Mindy Jensen: Last week, my episode with the Money Guys came out. Actually, mine and Carl’s episode with the Money Guys came out. And in the beginning of that conversation, I said that Carl and I had fallen into the middle-class trap, and that sparked quite a bit of discussion in the comment section of that video, with some listeners agreeing and others questioning whether we were using the term correctly. So today we’re going to unpack what I meant, whether the middle-class trap is still a useful concept, and whether you’ll be hearing us use that phrase going forward. Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me as always is my not middle class or trapped co-host, Scott Trench.
Scott Trench: Thanks, Mindy.
Scott Trench: That was a great socioeconomic intro. Really appreciate it. I’m excited to talk about this today. It was an awesome episode and the Money Guys were really, really fantastic. I mean, they both did a great job, but Brian in particular was just outlining the tax advantage he was proposing from a Roth conversion strategy, and he just crushed it. It was so eloquent the way he described it, talking about today’s tax code, smoothing out the tax brackets. I was listening to the episode. I couldn’t see the YouTube for that particular part, and it was just so clear the way he visualized it. I mean, they just do such a great job over there at Money Guy. But the top comment was, “Ah yes, the $10 million middle-class trap.” So I think we have a problem with this terminology as it applies to your situation, because clearly $10 million is top 1%, or very close, almost certainly top 1% for your age bracket. And it’s not middle, it’s not a middle-class problem. This is a high achievers, as they called it, or a larger problem.
Mindy Jensen: Yes. I liked, somebody said, “Oh, this isn’t the middle-class trap, this is the achiever’s trap.” And then somebody else chimed in, “Do you mean the blind achiever’s trap? They should have seen this coming.” So, all valid comments. When I said that Carl and I found ourselves in the middle-class trap— the middle-class trap, in air quotes, is a phrase that Scott and I have coined which describes a situation where you have done everything right. You’re contributing to your 401(k), you are not paying down your super low interest mortgage if you don’t want to, etc. But now the bulk of your net worth is in your pre-tax accounts, in our case the pre-tax 401(k), and your home equity. And this is true, the numbers are not middle class, but the middle-class trap, as I just described, is exactly what we find ourselves in, because the bulk of our net worth is in our 401(k) and our home equity. And yes, we do have money in our after-tax stock portfolio. We do have money in our Roth. But where this quote-unquote middle-class trap comes to hit us, and the whole reason we wanted to go down and chat with the Money Guys in the first place, is in the future we have RMDs that are sitting there just waiting for our 401(k) to continue to grow so that they can come and snatch out a lot of money from the 401(k). So we want to avoid that as much as possible.
Scott Trench: The reason why this term, the middle-class trap, aside from it being, you know, perhaps incorrectly applied to a $10 million portfolio, is so controversial is because people are right in a general sense that an optimal approach to financial independence often involves maximizing these pretax accounts, firing and stopping working, and then harvesting them in lower tax brackets. And that works for a lot of people. I mean, that’s a real appropriate strategy. And where it doesn’t work, though, is when you overshoot that FIRE number. I think that this really triggers a good section of the financial independence community. And I got no problem triggering that section of the financial independence community, because they’re wrong to be this dogmatic about what’s right and wrong. For a person who’s going to retire at 40 with a $1.5 to $2.5 million portfolio, stop on the nose and begin withdrawing at zero income at that point, they’re absolutely right. You should max the 401(k) the entire time, or as much as possible, and begin withdrawing. And you’re going to be able to do that for a chunk of that. You’re going to have a heavy balance there, but you’re going to be in those low-income tax brackets. And I think you’re going to get that arbitrage.
Mindy Jensen: I’m going to argue, if you retire at 40, how are you going to get into your 401(k) balance, Scott?
Scott Trench: You do the Roth conversion strategy, or your 72(t)s, right? You can do that. As long as you have some balance— you know, it can’t be literally everything in there— but as long as you have some balance in your after-tax brokerage, or your Roth, or in a cash buffer, you’re going to be able to do that. And there’s a real case to be made that it is tax optimal to go that traditional route and then pull it out at lower tax brackets after retirement. I completely agree with that. And to me, it’s not really a debate in that sense. But I want to get to the debate point here, because it is too rigid for people to just say max out the 401(k) at all costs, because it’s not how life works for a huge percentage of the people who listen to BiggerPockets Money.
