05.13.25 Ask An Advisor With Wes Moss

Summary

The Clark Howard Podcast: Episode Summary Episode Title: Ask An Advisor With Wes Moss
Release Date: May 13, 2025
Host: Krista Dibias
Guest: Wes Moss, Fiduciary Financial Advisor

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Introduction to Ask An Advisor with Wes Moss

In this engaging episode of The Clark Howard Podcast, host Krista Dibias welcomes fiduciary financial advisor Wes Moss to the "Ask An Advisor" segment. Together, they delve into critical financial topics, offering listeners valuable insights and practical advice.

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Market Stability and Investment Strategy

[00:52 - 02:39]
Krista begins by expressing gratitude for Wes's steady guidance amidst a tumultuous market year. She highlights the importance of staying invested to avoid missing significant market rebounds. Wes reinforces this by discussing the unpredictability of market movements, citing a dramatic 3,000-point surge in the Dow in April as a prime example of why maintaining a long-term investment strategy is beneficial.

Notable Quote:
Wes Moss ([01:44]): “Patience is really paying off.”

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Understanding Investment Vehicles: ETFs, Index Funds, and Mutual Funds

[03:02 - 12:02]
Wes Moss provides a comprehensive breakdown of the differences between Exchange-Traded Funds (ETFs), index funds, and mutual funds. He traces the evolution of these investment vehicles, emphasizing the shift from actively managed mutual funds to the more cost-effective index funds pioneered by John Bogle of Vanguard. Wes highlights how ETFs, the latest iteration, offer intraday trading flexibility and lower costs, making them attractive for brokerage accounts.

Key Points:

• Mutual Funds: Actively managed with higher fees due to extensive research teams.
• Index Funds: Passively managed, tracking specific indices with significantly lower fees (e.g., from 2% to 0.02%).
• ETFs: Offer the benefits of index funds with the added advantage of being traded like stocks throughout the day.

Notable Quote:
Wes Moss ([06:15]): “The more complex we make investing, the more big mistakes can happen. Making it simple and keeping it simple as an investor really can pay off over the long run.”

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Listener Questions and Expert Advice

1. Tax Efficiency and Lipper Ratings

[12:16 - 17:00]
Krista presents a question from Kristin in Michigan regarding Lipper Ratings and tax efficiency in brokerage accounts. Wes explains that Lipper Ratings assess mutual funds and ETFs across five categories, with a rating of five indicating top tax efficiency. He advises prioritizing tax-efficient funds to minimize taxable distributions, especially in taxable brokerage accounts.

Notable Quote:
Wes Moss ([13:46]): “Mutual funds pass on capital gains to investors, whereas tax-efficient ETFs minimize these distributions.”

2. Diversifying Beyond the S&P 500

[17:21 - 19:33]
Yoel from Oregon asks about the necessity of diversifying beyond the S&P 500 index fund. Wes acknowledges the S&P 500 as a solid core investment but recommends adding exposure to underrepresented sectors like energy, utilities, and real estate to reduce concentration risk, particularly the heavy weighting in technology.

Notable Quote:
Wes Moss ([18:30]): “The S&P 500 is tech-driven, so adding sectors like energy or real estate can provide better diversification.”

3. Evaluating IPO Investments

[19:33 - 22:17]
Ben from Iowa inquires about the risks of investing in IPOs compared to established stocks. Wes advises caution, noting that while investing in familiar companies can be rewarding, IPOs are inherently speculative. He emphasizes that historically, only a small percentage of IPOs outperform the market significantly.

Notable Quote:
Wes Moss ([20:30]): “Don't bet the farm on an IPO, but investing in companies you believe in can be part of a diversified strategy.”

4. Retirement Accounts vs. Brokerage Accounts

[24:04 - 30:26]
Krista and Wes discuss the fundamental differences between retirement accounts (like IRAs and 401(k)s) and taxable brokerage accounts. Wes uses analogies of a crock pot (retirement accounts) and a skillet (brokerage accounts) to illustrate the long-term, tax-sheltered nature of retirement accounts versus the flexibility and immediate tax implications of brokerage accounts. He advises utilizing both accounts strategically: maximizing retirement account contributions, especially to capture employer matches, and using brokerage accounts for additional savings and investment flexibility.

Notable Quote:
Wes Moss ([25:45]): “Retirement accounts are like a crock pot—you let them simmer over time, while brokerage accounts are like a skillet—flexible and exposed to immediate changes.”

