How To Maximize Your 401(k) Strategy!

Summary

Podcast Summary: Money Guy Show – “How To Maximize Your 401(k) Strategy!”

Release Date: January 15, 2025

In this episode of the Money Guy Show, hosts Brian Preston and Bo Hanson delve into strategies for maximizing your 401(k) plan. They address listener questions, provide expert insights on retirement savings, and explore related financial topics to help listeners make informed decisions about their wealth-building journey.

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1. Introduction to Maximizing Your 401(k)

[00:07] Brian Preston:
“401Ks how to maximize your strategy.”

Bo Hanson sets an enthusiastic tone, emphasizing the importance of small financial decisions that can lead to significant long-term impacts. The hosts express their commitment to answering listener questions and providing actionable financial advice every Tuesday at 10:00 AM Central Time.

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2. Deciding Between Roth and Pre-Tax 401(k) Contributions

Listener Question from LP

[00:49] Megan:
“I'm 31. My 401k lets me pick a percentage for Roth and a percentage for pre-tax contributions. I currently have $7,000 in a Roth IRA and I plan to max out my 401k and my Roth IRA next year. My 401k matches 8% pre-tax. How do I pick my Roth percentage?”

Understanding Roth vs. Pre-Tax Contributions

[01:13] Bo Hanson:
Bo clarifies a common misconception regarding employer matches:

“Even if you choose to do Roth contributions, you would still get the match. It’s just that the match goes in your pre-tax bucket.”

He explains that both Roth and pre-tax contributions have their benefits:

• Pre-Tax Contributions:

  • Tax Benefit Today: Reduces your current taxable income.
  • Tax-Deferred Growth: Investments grow without being taxed until withdrawal.
  • Taxable Withdrawals: Taxes are paid upon retirement withdrawals.

• Roth Contributions:

  • No Immediate Tax Benefit: Contributions are made with after-tax dollars.
  • Tax-Free Growth: Investments grow and can be withdrawn tax-free in retirement, provided certain conditions are met.

[02:45] Brian Preston:
Brian congratulates LP for aiming to max out both the Roth IRA and 401(k):

“Every dollar that comes into your command and control has the opportunity for a 31-year-old to multiply 20.39 times by the time you retire.”

He emphasizes the power of compounding growth combined with tax-free growth, particularly advantageous for younger investors.

Factors Influencing the Decision

[03:58] Brian Preston:
Brian suggests that younger individuals, especially those in their 20s and early 30s, might benefit more from Roth contributions due to their longer investment horizon.

[04:00] Bo Hanson:
Bo discusses the implications of higher incomes:

“If you're high income and your tax rate is beyond 30%, you might lean towards pre-tax contributions... hoping that your tax rates in retirement will be lower.”

He identifies a "gray zone" for those with marginal tax rates between 25% to 30%, indicating a need for personalized financial planning.

[06:24] Bo Hanson:
Bo underscores the importance of personal finance being personal:

“It depends on your unique account structure, your unique goals, when you think you’re going to access these dollars, your unique risk tolerance capacity...”

He commends LP for being in a strong financial position, moving into advanced stages of wealth building:

“You're moving into step seven... and to be able to do that in your early 30s is amazing.”

[07:45] Brian Preston:
Brian notes that most individuals tend to choose either 100% Roth or 100% pre-tax contributions, and that a mixed approach like LP's is uncommon unless there are unique financial circumstances.

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3. Incorporating Mortgage Principal Payments into Savings Targets

Listener Question from Foopa

[10:54] Megan:
“Thoughts on if you should include the principal amount of a mortgage payment in the 25% savings target since it's increasing the equity in your house and would it also increase your net worth?”

Analyzing Mortgage Payments and Net Worth

[11:13] Bo Hanson:
Bo explains the role of mortgage principal payments:

“Paying down debt is a good thing, especially when it is debt on an asset that retains value...”

However, he advises against including mortgage principal payments in the standard 25% savings target, emphasizing that:

“When you get to a 25% savings rate in step seven, it is above and beyond what you are paying on your mortgage.”

He affirms that once the savings target is met, additional funds can be strategically allocated, such as making extra mortgage payments to reduce debt faster or increase home equity.

[13:05] Brian Preston:
Brian elaborates on the distinction between building wealth and maintaining wealth:

“The typical American does not understand the difference between use assets and investment assets...”

