Afford Anything - Ask Paula - I Have Three Kids and I'm Hoping for Financial Independence

Episode Date: November 2, 2018

#159: Should a 36-year-old father of three invest primarily in Traditional or Roth retirement accounts? Should Rose, a grandmother of four, open a Vanguard account for each of her grandchildren? Should Nancy, who lives overseas and is the sole breadwinner in her family, invest in a Traditional or Roth TSP? Should Scott’s wife rollover her 403(b) from her former employer into an IRA? Should Patrick, age 35, cancel his life insurance plan? Former financial planner Joe Saul-Sehy and I answer these five questions in today’s episode. Our first caller is Mr. “Three Kids and Still Hoping for FI,” who asks: Should I be trying to grab as many Roth dollars as I can before I can’t contribute anymore? Or should I just pour dollars into my traditional 401(k) and have my Roth conversion ladder and/or SEPP-72(t) ready? Rose asks: I have about $1,200 for two of the kids. Can you please suggest the best fund I can start with? Can you also suggest options for birthday gifts? I like giving money, and the kids don’t need anything materialistic. Stocks, perhaps? One stock at a time? Government bonds? I’d like it to be something I can give to them inside a card instead of cash. Nancy asks: I’m 33 years old, married, and have an 8-month old. I work for the Federal government and we have a TSP. We’re living abroad and my spouse isn’t working. I’d like to retire within the next 20 years. We’re conflicted about whether we should invest most of our money into a Roth or not. We keep getting conflicting information about whether we should take the tax deferment now, or whether we should pay the taxes now and not worry about it when we retire. We don’t have much debt, and we have international properties as well as two properties in the Washington DC area. We’d like to know how best to manage the tax issue. Scott asks: My wife recently left a job at a hospital where she had a 403(b) and a Health System Defined Contribution Plan. What can I do with that money? Can I roll it over into something else? Second, what do we do with the 403(b)? My first instinct is to roll it over into an IRA, where I have more control, but my wife and I (with our current income) cannot contribute to a Roth IRA so we’re making use of the Backdoor Roth conversion. It’s my understanding that rolling money from a 403(b) into an IRA will affect our ability to execute a Backdoor Roth conversion. Am I understanding that correctly? Patrick asks: I’m about 35 years old and recently married. My wife and I have a combined gross income of about $100,000. I have some concerns about our MassMutual life insurance retirement accounts. I think MassMutual is a good product, but I think we are over-invested. We’re both putting away a premium of about $500 a month (about $1,000 combined) into our MassMutual. The payout that we’re expected to receive at the end is about $350,000 for me, and about $400,000 for my wife. I’m concerned that our premiums are too high and we could be using that money in better, more effective places. I tried to reduce my MassMutual payment a few months ago, and the cut in benefit was pretty drastic and not proportionate … it didn’t seem very fair to me. Any advice? ________ We answer these five questions in today’s podcast episode. Enjoy! By the way -- TRIVIA TIME!! At roughly the 36-minute mark of today’s episode, Joe and I talk about the late Senator William Roth, the namesake of the Roth IRA and Roth 401k. His birthday is July 22, 1921, which means his half-birthday is January 22. Which means we can celebrate his half-birthday soon!! Tune into the episode to hear our only-half-joking conversation about this. :-)  #AllTheCheesyBiscuits Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything, but you can't afford everything. Every decision that you make is a trade-off against something else, and that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention, anything in your life that's a scarce or limited resource. And so the questions become twofold. Number one, what matters most? And number two, how do you align your daily decisions to reflect those priorities?

Answering these two questions is a lifetime practice, and that's what this podcast is here to explore. My name is Paula Pan. I am the host of the Afford Anything podcast and the founder of Afford Anything.com. Every other week, we answer questions from you, the audience. And today, former financial planner Joe Saul Seahy is on the show with me to answer some of these questions. Hey, Joe, what's up? I'm here again?

You're here. We've done it. I am so happy. How are you today? I am excellent. We've got five questions that we're going to tackle in today's show. Our first question is from a 36-year-old who has three. kids and is still hoping to reach financial independence, or as it's often abbreviated,

FI. Let's hear from him. Hello, Paula. I found you through stacking Benjamin's with Joe. So if you want to wait to answer this question until he's back on, I understand. You two are great together. Although I am not a retail investor yet, I love the Afford Anything blog and think you have a unique style. I really enjoy your concept that you can widen the gap between spending and earning in two ways. That's key for this question as I charge ahead for FI and possibly early retirement. Context. As a young man, I saved heavily into my traditional 401k coming into my first job, less because of a good long-term planning and more because that's my natural way. Only over the last

year plus have I learned of the FI movement and have spent much of the time researching and learning. However, now 36 and married with three young kids, I'm battling my expenses to regain the deep saving rates of my youth. While I have a healthy traditional 401K, which has been my main investment for a decade, my work also offers the dual option of a Roth 401k, and I've seen. I've seen a healthy traditional 401K, saved about 5% of my worth there. Complicating the issue, I've worked hard to widen the gap by raising my income, and with my salary now scraping against the eligibility ceiling for Roth IRA investments, I'm unsure of how to move forward. Some people seem to think that because I'm eligible to hold both a Roth 401k and a Roth IRA, I should open a Roth IRA and pump all my savings dollars after

tax into both, especially since any future raise or promotion would likely make me ineligible. Others think that because my tax rate has been rising with my salary, I should be pushing my dollars into the traditional 401k because I'll likely be in a lower tax bracket in retirement. I followed your podcast and I would rather eat a live cockroach than pass on my company match or my maxed-out family HSA. And with the three kids, I don't yet have the saving rate to also be able to max out to the 185 level. Therefore, should I be trying to grab as many Roth dollars as I can before I can't contribute anymore? Or should I just pour dollars into my traditional 401k and have my Roth conversion ladder and or 72T ready? Literally, I can afford any investment,

but I can't afford every investment. Sincerely, three kids, but still hoping for financial independence. We don't want him to have to eat the live cockroach. So we'd better answer this. That was very vivid. I could picture it as he said it. The basis of this question, I guess, if we boil this down, do I use Roth or traditional? Exactly, yeah.

