Afford Anything - Ask Paula: I’m on the Verge of Retirement and My Taxes are Rising … Help!

Episode Date: July 21, 2021

#328: Sarah O Sahara’s parents sold their rentals and business of 24 years. They’d like to create a trust for their grandkids with boundaries in place to avoid entitlement. How should they structure this trust? Anonymous in Canada has a fully paid off condo that she wants to turn into a rental once her new townhome is ready. Should she mortgage against the condo to reduce the mortgage on her townhome? Are there any tax benefits to having a mortgage on a rental? Luis’s wife wants to start moonlighting in her field. Can she open and contribute to a Solo 401k even though she has a TSP account with her 9-to-5 employer? Russell and his partner want to emigrate to Canada in the near future. Should they move their investments into Canadian funds? Renee and her husband are in their 60s, and most of their retirement funds are in pre-tax accounts. They have federal tax credits they’d like to use to move these funds into taxable accounts. Is this a sound strategy? My friend and former financial planner Joe Saul-Sehy joins me once again to answer your questions. Enjoy! (Have an investing, entrepreneurship, lifestyle, or decision-making question you’d like us to answer? Submit it here!) Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to any limited resource that you need to manage, like your time, your focus, your energy, your attention. Saying yes to something implicitly means, saying no to all other opportunities. And that opens up two questions.

Number one, what matters most? And number two, how do you align your daily, weekly, monthly, annual decision-making with that which matters most. Answering these two questions is a lifetime practice, and that is what this podcast is here to explore and facilitate. My name is Paula Pant. I am the host of the Afford Anything podcast. Every other week, we answer questions that come from you, the community.

And every other week, my buddy, Joe Saul Seahy, former financial planner, joins me to answer these questions. What's up, Joe? Just hanging out with Paula, answered some questions. Nothing better. I got a great idea. What's that? I think we should go to Sweden. Oh, yeah, let's take the show on the road.

We're both vaccinated. Yes, there we go. We'll take some fizzy waters. I won't say the name, but we'll take some fizzy waters. We'll head to Sweden and take calls from there. I'm sure you're huge in Sweden, Paula. Is that like the I'm famous in Japan line? Yeah, I'm big in Japan.

Exactly, right? Well, hopefully today, though, you're big in Canada because we have two questions from one question from Canada, another one that's headed toward Canada, and then three that are in the U.S. Yes, absolutely. So let's start with one of our U.S. questions first. We're going to start with a question that comes from a caller named Sarah O'Sahara. I love that name. But before we get to her question, one quick announcement.

Speaking of taking this show on the road, Afford Anything is most likely going to be hosting its first live event, live in person, in real life event, in New York City, the weekend of August 2021-22. It's up to you to help us decide whether or not to put this event on. head to Affordanything.com slash event for all the details. Affordanything.com slash event. With that said, let's hear this question from Sarah O'Sahara. Hi, Paul and Joe, long-time listener, first-time caller. You can call me Sarah O'Sahara. My parents recently sold their rentals and business of 24 years.

As my siblings and I are in our 30s and 40s and doing okay financially, my parents are looking to their grandchildren and be a lot of. and want to create opportunity for our descendants. They also do not want to create trust fund kids that are entitled and waiting for a check. They currently have six going on eight grandkids, age three to 12. My dad had an idea to create a trust that the descendants could access for school, opening a business, or home down payment. He thought if the withdrawal is a low interest loan than the trust may last a long time.

and give the withdraw E some skin in the game. We could put a stipulation for draws to not start for five to 15 years. The seed money would be $3,000 with the intention of rolling one to one and a half million or more in over the next five years. I have read the books, What Would the Rockefellers Do, and the book entrusted. We will also be working with an attorney. and I am curious your thoughts on this sort of legacy and advice you have for us. I love listening to both your Paula and Joe's viewpoints. So thank you for tackling my question.

Sarah, thanks for the question. This is Paula, one of my favorite questions because when we start thinking about legacies and we think about our community and grandchildren, and we think kind of bigger than ourselves, I think that there are a lot of, there's a lot of exciting things that can happen when more people think that way. So I'm super excited about this. It also brings up some ethical questions, Paula. I know I wrote some pieces about this that actually made it to major media.