5. Roth IRA Conversion Considerations

[30:26 - 35:46]
Michelle from Wisconsin asks about the timing of Roth IRA conversions, especially concerning high-income brackets and additional taxes. Wes explains that Roth conversions increase taxable income and can trigger higher tax rates and additional Medicare and investment taxes. He recommends careful planning to stay within desired tax brackets, potentially performing smaller conversions now and larger ones when income decreases in retirement.

Notable Quote:
Wes Moss ([31:10]): “It may make sense to do some of these smaller conversions in the next couple of years and pick it up even more when your income drops.”

6. Roth IRA Contributions Post-Retirement

[35:46 - 38:50]
Rob from Oregon seeks clarity on contributing to a Roth IRA solely from pension income. Wes clarifies that pension payments do not qualify as earned income, which is a requirement for Roth IRA contributions. He suggests alternative strategies, such as part-time work, to generate eligible income if possible.

Notable Quote:
Wes Moss ([36:00]): “Even if you receive substantial pension income, it doesn’t count as earned income for Roth IRA contributions.”

7. Linking Financial Accounts with Yodlee

[38:50 - 40:00]
JJ questions the safety of linking financial accounts through Yodlee for automatic updates in financial planning software. Wes advises against it due to security concerns and the minimal benefits of real-time updates, recommending manual updates instead to maintain data security.

Notable Quote:
Wes Moss ([39:10]): “Invasively scary world when it comes to our information... You don't need to have your financial plan updated daily.”

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Conclusion

In this episode, Wes Moss provides listeners with actionable financial advice, addressing common concerns about investment vehicles, tax efficiency, retirement planning, and more. His clear explanations and practical tips empower individuals to make informed decisions to achieve their financial goals.

Final Thoughts:
Krista wraps up the session by encouraging listeners to subscribe for future episodes and thanking Wes for his invaluable insights.

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Resources Mentioned:

• Clark.com/askclark – Submit your financial questions.
• Lipper Ratings: A tool for evaluating mutual funds and ETFs based on several performance metrics.
• MoneyGuide Pro: Financial planning software discussed in relation to account linking and data security.

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Thank you for tuning into The Clark Howard Podcast. Join us next week for more expert advice on saving, spending wisely, and achieving financial freedom.

Transcript

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[Wes Moss]

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[Krista Dibias]

Welcome to Ask an Advisor. Where we here at Team Clark talk with fiduciary financial advisor Wes Moss. Thanks for being with us again, Wes.

[Wes Moss]

Always good to be here. Thank you.

[Krista Dibias]

And I'm Krista Dibias. We have a great time. And speaking of timing, I just, before we get into today's topics, which I think are really, really interesting, I just wanted to say how grateful I was like last week, just I know the markets, you know, there's, there's lots of tumult that's been going on.

[Wes Moss]

But you've been, it's been a rocky year.

[Krista Dibias]

But listening to you and your, you steady the course, make sure you're invested in the right things, what happens when people get out and miss historical lows, miss historical highs, all those things, it really has resonated with me and I think a lot of people who just are staying the course and found that to be very beneficial at least recently.

[Wes Moss]

I will say it's rare that as you're talking through economic history and market history that it presents itself in the same day or right around when you're talking about it. Usually you're thinking, well, at some point we have these really good days and if you're not in the market, you can miss them. And we had a 3,000 point up day in the Dow in the month of April. And the reason it's so impossible to nail that if you had already gotten out because of all the tumult in the other direction is that particularly in this situation, we never know what announcement that could come in the middle of the night, in the early morning after the market can move things so dramatically in equity markets that there's just really no way to predict that to the day. This was a good example to stay the course. And investors have been rewarded with a rebound again it doesn't mean we won't go back down to where we were, but that patience is really paying off.

[Krista Dibias]

On today's show, you're going to be talking about a couple of really interesting topics. First, the difference between an ETF versus an index fund versus a mutual fund. That's something that I think is really important for us to understand and know the difference there. Then you're going to help us also understand the difference between a retirement account and. And a brokerage account. When do you need what. When is it appropriate to go into each one?