Mindy Jensen: Okay, so you just outlined two strategies, the 72(t) and the Roth conversion. Assuming our retiree is age 40, the 72(t) is less enticing because you have to take that for a minimum of 5 years or until you turn 59 and a half, whichever is longer. So your 40-year-old retiree is signing themselves up for a 19-year 72(t). That’s going to be more of an issue. The other option is the Roth conversion. And when you convert to a Roth, that money is not available for you for 5 years. So a 40-year-old retiree still has a 5-year gap between when they can access their Roth-converted money. And also, I don’t think a 40-year-old is a good candidate for the 72(t). But, like you said, having the money in an after-tax brokerage is great. Again, I wanted to highlight what happens when you max out your 401(k). I’m 53. I’ve been maxing out my 401(k) since I was like 24. Well, actually, okay, I didn’t have earned income for the 8 years that I was a stay-at-home mom, but other than that— and Carl has been maxing out his 401(k) for the same amount of time. So that’s a lot of money that’s sitting in the 401(k). We also have an after-tax brokerage. We also have some Roth money. But if we would have been a little more forward-thinking— when I started at BiggerPockets, they had a Roth 401(k) option. I think that would have been a better choice. And another comment in that video, Scott, was somebody saying this really highlights the importance of having a financial advisor, or having a CFP or a CPA, look at your specific holistic position so that they can make suggestions. I have always been under the assumption that a financial planner just helps you with your investments. I don’t need any help with my investments. We’re doing okay. But that’s not all that they do. They also do tax planning. They also just are a wealth of this specific knowledge, and they can help you look at the bigger picture. Every business owner hits a point where they need more expertise than they can handle alone, but another full-time hire isn’t always the answer. That’s where Upwork comes in. It’s where growing businesses find highly skilled freelance specialists— not just for one-off tasks, but to build an entire team, fill critical skill gaps, launch projects faster, and scale support up or down at a fraction of the cost and without the commitment of permanent headcount. Visit upwork.com right now and post your job for free. That’s upwork.com, to connect with top talent ready to help your business grow. That’s upwork.com. Upwork.com.
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Scott Trench: I think going back to this concept here, though— we are not Dave Ramsey here at BiggerPockets Money. We’re not, you know, Money Guy over here at BiggerPockets Money. You know, we’re not some of these other shows. We are creating this show to help people who want to reasonably aggressively pursue their version of financial independence early in life. We presume that many of the listeners here want to retire in their 30s, 40s, or 50s and get there very rapidly. Some want to do it in their 20s. And for that population, you’re going to have a high savings rate. And I think that there’s a real possibility that a third of you listening are going to want to start a business or continue working in your version of early retirement or financial independence. Another third are going to be open to it. And a third of you don’t want to do anything after you retire and have no intention to make money at all. And so the pure FI strategy of maxing out the 401(k) throughout your career and then retiring and stopping earning money, and really being in that lower income tax bracket— I think the deferred approach works really well for that cohort. I’m not arguing that that’s not an optimal approach. I think I’d recommend that approach for many of that group, because the 72(t) is less impactful for that group, because they’re locking themselves in correctly, because that’s their goal, to that level of spending across that entire duration. And they’re likely going to need a fairly low income, so they’re not going to come close to those MAGI cliffs for ACA subsidies, that kind of stuff. And the Roth conversion works because, again, we have a very long-term worldview. We knew we were going to work. We knew we were going to stop, and we knew we were going to spend at this level for the rest of our lives. I think that’s not for me. That’s not for a lot of people. I wanted flexibility that expanded across my lifetime, from age 25 to age 30 to age 35. And that’s why I prioritized the brokerage account first— you know, my after-tax position first, my house hacking, that kind of stuff— because I thought that would give me options across my life. And then, after those first 3 to 5 years, I started maxing the 401(k). And that has produced those options for me. And I think the advantage I see now, that I didn’t see at 25 when I was doing this approach, is that I’m probably going to continue to make money through various ventures. I got real estate, I continue to do this podcast, I may advise companies in the future. So that income would make it very hard for me to do Roth conversions or 72(t)s or those other types of things. How many people have we talked to, Mindy, who have a spouse who continues to work while they’re living the financial independence lifestyle? That’s going to make it hard to do a 72(t). That’s going to make it hard to do a Roth conversion in those instances. And you can argue that that’s a good problem, and that’s just padding the win. And it is. But it also creates this feeling of trapped liquidity that constrains your thinking, and that money is really not as easily accessed as we thought. You can pay the taxes, but I find that to be very rare in practice. And I think the advantages of liquidity are great for a much bigger portion of the financial independence space than I think the purists, who have their tax-deferred account, tax-optimized approach, would argue. And I also will posit that this is kind of semantics here, right? So even if you dig through and just pay the taxes at various points, you’re not really talking massive percentage differences in post-tax net worth. Regardless of which path you choose, you’re talking about much more muted outcomes, because it all is getting taxed one way or the other. You’re just arbitraging these brackets. In some cases it can be really big, but in most cases it’s actually not this huge outcome. Your girls are getting a big inheritance if you go option A, and they’re getting a big inheritance if you go option B, according to the plan that we talked about on Money Guy.