They're fairly old now. It's been a while. But the ethical question continues. And the question there, which we can talk about later, is after you die, putting stipulations on what happens? to your money. Like ethically, if you have certain views about money and how people should spend money, is it really ethical if you're not here anymore to do that? Don't get me wrong. I'm not saying that the answer is no. I'm saying that there are people that go, you're dead. Why do you care? But I also agree with what your dad said, that he does not want to have people in the family that are just,

quote, trust fund kids, meaning, I think, because I do know some people that have been the recipient of trust funds who are very responsible people with large sums of money. But thinking about the horrible stereotype polo of people that just wastefully spend money because they didn't earn it as somebody else did. Right. That sense of entitlement. Yeah, yeah. But let's start off with this. So what you're talking about doing is skipping a generation and there is a way to do that called the generation skipping trust where the grandkids are the recipient. Now, there is currently a $5 million estate tax exemption on that number,

which means that any amount under $5 million. It sounds like you're going to be less than that you can do this with. I also love the fact that you're going to work with an attorney to do this. I would not try to do this type of stuff alone. So this is not, Sarah already said this. I want to make this clear. Sarah's going on the right path by working with professionals. The other thing, and I'm not sure if Sarah and her dad know this,

because when she said Paula that they want to fund. it with $3,000. And I think she knows this because she said it's going to be one to $1.5 million later. This is not going to be inexpensive. This is expensive to set up. It's expensive to maintain. And for most people, when you think about trust today, a lot of the charitable stuff that you can do, it is far better for the average person that just has very straightforward

charitable intentions instead now to do a donor advice fund. Yeah, I have a donor advised fund. way, way easier, almost no cost, very simple. Easy to set up. Easy to do. This is not that. This is very complicated, going to have yearly fees to have it continue. So there's also a cost benefit at $3,000.

You're going to pay more than that probably for the lawyer. So I'm not that excited about it. $1.5 million? Okay. Maybe. Maybe. And I think, Paula, that's when we get to the maybe, maybe range. is it that amount of money.

So I like the idea, Sarah. I would beware of unintended consequences, meaning what if there's a situation that your dad would approve of that one of the grandchildren would use the money for that's not stipulated? So in other words, somebody gets some great, and I'm not going to come up with them,

but somebody comes up with some brilliant idea and you know really well that your dad would love it. it, but the stipulation of the trust makes it so that the money can't be used for that purpose, which also means there has to be the right contingent trustee of the trust, meaning the person that is going to be in charge of the trust after your dad passes away. This person, it's their job to interpret the trust and to also then hand out money when it's appropriate. And probably more importantly, Paula, say no when it's appropriate to say no. That's a really difficult job. It's difficult emotionally because you've got to sometimes be the bad person who says no

to people that you like. So I always want that to be a person who is okay with being seen a little bit as a jerk. You know, is fine with that. Ideally, someone not in the family. Yes. But I don't like it to be a banker, though, Paula. Right. And the banks are going to want to do this. And and there have been some very large scale court cases about families suing a bank because the trust fund department just decided to do whatever they wanted to do instead of what the trust did. So I would have it be somebody who's not a banker or at least have somebody who oversees the bank. And I think a good attorney can help you set that up correctly. So it's going to be complicated.

I would really be careful thinking through exactly what stipulations you want to put on this money that might end up having the trust do something you didn't intend for it to do. Right. Well, so a couple of things strike me. I mean, Sarah O'Sahara mentioned that the stipulations as they're thinking about them right now would be that the money could be used for school or for educational purposes. It could be used a seed money to open or start a business or it could be used as a down payment. So if one of the grandchildren really wanted access to that money, the workaround would be to pull out their share as a down payment and then immediately sell the home. Yeah. That would be the workaround to be able to access these funds.

Yeah. Or fund a business. Fund a business. Immediately sell it. Use it for whatever you want. Right. Or open a intentionally poorly run business that's basically a shell for personal expenses. Yeah, good point.

be another way that that could happen. Or pay for school and pay for their living expenses during school, but not actually be an attentive student, just sort of skate by. I mean, if the question is, let's look at all of the flaws in the plan or the ways that this could be used in ways. Voliciously. Yeah, yeah, exactly. Not to be pessimistic here, but anytime you're structuring an agreement, it is prudent to structure it with a pessimistic framework. I will tell you something that is less, less structured about how the money gets spent, but still gives your dad the ability to possibly make sure that kids make good decisions with their money. And I saw attorneys recommend this a fair amount. I saw some attorneys that didn't like it. So you're going to have people on both

sides of this. But I did see this work a lot, Paula, which is this. Until a certain age, let's say that ages 25, junior could use the money for those things that are in the trust, right? But at 25, they get a third of the money or a quarter of the money to use however they want. Now, the bad news is at some point, juniors got to grow up and learn about money. The good news is, is that by not giving them all the money at 25, they can make some fairly poor decisions and learn from them. And so I was often a big fan. of this approach. So a third of it at 25, then maybe a third of it at 30 or 35, and then the other third at 40 or 45. So maybe 10 years between them. And so they didn't get all the money at once.