[Wes Moss]

Okay, so let's start with the difference between ETF and an index fund and a mutual fund. And for those, if you've been investing, if you're one of our more seasoned viewers and listeners and you've been investing for 20 or 30 years, you may be thinking, well, I already know the difference between these, but there's something about kind of going back to the beginning and understanding the roots of what these vehicles really are and what they're made to do. And kind of the evolution I find fascinating. The evolution of the financial industry that really didn't necessarily start with mutual funds, but that was the early adopter of really basketizing or putting investments all in baskets. And there's a bunch of different versions of that now. And they're all kind of cousins. If you've been investing for a long time, you may already. I already know what those are. But if you're in your 20s or you really haven't gotten started investing and you're in your 30s, I think just going back to understand those fundamentals is really important. So I wanted to kind of go through the history of and why we would use and where we would use these different vehicles and what separates them because they're all kind of close. So I think of them, I was trying to think of a last name because they're all cousins. And I was thinking, well, what is basket? A last name. And it kind of is a last name, but doesn't really make sense. But think of them as cousins all in the basket family. If you go back, call it 75 years ago, Wall street had an idea of, well, instead of just picking stocks, what if you had somebody really smart and really good at picking stocks and you put them all in a basket and you just delivered a no work, easy to invest in vehicle that had a bunch of stocks in it and a really supposedly smart research team would be picking those stocks for you. And it made investing, it was the first real entree to kind of putting your Investing on autopilot. Hence the mutual fund was born. So it's a fund of different individual stocks. Now. It can be almost any security, bonds, real estate, anything publicly traded. Very easy to put in a fund and then it's managed by a team. And that worked really well. And it's to this day, it still does work. The problem with it and why there was an evolution is that it got expensive. And you think about a mutual fund manager getting paid millions of dollars and then a 20 person research team and they all want to make a million dollars a year and they're flying around to different companies and they're meeting with CEOs. Think about all that expense now for many, many years. We love that. Well, that's great. You know, the company and the manager is at the plants and at the headquarters and they're doing research and they have real conviction in these companies. And that again, that worked and still works. But it got really expensive. There was a time, I think when I first started the investment industry over 25 years ago, it wasn't uncommon to see a 2.5% a year cost to a mutual fund, 3%. And then when you got into more esoteric mutual funds that were doing research all over the globe, think of an emerging markets fund where managers fly into India and Brazil and Europe got really expensive. So there was an evolution. So we started with mutual funds. Then the next iteration of that, which I know that Clark has talked about for many, many years, is the index fund. So an index fund is a mutual fund. It's the same vehicle, but instead of having a giant research team and a bunch of analysts and portfolio managers, John Mogul, who's the founder of Vanguard, now a multi trillion dollar institution, almost got, by the way, he almost got run out of Wall street because he said, well, what if because of these expenses primarily only 10 or 20% of mutual funds at any given time would beat the index it was trying to beat. Let's look at the S&P 500. So Bogle said, well, if 80% of funds or 90% of funds don't even beat the index, then why don't we just invest in the index and be better than most mutual funds? And the key difference was cost. So Instead of a 2% a year mutual fund, the original index funds were 90 plus percent cheaper than that and they were 0.2%. Now by the way, they've gone down to now 0.02%. So they've gotten even cheaper. But Wall street said, wait a minute, a, you're going for average B, you're trying to not charge anything. How are we going to make a living? Let's run this guy out of town. And he really did have a struggle in the early years until that gospel spread and people started to realize, well, maybe if I cut out. One of John Bogle's original principles was control. What you can control. One of those is expenses. We can control our expenses and we're okay with getting whatever the index does, which again is in a lot of cases, not all cases, as good as or better than an expensive mutual fund. Then let's just make it simple. That is one of the guiding principles I've lived by when it comes to investing, that I've learned from people like Bogle, learn from Warren Buffett, that the more complex we make investing, the more big mistakes can happen. Making it simple and keeping it simple as an investor really can pay off over the long run. I think that Bogle kind of embodies that. You've got mutual fund basket of companies has a price as everything settles at the end of the day, 4 o' clock in the stock market, that's the net asset value. Same thing with its cousin, the index fund, lower cost version. And then along came the next iteration, kind of the youngest cousin. Call it the last 25 years. These proliferated and really the last five to 10 have really garnered an enormous amount of assets that have moved out of actively managed, more expensive mutual funds into passively managed ETFs or exchange traded funds. And these are just baskets as well. But here's the big difference. An ETF is able to be traded throughout the day just like the stocks that it owns. Again, you can have a large cap us, small cap, reit, commodity, international emerging market. So we've got lots of different flavors of ETFs. The big difference is that you can trade them, buy them and sell them these baskets any second of the day, just like you would individual stocks. And the technology over the last 20 years has gotten to the point where that was possible. Imagine a fund now in an ETF wrapper, exchange traded mutual fund, but we shortened it for ETF. Imagine 500 different stocks that all have different prices at every given second. And then the basket itself has a price that reflects. That takes a lot of compute. It was impossible 50 years ago to really do that. But over the last 20 years it has been. We've gotten this next evolution of again, lower cost, more passively managed, meaning that the original ETFs were also essentially index funds. They said, let's track the S&P 500, the Russell 2000, the IFA, their international indices, et cetera. And now we're in a world where there's almost, it's a wide scope in the ETF world where still many are passive and just are super low cost, 0.02 of a percent in a lot of cases and they just track an index. Or now there are actively managed ETFs. But if you think about why this has been beneficial to the investor class us, they're much lower cost. So now you can get actively managed funds in an ETF form, But instead of 2% a year, we're talking about a half a percent a year or in some cases lower even for active management. For the most part we're going to use these. We're going to use mostly mutual funds and index funds within our 401 s, our retirement plans at work. I haven't seen a whole lot of ETFs make it into the retirement planning space, even though it's possible. Our 401k, at my work we have ETFs available, but most plans haven't gone to ETFs. But almost all plans, not all of them have low cost index fund options. So I would say index funds and mutual funds for your retirement accounts in General and then ETFs for your brokerage accounts where if you want to be able to trade, if you need to raise some cash or get some liquidity, you need to pay for something easy, quick to do. So with an ETF, you don't have to wait till the end of the day, the end of the trading day, like a mutual fund or an index fund. ETF allows you to do that at any time throughout the trading day. So not that you can't use all three cousins in either version of an account, but that's how I tend to see them used in different accounts, which we'll talk about in our next topic as well. The difference between retirement accounts and brokerage accounts.