He cautions against prematurely paying off low-interest debt like mortgages while neglecting investment opportunities that offer higher returns.

Brian highlights the Wealth Multiplier, illustrating how early investments can exponentially grow over time:

“Every $1 you have is worth... when you’re 20 years old, it's 88 times over. When you’re 30, it's 23. When you’re 40, it's 7.”

He advocates for prioritizing investment growth before aggressively paying down low-interest debts to stay on the path to financial independence.

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4. Advanced Strategies: Charitable Giving and Tax Planning

Listener Question from Emily and John Page

[18:19] Megan:
“Thoughts on making the most of Fidelity Charitable for donor-advised funds?”

Maximizing Charitable Donations with Tax Efficiency

[18:37] Brian Preston:
Brian discusses the intersection of charitable giving and tax planning:

“When you use a charitable gift fund, you can fulfill your charitable goals without paying income tax on appreciated assets.”

He details strategies such as:

• Donor-Advised Funds: Allowing donors to make charitable contributions, receive immediate tax benefits, and then recommend grants over time.
• Appreciated Securities: Donating appreciated stocks or ETFs to avoid capital gains taxes and receive a charitable deduction for the fair market value.

[19:55] Bo Hanson:
Bo highlights the convenience of using platforms like Fidelity Charitable, especially when aligning them with existing brokerage accounts:

“If you use the same custodian, the transfer of securities becomes super, super easy.”

He advises donors to:

• Assess Giving Frequency: Whether they give monthly, annually, etc.
• Choose the Right Platform: Based on fees, transaction requirements, and personal giving goals.

[21:22] Brian Preston:
Brian offers an advanced tip for tax-efficient charitable giving:

“Use a charitable gift fund to stack your charitable contributions... you can set up automatic distributions to spread out your giving over time.”

This approach helps in maximizing tax deductions while ensuring continuous support for chosen charities.

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5. Tax Allocation Strategies: ETFs vs. Mutual Funds

Listener Question from JB

[23:32] Megan:
“I've heard you talk about tax allocation. I recently switched all of my index funds in my taxable brokerage to ETFs. Is this truly more tax efficient or am I just counting pennies at this point? How do you know when something like that is worth it?”

Evaluating Tax Efficiency of ETFs vs. Mutual Funds

[23:49] Bo Hanson:
Bo explains the concept of tax location and its impact on investment strategy:

“High growth assets inside of your Roth, ordinary income type assets inside of your pre-tax accounts, and capital appreciation assets inside of your after-tax account.”

He differentiates between tax efficiency and tax location, emphasizing that while ETFs offer some tax advantages, well-managed index mutual funds can be equally tax-efficient.

[25:38] Brian Preston:
Brian elaborates on the tax efficiency of index funds versus ETFs:

“Both mutual funds and ETFs are pretty tax efficient... they don't have a lot of turnover.”

He notes that ETFs offer timing benefits, particularly regarding capital gain distributions, which can be advantageous depending on when investments are made within the tax year.

Brian advises balancing the focus between tax efficiency and overall investment strategy:

“The savings rate is so much more important than even the investment... Once your assets start reaching multiple six figures, you’re going to really want to start paying attention to where these assets are located.”

He cautions against overly focusing on minor tax efficiencies at the expense of broader wealth-building strategies.

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6. Key Takeaways and Final Insights

• Personalized Financial Planning: Decisions about Roth vs. pre-tax contributions, mortgage payments, and tax allocation should be tailored to individual financial situations, goals, and tax brackets.

• Maximizing Growth Through Compounding: Younger investors benefit significantly from tax-free growth in Roth accounts, leveraging the power of compounding over decades.

• Balancing Debt and Investment: While reducing debt is important, prioritizing high-return investments can offer greater long-term financial benefits, especially for low-interest debts like mortgages.

• Strategic Charitable Giving: Utilizing donor-advised funds and donor-specific strategies can enhance tax efficiency while supporting philanthropic goals.

• Tax Location Over Pure Efficiency: Properly allocating assets based on their tax treatment and growth potential is more impactful than merely choosing tax-efficient investment vehicles.

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7. Conclusion

Brian Preston and Bo Hanson wrap up the episode by reaffirming the importance of strategic financial decisions in maximizing retirement savings and building long-term wealth. They encourage listeners to utilize available resources, like the wealth multiplier tool on moneyguy.com/resources, to better understand the impact of their financial choices.

