yep. So Rachel, Camp Wealth. And yeah, Rachel, as always, this has been a lot of fun. And until next time, we'll do another mailbag number 10. You're quickly, quickly becoming, yeah, maybe our, our most frequent guest here on Choose a Vi. Love it.

[Rachel Camp]

Love being here. Thank you, Brad, everyone.

[Brad]

Thanks for listening. Thanks for being part of the community and please send in questions. So we have a new functionality at the Choose a Vi website. If you go to Choose a. Com Feedback, we now have our amazing friends and experts in a whole range of categories who are answering these questions and we're going to, they're going to respond most of the time in voicemail. We're going to turn it into an amazing piece of content and those will live on the choose of my website and a lot of those will be played here on the podcast as well. So this is something where, hey, if you have a question about safe withdrawal rates, Carson Big Earn from early retirement now is going to answer these questions. If you have a question about Slow Fi and coastfi, just from the pioneers going to answer these questions, you have Chad Carson on real estate. You have all these incredible, incredible experts. Rachel, I'm going to ask you if you, if you wouldn't mind, but I love doing these mailbags, so maybe we can keep this as our own little fiefdom here. But yeah, there's a lot of really cool stuff going on on the choose of I website. Jonathan, who is my longtime co host here on the podcast, is really building something incredible for the FI community. So check it out. Choose Feedback and if you have real questions, you're going to get answers from these incredible people. So thanks for being part of the community and thanks for listening to the podcast.

[Jonathan]

Thank you for listening to today's show and for being part of the choose if I community. If you haven't already, the best ways to get involved are first subscribe to the podcast. So you're listening to this on a podcast player. Just hit subscribe and then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand and I send it out Tuesday morning. So just head over to choosefi.com subscribe and it's really, really easy to get on the newsletter list right there and I would greatly appreciate it. It's the best way to get in touch with me. You can actually just hit reply to any of those emails and it comes directly to my inbox.

[Brad]

So that's the way that I keep.

[Jonathan]

A pulse of the community and how we keep this the ultimate crowdsourced personal finance show. And finally, if you're looking to join an in real life community, we have choose a vi local groups in 300 plus cities all around the world. So head to choose a vi.com local and you'll find a list of all of Those cities in 20 plus countries.

[Brad]

All across the world.

[Jonathan]

And if you're just getting started with FI or you have a family member or friend who you think would be interested, two easy ways choose a VI episode 100 is kind of our welcome to the FI community and even though.

[Brad]

It'S a couple years old at this.

[Jonathan]

Point, it still stands up and it's a really great just starting point to get an understanding of what is financial independence. What are we doing here? Why are we looking to live a more intentional life where we save money and use it as a springboard to live a better life? And then choose if I created a Financial Independence 101 course that's entirely free. Just head to choose a vi.comfi101 and again, thanks for listening.

[Brad]

It.