[Krista Dibias]

Yeah, that's great. And we will go to questions before that. If you have a question you'd like to Ask Wes or us, Clark, you can go to clark.com ask. All right. The first question for you, Wes, is from Kristin in Michigan, one of your favorite states.

[Wes Moss]

One of my favorite states, Kristin, Kristen.

[Krista Dibias]

Says can you explain the Lippor ratings to me and more specifically the tax efficiency rating in my brokerage account, I'm trying to move out of mutual funds and into more tax friendly ETFs. I know that they're better because they don't have capital gains. But why would an ETF that pays a dividend like schx, which yields 1.31%, get a 5 rating for tax efficiency? I love to do research. Do you have any favorite websites for evaluating ETFs? Thanks.

[Wes Moss]

Whoa. And you know, she brings up a good point that I forgot to talk about when I was describing ETFs and mutual funds. So here's the first one. There's a couple different questions in there. Michelle from Michigan, it sounds like she's going from mutual funds into ETFs and asked a question about tax efficiency and Lipper Ratings. Here are Lipper Ratings. Lipper is a research company that dives into almost most mutual funds that are available. And they give them scores on their rate of return, their return consistency, their tax efficiency is one of them. They have five different categories and it's one to five. Five is the best and it means that they're in quintile. So a five is in the top 20%, a one would be in the bottom 20%. And that's how they rate all these different categories. The tax efficiency one, I would put a lot of stock in the rate of return ones. A lot of stock in. That was almost.

[Krista Dibias]

You're very punny.

[Wes Moss]

