The Money Guys Help us Escape Our 401k Tax Trap

The reason we’re here is because I never planned on this early retirement thing. We just thought we would work until we’re 65 and then this whole thing wouldn’t be an issue.

Hello, hello, hello and welcome to The BiggerPockets Money Podcast. My name is Mindy Jensen and I’m in The Money Guy Show studios today with The Money Guys, who are going to be helping Carl and I figure out how to get our way out of the middle class trap. Brian Preston and Bo Hanson, otherwise known as the hosts of The Money Guy Show, are both CFPs. Brian is also a CPA and Bo is also a CFA, which is a bunch of letters that I’m throwing at you, but what that means is they know taxes and investing and money and finances.

Carl and I find ourselves in a good but not so good situation. Uh, we have discovered that we are in the middle class trap. We’ve done everything right, but we were prioritizing current year tax reduction instead of thinking about RMDs down the road. So we find ourselves sitting on a kind of big pile of money in a 401k, a traditional 401k. So Brian and Bo are going to help us figure out a way to kind of access that cash.

I feel like your self awareness is perfect. I mean, because I was sitting there, I mean you guys know the situation you’re in, it sounds like.

Well, and it’s interesting. I think so many people, you are describing it as middle class trap and that is correct. It is a trap that ought to be thought through, but it’s not a bad thing. There’s a lot of people out there when we kind of go through the numbers be like, holy cow, I would trade places with you guys. But there are some things that with some strategic thinking and some strategic planning, I think you’re going to be able to solve for. So it’s not as perhaps dire as maybe it sounds, but there are some things that you’re going to be able to do. And I don’t think there are a lot of folks that are dissimilar to this. They find themselves at this stage of life you are, saying, oh, wow, we have this ticking time bomb. What are we going to do about it?

Well, and I think people aren’t thinking 20 years ahead. If I do nothing and the stock market returns, you know, the rule of 72 and, I could be facing incredibly large RMDs, required minimum distributions, where I am now paying a lot of taxes to the government. And frankly, I’m a better steward of my money than the government is. So I don’t want to do that. I think that there are ways to pull money out of the 401k so that I can reduce my RMDs down the road. Plus, we have two children and I don’t want to leave them a pile of traditional money when I could leave them potentially a pile of Roth money.

It’s way better to do it that way.

I want to hear more of y’all’s story, but I do think just for because people go jump in and go, what’s this trap that y’all are talking about? And I I consider it, you said the middle class, but I I think it’s more of an achiever’s trap. Is because you guys, in a lot of ways, every year, and we see this with prospects all the time. Every year, you’ll maximize to minimize taxes, but to help build and grow assets by owning stuff.

That is great, but it has created this potential tax issue for the future. And then y’all are also getting squeezed probably on your liquidity to to some degree, too. Is so I but I want to hear before we get into, I just wanted to tease up some of the big overarching, that’s why I love that your self awareness already, you kind of know you’re because you’re living this. You know what y’all are struggling through, even though it’s a it’s kind of a blessing or a good problem to have. But we want to know more about y’all’s story so that people when they watch this can also figure out how they can apply this to their own life as well.

Because if I understand, Carl, you’re retired? Is that right?

That is true.

Not a bad place to be.

Not a bad place to be. What what were you doing in your previous life?

I was a software developer.

Software developer. And how long have you been retired now?

Oh, it was April of 2017, so coming up on 10 years.

Wow. Okay, okay. Retired for a decade. For those out there that are thinking about retirement, how’s it been? Do you recommend it?

Oh, it’s been great. It’s, um, you have to work at retirement just like you have to work at your job. Um, a great life just won’t come to you. You have to build it for yourself. But it’s fantastic. I I would not trade it for anything. There’s no amount of money that would make me go back to conventional work. So I tell people I work harder than ever, but I do work on my own terms and it’s things I really want to do. Like right now I’m building a house and I just installed a hydronic floor system and a water heater, so.

I love it.

Do you do it yourself while the house is being built? That’s great.

Yeah, yeah, I did. I’m putting up solar panels now because I’m cheap and don’t want to pay a big electric bill. All those data centers are coming online, so I’m just going to nip that one in the bud. But so I do I do work. I probably work harder than ever, right?

Oh yeah, I don’t know how he ever had a time for work.

I don’t like people telling me to work. I just you, I guess.

She doesn’t like that either.

I am curious though, because I noticed some of the big retirement accounts in your name. So those those were were those big earning years back before you retired?

Yeah, I was a software developer and then at the very end of my career, I was a contractor. So I went from W-2 employment to a contractor. They’re like, hey, um, we want you to change the nature of your employment. So you need to become a contractor. I was doing consulting and they’re like, but we’ll, we’ll double your your pay. So I was making like 85,000 a year and they’re like, we’ll give you $85 an hour. I’m like, okay, great. So at that time, I’m like, let’s really maximize these retirement accounts. Let’s go for the self directed 401k, which we did and we we totally maxed that out and um, I was subject to the, I think at the very end I was subject to the highly compensated employee. But when you have your own thing, you can go up to, what is it like 55,000? You can do the 25% employer match. So we took advantage of all that and because I was the breadwinner and we were fortunate that Mindy was able to stay home and raise the kids, we just piled as much as we could in there.

And I’ll back up and say one thing. I think the reason we’re here is because I never planned on this early retirement thing. We just thought we would work until we were 65 and then this whole thing wouldn’t be an issue. And then I discovered this whole other life. I’m like, I don’t need to work till I’m 65 because we have the money. But then all of a sudden the money’s locked up till we’re 59 and a half.

But was it your choice? I mean, did you choose? Because I have a lot of clients in technology and unfortunately, that industry is known for kind of…

Yeah, recommending the exits sooner. It’s a great, you know, lucrative while you’re in it, but then it does seem as you get grayer, they kind of show you the exits earlier than you anticipate. Did you get to choose when you left?

I did. I chose. I I dodged a couple bullets. My first job was with Sears and we all know how that worked out. I was there for the downfall of that.

Oh, when the catalog come out. Oh my gosh. You just go through my whole childhood Christmas time with circling Sears catalog.

I loved it. You could go in there and buy underwear and a lawnmower all under the same roof. It was a great place, but unfortunately, they didn’t evolve with modern times. Shopping malls went down the tubes, but yeah, I never, I was always, I’ve got a lot of financial insecurity, which explains some of our net worth too. So I’m like, we need to save, save, save. All it turns out all that worrying and financial insecurity was for nothing because I never lost a job. I left on my own and yeah.

You’ve been retired for a decade. How old are you right now?

I am 52.

52 years old. And Mindy, how old are you?

I’m 53.

53. And what does your retirement timeline look like? How long before you enter into this phase?

So, I really love my jobs. I host the BiggerPockets Money Podcast. I get to talk about money and real estate all day long. That’s not a bad gig. And it’s I say all day long, I have pretty low hour commitments. I probably work five or six hours a day, three days a week. So, and I it’s doing something that I love. So I don’t anticipate leaving that in the next 10 years. Um, I am a real estate agent. I also really love helping people buy a house. I think there’s no shortage of real estate agents who aren’t as good as me because they’re just kind of pushing people into a house. Oh, just buy it, just buy it. I really want to help somebody find the house that works for them. I point out issues and like, hey, this is going to be hard to sell when you go to sell it. So maybe let’s not buy it in the first place kind of thing. And again, I really like that. That is very low lift for me because I usually only work with one client at a time. I probably sell 12 houses a year. I make a lot of money doing it. So and I can just say no thank you when somebody comes up and and wants to work with me and I’m busy.

From a lifestyle standpoint, you’re still working. You plan on working for the next 10 years. Does your income cover the lifestyle needs that you guys have or are y’all living off the portfolio? Like where, how are you paying for the bills right now?

Well, so outside of building a house, our my income, he makes, he makes some money too. How much do you make, sweetie?

Like $500 a month.

Yeah, so that’s that’s groceries. Some groceries. Um, no, our income covers uh way more than what we’re spending outside of building the house. Building the house, you want to talk about where that money’s coming from?

Yeah, so as Mindy alluded to, our core expenses are pretty cheap. This beautiful hair, I cut it myself and Mindy cuts it myself.

You cut it yourself?

These good looks don’t come from a fancy hair place. So our daily life is pretty frugal and like uh we don’t go out to eat a lot, we cook. Um so our our taxes are cheap, we own our cars. Uh so our daily life is pretty cheap, but we do have a kid in school now. So and we decided to build a house, which is something I never thought we do, but here we are. That’s almost done and that cost about a million dollars. So…

General contractor, are you for yourself? Since you’re doing all this work? Or did you all work with somebody?

Kind of sort of. I’m like a co-general contractor. Yeah, I’m doing some of the big money items on there because I’m still pretty cheap and I don’t want to pay someone $120,000 to install floor heat when I can do it for 20,000. But we did outsource most of it. So to back up a second, most of our life is pretty cheap except for when we do these big projects or when our kids decide to go to school.

Yeah, because we didn’t put any money in a 529.

And so to answer your question, her income is not covering or and my income too, my $500 a month, is not covering tuition and the cost to build this house.

So income is covering living expenses and seems likely it’ll do that for the next 10 years. But for any big stuff, the homes, travel, education, that’s probably going to be portfolio or some other source, is what I got to come from. Yes. Okay.

Talk to us about because the you you mentioned y’all one daughter? Two daughters? I mean, what do y’all?