And it made sure that, hey, if I wreck the first third, I'm not going to do that with the second and third. I will learn my lesson and figure things out with a piece of the money instead of taking all of it and doing the wrong thing. Other issues that come to my, mind right now. So, and Joe, I like what you just outlined. Things that come to mind when I hear that. One is, all right, let's say junior gets married and then junior gets divorced. Does their spouse, especially if they don't have a pre-up, get a claim to some portion of that? That is another reason not to give all the money at one time. Because now there's a claim on half of a third. Right. Unless the spouse tries to make a claim on future proceeds or something like that. Yeah, and you're never going to stop that, right? I mean, the

thing that it's funny, a question my clients always used to ask attorneys in meetings was, hey, can we make it so people can't sue for this or for this or for this? And the attorney would always answer, people can sue for anything. It might not work and we might have to spend some money defending it, but people can sue for whatever they want. So we're never going to be able to stop that. What we can do is make sure that we protect at least a portion of the money from this. Right. A stipulation that the child, if married must have a pre-up, seems like a useful stipulation to have. Yes. Yeah.

The other thing that strikes me is that we're talking about $1.5 million divided by eight grandkids. So we're talking about what averages out to $187,000 per grandkid, which is substantial money for sure, but it's not a life-altering amount. And what I mean by that is the famous Warren Buffett quote, that he wants his kids to have enough money that they could do anything, but not so much that they could do nothing. $187,000 is exactly that. It is enough that they could do anything. It's enough that they could pay for school without student loans. It's enough that they could start a business with some substantial capital right from the outset. It's enough that they could make a down payment on a house or in the Midwest, buy a house in cash, right? It's enough that they

could do anything, but it is not so much that they could retire on it. Yeah. It's not fire money. Exactly. So even the amount that we're talking about, I think Sarah O'Sahara, I think there is some built-in, I don't know if protection is the right word, but the fact that this money is being spread across such a large number of grandkids is inherently a structure that makes it less like that any one or two or three or four grandchildren will develop an out-of-control sense of entitlement or will go too far off the rails. We're not talking about $1.5 million being handed to just one person or two people. That would be a very different story. I do like the idea of making the withdrawal a low-interest loan. I am not an attorney,

so I do not know what, if anything, the legal ramifications of that are. But at least philosophically, I do like the idea of, Sarah, as you said, of giving the borrower some skin in the game, making sure that the grandkids have access to funds when they need it, but that they don't feel like it's free money for the taking. But then here's the question beyond that. If that's the case and they have to pay back the trust, what's the ultimate use? used to that money? Like, where does that, how does this trust end? Yeah, that's what I'm wondering as well. Is the idea that the trust would exist in perpetuity? Or is the idea that the trust gets slowly spent down over time? Because she mentioned making the trust last longer. And the implication of that statement is that if you're trying to make something last longer, then you're implying that

it will be finite. You're pushing out the end date, but that there is an end date. So that part, I don't totally know from the way that she phrased that question. The frustrating thing to me as I think about this, you know, people will complain about the difference between a 0.35 and a 0.38 fee. And I've said a billion times on the show that that doesn't bother me. Right. The fees on continuing this trust really bother me for that amount of money. I just think that it will not last into perpetuity.

What will happen is it will get eaten up by fees. It will get, it is not inexpensive to have this administered. And every year you're going to pay these fees to keep it going. And I think a lot of professionals make a lot of money here. And I think that the people that you really want to have, have the money end up getting less, frankly, this way. I don't like anybody failing with money. But if somebody's going to fail with money, I would. would rather that it was somebody that I wanted to have the money failed with it instead of having

some banker that's administering the trust that fails with it. I don't want that to happen. So, Sarah, those are some thoughts on the situation that you've presented. But I think your next steps are on point. Work with an attorney who specializes in this arena and continue reading books about it as well. The fact that you've already read to is absolutely. Absolutely fantastic. So I think if you do those two things, one is self-education and the other is working with licensed credentialed experts. That's a powerful one-to punch. Joe, should we do another question from the U.S. or from Canada next?