Should I invest in a traditional 401K or a Roth 401K? And from somebody who is scraping up against the edge of Roth IRA eligibility, where what buckets should all these this money go into you know i think and you and i are going to disagree on this uh how do you like the way i start that we're going to disagree hey paula we're we know each other well joe yes mom speaking of mom mom always says do not let perfect be the enemy of good and i think this is a conversation about good and gooder and i i think that the fact that We don't know what tax law is going to look like in the future. We don't know what's going to happen in the future.

And we need all that. The only thing I'll say for sure, when he mentioned all of his choices, I want to avoid that 72T, the SCPP rules at all cost. It's complicated. It's convoluted. If you mess it up, there's a massive tax penalty. I want to avoid that. So I would make sure that he has enough money in a position to be able to withdraw.

it without having to do that pre 59 and a half. And then I would make sure he has tax diversification because I don't know. So I'm going to say I like the traditional for money that he's going to need after 59. And a half. I also, you know, looking at any company's website, whether it's Fidelity or TROPrice or Vanguard or whoever, they all have a tax calculator on their website, which is Roth versus traditional. The older you are, the more it skews toward traditional.

because the tax break today makes more sense, the younger you are, the more it skews toward Roth. Now, there have been lots of people writing online that say, none of that matters and it should be Roth all the time, which I think is what Paul is going to say. But I love the idea of tax diversification because I don't know. And if I don't know, let's take some of it as a bird in the hand today. The other cool thing is that getting that 401k match,

that will also already be pre-tax, no matter what he does with his money. So pre-tax versus Roth, I think I would begin with the end of mind, find out how many years he's going to need money pre-59.5. Solve for that bucket first and make sure that's on a position where he can get at it. And then after that, I would be tax diversified. And at his age, at 36, I think I lean more toward a 50-50 split. The problem is, is that, you know, like he said in his voicemail, There's so many opinions. Everybody has an opinion on this topic. So I go for a diversified approach. Joe, my answer is similar to yours. I do. What is up with that? I know, right? We've been doing

these questions together for too long. So I agree with you in that I believe that he should conceptualize the money that he will be living on prior to the age of 59 and a half differently than he conceptualizes the money that he lives on after the age of 59 and a half. And for the sake of listeners who are wondering why we're so fixated on your half birthday when you're 59, the reason for that is the age at which you can withdraw money, including capital gains and dividends, from an IRA without penalty. So prior to the age of 59 and a half, you can withdraw the principal contribution to a Roth IRA without any penalties, but you cannot withdraw the capital gains or the dividends that you make from that Roth IRA basket. And prior to the age of 59.5, you can't touch any of the money that you might put in a traditional IRA.

At 59.5, the whole game changes. And all of your IRA money, whether it's traditional or Roth, is all yours. So that's the reason that we keep talking about this age. And the game, and not to get too far off the track, but the game changes again at 70.5 when you have to take requirement distributions from those pre-tax dollars. The cool thing about the Roth is you don't have to do that. So the game is different. pre-59 and a half and the game is different 70 and a half. Right. Exactly. Which is, it's funny that we talk so much about half birthdays when we get to retirement age. It's like, I haven't celebrated a half birthday since I was five, right? Oh, in six months. That's true. Sorry. We should start doing that. I love the idea of half birthdays. It's like more celebrations. Isn't that nice? When's your half birthday, Joe? It would be in August, August 16th.

Nice. All right. We'll celebrate your half birthday. We have to do that next year. I'm putting it on my calendar. I'm going to expect a card, Paula. It's happening. I also agree with you, Joe, in that if we can avoid a situation in which we have to use some fancy tap dancing such as the SCPP 72T rule, that would also be better just for the sake of simplicity. And for listeners who are wondering what that is a reference to, if you want to withdraw money that's inside of an iron, prior to when you're eligible. It's possible to do that, but it requires a lot of very careful dotting of eyes and crossing of teas. It requires some very detailed paperwork. So this CPP-72-T rule is a loophole, essentially, through which you can access that money,

but it's complicated. And if you mess up any details, you're in for some bad news bears. So you can do it, but it's best not to set yourself into a position in which that's your plan A. So for all of those reasons, Joe, you're correct in that I do tend to lean towards Roth in what I normally recommend to people, largely because, as you said, the younger you are, when you run the numbers through the calculators, the younger you are, the more that Roth often makes sense. And remember, you don't draw down 100% of your portfolio balance on the day that you turn 59 and a half. Or on the day that you turn 62 or 65. You don't draw down everything right away.

So some of the money that you're investing now, you'll live on until you're 90. And for that reason, to me, it makes sense to skew towards a Roth when you're in your 30s or 40s, because you pay the taxes now and then everything that gets invested, grows tax-free for as long as it remains in those investment accounts, which could be many, many decades into the future. That being said, Joe, I also agree with you in that I like the concept of tax diversification, but I'm going to give the asterisk here that the money that your employer contributes is pre-tax.

It's a traditional contribution inherently, like all employer contributions to a 401k are always pre-tax. And so you do get some tax diversification just by virtue of having a tax. employer match. So my answer is I would, I would diversify between the two buckets. I would lean a little bit more Roth, but that tends to be my natural bias. But that being said, six a one, half a dozen of the other. And the fact that you are potentially going to be in a lower tax bracket after you retire gives justification for a stronger pre-tax orientation. I would split the difference.