Mindy Jensen: Yes, you’re not wrong. I do want to say that plans change. So in the beginning, 13-something years ago, when Carl and I first discovered this concept and started working towards it, our plan was he was going to retire. I wasn’t working at the time. I was raising the girls. We were going to retire and then we were going to live off of $40,000 a year forever. And then I became a real estate agent, and then I became kind of a successful real estate agent. I sell as many houses as I want to. We have a lot of income currently. Some of our investments took off, and then some other ones took off, and we have had a lot of success. So our plan completely changed.
Scott Trench: And I think that that’s something you’ve got to be open to as you go down this journey. You might win, you might not be dependent on winning, but if you might win, that’s going to change the tax calculus to some degree, if you factor that in as a probability assessment here. And I think, you know, at the point that you’re talking about Roth conversions and you needing to do that even while you’re continuing to earn income because you’re still going to have an RMD at that point, then you know it’s time to stop digging. So if we can concede that point— by stop digging, I mean by continuing to contribute to the 401(k)— and if we can concede that point, then yes, there comes a time when we’ve overcontributed to the 401(k) by definition, and we should have stopped before then. And if we can concede that point, then we probably shouldn’t have contributed to the 401(k) earlier in our journey when our income was at lower tax brackets. That’s my argument there. And I’m very happy with my decision to not max it out for the first few years. Again, this is not “don’t max out the 401(k).” It’s that there’s a prioritization here about going through this tax-advantage stack. And I think that that liquidity building, that first after-tax provides that whole lifetime of optionality at the lowest opportunity cost from a tax optimization standpoint. That’s my argument, and I’m standing by it after all this time.
Mindy Jensen: For many, I think it would be a very interesting exercise to look at what our obligations would be if we had been maxing out a Roth 401(k) over the last 10 years. But then also, I don’t want to do that math and be like, “Oh,” because I can’t go back and change it. So what’s the point?
Scott Trench: And, again, this is not a middle-class— the middle-class trap, I think, is polarizing, and we’re kind of stuck with it a little bit here. We call it the LFOF, the Liquidity First Optionality Framework, and that has not caught on yet. So the middle-class trap, I think we’re kind of stuck with for a little bit here. But the LFOF, or the middle-class trap, is a problem that begins when you’re in the middle class, right? So many, many households who are doing everything right with money— in the middle class, they contribute, and then 10, 20 years of disciplined saving go by, and you’re no longer middle class, but your wealth is locked up pre-tax. And unless you stop earning money and actually FI, which some people want to do and some people don’t— or the life looks different at that point and they’re not sure— then it’s actually quite hard to access that money. And that’s where the challenge comes from, and why people feel like they got hundreds of thousands of dollars, or even maybe a million bucks, in net worth, but still feel like they’re stuck in their day to day. That’s a real feeling. This is not something you can debate whether it’s technically accessible or not. No, this is how people feel. Millions of Americans in this country feel this way. And so the challenge is, what do you do there? And, again, my first point is stop digging for a little bit to build the balanced portfolio across these different accounts.
Mindy Jensen: Yeah, we have stopped contributing to the 401(k).
Scott Trench: Another point here, Mindy, is Bo had a really good point on the show with the Money Guys, where he said— and this was casually thrown in there, in like minute 32 or something like that— he was like, “You know, at today’s tax bracket, you’re going to have this amount of tax liability here.” And I think that that sentence is doing quite a bit of work in your situation, because I believe that, Uncle Sam— one day the political spectrum will shift and voters will come after the Jensens’ 401(k). That’s an easy target. What do you think? Am I being too hyperbolic with that statement, or is that something that you worry about?