“Make sure the actions you're doing are not getting busy doing nothing. Just because you're creating activity doesn't necessarily mean it's fruitful.”
— Brian Preston [28:51]

This episode provides a comprehensive guide to optimizing your 401(k) strategy, emphasizing the need for personalized approaches and informed decision-making to achieve financial independence and a fulfilling life.

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Notable Quotes:

• Bo Hanson [01:13]:
  “Even if you choose to do Roth contributions, you would still get the match. It’s just that the match goes in your pre-tax bucket.”

• Brian Preston [02:45]:
  “Every dollar that comes into your command and control has the opportunity for a 31-year-old to multiply 20.39 times by the time you retire.”

• Bo Hanson [06:24]:
  “It depends on your unique account structure, your unique goals, when you think you’re going to access these dollars, your unique risk tolerance capacity...”

• Brian Preston [13:05]:
  “The typical American does not understand the difference between use assets and investment assets.”

• Brian Preston [21:22]:
  “Use a charitable gift fund to stack your charitable contributions... you can set up automatic distributions to spread out your giving over time.”

• Brian Preston [28:51]:
  “Make sure the actions you're doing are not getting busy doing nothing. Just because you're creating activity doesn't necessarily mean it's fruitful.”

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This comprehensive summary encapsulates the key discussions and expert advice shared in the Money Guy Show's episode on maximizing 401(k) strategies, offering valuable insights for listeners aiming to enhance their retirement savings and overall financial health.

Transcript

[Brian Preston]

401Ks how to maximize your strategy.

[Bo Hanson]

Brian, I am so excited about this because we get to tell people how they can make small decisions that can have huge impacts. We get to tell people, hey, I've got a question and I want to know the answer to this question. And we love that we get to do that for you guys. Every Tuesday at 10:00am Central Time we get to load you guys up and today no different. So right now we have our team out in the wings collecting your questions because we believe there's a better way for you to do money. We also believe that you should subscribe right now to the channel if you have not yet subscribed. So with that senior content developer Megan, I'm going to throw it over to you.

[Megan]

All right, we are starting off with a 401k question from LP says I'm 31. My 401k lets me pick a percentage for Roth and a percentage for pre tax contributions. I currently have 7,000 in a Roth IRA and I plan to max out my 401k and my Roth IRA next year. My 401k matches 8% pre tax. How do I pick my Roth percentage?

[Bo Hanson]

I love this. So a lot of people are faced with this question, hey, my 401k, when I do open enrollment or when I go out to the website it says hey, I can either put money into the Roth side or I can put money into the pre tax side. Now I do want to clear something up because we've got some questions around this. He mentioned in here or he or she mentioned in here that I get an 8% match pre tax or I get a match on pre tax match on 8% of my contributions. I want to be clear that does not mean that you have to make pre tax contributions in order for you to receive the match. Even if you choose to do Roth contributions you would still get the match. It's just that match goes in your pre tax bucket. Sometimes we just assume these that people know these things and they don't. So we've gotten questions on that. You can contribute to either one of those buckets and you can still get your employer match. And we love each of those buckets because obviously pre tax you put money in today, you get a current year tax benefit, it grows tax deferred and then when you go to pull the money out, you pay income taxes on it in retirement versus Roth, you don't get a current year tax deduction, you put the money in, it grows tax deferred. And assuming you meet certain qualifications when you pull that money out in retirement, it is completely tax free. And so the question LP has is well, how do I decide which one do I know? And for a 31 year old who sounds like he's doing, this is a pretty big decision because this decision can have some pretty long term implications, right?

[Brian Preston]

By the way LP, congratulations. Just the thought that a 31 year old can max out not only their Roth IRA but also their 401k work massive. Because every dollar, every dollar that comes into your command and control has the opportunity for a 31 year old of multiplying 20.39 times by the time you retire. So if you, by the way, if you want to know your own wealth multiplier, I'd encourage you to go to moneyguy.com resources. You too can see exactly what every dollar of your saving, your investing and even keeping you away from the spending side you can do if you use that resource. But here's what lp the first thing and it is based upon the wealth multiplier, that compounding growth opportunity is huge. And if we can have compounding growth married to tax free growth. Wowzer. I mean that's just magical. But there is something that's sticking to me even though he's 31 and young and you really that tends to for the youth that have decades of compounding growth that lends itself to the Roth side of contributions. So it's easy to tell somebody in their 20s, even early 30s do 100% Roth contributions.