Two daughters.

Two daughters. And where are they ages and what are they what stage of life are they in?

One is a sophomore, going into be a junior in her high in high school and one is entering sophomore year of college.

Oh, so you’re in the front end of college.

We have seven more years of college to pay for.

Because I I got caught up. Junior in high school, soph just finished sophomore year of college?

No, starting sophomore year of college.

Oh so okay so we got three years of college still too. Okay, rising sophomore. Okay.

Seven years of school to pay for.

Yeah, seven years.

At least seven years depending on what they do. All right, awesome.

Well, you guys are in a fantastic financial spot. You were kind enough to share your network statements. So we thought we’d kind of look at where you guys are presently. You can see right now, you guys are creeping right up on decamillionaire status. Total net worth right now of about $9.8 million. And I thought it’d be helpful for us just kind of understand perhaps where some of these assets came from because the very first thing that I noticed right off the bat is when I look at cash on hand that you have, I see $70,000 and I just heard that we’re building a million dollar house and we have all these other obligations.

Kids in college.

One of these does not, something does not seem aligned right here. Walk us through what’s going on here.

I would say we’ve always had a very, very aggressive risk profile. A friend told me that I should be in bonds. I’m like, can you tell me about that? He’s like, well, you must know about them. I’m like, um, no, actually not. So we’ve always been very aggressive. That’s why there’s hardly anything in cash and almost everything is in stocks and a lot of scary ones. Um, I’ll back up a second and say we’re big believers in index funds, but I didn’t know…

Are you though?

Well, no, no, no.

In a second, we’re going to talk about concentration risk.

Our plan is I want to I want to look at a high level of your accounts, but you were kind enough to even share what’s inside of these accounts. And that was for us, eye opening. But before we get into like risk profile of the investments, so you’ve never had a lot of cash. You’ve always been pretty lean on cash. So how are you, like you’re building this million dollar house, how are you funding that? Or you have tuition payments coming up? How are you guys stroking the check for that? Are you selling assets and creating liquidity? What what’s going on there?

Ooh, you’re going to love this. Uh so to build the house, we borrowed $400,000 from a friend, the friend who said I should be at bonds. He’s like, oh, I get like 4 or 5% through bonds. So I could get the same amount from you if you want a loan. So we’ll pay him off when we sell our current house and the rest, this is where it gets really interesting, is a margin loan from Robinhood against our post tax portfolio.

Oh. And that’s 400,000 on the margin line? Or how much is on the margin line?

Uh, it’s around 500 at this point.

500,000 on the margin line. Yeah. All right. And what’s interest rate is built into that one?

I think it’s 4.25%. It’s very competitive, but it is variable. So if we see rates go up, that will go up. The other thing I think we’re going to do real quick is we’re going to get a mortgage against this house. I think it’s 5.4%.

You have something like that.

Like once it’s finished, you’re going to get traditional financing to clear off some of the debt. A month only for the outstanding portion I’m assuming, just swapping, essentially that $500,000 on the margin you just swap that for a primary.

Exactly. I don’t want to be like margin could be scary. Uh, we’ve did that once before and we almost got called out on it, even though I thought we were being very conservative. We weren’t conservative enough. And with rates going up, I’d rather be locked into 5.4%.

Yeah, that was 2022 when the market had a really bad year. And we had so much space in our margin. So we borrowed, and then we watched our margin go down and it gets to here and I’m like, we should probably get a HELOC on our house just in case we because we had borrowed to buy the the house that was there. And then we tore that down and rebuilt it. But we’re getting real close, so we get a HELOC and we take some money out of the HELOC and throw it at the margin to bring it back up. Otherwise, it would have gone negative and they would have called us out.

Yeah, and for those who don’t know, if you do, if you don’t have enough collateral inside the investment account to substantial the loan, they will do what’s called a margin call where they’re going to say, hey, you got to put some money in here. Well, if you don’t have any liquidity anywhere, you either have to sell assets to cover. 2020 while they’re down. 2022 is not the best time to sell assets. Or you got to come up with capital somewhere. So it’s a, it is a useful tool most often for like short term borrowing, but very risky. So I don’t love hearing that it’s there, but I love hearing that you have a plan for it to go away. So it is kind of a short term bridge right now.

And I don’t mind sharing when I when I when I wrote Millionaire Mission, the home equity lines, they are great on paper too, but sometimes stock markets get beat up at the same time that banks are getting squeezed. My I got a, because I thought I didn’t keep any cash and I had access to cash was my brilliant scheme with the home equity line because I had six figures plus in a home equity line. And then of course, you know, in 2011, I think it was I think it was, I I remember it was I think it was 2011, May 4th, May of 2011, I got a note from the bank saying, hey, that home equity line that you value so much because your house has been crushed, we’re going to freeze it. Like no more access. No more access, that checkbook, that debit card completely gone. And I’m sitting there going, no, I mean, this is this is my cash, you know, this is all my emergency funds. And I thought I was so smart. And that’s why I always because both things that you’re leaning on are what we consider access to cash, not cash. I think it’s because you’re so disciplined. When worst comes to worst, you can, you know, circle the wagons and you can make your your your spending so small that you feel like you’re really not taking that much risk. But the problem is is that you have to be careful to where you at least have real cash on hand because things can happen. when it rains, it pours typically. So your stock market can get crushed, the banks can write you a dear John letter on your home equity line. You all are at the stage of life and success. I want you to maximize, but let’s also keep some liquidity just to to to keep you safe too.

Well, it’s not about how much you can make at this point anymore. You’ve kind of already won the game. You’ve you’ve rounded third, heading towards home. Now you got to make sure you don’t trip. You want to make sure you don’t start showboating and gloating and end up getting yourself in trouble. It’s more about how much you get to keep in your back pocket, not how much you get to add to your front pocket at this point.

I really appreciate these comments because Mindy will tell you about this endlessly, but one of the things I struggle with is optimization in all parts of my life, especially money. Sure. And that’s why we see there’s no cash. I’m like cash earns 3%. I think I can probably do a lot better than that with other things, but again, as you just said, we won the game, there’s no need to play these games anymore, although I still enjoy them.

Well, one of the things people often think about optimization in terms of growth and accumulation. There is also risk optimization. And I would argue that you have not optimized for risk where you are in your current circumstance.

Well, I mean, just look at your net worth, your cash holdings as a percentage of your net worth is it’s a rounding error, negligible. I mean, you see that that’s a problem. I mean, we’re not even was that one that’s less than 1%. Yeah. I mean, we we’d probably ought to have at least a few percent of cash. I mean, just you know, because But remember, he has all those bonds that are keeping him protected too, right?

But we we’ve turned our cash into a rounding error and that’s that’s not really that big of a safety net.

So, I am a member of a group online called Long Angle. I don’t know if you’ve heard of them. It’s a closed forum for people who have a net worth, a minimum net worth of $3 million or more. And I went in there and I asked them, you know, how much cash do you keep? Because I was looking at these numbers too and I’m like, you know, $70,000 seems like a lot of cash. We probably spend between 65 and 100,000 a year depending when, you know, not including kids school and not including building a house. $70,000 is a whole year’s worth of expenses. That’s a lot of money to keep in cash. I’m like, he said it’s only making 3% when we can do so much better in the stock market. And I asked in in the Long Angle group, how much cash are you guys keeping? Because it seems silly to, you know, have a percentage of your net worth when that’s your net worth. And they were saying around 5%. is what people, and they did a an annual poll of their members and they said around 5% is what people are keeping in cash on average. And I thought, that’s a lot of money.

But you’re thinking in terms of, you’re not thinking in terms of your net worth, you’re thinking in terms of your spending. I keep hearing you bring it back to the grounding of of, hey, that’s a that’s a full year of our spending. But where is, you have a blind spot to, no, it’s not just the spending, it’s the $35,000 for your daughter’s next year college for the next three years. There’s 70, I mean, if you think about 35,000 times three, we’re already have exceeded $100,000 just on her education. And by the way, you got another one coming right down the pipe, probably $35 to $40,000 a year because, you know, so so you just right there, we’ve told you that within the next three years, you have well into 100 plus thousand dollars of need that you’ll have to we got a house that’s being built that we have a $500,000 of of debt that we have to, and you need to have margin to cover the underwriting period, you know, if when you’re when you’re turning this into a loan.

Well, and I mean to speak to the optimizer in you, we’re going to talk about some tax planning in a moment to help solve this trap that you have suggested. One of the things that you’re going to need in order to actually be able to implement that planning is having liquidity, which you don’t have right now. It’s going to have to figure out how do we find liquidity to satisfy the necessary mechanism to do some of that tax planning. But we’re going to get there. We’re going to get there.

I I do want to say one more statement on cash though, because I think it is a, look, and I was the same way, as I’ve shared, is you know, I was so lean that I had no cash because I had a home equity line. The biggest surprise for me as my wealth has has has has exploded is the superpower of cash when nobody else has cash. um because some of my biggest opportunities that have changed my financial life is when I’m sitting and and this is what when I talk about the financial order of operations, we’ll talk about this more. Step eight is when I like people to, and y’all are y’all are successful enough that you’re definitely into this phase. You should actually boost up cash, not because it’s it’s bad, but because it creates huge opportunities when others are struggling. And I don’t want you to be a miser and have all cash, but y’all are big enough now that that 5%, maybe even a little beyond 5%, that the next time things go ugly, you’re going to be like pig and slop. You’re so happy. I mean, you really are because you’re just like, oh my gosh, I can’t believe I can get what for that? You know, and that’s that’s the most amazing thing in the world.