Mindy Jensen: Not at all. If you look back and take politics out of the equation, if you look back to 2020, the government wrote checks to every American, or almost every American, for a while. Those checks need to be cashed. We’re in a deficit. Then we are spending money on upkeep and upgrading the DC area. Those checks need to be cashed. There’s all of this money that’s going out of the government that will need to be funded because you can’t operate at a deficit forever. I mean, contrary to government spending, somebody is going to have to pay for this. And I hope I’m not the only one that’s paying for it, but I absolutely believe that tax brackets will go up in the future. Maybe not the next administration, maybe the administration after that, but tax rates are going to have to go up because it’s not sustainable the way that the government is spending right now.
Evan Lawler: Let’s talk about some of the things not covered in The Money Guy Show. They had great advice with the Roth conversion here. But I want to call out— I don’t know if you’re going to do this, you and Carl, but I want to call out that real estate, I think, is a potential lever in your situation that we can pull to get out of this particular trap. Now, there’s pros and cons with this. But I think that in your situation, let’s say that you had rentals, right? You had my portfolio of rentals. The year of the Roth conversion would be a very good year to be particularly active as your real estate agent in your real estate business, if not earning a lot of income, at least, you know, doing a lot of hours to get your real estate professional status. And then that’s when I would hire the cost seg person and run a big depreciation year across all the portfolio, including anything I bought in that year that might generate a nice big loss that would be really compatible with a big conversion event in the portfolio. So either a real estate purchase or just using that one-time big tax hit to take a big loss and then still go up to the 22% bracket through the 22% back with the conversion. That would make a big dent in a rollover like yours. If you’re willing to put in that year of work, that might be more than several years of salary for many people if this has been a lifetime and accumulating it. What’s your thoughts in response to that as a tactic not discussed on Money Guy, but maybe appropriate here on BiggerPockets Money?
Mindy Jensen: Hey, Scott, you want to sell me your portfolio for a couple years?
Evan Lawler: Gift it to appreciate it. Yeah, I think then we’ll have a real talk with the IRS. That won’t be fun. Yeah, that’ll make a great podcast though.
Mindy Jensen: Yeah, live from prison.
Evan Lawler: Bigger Prison Podcast.
Mindy Jensen: Yeah, the Bigger Prison Podcast. I had a conversation with Carl about this, like, hey, here’s an idea. And he said, I don’t want to own real estate. I don’t want to put in the work. And I’m like, well, hold on, you won’t have to. I’ll have to do all the work. And he’s like, I don’t want that. We’re trying to simplify our life, and that is not simplifying our life. And ultimately, I think that we have decided that we are just going to, near the end of November or December of every year, look at our income streams for that year, look at what we own, and Roth convert up to the top of whatever tax bracket we’re in and just say, we saved all this money when we put it into the 401(k) and now we have to pay because I do appreciate having roads to drive on and, you know, having public services. So, you know, that’s kind of nice not driving down dirt roads all the time.
Evan Lawler: Another conjecture here is if you have a self-directed IRA, which I know you do to a certain degree, and you have private assets like a syndication investment or a hard money note or a private company investment that is illiquid, at this point, and you get those revalued, they may be valued at a lower basis than what you invested in them. And you can then use that in your Roth conversion years. And if, for example, the loan is valued at something less than its par value or repayment value, the principal balance, and it gets paid back into your Roth, now you’ve exhibited a larger Roth transfer. So that may be another item there is if there’s a component of your portfolio that’s going to be in these kind of alternative assets or syndication space, anyways, it might make sense to do that in the 401(k) and then consider, you know, hire somebody to value this. This is a kind of real technical tax challenge here, but there may be an opportunity to roll those over at a favorable valuation for you that results in less taxable income in the year of the rollover.
Mindy Jensen: So that is an idea that you floated to me, Scott, and I thought, that’s interesting, I need more information. So I went over to LongAngle, I asked in the LongAngle group, and I was actually surprised I didn’t get a ton of responses on this specific, very niche idea. So I’ve gotta do a lot more research. But again, when I floated this idea to Carl, he said, that doesn’t sound like we are simplifying our life. And I believe this is a huge red flag for the IRS.