[Bo Hanson]

But that's only part of the.

[Brian Preston]

But LP has given us some breadcrumbs here that there might be more to this story in the fact that if you can save and max out not only your Roth IRA but also your.

[Bo Hanson]

Employer, 401K, that's 7,000 plus $23,500.

[Brian Preston]

It makes me think that somebody's got a pretty good income rolling through, meaning they've got a good shovel. And when you do have good income, you have to start paying attention to taxes. And we're very clear on this for people. When you start trying to figure out if taxes have an impact on your saving strategies for the future. I saw somebody on social media post on one of our comments. He said, Brian, taxes don't really matter when you're talking about Roth or pre tax. If you just save the tax savings when you do the, the pre tax. And I'm like yeah, but, but here's what people never pay attention to is that they're that would the reality of the situation is there. It's True, It's a math exercise as long as tax rates don't change. And also assume you have to know that after tax savings even have an a drag on them as well. So here's what I would encourage you to do is you have to kind of really do the math. Don't skip homework. If you're young and your tax rate, meaning you add your marginal rate both federally and statewise, and it's less than 25%, I think that you're 100% Roth because you want that compounding and the tax free growth is very powerful. I do think if you're somebody who is higher income and your tax rate is beyond 30% now maybe you're thinking about pre tax. The why is because you're hoping on the arbitrage situation as soon as you leave the workforce saying late 50s, early 60s, you don't have to take required minimum distributions until your mid-70s. And you're hoping that once your earned income falls off of your tax return, all of a sudden your tax rates that you pay crater because you're now going to be able to take advantage of those much lower tax rates in retirement. You can do Roth conversions at that time. So if you're beyond 30% on the taxes you pay, that lends itself to the pre tax contributions. But I have a feeling that LP is probably in that gray zone, that 25 to 30% bo, what are the things that when you fall into that gray zone, that donut hole of opportunity, how do you answer that question then?

[Bo Hanson]

Yeah, that's where personal finance gets a little bit more personal. It depends on your unique account structure, your unique goals, when you think you're going to access these dollars, your unique risk tolerance capacity and all those different variables. Now I would say when you measure all of that and you look at all of it and you say, you know what odds are I'm going to be high income now and I'm likely going to be high income later, and I'm young and I really want to maximize the Roth, then you might lean towards more of a Roth contribution than a pre tax. Or if you end up saying, you know what, I'm kind of in my highest earning years now and there's a really good chance that I'm going to take a different career, I'm going to switch later on, or maybe my income is going to drop and I don't think I'll always be high income, then you might want to air towards the pre tax. This is where you do need to get a little more Nuance. And instead of just specific or instead of general guidance, you need specific guidance specific to your unique situation. What I love, though, whether you go either way, I love that you're talking about the savings rate and maxing out the 401k and maxing out the Roth IRA. What that tells me is, Brian, can you hold up? Do you have a thing that you can hold up? It tells me that you are moving along at age 31 in the financial order of operations. You are. Once you max out step six, you max out your 401k. You're already through step six, moving into step seven. And to be able to do that at your early, in your early 30s is amazing. The future is bright.

[Brian Preston]

To put an exclamation point on this. Most people, though, just typically you're 100% Roth or 100% traditional pre tax. You don't see a lot of that. I'm going to do 35% here, 65 here. You don't see that unless you do have unique things going on in your financial life. Like maybe you're between that 25 and 30 or you're using this for estate planning or so forth.

[Bo Hanson]

Love it.

[Megan]

Great. Well, lp, thank you so much for your question. Hopefully that gives you a lot to think about. This next one is interesting. I'm curious on your take. This is from.

[Bo Hanson]

There's a comment just came in, said, hey man, I love Brian's Members Only jacket.

[Megan]

I was wondering if you read that.

[Bo Hanson]

Comment that just came. I thought you should know. No, no, that's all I'm just talking about.

[Brian Preston]

I don't mind. No, I like sharing with the family I had yesterday. Now, full disclosure, it might be too bright for the show. We might have to try this later. I have an actual. I was wearing a similar outfit yesterday, but I had a red actual Members Only.

[Bo Hanson]

There's a literal members Only jacket.