Just missed that one. The rate of return ones I don't put a huge amount of emphasis on because there are also studies that show what are five star funds very often turned into one star funds. Now how is that possible? Well, they're investing if we're looking at short bursts of time, a year is pretty short term. You could have a manager that has been really lucky to some extent and in the right area and has a tailwind of the market and it's a five star fund and did really well. And then the tides turn and sometimes those really good five star funds can turn into one and two star funds. So I don't put a lot of stock in the Lipper ratings when it comes to rate of return. But tax efficiency is something that is more consistently measurable. And this is the big thing that I should have mentioned the very beginning. But thank goodness for your question, Michelle, because I'm going to mention it now. A mutual fund in brokerage accounts, this doesn't matter all that much in a retirement account because we're sheltered in retirement accounts. But in a regular after tax account, anything that happens in that actively managed fund, even an index fund, because there's some activity in an index fund and ETFs gets passed on to you, meaning that if they buy a stock for $10 and they have this great run and two years later they sell it at $100, great, great rate of return. But who pays those taxes? Well, everyone that owns the fund. That's why we call it a mutual fund fund because it's mutual ownership. So if you have a, a million dollar capital gain inside the fund and there's a million shareholders, that everyone's going to end up with a $1 capital gain, 1 times a million. All of the gains get distributed out to the shareholders. So this is, I think one of the big frustrations with the original mutual fund is that you can sit there in a year, Michelle, and your mutual fund goes from save $100,000 in a fund and it goes all the way up to 150,000. It's been a great year. Well, you get a tax bill because you had gains distributed out to you and that is what you have to watch for. And that goes back to your question about tax efficiency. If an ETF has a high tax efficiency, it means there's not a whole lot that gets distributed out to you. Where you would see a one star is a fund that has a ton of taxes coming and hitting investors in any given year. And this goes back to Churn. Churn is the enemy here. Churn meaning there's lots of trading. They're taking all these, their gains and losses and gains and losses and you end up with a big taxable gain in the fund. It gets distributed out to investors. And that would be a fund, if that happens a bunch, lots of churn would probably get a lower rating on tax efficiency. So this particular etf, it sounds like there's probably very little that gets distributed out in any given year. And that's why it is, quote, tax efficient, lower churn. Speaking of, just be careful or be mindful when you're making the switch to a fund because you want more tax efficiency and less churn. Make sure that transition doesn't create your own churn and you end up with a bunch of taxes in order to get into a new investment product like an etf. So just be careful and mindful of that.

[Krista Dibias]

Okay? Yoel wrote in with this one for Wes. I have my investments in schwab. I have two questions. One, can it all be in the S P 500 index fund or do I need to divert and if I should diversify, what other market index funds and what is the ideal split? And two, what are currency hedged index funds and when would you use them or not use them?

[Wes Moss]

Yo this is my take on this is yes, I think The S&P 500 is a great base, it's a great core. But there's a couple of caveats to that. It is 100% in stocks. It's got great volatility. You have to be able to handle and manage that, number one. Number two, if you're younger, that might make sense. But as you get closer to retirement, I personally like the thought of adding some other areas to the S&P 500. Here's one main reason why. It's a cap weighted index. That means the biggest stocks have the biggest influence on the index itself and the world we live in today. Those giant companies are primarily tech. You've heard of the Magnificent Seven. Those are seven multi hundred billion and multi trillion dollar companies. And they absolutely are the driving force of what these indexes do. If you look under the hood, The S&P 500, it says it's 35% in tech. But a couple of the other bigger sectors are also tech names. Within those other sectors, The S&P 500 is very reliant on tech. 40, 45, almost half of it. You can make the case that it's tech driven. What is not represented in the S&P 500 all that much? Materials companies, 2% real estate, 2 to 3% energy. Energy is a massive business in the United States. It's 3 to 4% of the S&P 500. So when you own the S&P 500, you're not getting the representation of the full 11 different industry sectors. So I think that it's a good starting place. But I would look to potentially add some of these less represented areas. Energy companies, utilities, as examples, real estate or REITs and or look at some of the ETF options around more equally weighted indexes. For example, the S&P 500, as opposed to having so much in tech, they limit the amount of every individual company to a certain percentage so that you're more spread out and not just so concentrated in a handful of tech names. So I would be adding over time to some of the other areas that the S and P doesn't get to.

[Krista Dibias]

All right. Ben in Iowa says, my relatives recently asked me about a new investment opportunity. It's a small to medium sized media company that my family watches and supports which is going public on the stock market. They're offering new IPO shares to invest in and share price will start at $10 with a minimum investment of $500. What are your thoughts on participating in an IPO? What are the risks versus purchasing an already established stock. Thanks for your time and insight, Lee. Enjoy and value your addition to the podcast.