Think about how much different 2022 would have felt if you weren’t thinking, oh gosh, we got to go take money out of our home equity line to go pay on this margin call. What if you’re thinking, man, we have cash and capital we could deploy at these unbelievably attractive prices while everything’s getting beat down.

The clarity of chaos too is because now when you are when you’re liquid in chaos, everybody else is scrambling and you’re like, it’s a superpower. It really is. And that’s something. Now, I don’t want people out there hoarding cash because they’re waiting for the. No, that’s timing the market. But there is something too when you’re in step eight of the financial order of operations is to be frothier after you’ve already taken care of of a lot of your other financial foundations. And think about Warren Buffett. Why is everybody watching the airport, you know, the FBOs whenever the market goes down? is because they want to know what airport, you know, who’s flying into Omaha to come to the feet to talk to Uncle Warren for money because they know he’s sitting on the cash. I mean, and there is something to that when when you’re talking about the power of cash as an as a kind of a contra wealth builder in a lot of ways.

Yeah, we actually encountered that back in 2011, we saw, we don’t want a 12,000 square foot house, but we saw one that had just been built and they’re like, the first person to show up with $400,000 gets this thing. And I’m like, we could buy this, hold on to it until all this all these dark clouds pass and sell it for $2 million. But we didn’t have $400,000. We didn’t have the cash. Nobody else does either. That’s why it’s a super power. We didn’t want to be selling.

The townhouse in Brekenridge, $250,000. That thing would be 2 million now. But nope, no one had any cash.

So cash gives you, it gives you opportunity money. It gives you the ability to capitalize on opportunities that other people can’t capitalize on.

And nobody does it. I mean, nobody has cash when when we hit these these horrible periods in the economy.

So you said that 5% or maybe even a little bit more sounds good for us. And then you said you don’t want people hoarding.

Well, I didn’t say for you guys. You guys have you just don’t don’t because I was trying to create a teachable concept there, but you guys have some unique things. All of your stuff is highly appreciated. Y’all done you’ve not only done a good job of minimizing taxes, but then even in your after tax assets, it’s all highly appreciated assets. So anything and everything you touch is going to create taxes now. So we it’s time to pay uncle. We have to figure out how we do this in a strategic way. So I don’t want to I don’t want to say, yeah, go to have five, six, 7% cash and then like, well how are you going to do that without generating a big tax bill? That creates a friction cost that we we got to get a little cute and creative with.

I want to make sure I understand because right now, so we’re showing the net worth here, but realistically we got a $400,000 personal loan to a friend. We got another $500,000 margin loan. So we got about $900,000. Any other debt that we’re not aware of or is that it, just that $900,000?

Our house now is worth about, our primary house, $800,000 and we owe like $280,000 on it. Okay. On a at a like 2.3% loan. It’s going to break my heart to sell that house. But you’re going to sell that house, right? We will sell that house. And then I imagine that the equity from that house is going to pay off the personal loan and you’ll get traditional financing for the margin loan. Is that the idea?

Um, you should be almost clear of debt once the one house sells and we move into the new house. Yes, and once we refi that house. Yes. Awesome. All right. So when we look at your account structure, I do notice what seems to be a little bit of redundancy in terms of accounts. Like, Carl, you’ve got this 401k, but you also have this large rollover IRA. Any reason why those two are not consolidated since you retired?

The 401k is a self-directed solo 401k.

Oh, so you’re still participating in adding to that one.

Yes, yeah, and it holds some, we do want to close it eventually, but we have one more private company in there, so we’ll have to wait till at least that company goes public or sells to, uh, dispose of that account.

So the idea is once that’s done, potentially, you do have, or once you stop working, stop earning, there’s some consolidation that could happen between those two accounts, potentially.

Yes.

Are you guys able to fund Roth IRAs every year based on income level?

Um, yeah, we could. We haven’t been just because we’ve been using all our money for this house project. Uh, so the past this year and last year we did not, but we have done a lot with Roths in the past. One of those Roths is also a self-directed Roth. Hence why there are multiple of them on there.

So most all Roth IRAs are, quote-unquote, self-directed. You get to choose where you put it, you get to choose the custodian is. But I think you did some unique stuff inside of your Roths, right?

Well, the the regular Roth IRA, the $109,000 Roth IRA is, I don’t even know what’s in there. What’s there’s one, there’s one that says 285 and one that says 16,000. Her is 109. Oh okay.

The 109 is just like regular stocks. The self-directed Roth IRA is a SpaceX holding. Okay. And we were able to get into SpaceX in that account in two 2024.

Oh, wow.

And so when it recently went public.

Exciting, exciting a couple weeks for you guys, right?

It’s been exciting a couple of weeks. When it went public, that’s when it kind of exploded. Um, Carl was able to get into SpaceX in 2022 through his 401k. That’s a traditional 401k. And when the opportunity came up again, I said, is there any way we could put it into a Roth? Because you put your risk in your Roth, right? And um, I wanted that money to grow tax free. So we were able to do some financial monkey business to get that into the Roth IRA.

So when we look at 401k for Carl, a big chunk of that SpaceX and it’s in a Roth?

Uh no, that’s a traditional 401k. My self-directed Roth IRA is, is that all SpaceX?

Uh, yes, that one is completely SpaceX. Okay, got it.

So there’s some reasons why there are multiple accounts that haven’t been consolidated because there were some unique things going on there. Now, with the way that you were able to enter into your SpaceX exposure, are there limitations on your ability to move and consolidate now that it’s publicly traded?

There are lockup periods. The first one comes up in August, so we will start receiving our shares there. The last one comes up in December. So between August and December, we will receive all of our shares. But as of right now, we cannot do a thing. They are locked up. They recently because I know we we have some clients who had who had also bought SpaceX through these, essentially they were buying them from, you know, employees as they left these private investors who realized they could put together these groups, help buy out the employees. There was some grayness on how long the because I saw some disclosures that had come out post IPO. Now, they might have clarified this. This has been a week or two since since I got, but the first thing that came out from the private company that we were dealing with for a few of our clients was, we think we’re going to be able to get you access at these points, but there is a chance as we’re getting clarification that we might be locked down for a full 366 for the first 366 days. Did they did they’ve all gotten a bunch of communication from these companies on on what your windows? because it was great initially but maybe they’ve clarified that.

Yeah, we have and I think I might know what you’re referring to. Uh certain employees and certain very early investors have more restrictive shares where they have to wait that full 366 days. In our case, we will have access in August. Okay, so you have access. Okay. Yep.

Well, and so this is probably a decent, once you begin to have access to these shares, what are your thoughts? Because again, you were kind of not only share net worth statement, you shared us sort of a breakdown of what you have in your accounts. And when we look at when we look at your liquid portfolio right now, it’s touch under $7 million and we look at the things that you actually own in there, we have nearly $4 million of SpaceX stocks and another $850,000 of Tesla, almost half a million dollars of Facebook, Google in there, Amazon, there is this Impulse space. I’m curious to know what’s what’s Impulse space?

That’s a privately held company right now.

No, this is a really good story. I’m a nerd. feel free to cut this out. Um, Thomas Mueller was SpaceX number one, probably the most brilliant rocket scientist of our time. He developed the original engines for SpaceX. Unfortunately, he became an employee and not a co-owner because he was worried that the company wouldn’t succeed. So, he’s only worth like, I don’t know, 50 billion instead of whatever he would have been worth if he would have done all the things. But anyway, I think he’s gonna be okay?

He’s, he’s…

Thomas, if you need help with your money, come talk to the money guy.

He started, he left SpaceX, he started a new company and um, I’ll get real nerdy for just a second. They bring stuff, it’s very easy to get stuff to low earth orbit, but very difficult to get stuff to higher earth orbit. You you need like a triple core rocket. I told you a nerd time. So this guy is deploying space tugboats, um SpaceX will launch something, get into a low earth orbit and then his things in space bring it to a higher orbit in a matter of hours instead of the year long it would take. And uh, yeah, we got in on the same round as Peter Teal, which is pretty cool. And this was uh, yeah, this whole thing was a bet on Thomas Mueller as most of our investments are.

Well, and you know something about making a bet on people because let me let me give you some. Now this is, I did some real back of the napkin math on some of this, but your top five holdings are about 86% of meaning individual holdings are 86% of your total liquid assets. So when you said you were an index investor, you know y’all pretty concentrated. And then let me let me blow your mind. If you think 86% with your first five holdings, how about the fact that 70% of your total is all Elon. I mean, between if you look at SpaceX and Tesla, I mean, you you guys are like, you you’re ride or die with with Elon in a lot of cases, which you know, it’s been a kind of a bumpy ride here in the last few years. It has been a bumpy ride. So so but I mean, but incredible wealth building has happened and y’all been actually the beneficiary of a lot of this, but it is one of those things of I wanted to get y’all’s temperature on is this because obviously you haven’t somewhat of an emotional attachment to these investments too because you just I can hear you telling the stories. I mean, this is you’re probably setting a table at Thanksgiving for Impulse Space at this point because you just told that story, you’re pretty excited about it. What’s the actual, what what do you want to do with these holdings? Because you’ve got huge appreciation. We’ve heard some of these are in Roth accounts, some of them are in after tax accounts, some of them are in 401k. So you’ve got, you know, it’s it’s dealer’s choice on on account structure. What are your ultimate goals for these individual holdings?