Evan Lawler: Yeah, you gotta definitely hire professionals and do this by the book. But like you have that Impulse Space company, right? This rocket company with the guy who’s only worth $50 billion cuz he didn’t own SpaceX or whatever. That may be a candidate. I don’t know. But that may be one of those things you’d ask your tax pro about, about whether that is— you already own it. So if it was in your 401(k), you would just value it and say, okay, it’s valued here. Let’s roll it over this year if we’re going to do the Roth conversion.
Mindy Jensen: Yeah, I think that’s in a special purpose vehicle and you can’t sell it. Like I couldn’t transfer it over. But that is something that I really wish we would have put in a Roth account. We did make 2 SpaceX investments pre-IPO, and one of them was in the 401(k) and one of them is in a Roth IRA. And even like to jump through all the hoops to get it into the Roth was kind of annoying, but I’m glad we did that.
Evan Lawler: Okay, so it sounds like Mindy’s gonna pay the tax man. Thank you for your contribution to the national debt here. And I think the Roth conversion up to those brackets is absolutely the right answer from The Money Guy in your situation there. Was looking for those other opportunities, doesn’t sound like they exist, but those are areas I would be poking around in if I were in your situation because I own real estate. I’d be thinking, can I use the one-time benefit of that cost seg to offset me in a particularly advantageous year?
Mindy Jensen: Yeah. And these opportunities do exist. We don’t want to take advantage of them.
Scott Trench: Of course.
Evan Lawler: Yeah. So let’s talk about another component here, cuz I’ve been talking to real estate investors and I think that this middle-class trap we’re gonna call the LFOF, the Liquidity First Optionality Framework, also applies in the real estate investor world. So I don’t think you get a free lunch either way. So here’s this concept, right? I’ve talked to a lot of investors. How many investors do you talk to that have like 3 to 5 properties that are levered with like a 3% interest mortgage, fairly lightly, let’s call it like 50%-ish in that world. And they’re not really producing that much cash flow. It’s not nothing, it’s certainly positive, it’s not really draining them. But it’s not really like that meaningful relative to the rest of their financial position. And they’re kind of stuck in the portfolio because if they were to refinance and pull cash out, they’re going to take their 3% rate and swap it for like a 6% to 6.5% rate. If they 1031 exchange, they’re going to have to do the same thing, get new debt. Otherwise, they’re going to pay taxes. So they’re kind of stuck in this portfolio. They also have the same problem in the 401(k) wealth situation where there’s a lot of wealth on paper and now accessing it and actually spending it on my life. I have a tax navigation challenge for this. And so I have a framework here for getting out of one property, which is you cost seg the other ones, you clean up your losses from the past few years, and you use that in the year you sell your loser in the portfolio and harvest that cash that gets you out of one. But I think eventually you have to pay the taxman here too, unless you defer for the rest of your life. And then your heirs inherit the property at stepped-up basis, which is what some people do. But not for me, I would like to enjoy the wealth or have access to it to some degree. That’s another problem, I think, in the space here. And I think the hard answer I have, aside from getting out of potentially that one property with a relatively low tax bill, is you just got to stop digging there too. You can’t keep buying properties with max leverage, and then, you know, cost segging them and taking the tax benefit in year 1, where you’re going to have a huge net worth on paper. But if you were to compute your after-tax net worth, it’s not nearly as big as you would talk about. I actually talked to a listener a while back who had this problem. And this person had well north of $10 million equity position in these rentals. But we computed it like if after sales and after tax and depreciation recapture, if you were to liquidate this portfolio, your net worth is closer to $5 or $6 million, which is still great. That’s a wonderful outcome for real estate. But it’s not the same as what your actual after-tax wealth. And I think optimizing for that after-tax wealth past a certain point, maybe that should be reframing the goal. That’s the new goal that we have, you know, after we’ve clearly hit our FI numbers. No, I’m gonna start maximizing for post-tax net worth instead of pre-tax net worth and going after that.
Mindy Jensen: Yeah. So anybody who owns a property that they no longer wanna own should sell the property regardless of the interest rate.
Evan Lawler: I don’t think it’s that simple.
Mindy Jensen: I think it’s that simple. If you have a property, Scott, let’s say one of your properties is just a dog. It doesn’t generate much income, you’ve got the super low interest rate, but it’s always filled with problems. You just can’t get a really great tenant in there. Everything breaks. It’s just a headache and it takes too much mental space. Get rid of it. You don’t have to own it just because it’s a 3% interest rate.