[Brian Preston]

The reason I have a Members Only jacket is because when I was a kid, members only was like what the kids who had money had. I had like Players Club, you know, so, you know, it looked like a members only, but it was, it was not a member zone. My parents refused to pay, if you can believe it. Back in the day, I think you could buy Players Club jackets for like less than $19 at like JCPenney's outlet or something like that. So that's, that's what I ended up with. But all my friends who came from, you know, a little more means they had Members only jackets in every color of the rainbow. And I remember as a kid Being so jealous of that. So as soon as I found out as an adult, I could buy a Members Only jacket.

[Bo Hanson]

I'm doing that.

[Brian Preston]

So I wore it yesterday, and I really did get probably four or five compliments on it, but I was at.

[Bo Hanson]

Least three of them.

[Brian Preston]

I got home and my wife goes, didn't you buy that jacket for an 80s night? We went to. And I said, yeah. I was like, but it's kind of cool. So I've been wearing it. And then she's like, yeah, it makes you look like a Gen Xer, you know, so that's on brand.

[Bo Hanson]

You are, in fact, a Gen Xer.

[Brian Preston]

I think her point was, is that we're trying to youth ourselves down a little bit, and here I am putting myself forward. So I. So we were going out on a double date last night, and this is the jacket I put on. She goes, that's much better. So, you know, and we all want to impress that significant other. So it kind of put a. It put a rain cloud over the red Members Only jacket. So it's in the closet at the house right now.

[Megan]

I will say confession. I didn't know what a Members Only jacket was before this morning.

[Brian Preston]

Really?

[Megan]

Yeah.

[Bo Hanson]

And that's why you could have educated the world. You could have done the hard work of showing the world all of our millennial Gen Zs out there what a Members Only jacket is. But, you know, you missed that opportunity.

[Brian Preston]

Well, maybe I still can. I mean, we'll have to find another content day that I'll wear the red, but we have to. I'll have to get with Nate and Cale, make sure that it's not too bright, that it saturates out the cameras.

[Bo Hanson]

It sounds like, you know, your camera lighting up.

[Brian Preston]

Somebody said it in content meeting this morning, so I just mimicked it like a parrot.

[Bo Hanson]

I'm sorry, I guess you were trying to saturation.

[Megan]

All right, y'all ready for the next question?

[Brian Preston]

I guess.

[Megan]

All right, so this is from Foopa. He says, thoughts on if you should increase the principal amount or. Sorry, include the principal amount of a mortgage payment and the 25% savings target. Should this be included, since it's increasing the equity in your house? And would you also increase your net worth?

[Bo Hanson]

It is awesome that when you pay down your home, because it's an amortizing loan, part of your payment goes to interest every month and part of your payment goes to principal. And that principal reducing the debt balance on your home. And as you reduce the debt balance on your home, the equity goes up. So this is a great thing. So paying off debt is a good thing, especially when it is debt on an asset that retains value and does not depreciate through time. So we love the idea of you paying off debt and we love the idea of you making those principal payments. We love the idea of seeing your net worth increase. While all of those things are wonderful, and while all of those things are amazing, we do not believe that you can include your principal portion of your mortgage in your 25% savings rate. Our assumption would be that when you get to a 25% savings rate in step seven of the financial order of operations, it is above and beyond what you are paying on your mortgage. Now, here's the good news. Once you hit 25%, much to Brian's delight, you get to pick and choose what you do with your dollars after that. So if you decide, hey, I have additional capital that I want to deploy in some meaningful way in my financial life, and you desire to take that additional savings you have and apply that to your mortgage to drive that debt balance down quicker and increase that equity faster, then you can absolutely do that. But it is not a replacement for the 25% savings rate. It is in addition to the 25% savings rate because in our view, house is a used asset. It's something that you live in. It's something that you are presently consuming. The dollars that you are building and saving for the future are for your future self, not for your today self.