Now, if you reach financial independence and you quit your job, then you may find yourself in a lower tax bracket. And at that time, you can convert money from a traditional to a Roth while you're in that lower tax bracket. Of course, you're going to pay taxes when you make that conversion. And so in the early retirement context, sure, it does make sense that to a certain extent that when you're in a higher tax bracket, you put money into a traditional IRA, then you retire or quit or resign.

And then at that point, when you're in a lower tax bracket, you convert money from a trad to a Roth at the time in which you are at a lower tax bracket and you pay the taxes then. That said, number one, there's only so much that you're going to convert because you'll want to maintain the ability to stay in that lower tax bracket. Number two, we don't know what tax rates are going to be like

even 10 years from now. So there's always a little bit of rolling of the dice that happens whenever we start making projections about not just what the markets are going to do, but what the politicians in Washington are going to do in terms of our tax rates, even just a mere 10 years into the future. We just don't know. We can make guesses, but we don't really know. So there's an added risk premium there. And number three, oftentimes, even when a person has the intention of being in a lower tax bracket in retirement,

Meaning even when a person has the intention of not making as much money in retirement, well, I have anecdotally often seen the people who self-select as ambitious enough to reach financial independence and to quit their jobs are often also the type of people who end up somehow, in some way, shape, or form making often as much money or more during their retirement years, their early retirement years. And so it may be or may not be the case that you reach early retirement and your tax bracket doesn't change or it goes up. Again, any time you're planning for taxes and the future, you're rolling the dice a little

bit. And that's part of the reason why I biased towards the Roth. My inclination is to say, you know what, let's just pay the taxes now and not have to think about it again. And particularly in your case, since you will be phased out of eligibility for a Roth IRA account, and sure, yeah, there's the backdoor Roth conversion, but that also has some details around it. You can only convert a pro-Rata share, blah, blah, blah. Given the fact that you have the circumstances that you do, splitting the difference just seems

to make the most sense, in my own opinion. I like the fact that he's asking this question because this is the question most people don't ask. I've seen studies that show that a lot of people get the investment piece right. They focus on that a lot, but because they have the tax piece wrong, they end up with money in a spot where it's not easy to get to or money that is creating unnecessary taxation where it shouldn't. So thinking about the tax bucket, I think, is a great thing. But I'll tell you, there's two things that are bigger fish. Number one is having money available when you need it. And then number two, I think, especially with his three kids, and he alluded to this, is how does that?

he go back and begin capturing more money? How does he get more money saved? And so how does he run a more efficient operation, getting more of the stuff that he wants in his life, but cutting out all those things that really aren't making a difference so that he can get financial independence as soon as possible? You know, the other thing, so he mentioned his 401K, he's got a traditional and a Roth 401k, he mentioned a Roth IRA, he mentioned an HSA. I didn't hear any mention of 529 plans. Nothing. So that's the other thing that I would say is if you plan on helping your children with some of their educational costs, which you may or may not plan on doing it. There are many people who decide that, hey, kid, when you're 18, it's up to you to make your own way in the world.

And that's perfectly fine. But if you choose to be involved in financially supporting your kids' education, that's another piece of this. Yeah, I agree with 529 plans, to your point, if he is going to save for college. You know something else I want to shine a spotlight on, Paula, is the fact that he says that the one thing he did really well, and I think our younger listeners should hear this loud and clear, the fact that he automated that 401K at the beginning of him going to work was fantastic. And now he's 36 years old and he's starting to get more analytical about it.

Just if you start and you directionally move. And you put money away in a spot where it's easy to save, even if it's in the wrong type of fund, you're not really analytical about how much you're putting away. The fact that he did it is something so many people out of high school or out of college don't do with their first job. And now that's given him some flexibility that he wouldn't have had. So congratulations there. Exactly. So I suppose in summary, the answer is tax diversify, have a little bit of,

of both. Yeah. So thank you for asking that question. Our next question comes from Rose. Hello, Paula. This is Rose from somewhere in Florida. I have a question about how to save money for my grandchildren. By the way, I did search the files for this question, but couldn't find it.

I'm pretty sure you talked about this before. Maybe not exactly as my question, but similar. My apologies for asking it again. Here's my situation. I have four grandchildren, ages seven months to six years old, and I am saving a little money every month for all of them, not much, like $30 a month for each. My intention is to eventually open a Vanguard account where I can leave the money there until they turn 18 years old or so.

I know some funds have a minimum amount required to get in. I have about $1,200 right now for two of the kids. Can you please suggest the best fund I can start with? Another question. Can you suggest options for birthday gifts? I just like giving money and the kids don't really need anything material. I was thinking about stocks, perhaps, one stock at a time, or government bonds, something I could give them inside a card instead of cash.

Thank you for all that you do. I love your podcast. Listen to it while exercising and it keeps me going. And I do tell everybody I come across about it. Rose, thank you for calling and thank you so much for that compliment. I'm glad that I can be part of your workout routine. You mentioned that you'd like to put this money in Vanguard, but you're concerned about minimum requirements, minimum investment requirements.

One workaround to that is to buy Vanguard ETFs rather than Vanguard index funds. Now, ETFs and index funds can, depending on how you use them, function similarly. So here's the difference between the two. An index fund is a type of mutual fund, except instead of being an actively managed mutual fund, an index fund is a passive mutual fund that tracks the market. And when you buy an index fund, people don't actively trade index funds the way that they actively trade ETFs. When you buy an index fund or a mutual fund, that trade is executed at the end of the trading day. So you don't have a whole bunch of professional traders in suits who are making lots and lots of very quick orders in a matter of seconds.

You don't have that kind of noise going on with index funds. When you read articles online, a lot of people often talk about index funds because that tends to be what is used in the buy and hold communities. But it doesn't have to be that way. You can buy ETFs as a proxy for an index fund. And as long as you buy and hold an ETF, as long as you're not actively trading it all the time, you know, every day, then you can hold an ETF in the same way that you might hold an index fund and have a very similar experience between the two. And ETFs and index funds often have expense ratios that are quite comparable. I love ETFs. I think they're fantastic.