[Wes Moss]

Ben, I appreciate you writing in a couple of things. I'm not opposed to IPOs. 1 initial public offerings, new stocks on the market. They're not new companies necessarily. They're new newly public for you to buy on the equity markets. 12 I also love participating in companies you know, believe in and already use. That goes back to Peter lynch, who was a famous mutual fund manager back at Fidelity. He managed the Fidelity Magellan Fund. He and Warren Buffett has said something similar that if you invest in what you know, there are a lot worse ways to be invested. Let's put it that way. If you're using 10 big companies all the time and you're constantly paying the same 10 companies, it's a pretty good sign they have your wallet share. There might be something to it. And there's been a lot of successful investors in investing in what people already know, brands and companies we already use. That being said, a new media company, it has to go with your exposure. I think the answer really goes back to how much are you going to do in this individual company. I think the IPO is fine. I think investing in a company you love is fine. But don't bet the farm on it because it is the equity market. And if you look back over the course of history and look at IPOs, and I've done some work around this, it's kind of a winner take all scenario where 10% of IPOs do really, really well even if you look three years out. So one out of 10 do really well. They're up like something like 300% above the market. Decile two does pretty well. Decile three just a little better than the market. And then seven out of 10 do the same as the overall market and way worse. Really. You've got 70% of IPOs three years out are pretty bad. And they're way worse than the equity markets. Once In a while, 1 out of 10 is kind of a home run. And that's how I would treat this. It's speculative. You never know what's going to happen with a new company. They're not necessarily time tested with various economic cycles. So who knows what happens? It could be great, could be terrible. Just don't bet the farm, Ben. But I like how you're thinking.

[Krista Dibias]

All right, we're going to take a quick break and we come back talking the difference between retirement accounts and brokerage accounts.

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[Wes Moss]

I'm Wes Moss along with Krista Dibias here on the Clark Howard Show. Krista, what do we got?

[Krista Dibias]

Retirement accounts versus brokerage accounts.

[Wes Moss]

And then we're going back to questions.

[Krista Dibias]

Yes, I've got tons of questions for you.

[Wes Moss]

Okay, again, if you've been investing, if you're in your 60s or in retirement, you probably know the answer to this, right? And you maybe even take it for granted. One's an ira, one's a retirement account, one's a brokerage account. But if you're younger, I think it's good to understand just the fundamentals here. So let's think about we've got there's really only two main places you can own assets. If you really were to boil it down and that would be in in your name, in a brokerage account or in a retirement account. Yes, there's a Roth. I would put that still in the same retirement account bucket. So thinking you get two main categories where you can own assets that should appreciate long term for the future. The retirement account. If I were to give this an analogy. Think of it as a. If you're a cook and you've been in the kitchen, or even if you haven't, it's a crock pot. The retirement account is a crock pot. The reason for that is that I think about the one we have at my house and we don't use it enough. When we do, I always say, why don't we use the crock pot more? Because it's always so good. And the reality is you put a bunch of ingredients in it, and you usually have a little glass top that has a little bit of a hold, let some of the steam out. Right. But that's a retirement account. You put a bunch of ingredients in and you don't use it right away. It simmers over time. And eventually you get to the point where you're allowed to take the top off as long as you've cooked it long enough. Slow and slow. Krista. That it's amazing. And if the longer, typically you put a bunch of ingredients in a crock pot, the better it is. And it's a lot like a retirement account.

[Krista Dibias]

And you can keep it on and you can eat little, little bits of it and keep it simmering because then it can still get better and better.

[Wes Moss]

You don't ever just take the crock pot and dump it out.

[Krista Dibias]

No.

[Wes Moss]