I feel, we feel stronger about some of them than others, but I would like to slowly get rid of them. I am a big believer in index funds and where I was going with that was like we bought Tesla in 2012. For the first time. SpaceX was or Facebook was 2012, Google, I was a computer nerd, so we bought that company in IPO in 2000, August 2004. Wow. Yeah, 85 bucks to 15,000 if you don’t account for splits. Yeah. But yeah, it’s just luck. I didn’t run numbers or anything like that. But anyway…

But oh, hold on, hold on, because I say this all the time. If you were going to invest in individual stocks, you need to be doing a ton of research on that individual stock because the, you’re you’re a you’re going to lose. Like most people are going to choose something. I mean, he had a loser stock once. Once. Carl Carl’s got a pretty good track record. I mean, Carl’s got a pretty good track record. I would like to say that I suggested Berkshire and Costco. Thank you very much. They’re, you know, at the bottom, but they’re still seven figures like Carl’s picks are. you know, if you want to keep track with actual numbers, Carl is a little more successful at picking stocks than I am. Um but he also, I think he’s downplaying. He reads tech news all day long. He reads, I mean, ask him anything about Tesla or SpaceX. He’s done a ton of research. And our Tesla stock was from 2012. When some random dude with a funny name was going to make electric cars. And back then electric cars weren’t cool. They weren’t sexy. They were just like a pain in the butt because there was nowhere to charge it and they got like 40 miles of range and that was it. And this guy was came out with, I don’t know if you know this, but sometimes he makes grand declarations. I’m going to change the world. Does he really? But he said he was going to put full electric cars on the road. Did he say he was going to make them self-driving back then? It wasn’t back then, it was a little bit later on. Yeah. So and Carl, wants the earth to continue to rotate and, you know, let’s get off fossil fuels and all of that. Sure, I’ll throw some money at that. How much money do we have in Tesla? How much did it cost us to get that Tesla?

Can I can I have a guess? Yes. I bet you put less than $10,000 into it.

Yeah, I think it was about 2,000. It was $2 a share. Wild. But um…Wild. Where I was going with this is I discovered index funds in 2014 and that was after we had invested in most of these. So now when we do get money, almost all of it goes to index funds.

Well, that’s a question we were going to ask is since what’s happened is you guys have some winning lottery tickets here, right? You you took a big bet, you took a risk. Those risks have obviously paid off up until this point. The question is, what do you do moving forward? Especially as you’re thinking about, I’m not going to say de-risking because you’re going to perceive that as being suboptimal, optimizing for risk adjusted nature, right? Uh, so we optimize for risk, I do think probably one of the things because you you guys do have index funds. You you were kind of you have another $1.7 million dollars across various index funds. Now all of these index funds happen to own a lot of the same companies that we just went through, but this is at least more broadly diversified than your than your other holdings. And so what we’d love to see is as you guys age and as you move into retirement and now that you’ve kind of got this very healthy portfolio, how do you build a portfolio that doesn’t just focus on capital accumulation, but also has some sort of idea around long-term capital preservation? Why take more risk than absolutely necessary?

Yeah, and I think the one thing we have the luxury of doing is because so much is in the 401k accounts, we could get rid of those holdings, move to bonds or VTI and not have any tax consequence. So, just one thing. But I would like to get it some of the money so we could actually use it sooner than later too, or start being tax efficient. I don’t want a $2 million RMD in 22 years or whatever.

Well, I was nervous you were go say it was that you love having these holdings so much that you didn’t want to sell because look, I I get it. I mean, especially when you, you make a two or $3,000 investment and I bet you’ve done, I mean we could do that with the Google investment or even the meta, you know, with Facebook because you you guys hit them right as they came up and then you just held them. I mean, you you permanent portfolio these things until they’ve created huge success for you. But what I was worried is you say I want to really keep these holdings because I really believe in these brands. But and we were we had we had kind of talked about this beforehand and is that there’s nothing that says that you couldn’t if you had said that, liquidated in the taxable form so we could actually have access and then you can go move things around in any of the retirement accounts and not pay taxes. But but I actually like hearing, it’s the preferred answer is that yes, these have created tremendous success, but I’m okay if we start diversifying our our capital structure so that we can, you know, have access to this money and and kind of optimize from a risk standpoint what we’ve got going on as well. So you you did even better than what I was worried that you were going to be locked in on because we see it all the time.

Yeah, thank you for saying that. Uh these companies are near and dear to my heart. You could tell I’m obsessed with some of this tech. But I think going on a nice trip, like we’re taking our kids on a trip to Japan and going on a trip to Japan with our children sounds like more fun than owning Tesla or SpaceX. So.

That’s what, that’s the reason why we build the wealth is so we can actually use it to do the things we want to do and have the experiences we care about with the people we care about. And you guys have obviously done that. Now you’re at that stage where you get to enjoy some of that stuff. But that doesn’t mean you have to walk away from optimization all together because you’ve already said, hey, we’ve got this this problem, right? And and fortunately, we have software. We’re able to kind of model out this problem for you. So what we looked at is based on where you guys are now, your retirement is no longer pass fail. It’s no longer, are we going to have enough to be able to retire? Are we going to be able to be financially independent? I think we’ve already answered that question in spades. Now it becomes, how do we optimize and make sure that we’re making the right decisions early enough that it can have a meaningful impact over the long term.

So what you can see on the screen, every year, this is just a projection of based on the living expenses you shared with us, portfolio you shared with us, what we anticipate basically your tax return looking like every year. Each one of these blue bars is like an active tax, your active tax base that you would be paying tax on. Now, we didn’t know about what your working life was going to look like over the next couple years. We just made some assumptions. like, okay, if we’re earning a decent amount, we said for five years and that goes away. Really, all of your income turns into capital income from the portfolio. For a lot of folks, depending on how your portfolio is structured, a lot of people pay 0% capital gains taxes right in the early years of their retirement. So your tax bill kind of goes next to nil if your portfolio is structured correctly. And that would work wonderfully. and you guys could retire and you could live off of your brokerage assets. You could begin, you know, selling at 0% cap gains, generating some capital so that you can pay for the things you want to pay for. But eventually that becomes exhausted and you would have to start pulling off of your retirement assets at some point. But what really gets you guys is right there in your mid 70s. Right there in your mid 70s, because your qualified accounts are so large, you can have these huge RMDs that are going to take place. uh and we actually went and looked at the number in nominal dollars your RMD based and we did like a very conservative, I think 6 and a half% rate of return like very, very conservative. like $850,000 year one of your first RMD. I think it was 2049. $850,000 of income you have to recognize that you may may or may not want to recognize. And what that’s going to do is going to now jump you into the highest tax brackets. You’re going to go through the 24% bracket, 32% bracket, ultimately you’re going to even into the 37% bracket under current tax code.

So we said, okay, there’s no point in all this tax deferred savings you guys have done your entire life to try not to pay taxes, to only spend the last 20, 30 years of your life paying way more taxes than you want, right? So one of the ways that we think about helping clients figure out how they pay less taxes over the lifetime is what strategies are available to begin minimizing that lifetime tax bill. And for most of our early retirees who retire before a pension kicks in and before social security starts, before you have to do RMDs, Roth conversions are a great solution that might be available to you. We just said if all we did for you, categorically, was let’s just think about maxing out the 22% tax bracket. Now, there’s an argument to be made we could go up to 24 and max that out. We just said just max out the 22% bracket. What does that look like conceptually? And if we started doing that this year and we did it all the way until you got to age 75 or got to RMD age, what does that change about the plan? Well, now you can see you never actually cross into those 30 plus percent tax brackets. You never actually have that tax bomb take off because you’re converting so much of your pre tax assets to Roth. Well, if you run this through the scenario and you look at what does this mean tactically for you guys, if you were able to implement this, you’re able to convert all of those pre-tax assets or a lot of those pre-tax assets, your required minimum distribution in the first full year you had them goes from like a $850,000 distribution to like a $300,000 distribution. It’s like a $500,000 annual income offset because now you’ve shifted them to Roth. And what you can see is by doing this, at the end of your plan, when you guys leave this earth, and we just use age 95 as our mortality assumption, it actually adds almost $3 million in present value dollars to what your kids would inherit one day. Because now you’ve paid taxes at lower rates, they’ve grown tax free and your cumulative tax bill drops by over $1.1 million in present value dollars by doing this Roth conversion strategy. So when we look at this, it seems like a slam dunk, right? Right?

Well, and just for the legacy factor is huge because your kids because you know, with the new update of updated beneficiary rules, 10 years is what you get to continue to let the assets grow after your passing. So they inherit Roth assets and then they can grow for 10 years if they so choose to optimize. I’m imagining you’ve probably instilled a lot of these behaviors in them as well. But it is it’s just a huge legacy win too because when they inherit a 401k, now they have these inherited RAs that they would have to take distributions off of life expectancies as well, whereas this lets them say, hey, how do we how do we use these assets but also optimize these assets from a a tax planning standpoint. It’s it’s a pretty cool win.