And a lot of times online people will say, oh, don't buy ETFs because you don't want to be an. active trader. Well, guess what? You can hold an ETF without being an active trader. So that's what I would recommend doing. Get an ETF, hold it for a long period of time, and enjoy the fact that you also get that similar benefit of a low expense ratio coupled with no minimums. I love that recommendation. It's straightforward. It's good for the time frame that 99% of kids will need. I absolutely love that. I'm going to give you a couple more options. because of the fact that we don't know really what Rose's goal is giving this. I mean, she said to give it to them when they're 18, but I'm going to ask a little bit more of a for what.

But before we get to that, one thing you want to watch out for, Rose, and we don't have to complicate this too much, but expected family contribution rules if your grandkids are going to college, you might run into problems with them getting less financial aid because they have this money available. So there's a few options in terms of giving it to them. one, keep it in your name, that exchange traded fund in your name, with them as beneficiaries on the account. And then as long as it doesn't grow above the point where you need to file a gift tax return, and that's well above the 1,200 that you have saved now, you can just give it to them at 18. And then you'll know how expected family contribution works at that point and whether this might affect their financial aid situation.

The second thing to do. Joe, quick time out. Can we define expected family contribution for the sake of any listeners who are wondering, what on earth are we talking about? What's an EFC? Yeah. So when you calculate how much financial aid junior is going to get for school, you're going to fill out this thing called the FAFSA, which is the financial aid form that 99% of colleges use to determine financial aid. It's all been centralized. People fill out one form. Specific schools may have other forms on top of that one,

but you'll fill out the FAFSA form. The FAFSA form uses a calculation they call expected family contribution and that's how much money they expect the student and the student's family to pitch in for school before they get need-based aid. So knowing that a little bit about that calculation makes a lot of sense. Now, we could talk about how that calculation works now, but especially for the seven-month-old, we have no idea how it's going to work later. But I do know today assets that are in a parent's name count differently than assets that that are in a child's name, which, by the way, makes sense.

If I think about a parent, a parent has to juggle a lot of different things. They have to feed the family. They have their own concerns and they have to help junior get through college. Junior, according to the FAFSA, has one priority and that's to get through school. So because of that, assets in a child's name are generally today calculated more heavily than assets in a parent's name. And guess what? The reason I said, leave it in your name.

and make junior the beneficiary is because of the fact that assets in a grandparents' name don't factor in at all. Now, if you want it specifically for college, you can put it in a 529 plan. Once again, a 529 plan is in your name. It also gets around a lot of that. Junior becomes the beneficiary of the 529 plan, meaning you can use it for junior's college. So if you want it specifically for college, a 529 plan might be a good idea. If you want the money to teach them about investing, I've found that teaching a child about a mutual fund or an index fund creates a yon, but buying them an individual stock, even though Paula and I can talk all day about how, you know,

they don't want to learn to be a stock jock. Just getting the fact that you have ownership of a company is really what the stock market's all about. And then we can teach them diversification a little bit later using something, a tool like stockpile might be a good idea, where you're buying them shares of the brand shoe that they wear, or maybe it's Disney, or maybe it's whatever they're into, I think kids connect much more quickly to stocks and how they work when you buy individual companies. And maybe I don't do that with all the money, but maybe I do that because I do think diversifications are the right thing to do. But if the goal is to teach them about how this stuff works, buying an individual share

might be cool. In terms of birthday gifts, I really like this company, this cool fintech company called Goal Setter. And it's Gollsetter.co. It's run by this brilliant woman from Stanford, Tanya VanCourt. It's cool because much like when I was a financial planner, we talk about setting up goals. Junior goes in, sets up what their goals are, and then part of the money they can set to a charity or somebody that they want to gift that money to. Some of it could be spent on a short-term goal and some of it toward a long-term goal and gets invested. Goal setters fantastic for teaching kids.

The piece of this that I think is really important, I get this money instead of $20 in a card or $50 in a card or whatever it might be. Now they get the gift of learning how to set goals and then work toward achieving those goals. And then as they get gifts or they get an allowance or they earn money, whatever it might be, they can put more money into their goal setter account. And I think it's a really cool kid's program.

I was actually thinking for the gift component of it, I was actually thinking buying just one share of some company that that kid loves, like Disney or Nike. And then you yourself can just make a little handwritten little certificate, a handwritten little piece of paper that says, you're partially an owner of Disney and put that in the card and show the kid, hey, you, you own the Disney Corporation and use that as a teaching mechanism. So I thought that could be kind of a cool kid's gift. Just one share. Don't put a lot of money into it, you know, but yeah, 20 bucks, 50 bucks, whatever, just a small amount of money, I think could be a really cool gift idea and then execute the actual trade on some platform. that allows you to buy shares for free. So, for example, the Robin Hood app allows for fee-free trading of individual stock.

So it's perfect for buying a really tiny amount, $10 worth of a stock. But, yeah, Joe, I agree with you. The expected family contribution is definitely something to look out for because if the money is in the kid's name, it's going to – there's essentially a penalty for the money being in a kid's name. So you want to avoid that penalty. Yeah. And, you know, for most people listening, your need-based aid may end up being zero. But why chance that if you don't have to?

Exactly. All right. Thank you, Rose, for asking that question. We'll come back to this episode after this word from our sponsors. If you run a business, you know that payroll and benefits are hard. You don't have time to deal with a mountain of paperwork and don't have time to become an expert in taxes and regulations. Don't worry. You don't have to.