That's usually what that would be. Is a disaster and be a huge tax bill. So there's a bunch of rules around the crock pot. Just like in the kitchen, you put in things slowly, you let them cook for a while. You usually scoop things out over time. That's really how a retirement account works. You use it over the course of your entire life. There are a bunch of rules around retirement accounts. We'll get to them. And then versus the crock pot, a taxable account or a brokerage account, it's like a skillet. You can put whatever you want in it, but you're exposed to it. So if you put whatever you put in and it simmers up, it pops out, it doesn't stay in the pot. Right. And that, to me, is the difference between these two. The crock pot retirement account cook a long time, eventually you use it brokerage account a lot like a skillet. Whatever you put in there, you're exposed to it in any given year. And then let's start with that. Anytime you get a dividend in the skillet or the brokerage account, you owe taxes on it that year. Anytime you have a taxable gain or a loss, that gain or loss shows up that year, you're exposed to it in any given year. It's kind of an ongoing process. Whereas think about your crock pot of the retirement account. I think bubble up all day long. You can get dividends and interest, capital gains, and it still all just stays in the pot. You don't have to worry about any sort of capital gains in any given year. I think that's the, that is the big difference with the retirement account. It's sheltered, it's covered, and you don't have to worry about reporting until you take money out. Now, here's some restrictions, no restrictions on the skillet. You can take money out of a brokerage account whenever you want. You can put as much in as you want. Take as much out as you want. You're exposed in any given year in the retirement account, there are limits. So we know that we have limits on our 401k. We can only put. We can max out at 23,500 in the year 2025. That's the most you could put in. If you're 50, it's 31,000. That's the most you can put in. Now you can get an employer match for that and that all stays in the crock pot. But you can't tap it or open up the lid and use it until you're 59 and a half. And then it becomes free and clear. You can use it as much as you want, but whatever you pull out is taxed at ordinary income. So we want to typically be measured with this. We cook it for a long period of time and then we're going to use it over a long period of time as well. That's the way I would look at this. And the answer is, well, which one to use? It's not an either or, it's a both. The way I typically see this work is that when you're younger, it's hard to save a bunch of money after tax. And it's a little easier to get started in a retirement account, particularly when you get a free employer match. So if you put in $1,000 and they're going to match up to that, that is literally free money just for you because you saved. And that's an incentive that we want to take part in. So I would get started with a retirement account, particularly putting in enough that gets you the full free match and then saved in an emergency fund so that a brokerage account and then you go back to really maxing out your retirement account. So whatever that number is for you, depending on your age 23,500 getting up to that point, if you can still save beyond that, then everything beyond that goes into a brokerage account. So lots of flexibility on brokerage. Immediate kind of, you're exposed to whatever happens in that in any given tax year. Retirement account more limited, a lot more rules. You can only put so much in at one time, can only take money out starting at 59 and a half. Now there's the 55 rule. There is the 401 age of 55 rule. So it may be 55. If you've left an employer and left your plan or 401k plan post age 55, then you can tap that. But those are the ways that I would look at this is retirement plan. First, get the match and then if you've already been able to save as much as you're allowed to save in a retirement account, then everything else goes into a brokerage account. And the vehicles you can use are the same you can use. We talked earlier about mutual funds, ETFs, index funds, individual companies, individual bonds. You can hold any of those assets in either account. So there's very few restrictions within either account. And I think that's the way I would look at this. But really the answer is to use both. They're very different vehicles in the kitchen, but they're both super useful over time.

[Krista Dibias]

All right, let's go to some questions for you, Wes. Michelle in Wisconsin sent this one in. I've been considering a Roth conversion and I would like to know when it is not advised. I would like to start doing small conversions. However, our income puts us into the 24% bracket and we are subject to additional Medicare tax and net investment tax. My husband and I are both 54 years old and plan to drop to part time hours at age 59 to slowly transition into retirement. Should we wait until that time to start converting?

[Wes Moss]

You know, Michelle in Wisconsin, you're thinking about this the right way because really Remember Roth conversion 101 is that whatever you're taking from a regular IRA and getting it into a Roth, you're going to owe ordinary income taxes on that. And it is about taxes today, your rate today versus what your rate will be way out into the future when you were going to use your retirement account or a Roth. So that's the simple way to look at it. The next step in thinking that through is all the other ramifications that happen when you convert a certain amount and what it does to your overall income bracket. And does it trigger things like the additional Net investment income tax, which is 3.8%, the additional Medicare tax, which is almost 1%. And remember, why all those things matter is that at certain income levels, you don't have to worry about those new extra taxes that kick in, but at higher income levels, you do. And adding anything you convert from a traditional to an IRA adds to your income. So you're literally, it's like you're getting a raise at work, according to the irs. And that could have ramifications. The other thing, you're already in the 24 bracket. That's a pretty high federal tax bracket. So if you were to do a Roth conversion, you'd want to do the math to say, if we're keeping this really simple and we're not worrying about the Medicare tax and the net investment income tax, how do you stay in the 24 bracket? So if you look at your bracket and I don't have the brackets in front of me, but let's say you have room the next 50,000, you could get a $50,000 raise at work and you're still in the 24 bracket. That's probably the most I would consider doing a Roth conversion amount in any given year. Now, in five years, it sounds like you're going to be working more part time and your income is going to go down. That may be a smarter time to do larger, more significant Roth conversions is that when your income drops now you've got more room to take money from IRA to Roth, increase your income and still stay in the bracket which you want to stay in. And I think this goes back to some extent. It's our own pain tolerance. Some people will say, oh gosh, I'm in the 12 bracket and I want to do a Roth conversion, but I don't want to go up past the 22. So you just calculate the amount of ordinary income, the space you have to get you only to that the top of that next bracket, and you stop there. But it may make some sense that you do some of these smaller conversions in the next couple of years that don't move you into the next bracket. And then you could pick it up even more when you're 59 and you're working part time. So that's how I would approach this. Michelle in Wisconsin.