[Brian Preston]

Bo went all over the place to say, I'm just going to say no, because football, look, don't be like everyone else. I mean, this is something I always tell people. You got to pe out, you got to be different than everybody else. A few years ago, the Fred came out with data on net worth of Americans and the initial headlines were net worth for Americans is up 35%. You're like, Ah, that's great. Everybody is doing so good building up their net worth statements. And then you read into the fine print because that's how nerdy we are. And you find out the only thing that went up on this Federal Reserve analysis was people's ownership of their equity in their homes, meaning that inflation had caused houses to go up, their net worth had gone up because the market value of their real estate. That troubled me because it showed me that the typical American does not understand the difference between, as Beau described, use assets. This is something that provides you shelter, you raise your family. And the only way you turn a use asset into an investment asset is you either take on more Debt that sounds less than ideal when you're trying to reach financial independence or you go sell it. Well, if you try to sell assets right now, if you were trying to move to a bigger home, the only way that works is if you're downsizing and you move to a lower cost of living area. Which that's a lot of assumptions when you're trying to make a decision of how do you build financial independence outside of your back, your brain, your hands. That's with investment assets. So that's why I don't think foopa. I don't want you counting that 25% towards the investable assets because I'm trying to get you to build be like unlike the typical American and actually build financial independence and assets. Your army of dollar bills that are working just as hard for you as those other elements. The other thing is I always worry about is I see this all the time. People become debt crusaders. It feels so good when you pay off your credit card debt. And it's and you should pay off your credit card debt. There's a reason in the financial order of operations that's step three because you're never going to get ahead if you're paying the credit card company 25% while you're hoping to make 8 to 10% on your investments. So go be a debt crusader on credit cards. But a lot of times people get so excited about paying off the high interest debt, they put their eyes on the low interest debt like your mortgages. And I always remind people there's a difference between the make wealth behaviors, the maintain wealth behaviors and then the multiple wealth behaviors. And if you're already doing the maintain wealth behaviors before you've even made your first million dollars two million dol what are you doing? And that's why we're very, very serious about the fact that paying down low interest debt. Because it breaks my heart when I hear people paying off mortgages that are less than 4.5% when they're in their 20s and 30s and they don't even have their first seven figures in their investment accounts yet. I'm like what are you doing? You've got to get to the make wealth phase first before you start de risking into these maintain. And that's why it's a balance. And look, I'm all about paying off the mortgage, paying off the debt, being as debt free as possible. But there's a time and a place and if you know any value of what the wealth multiplier. And with all my stacks, I don't have that. If you go to moneyguy.com resources, we can show you what every $1 you have is worth. And that's why when you're 20 years old, it's 88 times over. Meaning every dollar can become $88. When you're 30, it's 23. When you're 40, it's 7. Do you see how this can go downhill very quickly? That's why we tell you pay off the mortgage when you're plus beyond 45, because you're just not giving up much on the compounding growth. And that keeps you financial squarely on the financial mutant path versus just being this debt crusader that is doing things that might feel good but then your 50 year old self goes, what was I doing paying off that 3.5% mortgage when I wasn't even maxing out my employer for one K or my Roth? I think, I think I might have put that step out of order just because it felt good at the time.

[Megan]

Great advice. All right, food pod, thank you so much for your question.

[Bo Hanson]

You know, I think it's funny you made fun of me for going all over the place and taking a long time to say no and then you took twice as long to say no as I took.

[Brian Preston]

Well, no, but I mean I'm a good teacher. Oh, that's teachers, you're direct so that they remember just kind of like when you touch that hot stove, you want that initial reaction to kind of shock and open you up to being able to now absorb. And then you say the why.

[Bo Hanson]

You are the third degree burn of the education.

[Brian Preston]

But I want to give the why afterwards because I don't like the. As a Gen X kid since I've already made fun of my age once. One of the things my dad used to do and I love my dad and I respect my dad. I was scared of my dad in a good way. But. But it was said in my household all the time because I told you so. And that was a just. That was the why. And as a curious individual, I don't like because I told you so. I want to know the why. So I try to just. I give you the pop, but then I want to give you the why.

[Bo Hanson]

That's very Gen X of you. I don't. I need another one.

[Brian Preston]

I should be wearing a red members only, I think.

[Megan]

All right, next question. We've got from Emily and John.

[Brian Preston]

Emily and John. Are they watching as a couple? That makes me happy.

[Megan]

Sounds like it.

[Brian Preston]

That's cool.

[Megan]

They said, hey, money guy, we just finished Make Sorry. We just finished Millionaire Mission and it Brian recommended Fidelity Charitable for a donor advised fund. Does Brian have any tips and tricks for making the most of Fidelity Charitable? I know we don't talk about charity a whole lot, but I know that's one of your favorite topics.