Gusto does the heavy lifting for you. you. They make payroll benefits in HR easy for small businesses. In fact, 72% of customers spent less than five minutes to run payroll and four out of five customers actually reduce payroll errors after switching to Gusto. 9 out of 10 users also say that Gusto is easier to use than other payroll solutions. In fact, if you Google them, you'll find out that people really love Gusto, which is saying a lot because how often do you love your payroll provider? So if you're a small business and you don't have an HR expert, don't worry. You don't need to use one because Gusto gives you that great software and that great service that allows you to focus on running your business rather than dealing with payroll and paperwork.

And you no longer have to be a big company to get great technology, great benefits, and great service. To help support the show, Gusto is offering our listeners an exclusive limited time deal. Sign up today and you'll get three months free once you run your first payroll. Go to gusto.com slash Paula. That's G-U-S-T-O-com slash Paula, P-A-U-L-A. Gosto.com slash Paula. If you've been reading my blog for a while, you've probably read me say that one of the big advantages to working from home is that I wear yoga pants every single day. I don't have to wear anything uncomfortable.

I can just hang out in yoga pants. And that's great, except there are still times that I have to leave the house. And I've got to go to meetings or conferences or events where I'm supposed to dress professionally. And in theory, I'm supposed to put on a pair of dress pants or professional pants, but I don't want to because they're not as comfortable. This company called Beta Brands solve that problem. They have a product called DressPant Yoga Pants, which are yoga pants that are appropriate for a workplace environment.

These pants have belt loops and a front button and a faux zipper in pockets. I have a pair and they fit really well. They feel great. They're as comfortable as yoga pants. And yet they are professionally appropriate. They've got a bunch of different colors like black, navy, gray, khaki, and styles like boot cut, straight leg. But basically, it's a way that you can wear yoga pants in a professional setting, which is awesome. So that's why I started wearing Beta Brand's dress pant yoga pants.

Visit Betabrand.com and use my code Paula to get 20% off yours. Millions of women agree, these are the most comfortable pants you'll ever wear to work. That's Betabrand.com. B-E-T-A-B-R-A-N-D.com. use my code Paula and get 20% off your dress pant yoga pants. Our next question comes from Scott. Hi, Paula. I have a two-part question. My wife recently left a job at a reputable hospital where she had a 403B and something,

what I think is called a health system defined contribution plan where it appears only the employer is contributing to it. So the first question is, what can I do with that? Can I roll it over into something else? I'm not really sure what it is or what I can do with it other than leave it where it is. And secondly, what to do with the 403B? My first instinct is to roll it over into a traditional IRA where I have more control. But my wife and I currently, with our income, cannot contribute to a Roth. So we are utilizing backdoor Ross, and it's my understanding that you can be taxed on that

rollover based on how much other money you have in traditional IRAs, and I'm not sure if I'm understanding that correctly. So any insight would be great. I love the podcast. I'm looking forward to hearing from you. That's a fantastic question. Now, if you roll over money from a 403B into an IRA, if you execute a rollover, There's no tax implication for executing that rollover.

However, where it can come back to bite you is that the money that is in an IRA, when you execute a backdoor Roth conversion, you can only convert a pro rata share of the money that you have in your Roth relative to the total amount of money that you have in your IRAs. So if you have a lot of money in your pre-tax IRAs, then you won't be able to execute a backdoor Roth conversion on as much money. So it isn't that you'll be taxed at a higher rate. It's that you aren't going to be able to execute that backdoor Roth conversion on as much money because that pro rate a share relative to the rest of your IRA assets will be smaller. On the second half of this, which is the employer-only plan, if the employer-only is putting money in the scot, there's probably a vesting schedule that's attached to that money before it's yours. So you'll want to find out what the vesting schedule is. That means that when they first put it in, there's a carrot to your spouse to stay longer attached to that money. In a lot of cases, it's five or seven years that you'll see these vesting schedules for.

But because those are plan specific, you're going to need to go to her old HR and ask about that. And then the second thing is, is while usually if it's a defined contribution plan, meaning it's not a pension plan where we know how much she's going to get in the future, it's just money in a basket that's being added, especially if it's a plan that has different investments inside that you're allowed to move around, there are probably, when I say probably, like a 90 to 95 percent chance that there's a. There's no reason she can't roll that money also over into her own control. Once again, though, as long as you're making the call to HR about the vesting schedule, I'd also make the call about whether that money is rolloverable. And because it's managed by a third party, you shouldn't get, you know, some type of sales pitch unless they refer you to the third party who's actually managing it, in which case, my apologies for making you do that.

but it's the only way to find out, it's the only way to find out whether there's a hitch attached on the end of this money. Here's the notable exception. A lot of the time with hospitals or government agencies, that money goes into an annuity. And while the tax shelter doesn't have any ramifications in terms of taking it out, meaning you can take it out whenever you want, the fact that it's an annuity means there might be some significant penalties in taking it out of the annuity. Once again, that means there's a phone call.

I don't want you to be surprised. I'd rather that you knew all the options going in with your eyes open. I'm still thinking about his 403B rollover. Given that this might adversely impact the amount of money that he can use when he executes a backdoor Roth conversion, I mean, my inclination is to say, yes, that's probably going to happen and yet roll that money over anyway because that's still preferable. leaving it in your old 403B? Well, that's funny. That brings up some interesting points.

All 403Bs are not created equal. Some have horrendous fees attached, and some of them are very responsibly managed. So I think the first question he needs to look at is, what are the fees inside of those funds in the 403B? Because maybe it's a better strategy to roll it out a little piece at a time. You know, maybe he takes a piece of it, does the backdoor Roth IRA with that part, and then does another one. And, you know, that can get onerous over time.