Evan Lawler: I agree. But the problem is, at what price do I get rid of it at? Right? So that’s the issue, right? It’s like, life is not as simple as get rid of the things you don’t like. If I could part with this property at $400,000, I’d do it right now. But at $330,000, I’m not parting with this property because it’s worth more than that. And it’s worth more to me than the next buyer because I have that debt on that property. And that becomes the problem. So like, my— this property is a pain in the rear. I would love to sell at this price, but below that price, it’s better for me to keep it. And I think that’s the real issue that hangs up a lot of real estate investors. And I also think that the tax— but the tax thing is another thing that they have in the back of their minds. But haven’t quite modeled out in all cases if they were to sell it in that year.
Mindy Jensen: That’s where this example is me saying, yeah, I totally hear myself saying this and I should just sell, you know, the stocks and be done that I don’t want to own anymore. You know, do the Roth conversions and then sell after-tax stocks to fund the tax bill on the Roth conversions. You’re right. It’s not that simple. I make it sound so simple because I currently own zero real estate that isn’t primary residences. And I say primary residences, I’m building my new primary residence. I live in my current primary residence, but I’m going to sell this as soon as the new one’s done and we move in.
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Evan Lawler: Like, I got this one property, Mindy, you know this one, I— you actually helped me list it and I tried to sell it and we couldn’t get interest in the property, you know, at the price point. We could have lowered the price and lowered the price and lowered the price and sold it. And I was like, no, we’re not going to do that because it’s not worth it. And then we put a tenant in there, it’s cash flowing and comes back. It’s still kind of a pain in the rear, this particular one. But it wasn’t worth it for us to sell at the price that we probably would have had to trade it at in there. So we’ll just relock, reload. We did the work to get the property back in shape, put the money in, and now we’re going to ride it for a while. And I think that was the right answer in there. You know, it wasn’t as simple as just sell it. Would you have advised us to take a $100,000 price cut to sell it?
Mindy Jensen: If you don’t want to own it anymore and you need to sell it.
Evan Lawler: At this price, I would have rather sold it. At this price, I’d rather keep it.
Mindy Jensen: So why is there the disparity between what you think it’s worth and what someone’s willing to pay for it?
Evan Lawler: It’s what it’s worth for me to sell, right? So what it’s worth is what someone will pay for it. So it’s worth less than my asking price, right? But to me, it’s worth more because I have low interest rate debt on it. If I were to take the money out and 1031 exchange it into another property, I’d get a worse deal. Even if I got a better deal unlevered, I’d actually have a worse property that I’d own because of the debt difference I’d have.
Mindy Jensen: And it’s not worth it to just sell.
Evan Lawler: And a simpler way to explain this is we’ve got this house in this family neighborhood, and there are people that they’re empty nesters now. There’s no kids in the house and they still live in this neighborhood. And there’s no real reason to live in this neighborhood if you don’t have kids. I mean, it’s good. It’s a nice neighborhood, but it’s not— I would imagine many of them would have moved on, but they can’t because for them to downsize, they would have a higher payment on the new place that they’re buying because of the mortgage rate. If they were to downsize, they have more rent than their current payments plus maintenance costs because of the way the mortgage lock-in works.
Mindy Jensen: Yes. And I remember one of our former coworkers at BiggerPockets was locked into a similar situation. She didn’t need as big a house anymore, and she couldn’t move to a different house because it would just cost her more. So she’s just staying in this big house.
Scott Trench: Bringing this back to the middle-class trap, the liquidity-first optionality framework, this concept of I’m wealthy, I’m building wealth, but it’s pre-tax and I need to harvest it. And in real estate, I’m going to probably have to do that in one big shot, right? Selling the property, that’s going to trigger my gains unless I 1031, for example. And in the 401(k), we can do it with Roth conversions up to very specific amounts. So the 401(k) has some serious advantages in there. The real estate investor’s advantage is that I’ve got this dry powder in offsetting my tax bill, at least in the real estate sense, especially if I’m going to go into the real estate professional status where I can run those cost segs or that purchase in the most advantageous year, and then I can manipulate my tax brackets. I can stay in that low-income tax bracket in the year when I have other offsetting income and smooth out that ride. And I think that’s the right answer, is it’s not a formula. It’s knowing where my dry powder is from a tax perspective and using it in the right time periods that are the best guesswork. And my bias, and I think this is where people disagree very reasonably with me, is my bias is to pay the tax man earlier in life rather than later in many of these cases. I especially want to pay this when I’m in the 10, 12, 22, and 24% tax brackets, because those are, relatively speaking, if things go well, I may find myself many years above that. And so I’m actually happy to pay those in those brackets for my situation personally, and would rather do the Roth or the post-tax stuff for that. And so I actually did max the Roth most of my years. Yeah.