And from a selfish standpoint, if we convert to a roth and for your audience too, we can use the money after five years, right? The money we move over, so…

Well, and yes, technically you can, but I’m telling you, everybody who once you get big Roth assets, you you hold them like Gollum. You know, you you just so hard to to use Roth assets because you just know how powerful that growth is. That’s where your tax nerdiness maybe it’s I just know when we plan it, that’s why I’m always amazed when we when we when we do deal with like co-fire and others, everybody’s like, I’ll just use my Roth first to bridge me. I’m like, you think you will, but you’re probably not going to want to burn through all those because that’s just from a legacy standpoint. Now look, I know you all also have the die with zero type mentality and we’ll talk about that too because I think there’s some better assets that you can gift, especially with the 0% capital gains, while you’re, you know, assuming your girls have lower taxes. There’s some ways you can make gifts, maximize theirs their lack of income to to give some of these highly appreciated assets that’s so much better than than just giving, you know, burning through your Roth assets.

Yeah, I would like to leave them as much Roth money as possible and to get it out of the 401k as soon as possible so that it can be in the Roth. The only issue is we you alluded to this earlier, we have a liquidity problem and we don’t have the money to pay the taxes on. I mean we have the money to pay the taxes but we have to find it somewhere. So doing a Roth conversion at our age, we have to pay those taxes next year if we Roth convert. How do we do that?

Yeah, so one of the things that we think is important whenever we do a Roth conversion analysis, we always we always set out like best laid plans. Like, hey, our strategy, our goal is going to be to convert at this bracket, whether it’s 22% or 24%. But what happens in reality, even though we lay out this like, uh, playbook of what we want to have happen, in practice, the way it actually manifests is that every single year, it’s a year-by-year decision based on the unique things that go in this year. Maybe in one year, you sell 10 houses instead of 12 houses. Maybe it’s a 2022, we were able to harvest a lot of capital losses, so there’s no capital income. What we do for our clients, and this is like what we get to do, it’s like for our day jobs, is every year towards the end of the year on October and November, we’ll actually do an analysis of where your income is for that year and you begin doing tax projection to figure out how much could you convert in reality and what would be the associated tax bill to pay for and then how do you pay for it? For you guys, we wanted to put together an illustration just kind of give you an idea of what that tax bill could look like under this scenario, but the numbers would change. And so we just picked a random five year period. I say random. We assume that you worked for five more years and then you retired, right? So from 2031 to 2035, if you did nothing and you had no other income coming in and all of your income was strictly capital income and it was structured in a way that you weren’t generating tons of capital gains or tons of dividend income, you’re going to have a relatively muted tax bill. It’s just not going to be a super large tax burden for you guys. And so if our goal was to then convert at the 22% bracket, for you guys that would mean about a $211,000 conversion every single year, roughly, obviously it changes every year based on your income, but the associated tax bill do on that would increase by about $60,000, right? So your effective tax rate on that income because a lot of your income is going to be capital gains income at 0%, you run through that and then you have 15, you’re still not even hitting an effective tax rate of greater than 20%. It makes tons of sense. What you have to figure out with is figure out is when you get to 231, how do you begin paying that tax? How do you begin doing that that $60,000. I’m going to argue that right now while you’re still earning, if you’re a high income earner and you look at your taxes and there’s not a ton of room going to convert, I don’t know that converting in these years are the years that make the most sense. What likely is going to make the most sense is when your earnings drop or in specific down years where you do have low income years and you begin doing that from now out until age 75 or 73, whenever your whatever age your RMDs have to start. Does that make sense?

That makes sense.

Again, high income and we get people love Roth. They love Roth, they love Roth. We always remind them, you’re likely going to have better opportunities in the future to convert to Roth than these current years if you’re a higher tax earner. Now, if you have the thought process that I’m always going to be a high earner or tax rates are going to meaningfully go up within the next one, two, three administrations, then there’s an argument even made for that. Maybe you could look at, okay, we’re going to earn income at this level and we’ll convert up to 24 and we’re going to be comfortable with that. But if you begin doing that, you have one of two options to satisfy the tax bill. You’re either going to have to either have to start saving up cash from your earnings every year to be able to pay the tax bill, or you have to start slowly divesting out of your taxable brokerage assets and begin using those to pay whatever the associated tax bill would be. Also going to be kind of hard to do in a year that you’re paying for a bunch of college and in a year that you’re building a million dollar house.

But but to bring it to a simpler form just to understand is that I think you have to you guys need to go ahead and start playing the mind game with yourself is I have to get comfortable that we’re going to just have to pay capital gains on some of these after tax assets because it’s going to, I mean, it it’s the easiest, lowest cost access to capital because it’s 15%, you know, on a married couple with your’s income, that’s that’s a pretty low bar if you think from a a tax standpoint. Y’all’ve won a lot of this. You just have to kind of know that’s the toll you have to pay to get access to this liquidity. And I think that that’s okay, because I know y’all had asked that you know, when we were trading emails, you’d asked about 72T and some other things like that. And those concepts are powerful.

Did you have a thought process? What was your, what were you guys thinking when you brought up 72T?

Just access to the 401k. It’s a taxable access, but it’s not a penalized access. Because I don’t like to pay taxes. I super don’t like to pay penalties. So I don’t want to just pull money out of the 401k, but it’s a way to generate a little bit of income because we do have that liquidity problem this year. A way to generate income and take money out of the 401k that isn’t a Roth conversion because the Roth conversion, we can’t access for five years and we have to pay taxes on that. That’s the opposite of helping us with our liquidity problem.

But your ordinary income tax rates plus your while you’re still working because that’s more than likely you if you did something like this on on Carl’s assets because he’s retired, you’re still working, it’s such a higher barrier, you know, higher tax rate, whereas these capital gains.

Ordinary income tax rates are going to be higher than capital gains. because you’re already you’re earning money as well. So it’s going to run you through the tables or at least the capital gains. I mean, you don’t get into the 20% tax bracket until y’all’s combined income is around $600,000. So it would be 15. Now that look, there’s the Medicare surcharge and other things. I’m I’m over simplifying this to a degree, but it is still lowest cost of access to capital. And that’s that’s kind of where you you have to go through the the triage of thought matrix of how am I go get access to money. That’s the that’s the easiest area to probably do it.

Yeah, we talk about, you know, we use the financial order of operations as a as a mechanism to help you think about how you accumulate. Well, when you begin decumulating, you kind of pull money out in the reverse order that you put money in most often. So for most folks, the first money they ever save is the Roth money because they open up a Roth IRA when they’re young or whatever. That’s probably the last money you want to pull out in decumulation. The second money that people start putting in is their 401k. I started maxed out my 401k, getting my employer match. That’s probably going to be the second money that you want to pull out in retirement. And the last money that most people often put in are the taxable brokerage assets, once their savings mechanism or have a opportunity to do that. That’s actually be the first bucket you want to pull from. And I think that’s going to be true for you guys, even though capital gains are present, because capital gains tax rates are going to be lower than whatever your 72T tax rates are going to be. While it does give you access to that, I’m going to argue rather than pulling those assets out early and paying the tax and and uncaptivating from this tax incentivized structure, you’d rather use taxable assets, preserve those tax deferred assets that you can then convert to Roth when your income does go lower because you’re going to love having those Roth assets later on.

Yeah, that’s a good point and a lot of the stuff I would like to get rid of is in our brokerage account too, so that just makes a lot of sense. And it’s also not not an all or nothing. because a lot of you guys do not seem like you have anxiety around selling these things. But a lot of folks do. They’re like, oh, I can’t sell SpaceX now, it’s going to do this, or I can’t sell Tesla now, it’s going to do this. Whenever there’s emotion in in a decision, we try to remove emotion as much as we can by adding a system. And for us, the system even when there’s like highly concentrated, highly appreciated positions is something like a dollar cost divesting strategy. Same way that we would put cash to work. Hey, we’re going to sell $10,000 a quarter every quarter of this stock and we’re going to do it an automated basis. So that way whether the stock is going up or down, we’re not having to time it to figure out, okay, is now the right time to sell or not the right time to sell. You kind of cover all your bases.

It’s interesting that you say it like that. I’ve never heard dollar cost averaging for the withdrawal as well, but I mean I talk about the dollar cost averaging into it. Like automate it and then you don’t have to like you’ve made the decision once.

It’s the exact same thing instead of because people sometimes need to take the emotion out of buying because they’re worried that they’re buying at the worst time or so forth. This is the exact same thing just in the reverse order. We’re taking the emotion out of you guys feeling like when’s the best time to sell. Let’s let’s do it in a systematic way so now it’s it’s not as human, it’s more of an automated process.

Yeah, and we’ve made the decision to sell one time and you set it up and it just happens.

That’s right.

Can you do that?

Uh yeah. I I think Brian hit on something important a while ago and to back up a second, we were always like I had healthy income as a software developer, but we were super cheap and super frugal. So we we just minimized our taxes so much. We hardly paid anything because we would max out our self-directed 401k. So my struggle, perhaps my biggest one and perhaps I need a therapist instead of a CFP is just to get over the paying taxes thing. Exactly. Like uh I’ve got a friend who works for Sandisk and he told me he’s got like he’s going to have a $500,000 tax. He’s got to write a check to Uncle Sam. and that made it a little bit easier because ours won’t be anywhere near that, but it’s still a struggle. Like we spent so many years absolutely minimizing that and now we’re going to have to pay up and it’s going to be okay, but…

Well, I I still think you’re going to minimize it, right? You’re still like obviously in your highest earning years, if you were trying to do some of this stuff, you might your capital gains rates a might have been 23.8%, right? It would have been there. But you are you are still paying taxes, but you want to pay as little tax as possible in the sense that makes the most sense, right? And you’re still going to be able to do that.