But I think that knowing what the fees are inside the 403B ahead of time, that'll be significant when it comes to deciding what to do. By the way, my inclination here, your inclination is to the Roth IRA. My explanation is usually to roll the money out, even if the fees are low. And here's the reason why. When it comes to a 403B, a 401K, a 457, any of these plans that are employer-sponsored, you're not in control your employer is. And if you're busy doing something else six months from now and the company decides to go cheap, i.e. cheap for them, not cheap for you, go cheap for them and change the funds to funds that have higher fees or worse performers than the ones they have now, any change

happens. They can go from a phenomenal 403B today to a horrible one next year. So I like rolling it over because you're directly in control and you don't have to keep up with what's going on at your old company a couple times a year to make sure that that money's actually doing what it used to do when you were there. I agree. From a managerial perspective, it's much easier to have all of your investments under your own control. Yeah. But if those fees are low and he's worried about the whole backdoor thing, do it a little piece at a time then.

You know what I would do? I'm just thinking about, I'm putting myself in his shoes and thinking, all right, what would I do if I were in the same situation, what I would do is I would email my CPA and say, okay, here is a current snapshot of exactly what I have. And as you know, we can execute a backdoor Roth conversion on what perhaps the full amount or perhaps only some fractional share of that amount. As you know, this is the current amount that we are currently eligible to execute a backdoor Roth conversion on. if I were to move this chunk of money from bucket A to bucket B, how would that impact my backdoor Roth conversion eligibility? When I say eligibility, I don't mean your eligibility to do any backdoor Roth conversion whatsoever.

You'll almost certainly still be eligible to roll over something. But what I would ask the CPA is, how much money would I be able to execute a backdoor Roth conversion on? If right now I can execute a conversion on $5,500, but after moving this money, I can only execute that conversion on $2,000 or $3,000, that's the X that we're trying to solve for. And once you know those numbers, once you know how that's going to affect the amount of money that you can backdoor, that'll give you the data from which you can make this decision. That's how I would start. I would start with an email to my CPA. Great idea. So thank you, Scott, for asking that question. Our next question comes from Nancy.

Hi, Paula and Joe. This is Nancy. I'm calling to get some information about the benefits of a Roth versus a regular TSP. I'm 33 years old. I'm married and have an eight months old. I work for the federal government, so we get the TSP. And we live abroad right now. So my spouse is not working because he doesn't have consistent ability to work everywhere that we go

and where he is right now, we're not able to get him job. We are trying to make sure that we're doing the right thing by our retirement because I like to retire within the next 20 years. And we're really conflicted about whether or not we should be putting most of our money into a Roth or not. We keep getting conflicting information about whether or not we should take the tax deferment and that's a good thing or whether or not we should just go ahead and take the taxes now and pay the taxes now and then not have to worry about it when we retire. At this point, we don't have very much debt. And, and we have international properties as well as two properties in the D.C. area. And we just like to know how best to manage the tax issue.

Thank you for your time. We look forward to hearing your response. Bye. Nancy, congratulations on being 33 and already having two properties in the D.C. area plus properties internationally. You are a real estate mogul at 33. Nice work. Fantastic. We covered a lot of the thinking around traditional versus Roth contributions in our answer to question one on today's episode. Mr. Three Kids. Yes, Mr. Three Kids.

I suppose the main thing that I would say, you mentioned your 33, you want to retire in 20 years, so you'll be 53 years old approximately at the time that you retire. So we're talking about covering that distance between age 53 to age 59 and a half as one conceptual bucket and then covering age 59 and a half onwards as a different concept. conceptual bucket. When we're talking about covering your expenses from age 53 to age 59 and a half, that's not actually that much time. That's the good news. You're planning for six years, six and a half years. You can probably draw down, depending on your living expenses. I don't know how much you need to live, but you might even be able to draw down the principal portion of a

Roth IRA contribution if we're only talking about that six year time span. Six years is just it's not that much time to have to plan for. So that's the good news. Yeah. And no matter what Paula's bent is toward Roth IRAs, it's a good one here. So lean on that Roth. The TSP phenomenal program, it's something the government definitely gets right. So absolutely love the Thrift Savings Program and going mostly Roth, or if you're comfortable going all Roth there with your money, I'm very comfortable with that. Yeah. I'm going to throw in another, I do, tend to favor their off. And I know, so for the sake of anybody who's listening, who's wondering about these arguments, in the early retirement community, many people advocate for traditional contributions

because when you retire early, you may find yourself in a lower tax bracket. And so the thinking is get the tax benefit up front. And then that way when you retire, you'll be in a lower tax bracket and you can start drawing down from those traditional buckets after early retirement when you're in that lower bracket. And I totally get that. It's a very valid argument. There's a lot to be said for it. And that being said, to pay the taxes up front and then enjoy decades of compounding growth, all the capital gains, all the dividends, all that growth is tax exempt. And a huge amount of that is going to continue to grow for 30, 40, 50 years into the future. I mean, as I said in question one of this episode, you're not going to draw down everything when you're 53 or when

you're 59. There's money that you're investing today that will still remain invested when you're in your 80s or your 90s. So to be able to make an investment at the age of 33 and have tax-exempt growth that stays with you until the age of 9. I mean, that's powerful, powerful stuff. Yeah, the only thing we have to worry about is that the government changes the rules there, talking to tax experts, though. They think there's a lot of other rules that would upset fewer people that they could change first before they get to changing the rules on the Roth.

So things would have to be incredibly dire for that to happen. I love that idea. Pay the toll up front if you're young. Don't worry about the toll ever again. You're a happy camper. Exactly. So, yeah, I lean Roth, but I get that there are very good arguments on both sides. People don't know this about Paula, but she has a pillow that she snuggles with when she sleeps called Roth IRA.

She always has like a big smile on her face while she's sleeping. Dreams about tax-free income forever. Should I start like the Roth IRA fan club? That would be so funny, wouldn't it? Hey, guys, we made T-shirts. celebrate the Roth IRA half birthday. That would be fun. Whoa.

