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)

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.

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.”

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.”

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.”

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.”

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.”

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.”

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.”

Additional Resources

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

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