I’m going to challenge you all from a mindset standpoint is because all the things that have rewarded you in the past, to some degree, you have to rewire or reprogram. You were rewarded for being as minimalistic as possible. But and you and I I love that y’all gave me the notes that y’all y’all’ve read the book, Die with Zero. And and look, I pick on that because a lot of people I love the concept, but a lot of people, it it makes some assumptions you have to be high income and you can go grab capital very or make capital very easily. And for most Americans, that’s just not the case. You know, the the the the ability to turn on and off how much money you make. You guys can. You’ve already won the game. So I do agree with the Die with Zero for you guys to challenge you is that because you got to think about the fact that you have your time, which is diminishing for you guys. I’m I’m the same age as y’all, so I understand that. I was like a sick burn, bro. I don’t mean because I I deal with this. Success at this age is unique because you still feel so healthy and so good, but you also know where you are from a chronological. So time is, you know, is is is a limited resource. Your energy, how well you can go and do activities and things like that is also as you found out as soon as you retired, you’re like, holy cow, I don’t have time to do work because I’m so busy. And then you’ve got your wealth. The one that’s probably of the three that’s the most valuable to you guys is the two that I just mentioned is is is your time and then the energy to go live your best life. So don’t think in terms of maximizing or minimizing the the taxes, maximize life because you’ve won the game. We still can do it in a strategic way that that does it well. But I want you to live your best life.

Because I think y’all say on paper you have a die with zero mentality, but when I look at how you’re structured, it’s more of, hey, die with as much as possible. How do I keep from paying Uncle taxes? And those two don’t coexist when you’re in the consumption side of your life. I mean because you are, this is the my favorite clients is because I see it and I am a therapist in some ways. I’m not licensed and I’m not trained. It’s more of on the street training. But it’s um most people who are really successful, you’ve been rewarded for being so good with how you allocate capital that when it comes time to actually start you’ve been rewarded to build that capital, when it comes time to consume the capital, you you lose your mind a little bit because you’re just not used to it. You don’t know how you feel guilty, you feel weird and that’s what I have to part of our job is to to basically hammer you on why no, focus on the energy, focus on the time and the diminishing capability you have with that so that you can live your best life.

Well, we get to tell people, it’s okay to do things that doesn’t naturally feel like. Hey, it’s okay to spend money. Hey, it’s okay to have a bunch of money in cash. Hey, it’s okay to pay taxes when it makes sense to pay taxes, even though that grinds against builder’s natural inclination.

Well, I mean, you know, because when I was watching I love personal finance content too. and before we were doing all doing the podcasting and YouTube and stuff, there was Suzy Orman out there, you know, on her nightly show and every they would have that segment where people would say, can I do this? And and we all love hearing to go, no, you know, because that’s what that’s the whole segment was just her killing dreams, you know, and that’s what’s funny is that once you do this for a living, you realize my job is actually just the opposite. I think people think a financial planner is going to tell you no. We’re actually like, please go do this because I’m going to show you statistically why your your your chance of success is still like pegged at 95 plus percent. Let’s go do more. Y’all y’all just have to free your mind to to feel okay with that.

That’s the problem that we are having.

It’s a it’s a it’s a that’s the achiever’s trap. Is that you you can’t you’ve been rewarded for building to consume hurts. And that’s why I do like that’s why I do like the die with zero mentality for successful people is you have to figure out how you create the balance on that.

Yeah, I mean with die with zero, it’s more like we want to do experiences and with our kids and, you know, maybe buy them a house when they’re 30 as opposed to leaving them a giant pile of cash when they’re 65.

I like 50 year olds reading that book. I don’t love 20 and 30 year olds reading that book. Because because that’s the problem is that when you’re 20 and 30, you probably more than most Americans anyway. Now look, I was somewhat miserly in my 20s and 30s, but now I’m looking at my life and I’m like, thank goodness I was kind of miserly because that’s where I’m getting the dividends of my money working harder than I do in a lot of aspects. But to tell that to a 20, 30 year old is probably the wrong message at that stage of life.

Yeah and it’s even you know, that was zero one of the things they say is, hey we want to want to be able to use the money now. We want to be able to see the money get used now. I want to be able to help our kids. You guys are in a great situation. You have young kids. If you wanted to start doing some sort of like annual gifting strategy, you can gift up to the annual gift tax limit to each of your daughters. And one of the really efficient things you could do, Brian already alluded to this, is you could gift them appreciated securities. Because whenever you do a gift of an appreciated security, the basis that you have in it carries over. So you have something that has a very low basis but a very high price, you gift that, if they were to sell it, they’re now going to sell that at their tax rate, not at your tax rate. So if they’re not earning a ton of income, if they don’t have high, you know, not in a high tax bracket, there’s a good chance they’re going to be able to sell up to that $20,000 gift that you give them and not pay any tax on that to be able to liquidate it.

Ooh, that’s a great tip.

Well, especially your college age daughter who probably can stand on her own more, you know, because there is some things with kitty taxes and other things, but for adult children who are more independent and following their own taxes and stuff, there’s some big planning opportunities there.

I was just talking to someone this week who has a wealthy relative and he said, I think this person has multiple kids, three kids and he said, oh the kids, I’ve heard them talk like they I don’t I’m looking forward to this guy’s death because then they’ll get a lot of money. I don’t want anyone to look forward to my death. You want your kids pulling for you. You want your kids to be like, man, I hope mom and dad stay around for a while. They sure are nice. Yeah.

Well, I will tell you there is a curse though of success is that you do need to go ahead and start having and surely y’all have already been doing it with the the girls being the age that they are. I’ve had to start talking to my daughter about money much because there’s something about growing up in a successful family. Now, you guys live a tight lifestyle, but It’s pretty obvious that you’ll have a big net worth and you want to start just planning those seeds because you don’t want your kids’ best life to be while they’re under your roof. You still want them to have drive to kind of create. That’s I think there is look, we both grew up without any money and I know you both shared y’all come from very humble beginnings as well. So I think we all want to make our kids’ lives as easy so they don’t have the struggles. But we need to still have enough struggle in there that they get all the fulfillment when you get to go do all the big experiences of life when you buy your car, your house and stuff. There is something that hedonic treadmill that I know you’ve probably talked about that concept before. You you always remind people, spread out the good stuff as much as possible so every time you get that dopamine hit, it’s actually as healthy. And that’s why you don’t start with the Lamborghini or the Mercedes, you know, or even the fancy BMW, you know, or something like that. You start you start with the smaller cars. You know, and then that way as you’re going up the train, you know, and it’s the same way with vacations. You know, you’re you’re hoping your kids, now I love giving experiences, but you’re hoping that they also as they’re going through their own life, you know, have some achievements built in there so they get to live their best version of themselves.

Yeah, we’ve we’ve put some carrots out there. I’m trying to, what’s the term, wag the dog or whatever. I’m like, hey girls, because we’re open with them about money, which my neither of our parents were or ever were, which I think, I don’t know, I don’t agree with that. Anyway, we’ve been open with money and we’ve told our girls, hey, you have to make it on your own. We will help you, but you’ve got to, this help isn’t going to come for another decade or two, like maybe your 30s, but you got to get out there, go get good grades and And then maybe We’re rich. You’re not, that’s what, that’s what happens. You do parental matching though. That’s one of the things probably the best thing I did with my daughter when she was 15 and started babysitting and then she started working fast food at Chick-fil-A all through high school, was I started priming the pump by doing a dollar for dollar match on Roth contributions. Our kids just going to start working at Taco Bell. It’s been huge. It’s been huge because now, I mean, she’s full-time employed out of college and she’s still like she’s loading up Roth IRAs and doing other things and so the priming of the pump, you know, just like you pour a little little gas in the carburetor to get things going, you do the same thing with your kids with parental matching and and it and it works beautifully because you’re modeling that behavior and then they start seeing the the power of compound and growth and it sticks. When you realize your children are hard workers and they understand the value of deferred gratification and investing, man, that is like that’s like parental dividends right there.

I will say you have to be very clear with your kids what you’re talking about. I had told our youngest just started at Taco Bell like a week ago. Okay. And I told her, yeah, dad and I will match your salary dollar for dollar. And she’s like, this is great. And then we were having a conversation a little bit later. I’m like, oh, you think I’m just gonna give you double? That’s not what happened. That’s not what happened. You have to put it in your Roth IRA. Oh. Oh, I don’t get that. I thought I was making a double time. She really thought I was just going to give her cash.

But think about the learning experiences on that because that’s the learning the concept of of putting a little bit away that you just don’t get access to, but you get the value of watching it grow and build. So you don’t have to work so hard in the future.

Yeah, and I understand, I mean the whole reason I want to do that is she’s 16 years old. She, 60 is a thousand years for her. When she can actually get access to this money, she’s like, that’s so far away. It is. I hope that you make it to 59 and a half. And I would love for you to have a lot of money in your Roth IRA when you do it. So that’s why we have talked about doing that. Our oldest one actually doesn’t have any taxable income right now. So, uh you said something about your daughter was babysitting. Did you do this when she was babysitting too?

Yeah, I mean, well those years, because you know, when you’re doing neighborhood stuff, you have to follow a tax return for and report claim that. There’s not really any taxes due on it. Um it’s effort for self employment, you know, for Medicare and social security, but you just have to follow so you qualify then for doing the custodial Roth RAs. Okay.