How's that for meta? Oh, that would be so meta. So the Roth IRA was named after a politician by the name of William Roth. So we could figure out his birthday and then celebrate his half birthday. That could totally be a thing. Could be a thing. Here we go. This is how movements get started.

You know the financial independence movement? Now we have the Roth birthday movement. The Roth half birthday. Nearly. as compelling. I'm sure the Facebook group's going to be monster. Both members of it will absolutely love it. Thank you so much for your question. We'll come back to the show in just a second, but first, you know, the world just wasn't built for the self-employed. Lots of services, like banking, retirement planning, and accounting services, aren't built for people who are freelancers

or who are self-employed. But fortunately, Fresh Books is. FreshBooks is cloud-based, simple, easy-to-use accounting and invoicing software that is designed for the solopreneur. When you log in, it answers the one burning question that you really want to know, which is, how's business? The Notification Center is like your personal assistant. It tells you what's changed since you last logged in, and it tells you what you need to deal with, like overdue invoices. And speaking of overdue invoices, if you have a client that's laid on making a payment, then FreshBooks will automatically send them a late payment reminder so that you don't have to have an awkward conversation. If you want to give them a try, FreshBooks is offering an unrestricted 30-day free trial, and there's no credit card required.

So just give them a try. To claim it, go to FreshBooks.com slash Paula. And when they ask, how did you hear about us? Type in, afford anything. Again, for a 30-day free trial, go to FreshBooks.com slash Paula. P-A-U-L-A. And when they ask, how did you hear about us? Type in, afford anything.

Are you looking for a bank that is not going to nickel and dime you with a bunch of fees? Check out Radius Bank. They have a free checking account. It's called Radius Hybrid Checking. No monthly maintenance fees. There's no minimum balance requirement other than the $100 minimum deposit that it takes to open the account. And you get unlimited automatic ATM surcharge rebates. That means that you get access to free ATMs worldwide.

Now, let's talk about that for a minute. Out of network ATM fees cost, on average, $4.69 per withdrawal, according to CNBC, as of August 20, 2018. That means if you were to use an out-of-network ATM six times a month, paying that average fee of $4.69 per withdrawal, over the course of $12 months, you'd spend $337. $1.68 cents in ATM fees. That's a lot of money. So it's awesome to have a bank that gives you a free checking account with no monthly maintenance fees and free ATMs worldwide. If you'd like to open an account with them, go to radiusbank.com slash Paula. That's R-A-D-I-U-S-Bank.com slash Paula. Our final question today comes from Patrick. Hi, Paul. I'm a new listener to the show. Really loving it. It's been great advice for me. About 35 years old, relatively new to the investing game, just got married. We live in Indiana, combined gross income of about $100,000. And my question today is about our mass mutual accounts. I really have some concerns that we got sold into these mass mutual life insurance retirement accounts. I think mass mutual is a good point. product, but I think that we are way over invested in what we're spending.

Currently, we are both putting away a premium of about $500 a month, so about $1,000 combined into our mass mutual. The payout that we're expected to receive at the end is for me about $350,000 and for my wife about $400,000. But I'm just really concerned that our premiums are too high and that we're, we're we could be using that money in a lot of better, more effective places. So I really want to get your take on that. I appreciate any advice you'd have. I did try and reduce my mass mutual payment a few months ago. The cut and benefit was pretty drastic and it wasn't proportionate to,

it just didn't seem very fair to me. So I'm really looking for your advice and love the show. And thank you. Well, I can summarize my take on it in four words. Get the hell out. There it is. Thanks for the question, Patrick. I think that does it for the day. Well, let's go into a few things because I think Patrick's situation is more complicated than even he may think because of the fact there's some words that he used.

At first, I thought he was in mass mutual funds, which was going to create. significant discussion between Paul and I that luckily we get to avoid today that we've had before. Instead, it looks like he's involved with the insurance company Mass Mutual and that when he used the word premiums, now we know that he's saving into a life insurance policy because you do not, and when he said payout of $350,000 and $400,000, I'm like, how do you know,

what your payout is on your fund ahead of time. Like you don't know. So it's a life insurance. Yeah. There's there's some bad news here. Bad news piece number one is if the agent sold it as mutual funds that have a payout at the end, and I've heard that before, that is so uber slimy that it, but let's pretend that's not the case. Let's pretend that that's not it at all. A life insurance policy can be a good place to save for the right person. There's a bunch of hate mail you're going to get. Send your hate mail to Paula. Not to me. I mean, only right person if you have millions of dollars and you're looking for a tax shelter. Sure. I don't think that's a situation here. And it isn't having millions of dollars. It's having tons of cash flow. Okay. Yes. Tons of

cash flow. And you know that cash flow is going to continue for a long, long time. Because if that cash flow ever gets disrupted, it kills the whole strategy. So assuming, because when I was a financial planner, I would see this maybe once every other year, assuming you're not that person, you're newly married. I'm assuming no children. And whether you do or not, for most people, term insurance is a better way to go. This is a rotten place to save money. I mean, this is a horrible place to save money. So I'm, I'm completely down with what Paul is saying. Get the hell out. But you got to watch out for one thing. If you need life insurance, before you get rid of these policies, apply for and get accepted for term life insurance that replaces them.

Because I've seen people cancel their policy. They get out. And then they find out when they apply for the new policy later that they have a heart defect they didn't know about. And now they got rid of their life insurance policy and they don't have any new stuff. So watch out for that. Then take your money out inside the policy and save in. into something that is much better. I mean, Paula's a favorite of Vanguard funds, phenomenal place to be.