[Brian Preston]

I don't know if I recommend I use Fidelity Charitable. You know, there's Schwab has them, there's others. I just like when you have the intersection of your charitable desires and then a good tax planning opportunity. Because it really is a win if you've had success and you've started saving and investing for the future and you're even beyond the make wealth phase and you're now in that maintain and you have appreciated holdings. It's not uncommon, even with mutual fund investments, that you're going to have appreciated securities that are close to 100%. And wouldn't it be great if you could fulfill your charitable goals where your charity gets 100% of what you donate to them, but you never pay the income tax on that appreciation, but you get a charitable deduction for the full fair market value. That is a win win. And in the book in Millionaire Mission, I go way beyond the common sense component and the fact that I talk about how I've done this with my charitable strategies that I do annually, where I'm also reinvesting into those same investments that I'm giving away every year, because that over time pushes up the basis. So if I ever needed to have access to these funds for like an investment like real estate or some other big purchase, over time, I'm actually making these assets even more accessible to me as well.

[Bo Hanson]

Yeah, specifically when you ask about Fidelity, one of the benefits of if you use a Fidelity, if you use the charitable giving account at the brokerage at which you hold your assets, it just makes the linking and the donating of the securities really, really convenient. I know a lot of people like to use a service like dafi or if you're like, if you're a Schwab client, you might use the Schwab Donor Advisor fund. If you can use the same custodian and the same giving account, the transfer of securities become super, super easy. So Fidelity specifically is an amazingly easy platform that you log into Fidelity Charitable and you can order all of your holdings by Most appreciated. You can even do it by specific tax lots. You can make the donation. And then one of the other things you can do is if you have a really good charitable platform, rather than having like every week or every month or whatever your giving Cadence is you can set up automatic distributions, automatic grants from your giving account. So it's kind of a set it and forget it. If you're someone who gives on a very consistent basis. So it's one of those things. Before you choose which account to use, figure out how you are, what type of giver you are. Am I a consistent monthly giver? Do I give once a year? And then you choose the best provider. Some of them have lower fees, some of them have higher fees. Some of them have transaction requirements. So you just want to understand what is the ultimate goal I'm trying to accomplish through my charitable giving, and then which platform is going to set me up to do that in the most efficient manner.

[Brian Preston]

I'll give one more financial mutant tip. A lot of people have a hard time now itemizing because the standard deduction for married couples has gotten so large. It's, you know, mid to high 20s, depending upon your age. And, you know, a lot of people just don't itemize anymore. But if you could use a charitable gift fund to stack your charitable contributions, meaning that you give more in every other year to qualify to itemize for that year, but then you use the charitable gift fund to basically spread out and smooth your giving to your favorite charities. That way they're actually. Even though you're now grouping the contribution for tax deduction purposes, you're still giving your contribution or making the distributions from that charitable fund over time. So it doesn't look like. Hey. Because their name was.

[Bo Hanson]

This was Emily and John Page.

[Brian Preston]

Emily and John, if you want to be able to fund this every month, you can do that with a charitable gift fund. Even though you might be grouping those funds to every other year.

[Bo Hanson]

It's great.

[Megan]

Wonderful. Well, thank you, Emily and John, for your question. I love that you're thinking about this advanced strategy.

[Brian Preston]

This is the problem when you flip pages. I went to a new page because I had already used. I write way too big. I don't know.

[Bo Hanson]

You wrote their name at the bottom. There's no margin.

[Brian Preston]

I didn't have any note. This is called a not.

[Bo Hanson]

Do you know about the pinch function? You can pinch and squeeze to shrink it. Did you know that? So, like, if you just do like that now, you give yourself a bunch more room to write.

[Brian Preston]

You can't write there, though. K. No, see, that's not writable space, is it?

[Bo Hanson]

I think it's marking up, isn't it, bro? I mean, y'all can't see this. This is more for us. But yeah, that's how the Remarkable works pretty cool, huh? I'm a bit. Whenever I'm in meetings, I'm a big. You know what? This doesn't matter. I don't know. I don't know why we went here. Hey, next question.

[Megan]

Little remarkable infomercial for you.

[Bo Hanson]

All right.

[Brian Preston]

We're so good at doing those and we have no affiliate links to anything.

[Bo Hanson]

We are the world remarkable either.

[Megan]

We always get asked that in the chat though. Like every couple weeks we'll be like, what are they using?

[Bo Hanson]

What are they using? What's that thing? It's remarkable. Awesome.

[Brian Preston]

If only if somebody was thinking a little bit more about doing things we're.

[Bo Hanson]

Not very good at. Business.