Mindy Jensen: And that will probably be the smarter choice for you.
Scott Trench: The Roth 401(k) specifically at work.
Mindy Jensen: Yeah. Yes.
Scott Trench: So Mindy, after this conversation, does the Middle Class Trap still exist?
Mindy Jensen: Yes, and I am going to say that based on the commentary, I am not going to call myself middle class, although I have been middle class my whole life, so it’s hard to make that change. The Middle Class Trap, as we describe it, Scott, still exists because there’s so much personal finance content out there saying get the match, then contribute to your HSA, and then continue maxing out your 401(k). That’s top of the list of almost everybody’s financial order of operations. And I think that people need to really look at their specific situation and ask themselves, is this the right choice for me? Based on what you said, Scott, you think you’re gonna have higher income down the road, then the Roth now is probably a better choice for you, because your withdrawals from your 401(k) stack on top of whatever income you have. Ten years ago, I didn’t think I was going to be such a successful real estate agent, and now I am, and I can’t go back and change to a Roth designation ten years ago.
Scott Trench: I completely agree. I think this problem exists. The Middle Class Trap is the wrong term to describe it. We need a new term. I don’t think we’re going to come up with that term today here on the BiggerPockets Money podcast, so I think we should crowdsource this. Please go to YouTube and tell us what the name for this problem ought to be. Something catchy that we can refer to it as. And then go upvote the one that you like the best in the comments section here, and we can go with that. I would love to remove the word trap from it, and I’d love to remove the phrase middle class and replace it with something that is post-tax net worth, something— those are the themes I want to go with, because it’s a real issue facing lots of people, and you’re just wrong if you think that this doesn’t exist. And it does. It’s clearly a problem for people that have this. And it is dependent on your worldview. So it doesn’t exist if your worldview is I’m going to retire with $1.5 million and withdraw at 0%, effective 0%, almost 0% rates by using the standard deduction and the 0% long-term capital gains tax bracket, and pay very low taxes. Then you’re right, it doesn’t exist for you. But it exists in a very real sense for other people who are not going to follow this prescribed early retirement path where they’re truly withdrawing their portfolio entirely with no other income. And for those people, this is a real problem. How do we move from pretax to post-tax efficiently in a way that gives us that optionality early in life instead of at traditional retirement age? And so we’re going to ignore you if you tell us it doesn’t exist, because it does. The thousands of people that have said this exists. But we will acknowledge where and when it doesn’t apply and how to think about it, because it’s different from different concepts.
Mindy Jensen: Yeah. Is it really a trap? No, but middle class conundrum. Doesn’t sound so catchy.
Scott Trench: The middle class conundrum.
Mindy Jensen: The middle class head scratcher. The middle class problem that isn’t really a problem.
Scott Trench: Optimizing for post-tax net worth. That’s the goal that we want to do here, I think, in the financial independence world, reasonably early in life, right? So we can spend it on the things we want.
Mindy Jensen: I did like the achiever’s trap that someone said, but I would love to hear from other people. Let’s see if we can crowdsource. Like you said, Scott, let’s crowdsource a really awesome new name for the Middle Class Trap.
Scott Trench: Let’s do it.
Mindy Jensen: All right, Scott, this was a lot of fun. Thank you so much for chatting with me about my episode with The Money Guys. If you have not watched the episode, please go back and watch it. I got some really great information. There’s a lot of tax planning and tax strategy information in there for people at any net worth. And it was really a lot of fun. I learned a lot. Carl learned a lot. We had a ton of conversations after we finished recording. It was a really, really great episode. So definitely go back and check that out if you have not yet. All right, the end of this episode is now, but we have a website filled with information for you. Go to biggerpocketsmoney.com or biggerpocketsmoney.com/resources to find templates and calculators, spreadsheets, all sorts of things. Scott has been working with our technology team to create really, really awesome free resources for you to help you on your FI journey. So that’s biggerpocketsmoney.com. All right, Scott, should we get out of here?
Scott Trench: Let’s do it.
Mindy Jensen: That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench. I am Mindy Jensen, saying don’t let lifestyle inflation derail your destination.
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