Very low fees, very responsible management. You can keep your money passive for the most part. I like all that. Just don't be here. Right, absolutely. For what you're paying, $1,000 per month, when the two of you take home $100,000 a year combined, that's a substantial portion of what you bring.

home. I want to be clear here, though, Paula, to people, when you hear $1,000 a month and you hear premium, that's not the cost of the insurance, just so you know, because people like, oh, my God, $1,000 a month for insurance, no, no, no, no, no. And once again, this is another reason to get out is because it's so flipping complicated. A thousand dollars a month is what he's paying in. What's going to insurance is substantially less than that. But for this policy to work the way that it's supposed to, you have to have high cash flow because you want to buy the insurance when it's cheap when you're young so that when you're older, the insurance cost has been subsidized so at last your whole life. By the way, the chance you're going to need insurance your whole life? Incredibly small,

which is why generally you don't want to have this type of policy. But if it costs $1,000 to run the policy, regardless to make it last that long, run. Don't walk run. Right. Absolutely. You can do much better things with that money. I feel so bad. because this just seems to be this is why these policies get a bad rap. I end up on the Afford Anything podcast defending this policy. The policy is not the problem. And a bunch of people are going to say, yes, it is Joe. No, it's not.

The policy is not the problem. The problem is the people selling it, selling it to the wrong person is completely the problem to me. I get a little hot about that. You do. You do. I've heard you say it many times. It drives me crazy. Oh, man. But anyway, good luck with that, Patrick. That's going to be a lot of fun.

And on that happy note, that's our show for today. That's right. What's such a, such a, well, you know what? It is good. Because Patrick, you rid yourself of this policy. I'll tell you something cool. You're going to have a bunch of cash flow. And I'll tell you where people make mistakes. And, Paul, you'll totally agree with this. Do not get rid of that cash flow stream and not immediately. save it into the right place.

Make sure you immediately save it, because I'll tell you what most people do, they get rid of the wrong thing, and then they don't do the right thing. Instead, this becomes Red Lobster Night. And that's an awesome Red Lobster night, by the way. A thousand a month on Red Lobster. Wouldn't that be great? You're getting the whole Admiral's Feast or whatever they call it. All the cheesy biscuits.

It's so great. You can tell, I'll go into the text. can a red lobster and I'll see somebody with like three Admiral's Feast and a pile of cheesy biscuits and I'll walk over and say, you're Patrick, aren't you? Let me guess, did you just cancel your variable universal life plan?

Is this the celebration dinner? And he's laughing while he's stuffing his face with shrimp. Yeah, that's good. Yeah, I agree. It's not savings until you save it. A lot of people think that if they trim costs, then that is the equivalent of savings, but oftentimes trimming costs simply means that you are shifting your expenses to a different category. You're not actually saving money until you save it, until you take the costs

that you've trimmed and put it deliberately into some type of savings-related vehicle, whether that be a savings account, an investment account, a retirement account, use it to pay off debt, use it to make a down payment on a home. Anything that builds your net worth is what I refer to as savings. So trimming expenses is great, but trimming expenses alone is not savings. It's not savings until you save it. Yeah, don't think about trim. Think about trim and capture.

Yeah, exactly. So thank you so much for joining us again, Joe. Where can people find you if they want to hear more of you? You can find me here next month on the podcast, answering more of your questions, about, hopefully about permanent life insurance so I can get angry again at insurance agents. No, you can find me three days a week at the Stacky Benjamin Show

and three other days a week at Money in the Morning, which is a live podcast in front of a Facebook audience that scares the heck out of me. But that's where I take two headlines ripped from the financial press and say, what does that mean to me? Like when the Fed meets. Most people, we hear this thing the Fed meets.

What hell does that mean to me? It means a lot to you. But we would try to take some of the financial press that's out there and decode it a little bit. And that's my newest show, Money in the Morning. Nice. Excellent. And people can find that on Facebook live? Yes.

If you are on our Facebook page, it's Facebook.com forward slash Istack Benjamins. But you know what? It's a live recording of an audio podcast. So you can just listen to it where you listen to afford anything. Just look up in the morning and you'll find me there. It's a picture of a nice scene and just the top of my head at the bottom of the page. Because that's a way we roll. My bald head like the sun coming up.

Thank you so much for tuning in. Coming up on future episodes of the Afford Anything podcast, we have the guys from the Choose FI podcast, Jonathan and Brad, joining us to talk about the paradox of FI. So that's coming up on the next episode. If you enjoyed today's episode, please open up your favorite podcast. playing app, whether you use... Joe, what do you use to listen to podcast? Do you use Apple Podcasts, Stitcher, Overcast? Yeah, you know what's funny is I should use Overcast, and I've actually tried out

Castro, which is also really cool. It's a paid app to listen, but has a lot of features. I started using Stitcher before all of them, and I found myself like halfway migrated to Castro, but I always go back to Stitcher, and it's not my favorite. And it screws up a lot, but I use Stitcher. Oh, cool. What do you use? I use Apple Podcasts because I'm an iPhone user. Yeah, I'm an iPhone user too, but for whatever reason, I use Stitcher. Whoa, you've doubt. I just assumed that all Stitcher users were Android. No, no, no. Wow, you downloaded Stitcher onto an iPhone. I'm the 1%. Wow, you are the 1%. Would people talk about the 1%. I always assume they're talking about that. Is that what we're talking about it? That's totally what people are protesting, Joe. It's that. I'm like, we're not that bad. So whatever app you used to listen to podcasts, please open that up and hit the subscribe button so that you won't miss any of our upcoming episodes.

And subscribing is free. I didn't realize until just this year. Somebody said that you shouldn't talk about subscribing because people think you got to pay. Because when you subscribe, you got to pay. Subscribing to afford anything is completely free. Oh, it didn't even occur to me that anyone would assume that it would be paid. Of course it's free. But yeah, that makes sense. We grew up in the era of newspaper and magazine subscriptions, and those cost money.

Yeah. So are you sitting down? This is completely free. Ooh. So yes, please subscribe to this show for free. And while you're there, leave a review. Thank you so much for tuning in. My name is Paula Pat. I am the host of the Afford Anything podcast. I'll catch you next week.