[Megan]

All right, you ready for the next one?

[Bo Hanson]

Yes, ma'am.

[Megan]

All right. This is from jb. They say, I've heard you talk about tax allocation. I recently switched all of my index funds in my taxable brokerage to ETFs. Is this truly more tax efficient or am I just counting pennies at this point? So how do you know when something like that is worth it?

[Bo Hanson]

Well, okay, let me answer your question. Slightly different, not your specific question, but is there a positive impact to thinking through the tax considerations of my investments? Absolutely there is. You mentioned tax location as an example. You know, different types of accounts. You have your pre tax accounts, you have your after tax accounts and you have your tax free accounts. Well, because they're all taxed differently. When you move from like a generalized structure, like a target retirement fund to a more specific, specific asset allocation, you not only want to think about how you're allocating or spreading out your assets, you want to think about what types of accounts you're holding in those. Like you want your high growth assets inside of your Roth. You want your ordinary income type assets inside of your pre tax accounts. And then you want your assets that either have capital appreciation component or qualified dividends or distributions inside of your after tax account so that it's subject to favorable capital gains rate. So you want to think about what types of investments am I holding and which types of accounts. And even you want to think through, okay, am I using mutual funds and am I using an active mutual fund where there is literally a trader on the other side of the fund who's buying and selling and trying to outperform his specific index and generating a bunch of taxable transactions that ultimately get passed through to the end shareholder, or do I want to use something more efficient? Now it's interesting in JB's question, Brian, I said, hey, I sold all of my index mutual funds and I bought ETFs. And while there may be some tax efficiency garnered there, I think of those as almost synonymous because really good passive index funds should be tax efficient in and of themselves already without having to go to an ETF structure.

[Brian Preston]

Yeah, all index funds, whether we're talking about mutual funds or ETFs, are pretty tax efficient for exactly the reason. Both said they don't have a lot of turnover. Because think about indexes don't. They don't drop. They drop like three or four stocks a year and then they add three or four. So it's just not a lot of turnover, meaning trades aren't being placed. That's why they're so efficient. The income, primary income source is just those few trades as well as any dividends that are paid on the portfolio. Now ETFs versus mutual funds is more of a timing tool, meaning that if I was buying in the late third, early fourth quarter, I'm probably buying the etf. Because you won't have a capital gain distribution from the earlier trades in the year that have built up within the mutual fund. So it's more of a timing of when you're buying your investment. Jb, you asked, am I splitting hairs here? I think for like a dollar cost averaging strategy, like if I was doing a monthly investment, I use the mutual funds because they just are easier. Now I know you can set up ETFs for that too. But most trading platforms and the big brokerages is easier to set up automatic investments with the mutual funds. So that's what I've always kind of stuck with. You are confusing tax efficiency versus tax location though. And that's what I do want to make sure we spend a little time because tax location, when you use the word tax, even though they're connected, they are separate planning elements because tax location is exactly what Bo was talking about is that you're going to want the tax policy to tie into the location of the investments. And when you start out, your savings rate is so much more important than even the investment. That's why we recommend like index target retirement funds where you only choose how much you can save and when you need it. But. But once your assets start reaching multiple six figures, you're going to really want to start paying attention to where these assets are located. Because as Beau said, the growth stuff put in Roth, we want to stick it to the man legally as much as possible to get that tax free growth and that compounding working for you, your pre tax assets, you want to there, you know Everything in that category, you kind of want to, if it's treated as ordinary income, that's what you put in there. So it's a lot of, it's usually a lot of your conservative holdings, your bonds, bonds, some of your alternative strategies, those type of things will go in that category. When you look over at your after tax, now we're looking at our dividends, things that can have capital gains, even some real estate holdings and other things. You want to put those in your after tax because they just have some lower tax rates with the long term capital gains or the, you know, qualified dividends that you just want to maximize the tax efficiency of those things. So that's why now tax location creates more tax efficiency. But tax efficiency of how index funds operate different than mutual funds is kind of a different thing altogether. But hopefully that gives JB some details there. And I would often caution financial means don't fall into the hassle factor trap of you're splitting hairs doing things. Make sure the actions you're doing is not getting busy doing nothing. Just because you're creating activity doesn't necessarily mean it's fruitful. That's great.

[D]

The Money Guy show is hosted by Brian Preston. Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with the securities laws and regulations, Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only and does not constitute financial tax, investment or legal advice.