It’s a great planning thing for for anybody who has children who are starting to work earning money, go ahead and let them know that a portion of that ought to be working for them going into their army of dollars so that they can get that behavior and that habit. And then what I always did when we get the statement, I’d look at it and we look at the change, especially on good months and I’d be like, you you see you made $300 on that that what you put in over the, you know, a year ago and you be like, you’d have to work, if you’re making $10 an hour, that’s almost That’s almost, you think about that’s like two weeks worth of work, part-time work for you. You just made without doing absolutely anything. I mean, and that’s you you start building those connections in the brain, you you you see the fireworks that are going on. That’s what we all have kind of figured out is that yes, it’s fun to spend money, but what’s really cool is when your money can grow so it can you can spend without having to work.

Any other questions we can answer? Any other things that you guys are curious about that we could speak to?

The comment about the long-term capital gains versus 72T income is uh kind of eye opening. I know the long-term capital gains tax rates are 0, 15 and 20% and income tax is more and it didn’t click. Right. I really appreciated that comment. Did you, did you hear that part about selling after tax stocks?

I did. Yeah, capital gains rate is like 98,000. When does capital gains kick in? Like for a married couple, 98,000 or something?

I’ve got it right here. It’s um the 0% capital gains, married jointly, $96,700. This is for 2025 though, probably. Yeah, it’s 2020. So we’re a year off from an index, if you know, they they index that stuff.

So right under $100,000. Right under $100,000. Yeah, that’s huge. I think people don’t appreciate a brokerage account because it’s kind of like, if you’re not a big spender, it’s similar to a Roth, but even better because it doesn’t have the restrictions as long as you stay under that amount. I guess the only other thing we had talked about was uh, we’d like to be charitable. We’re going to start a donor advised fund and that was a brilliant yeah. We we both use those. They I mean, I love to nerd out on those things because you feel like it’s a win win. You’re you’re giving appreciated assets so that the charity gets full access to whatever the market value is, but you get full charitable deduction for it, never pay the capital gains tax on it. So with you guys having huge capital appreciation, you you get the the huge benefit on that.

And the one thing I would think through is depending on the level at which you want to give, you guys have appreciated holdings. So it’s going to make sense to use a donor advice fund no matter what. You ought to review how much you think about giving because some folks they they give an amount every year, but because of the standard deduction is so high now, they’re not even able to take advantage of the charitable deduction from that. So whenever we review one of our clients’ tax returns and we see that going on, we say, hey, instead of you giving to the donor advid fund every single year, let’s make a donation every two years. So if they’re given $1,000 a year, instead of giving $15,000 every year and never taking the deduction because standard deduction so high, we’ll give 30,000 one year and zero the next year and 30,000 one year and zero the next year, allowing them to itemize, standard deduct, itemize, standard deduct. It allows you to still get the tax deduction. And then you can still give the money to your charities on whatever cadence you want to. So they can still go out every single month even in that year you’re not contributing. You’re basically just bunching those donations.

Does that make sense? You’re giving throughout the period so that the charities because they kind of count on your, they know who their givers are and they start expecting that. so you can still fund it throughout, give distributions throughout with a donor advice fund.

Yeah, that makes a lot of sense. Okay, so we’ll do huge gifts and then zero gifts for a couple.

Is there any way to get the money out of the 401k into the DAF or…

Well, there is. You have to be 70 and a well, not in the DAF, but uh when you turn 70 and a half, there is a really, really efficient way that you can start giving. You can do qualified charitable distributions. QCDs where you take money out of an IRA or out of a 401k and rather than it coming to you directly, you can have it go straight to the charity. And if you do that, and again, this is after 70 and a half, when the money goes to the charity, it never shows up on your tax return. So if you give $10,000 as a qualified charitable distribution to a charity, it goes from your IRA, from your 401k to the charity, no tax ever.

So it doesn’t even show up on your tax return really. The benefit is is that that’s just less forced income that year because you know, when you get to those required minimum distributions, you know how big that pushes it up. So let’s you meet the you get to fund the charity and lower your not have the taxable income hit your your tax return.

So most folks are who who are giving in a tax efficient way, they’re donor advised fund, donor advised fund, donor advised fund until they hit that age, and then they switch over to qualified charitable distributions.

Okay. You’re a little too too y’all are young. It’s nice being called young. You’re too young. Oh, not only call me old and young in the same episode.

So, one last question about Roth conversions. Right now, because I’m 53 and he’s 52, if we Roth convert, we have to pay the taxes. I thought I heard something about at age 59 and a half, you can Roth convert and then you’re not you can take pay the taxes from what you’ve converted?

Oh no, you can still you can still you can still you can still pay the tax from what you converted. No, you uh you can you can still convert to Roth right now same as if you were after 59 and a half. What happens after 59 and a half is now your Roth assets come into play if you needed to take distributions from them. Like you could actually begin using Roth assets if you needed to. Brian calls it like your Gollum precious, you don’t ever want to use it. Where we see clients practically do it is in years where you’re doing tax planning, something comes up, oh, we had to replace the car. I need to pull out $40,000, but man, I really don’t want to trigger any more capital gains or I don’t want to make a distribution from my IRA. I’ll use Roth dollars to do that so that I can still keep in the same tax strata that I’m trying to stay in.

And and the reason people talk about Roth as the bridge pre-59 and a half is because you can always get access to your basis, you mean your contributions can come out tax free. So that’s why everybody’s usually talking. 59 and a half, you know, the key dates, 401ks if you’re still employed is 55 for if the plan is written right. And then for all IRA and other retirement and so forth is 59 and a half for access penalty free.

Talk to me about that 55 because we are, we have a self-directed 401k, which is where his SpaceX is. If it’s written right and we can get it at 55, that’s like three years for him and two years for me.

It’s kind of squishy though because don’t you have to like close it and be disconnected from the company? In which case you have to.

Yeah, you’re basically you have had separation from the company at that point, but it’s back to for you guys specifically, it’s back to tax rates. You know, you’re ordinary income tax rates when you pull out that money versus still capital gains. So you could create that as a penalty free access point, but from an optimization, I don’t know if it will be the ideal choice for you guys. Okay.

So at 55, if you were separated, you could access your 401k so long as you were employed in the year that you turned 55 and then you stopped. So like so long as Carl’s actively participating until that point, turns 55 and then retires, then he could access it. Much more efficient way, much cleaner way than trying to do 72T distributions, uh because it’s not a thing that’s fixed in time, you can do it ad hoc, but like you said, you’re still paying ordinary income tax rates, which is going to be less attractive than your capital gains rates. Okay.

Well, I think we now have a lot of things to talk about. Yeah, one one closing thing. We were talking this we talk about money all the time, including on the walk here, but one thing I think I asked you about yesterday or the day before, I said, do you feel wealthy? That what was your answer?

No.

Yeah, but I think part of the reason we don’t feel wealthy is the reason we’re here. We’ve got this, but we’re too afraid to like the monkey like grabbing the food, the monkey trap or whatever. You don’t want to put your hand in the cookie jar. So, but it would feel good to actually be able to use some of this.

I would say, you know, we did we we harped on it a little bit, but we didn’t actually give you the action point on it. I do think y’all need to boost your cash just because of the college. You got you got things you can’t get away from with the college tuition coming up. You’ll probably should boost that cash up just so you the volatility of because you you have to make the tuition payments anyway, the volatility of some of the things that are coming, it’s a good time with markets as good as frothy or frothy’s not the right word because I’ve just been on a trend of saying frothy. They’re up right now. So it’s it’s a good time so you don’t have regrets just in case it turned into a rainy day. You know, it’d be nice to have a little more liquidity.

Yeah, I’ll put a few little homework items for you guys if you’re interested. I just kind of what to think about. Uh, I did number one, uh talk about building your cash up. I wrote down the number $500,000 only because that’s 5% of 10 million, right? That’s not prescriptive, but as you guys think about like an appropriate cash goal to have, as you think about some of this stuff.

You said that threw up in their mouth.

Yeah, as you think about how you’re earning and what you’re doing with real estate commissions or what you’re doing with those sorts of things, rather than going and deploying those dollars, I might consider thinking about building up your cash holdings to the extent to the extent that you can. And doing that if you do decide to put together some sort of like reverse dollar cost averaging or dollar cost divesting strategy, I would think through your overall allocation. You guys are 100% equity, 0% anything else. Uh so perhaps is there some way to maybe mix in, you know what, we’re talking about optimization. Maybe it’s not bonds, maybe it’s like municipal bonds, right? That’s like a sexy way to say bond without just saying bond, right? So there’s some opportunities there. It’s less about rate of return, more about risk mitigation. But review your allocation. I do think you guys are at the stage where every single year, around October or November, you ought to be doing an end of the year tax projection. Hey, what’s everything we earned this year? What’s it all look like? What are all the dividends that have come in? All the capital gains that have come in? How much room do we have in whatever bracket we’re in? If we’re already in the 24, how much room? Because even if you’re doing small Roth conversions, I we can only convert $15,000, that’s still 15,000 that you’re able to convert in that tax bracket. So it’s worth doing the exercise every year to see where you fall. And then I said talk with your kids about money, which you’re already doing, but if you are trying to figure out how can they begin using some of these dollars now or begin having access to these dollars at some point in the near future, are there efficient ways that we could begin doing that even today without them having to wait until we leave this planet?

