How to Money: Ask HTM - Special Roth Accounts, Investing During A Sabbatical, & Reverse Mortgages #985
Release Date: May 19, 2025
In episode #985 of How to Money, co-hosts Joel and Matt dive deep into listener-submitted financial queries, offering practical advice and insights on specialized Roth accounts for children, investment strategies during sabbaticals, and the complexities of reverse mortgages. This detailed summary captures the essence of their discussions, complete with notable quotes and timestamps to guide you through the episode's key points.
1. Joel's Dishwasher Deal: A Case Study in Smart Purchasing
Timestamp: [02:58] – [08:10]
Joel kicks off the episode with a personal anecdote about purchasing four Bosch dishwashers from Costco at a remarkable deal. Despite his wife's reservations, Joel explains the logic behind bulk buying:
Joel: "The more dishwashers you bought, the more you saved."
He highlights how leveraging multiple discounts and free installations allowed him to secure each dishwasher at approximately $360, significantly below the regular price of $700-$900. Although he initially intended to flip the dishwashers for profit, only two were sold, with plans to sell the remaining units through his father's assistance.
Key Takeaways:
- Bulk Buying Benefits: Purchasing multiple units can lead to substantial savings per item.
- Smart Flipping: While not always guaranteeing profit, flipping can be a viable strategy for recouping costs.
- Community Sharing: Engaging friends and family can help in offloading excess purchases effectively.
2. Listener Question: Opening a Roth IRA for a Child
Timestamp: [10:15] – [21:40]
Mary from South Carolina poses a thoughtful question about initiating a Roth IRA for her 12-year-old daughter who earns money through babysitting and pet sitting. She seeks guidance on documentation and whether Fidelity is an appropriate brokerage for a youth Roth IRA.
Matt's Insight:
Matt: "Mary, we've got to talk about the fees and yeah, I feel like I just made a reverse mortgage sound pretty great."
On documentation, Matt emphasizes the importance of tracking earned income to ensure compliance with IRS regulations:
Joel: "You want to make sure that you are not over contributing to that account."
He recommends maintaining a simple spreadsheet to record earnings and contributions, ensuring that only earned income is funneled into the Roth IRA.
Fidelity Recommendation: Both hosts advocate for Fidelity as a solid choice for youth Roth IRAs due to its no fees, diversified funds, and long-term reliability.
Joel: "I just can't think of many better options than being with Fidelity over the long haul."
Key Takeaways:
- Documentation: Maintain accurate records of earned income to comply with Roth IRA regulations.
- Brokerage Choice: Fidelity is recommended for its robust features and user-friendly platform.
- Early Investment Benefits: Starting young allows for significant compound growth over time.
3. Listener Concern: Reverse Mortgages and High Fees
Timestamp: [25:24] – [34:49]
Hayden from Marlboro, New York, seeks clarity on reverse mortgages after hearing about them from his parents’ financial advisor. Joel and Matt address the often-overlooked high fees associated with reverse mortgages, comparing them to taking out a traditional mortgage but in reverse.
Joel Explains:
Joel: "The fees are high as they are with the traditional mortgage. We're talking origination fees, closing costs, appraisals, title search, all the above."
Matt adds severity by sharing alarming statistics:
Matt: "Close to one in five reverse mortgages, they actually end in foreclosure, often because the senior citizen there was unable to pay property taxes."
Alternatives Suggested:
- Selling or Downsizing: Joel proposes selling the home or downsizing as more viable options.
- Cash-Out Refinancing: Another alternative to access home equity without the exorbitant fees.
- Immediate Income Annuities: Matt mentions single premium annuities as a cheaper alternative for generating a steady income stream.
Key Takeaways:
- High Fees: Reverse mortgages come with multiple fees that can significantly reduce the benefits.
- Risk of Foreclosure: A notable percentage of reverse mortgages result in foreclosure due to unmet financial obligations.
- Consider Alternatives: Explore other financial products and strategies before committing to a reverse mortgage.
- Informed Decision-Making: Utilize resources from the Consumer Financial Protection Bureau and consult with a HUD counselor.