[Krista Dibias]

This came in from Rob in Oregon. I have a question about my eligibility to contribute to a Roth ira. I'm retired after a career in public safety and receive a pension at the end of the year, I receive a 1099R. My living expenses are less than the amount of my pension and I would like to continue to contribute to the Roth IRA that I established long before I retired. But now my only income is from my pension. Does this income count as the required earned income to enable me to make a contribution? I feel like it should since it's part of my AGI. But then again, I can see why it may really work out that way.

[Wes Moss]

Rob, you find the tax code confusing. Can you believe that? Don't say you may be the only one, Rob, that's not confused by the 3,000 pages of the tax code. And yeah, you get a pension, you worked to get the pension, now you're getting the pension. But guess what? Even though it's part of your AGI, it's still not earned income. The IRS has these very different delineation. You've got wage income, so you're working and receiving a paycheck. But rent doesn't count as earned income, investment income or interest doesn't count, dividends don't count, and pension doesn't count. So you can be getting five grand a month in a pension, but the IRS says that's not wage income, it's not earned income. So you can't now qualify to be able to put money into a retirement account or Roth. Now what's another way to make this work? If you have any wage income, if you were part time and made $5,000, that's enough for an income to be able to make some contributions. Or if your spouse is working part time or has some earned income, that will count towards it. But if your only income is pension and interest and dividends, then that's not going to count as earned income. So you wouldn't be able to qualify to make a contribution.

[Krista Dibias]

JJ in others, so we don't know what State says. I recently hired a fiduciary financial planner for Holistic Financial Health checkup. He uses MoneyGuide Pro for his clients. And in general, I like the software. I filled out a lengthy form and sent the financial planner copies of financial statements to populate that information in the software. MoneyGuide Pro offers to link my financial accounts using Yodlee. I've never done anything like that and feel uncomfortable giving third party access to my accounts, but it sure would be convenient to have that data updated automatically. What are your thoughts on the safety and wisdom of adding yodlee access to my financial accounts?

[Wes Moss]

JJ A couple of things. Look, first of all, MoneyGuide Pro is a really good software tool to get a great retirement plan. There are a lot of good tools out there Emoney's another one, Moneyguide Pro. You can even build these within AI now and do retirement plans. So the 99% of the power of the plan is not in the software. It's the inputs that you're giving that's what really matters. In any good plan, it's your inputs on how much you have and how much you think you're going to save. And then you and your advisor figuring out rates, return, assumed inflation, because you're just guessing towards the future, educated guess towards the future. So the softwares are, all the different packages are really good, but your plan is only as good as the inputs you put in. Which gets to your second question, which is, hey, do I, do I link this up with something like Yodeli so it's always updated? And I would say no, because first of all, we live in the most invasively scary world when it comes to our information. And that's why we have dual authentication. And we are very protective of our data and our financial information and really all of our information. And to have something be automatically populated, you've just got another tunnel that's exposed is the way I look at it. And it's overkill. You don't need to have your financial plan updated daily for account balances or weekly or even monthly. It gives you no incremental gain in the world. Zero. It's diminishing marginal returns. It's good to update your financial plan and your balances once a year. It's really no better to do it every six months and it's certainly not better to do it every three months or every day. So I think you get almost. You get zero benefit from doing an active link. If you're worried about security, then you do upside. Now it would be convenient. It'd be nice to just have things automatically updated and in some situations that's, that's probably okay. But I would not be linking to a third party just so that you can now have real time data in your financial plan. If you're updating it once a year, you're better than 95% of the world anyway. And it's still ultra useful. If it were me, if you have any question and you're worried about it, skip it.

[Krista Dibias]

All right, well, thank you so much, Wes. That does it for Ask An Advisor for this week. We'll be back next week with another episode. Tomorrow, Clark will be back with a brand new episode of the Clark Howard Show. So thank you everyone for tuning in and hope you have a great rest of your day.