Yeah, and I’ll just I’ll put an exclamation point on that one because we work with a lot of successful families and that’s y’all are the tail end of the influence you have on these girls. Please have those conversations now because we look we have conversations all the time with wealthy families and they’re like, I screwed up. I didn’t talk about money. I didn’t talk about money early enough. So now they have these misunderstandings about money that somebody else placed in their heads. Y’all have been very successful with how you’ve allocated your capital. It would behoove you to please pay that forward into your daughters as well because y’all y’all understand how money works. Please put it in their head because if you don’t, somebody else will and it might not be the ideal way to be because then when you get spouses and other things, it gets very it gets very inefficient. And and so this is your moment in time to make good things happen.

I laugh because we had that conversation on the way here too, like with the whole prenupt thing for we specified that our kid must have a prenupt so they don’t have to but that’s a whole other. Yeah, if you talk to our kids, they would say, mom and dad will never stop talking about money.

Well, what you talk about, I haven’t I haven’t pitched you guys, but when you start getting this stuff, this is the perfect reason why you should have a financial planner is because do you realize how often I’m the bad guy on when we talk about prenups and other things is because we’re instead of you because you have to you have to eat Thanksgiving and Christmas with these people. So it’s nice if you if you have a big bad boogie man that um and that’s nice.

I don’t really want to do this, but Bo and Brian said I have to.

No, we have a, I’ve had I’ve had some adult marriages that we are brought in to kind of because it’s an uncomfortable thing, but we’re also it’s a legal protection that needs to be and we’re all about to become one. I mean we are if you listen to any of our content, I love joint accounts, but I also think that if you come into marriage with assets, you also have to be smart and realistic on on protecting that stuff as well.

I’ve never wanted to see a CFP more than I do right now.

But but that’s the thing, everybody always you know, I’m always I think most people don’t need a financial planner while you’re building, but once you get to close to seven figures, you realize no matter how simple you’ve tried to create your life, it gets complex with success. It really does and that’s when we’re there to kind of help with the therapy side of it as well as the allocation side of it, as well as to be, you know, kind of the boogie the guy under the bed, you know, to to to do the bad stuff that nobody wants to do. I mean, we’re kind of the fixer in a lot of those situations as well.

I can picture it now, talk to Uncle Brian about this.

That’s right there. That’s the truth of thing. And that’s why, you know, y’all can tell, we do the same type of content on making a millionaire is because we want people to see behind the curtain because I think so much, I think most people think financial planners are just asset allocators and that’s so the world has become so commoditized on the investing with index funds and so forth is that if that’s what you think a financial planner is, then you’re probably missing the boat. So we were like, what better way than to kind of sit down with real couples and let them know, hey, this is actually what a financial planner does for for for families and and help them know how to work with money.

It’s awesome. Tell me about your book. I saw the rocket. I New York Times bestselling book. Wow. That’s right.

You tell me about your New York Times bestselling.

Yeah, so yeah, so that that’s the thing. I mean, look, if I think my high school teachers would be just as shocked to find out that I’ve written a book. If you saw my SAT scores, I am much more math-minded, but but it is I am very the two books that changed my life when I came out of college was Wealthy Barber and Millionaire Next Door because I was a very motivated 22-year-old when I got out of college, but I didn’t know how money worked at all because nobody in my family had ever dealt with it. And I’ve kind of walked through my journey with how we developed the financial order of operations, put a lot of life stories in there, and I think anybody if you go and look at the Amazon reviews, we hit the mark on it being extremely motivating and helping people know exactly what to do with their next dollar. So we have a a very close friend and he’s we’ve met through the show now and because I had to meet him after this guy was buying hundreds of books every year that he gives out to students at Clemson. Um so we have lots of people who are buying this to give out to graduates and so forth and so I feel mission accomplished on on helping people understand how money works.

Super cool. One uh one final comment. I was listening to y’all uh earlier this week and I heard you mentioning the millionaire next door and that was probably the most profound thing I’ve ever read because growing up, you might remember this, you don’t but there was a a show called Lifestyles of the Rich and Famous. Oh yeah. Champagne wishes and caviar. Look at this helicopter and yacht. I’m like, wow, that when I was eight, I’m like, wow, that’s how rich people live. That’s how rich people live. And then I read that book, I’m like, whoa, I had it all wrong. How’d I drive an F-150 according to that book? I’m like, I know Uncle blah, blah, blah and Uncle blah, blah, blah, they are millionaires and um the people who look like millionaires probably are not so.

That’s right.

Well, that’s what you know, what’s funny is we as we work with all these millionaires, these thousands of millionaires, is that we I have asked that question of many of them. Do you feel rich? Most people say no. I mean, because you don’t. I mean, because it’s it’s back to the understanding that there’s a difference between access to capital versus access to cash. And most wealthy people, they don’t have cash. Y’all are the perfect example. You’re worth $10 million and have less than 1% in cash. You know, that’s the difference. you know, you’ve heard that Morgan quote is that most people say they want a million dollars. They really don’t want a million dollars. They want to be able to spend a million dollars. and there’s a big difference between having capital and wealth versus having just money that you can consume. And that that’s the big mindset difference we try to help people with.

Oh, that’s huge. Thank you. How do you feel about having $500,000 in cash? And what does in cash mean? Because he is never going to have to 500,000. $500,000 in cash on a $10 million portfolio. Put the context on it.

Yeah. So high yield savings account or a high yield money market fund. Like right now, where my cash is, if you hold over $100,000 in cash, it’s like 3.47%. So it’s like 3 and a half% yield on that. If you want to get real like, you know, sophisticated, you can look at treasuries and do some sort of ladder. I mean, you can make it complicated if you want.

No, no, don’t tell him he can make it complicated. I see this. I know he’s going to automate.

But just readily available liquid cash paying somewhere between three and a half to 4% right now. And it’s just kind of sitting there for when you need to pay for things or write checks or when opportunities present themselves. And it’s kind of one of those things like your portfolio is not going to start growing. So even if you use that 500, maybe you have to use 100 of it for tuition, whatever. As you’re selling securities over here, you replenish it, right? So it kind of is like this revolving door. We go down a little bit and then come back up and go down a little bit and come back up. And that’s okay. That’s the life cycle of what your total portfolio allocation should look like.

So how does that feel? It feels good now that I talk to Uncle Brian and Uncle Bo. So you’re younger than me, so it’s a bit awkward. Oh, that’s all right. Weird family dynamic. My aunt is younger than my oldest cousin. Yeah, your family’s weird. from the south? Does that mean you are from the South? Let’s not tell me for the South. No, there’s just a lot of, uh, a lot of people.

I know this is you’ve been going for your show too, but we’ve had a great time creating this content. I really appreciate the time that you took to make all these fun slides and to look at our situation. I mean, obviously we know that we probably have a little too much money in Elon controlled companies or a lot too much money in Elon controlled companies. And the 70,000, when I saw this slide, I was like, wow, we really only have 70,000 in cash. And that’s, I mean, that sounds so snotty to say, ‘oh, we only have 70,000’. But compared to our net worth, that’s probably not enough compared to our upcoming known expenses. We have a rounding error. Seven years of college at least, the next seven years.

And I think it’s actually less than that because I paid a bill this week, so. I think it’s while you’re building a house, by the way, which if anybody’s ever built a house, it’s like your builder’s like, you yeah, I can do that, but it’s going to cost you. Back when I built my last house, it was probably like three to $5,000. Now with inflation, it’s probably, yeah, but for $10,000, $15,000, so you can make that disappear with four upgrades probably.

One of the workers pulled up in a new pickup truck this week. I’m like, wow, that’s better than any of our cars and it’s probably from the last bill I paid. They’re great. If you’re listening, you guys do great work, so I’m not throwing you under the table, but um yeah, enjoy the pickup truck.

Your orthodontist also drives a really nice car.

We don’t drive a nice car. I mean, they’re okay.

You have a nice car.

$35,000, it’s a Tesla Model Y.

Of course it’s a Tesla. Of course he does. I figured it. I knew it. It drives itself. I don’t drive it.

Thanks so much for having us on though. This has been great.

Yeah, this was a lot of fun. I really appreciate you guys giving us all this information and now we have a more conversations to have. Good thing we have a flight home to to discuss, to start to discuss. Plus we’re in the town this whole weekend, so we’re going to talk about it all the time. I can hear my daughters watching this thing. Oh my God, please tell them not to talk to us more about money.

Well, I’m going to do what I just like I remember when my parents gave me the birds and the bees, they gave me a book instead of actually having to talk. I’m going to give y’all before y’all leave, I’ll give you two copies of the book to give to your girls. Oh, that would be awesome. Thank you. That that uncomfortable talk can be helped with with Uncle Brian’s book.

Can you please sign them too? Yes, we can do that too. That’s great.

Oh, we’re going to the Gibson guitar store later. I can buy a guitar now. I can buy like a nice Les Paul.

Oh, I don’t think they said that at all. They alluded to it. $500,000.

We already have three guitars at home. How many can you play at one time?

I don’t know.

One.

We’ll find out.

That wraps up this episode of the BiggerPockets Money Podcast. I am Mindy Jensen. He’s Carl Jensen. They are Bo Hanson and Brian Preston, The Money Guy Show. Check them out on their YouTube channel at The Money Guy Show. And I’m saying see you later alligator.