4. Listener Question: Investing During a Sabbatical
Timestamp: [35:47] – [44:43]
Yesel from New York City shares her situation of preparing for a sabbatical and seeks advice on whether to continue contributing to her investment accounts during this period of no income. She outlines her current investment strategy, including maxed-out IRAs and a fully funded emergency fund.
Joel's Advice:
Joel: "Don't let the current state of things freak you out to not do that."
He recommends continuing with her investment strategy if her finances are robust, emphasizing the importance of trusting the long-term investment process despite market fluctuations.
Matt's Strategy Suggestion:
Matt: "Consider doing strategic Roth conversions instead."
Matt introduces the concept of strategic Roth conversions as a tax-efficient method during low-income periods, allowing Yesel to pay taxes at a lower rate and benefit from tax-free growth in the future.
Key Takeaways:
- Maintain Investments: Continue regular contributions if financial stability allows, leveraging dollar-cost averaging.
- Strategic Roth Conversions: Utilize periods of low income to convert traditional IRA funds to Roth IRAs, optimizing tax benefits.
- Emotional Discipline: Stay committed to investment plans despite market volatility to capitalize on long-term growth.
5. Listener Question: Spousal Roth IRA Contributions
Timestamp: [48:30] – [51:08]
Matthew inquires about contributing to his wife’s Roth IRA despite her not having earned income, as she is a stay-at-home parent. He wonders if his income qualifies as hers for Roth contributions.
Matt's Explanation:
Matt: "Your wife is eligible to contribute to a Roth IRA in the form of what's called a spousal Roth."
Joel confirms that through the spousal Roth IRA, married couples filing jointly can contribute to a non-earning spouse’s Roth IRA based on the total adjusted gross income (AGI) of the household.
Important Points:
- Spousal Roth IRA: Allows a non-earning spouse to contribute to a Roth IRA using the working spouse’s income.
- Contribution Limits: Ensure total contributions do not exceed the couple's AGI thresholds.
- Joint Filing Necessity: The ability to contribute is contingent upon filing taxes jointly as a married couple.
Key Takeaways:
- Eligibility: Even without earned income, a non-working spouse can benefit from a Roth IRA.
- Maximizing Contributions: Couples can effectively double their retirement savings by utilizing spousal Roth IRAs.
- Tax Benefits: Contributions grow tax-free, providing substantial long-term financial advantages.
6. Listener Concern: Emergency Funds in Credit Unions vs Online Banks
Timestamp: [51:08] – [56:21]
An anonymous listener shares a financial misstep of keeping an emergency fund in a local credit union savings account earning less than 1%. They express hesitancy about transitioning to high-yield online banks despite the higher interest rates.
Joel's Perspective:
Joel: "High yield savings account. That though I would say is best done at an online bank."
He underscores the importance of maximizing interest earnings on savings to combat inflation, recommending online banks for their superior rates compared to traditional credit unions.
Matt's Recommendations:
Matt: "Have some cash at home... boost your savings rate by going with a bank that pays those super high rates."
He suggests maintaining a small amount of readily accessible cash at home while transferring the bulk of the emergency fund to high-yield online savings accounts. This approach balances accessibility with financial growth.
Key Takeaways:
- Maximize Interest Earnings: Transition emergency funds to high-yield online banks to earn competitive interest rates.
- Hybrid Approach: Maintain a small amount of cash at home for immediate access during unforeseen emergencies.
- Trust in Technology: Online banks offer secure, efficient, and higher-yielding options without the need for physical branches.
Conclusion
In this episode of How to Money, Joel and Matt provide invaluable advice on optimizing financial strategies tailored to individual circumstances. From leveraging bulk purchasing deals and maximizing retirement accounts for dependents to assessing the true costs of reverse mortgages and enhancing emergency savings, their insights equip listeners with the knowledge to make informed financial decisions.
Notable Quotes:
- Joel: "You do business with a better bank that pays you what you deserve on your savings."
- Matt: "Future Yesel is going to be very thankful."
For more detailed discussions and resources, listeners are encouraged to visit howtomoney.com.