Oh. I say we saved the Canadians for later because they're always so entertaining, right? Excellent. Tell you what, let's take a quick break. We'll have a word from our sponsors. When we come back, our next question will come from Renee. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business.

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Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Our next question comes from Renee. Hi, Paula and Joe. This is Renee in New Mexico, and I have a strange question that I've never heard addressed or seen anywhere. My husband and I are in our early 60s. He owns a business, and we are getting within a couple of years of retiring and drawing from our retirement IRAs that we've set aside. Most of those

things have been put into pre-tax accounts. Due to some strange issues in his business, we have a big credit of taxes built up with our federal taxes. And I'm wondering, if this could be used to our advantage that we could perhaps convert, take a bunch of money out of our pre-tax IRAs, apply the federal tax credit to them, and then just reinvest them in our taxable side of our accounts. We don't really plan to withdraw any money from any of our investments for the next few years as his buyout from the business will take care of us initially. But down the road, we're going to have to take money out of the pre-tax IRAs. We have almost no money in any Roth or HSAs.

So we are going to have to pay taxes eventually. I do think our tax rate will be much higher in retirement than it actually is now, believe it or not. So I'm just wondering if it would make some sense to convert some of that pre-tax money and just roll it over into a taxable account where it could then be taxed at capital gains rates down the road when we withdraw it rather than the federal tax rate. I hope this makes sense. Thanks for your input.

Bye-bye. Hey, Renee, thanks for the question. And I love this type of question because as somebody who is now at the spot where they're starting to take money out, I think this is great for people listening, Paula, that are in their 20s and 30s as well because of the fact that Stephen Covey in his book, Seven Habits of Highly Effective People. Stephen talks about when you pick up a stick, you don't just pick up one end, you pick up both ends, which means in this case you put money in a certain way.

Renee has a bunch of money like a lot of people who are starting to withdraw money now because the Roth IRA wasn't around when Renee started putting money in, has a lot of money in this pre-tax position. And what do we do with it? I think Renee is missing out on a big opportunity. I definitely like the idea while you have a lot of tax credits of taking that money, and converting it. But when she says convert it, I think, Renee, you're going to the wrong place. You have this opportunity to turn it into a Roth conversion. And if you make it a brokerage account,

from now on, all the money that's invested in there will be subject to taxes whenever the, let's say it's a mutual fund. If the mutual fund pays a dividend or if there's capital gains inside of the fund, you're going to pay tax on that every year. Well, you can use that tax credit And I wouldn't take my word for it. I wouldn't take Paula's word for it. I would still work with a CPA, work with a great tax advisor on this, but figure out if you can move that money to a Roth IRA and a Roth conversion strategy instead. Now, you'll be able to still take the money out in the same way that you would if it were

in a regular brokerage account, because that's what you want to do. But the neat thing is here is that if you don't spend the money, we don't have to worry about any rules like you do with your pre-tax money around taking distributions at a certain age in your 70s and throughout the rest of your life. Don't worry about that anymore. Money can pass on to your heirs if you don't spend it. And all the money in that Roth, as long as it stays in the Roth and you're not spending it, you will not be taxed on it again. So I think that's the move, Paula, not to the brokerage account. And the point that I want to emphasize, and this is, Renee, this is not just for you. This is for all people who are listening. The key words

that I heard, that key sentence that I heard within your question was that you think that your tax rate will be higher in retirement. And there are many, many reasons why investing in a Roth account is a fantastic idea for a more thorough discussion of it. Listen to our podcast episode with Ed Slot. We will link to that episode in the show notes. And you can subscribe to the show notes for free at afford anything.com slash show notes. So listen to the episode with Ed Slot for a more detailed discussion about the benefits, the advantage, the advantage of of putting money into Roth accounts. But, Renee, for your specific situation, the fact that you think your tax rate will be higher in retirement, those, to me, the minute that I hear those

words, I automatically think Roth, Roth, Roth, Roth all the way. And, Joe, to your point, it's telling just how new the Roth IRA is. You know, the fact that, as you said, that type of account was not available to Renee when she was 22. Yeah. Right? But everyone who's listening right now, who is 22 or in their 20s or in their 30s, millennials and Gen Z have the advantage of having access to this type of account at a very early age. And that's powerful.

When you think of the opportunity to have 40 years or 50 years of compounding growth that is all tax exempt, I mean, it's the most magical type of account there is. Yeah, super powerful, very powerful. And the cool thing is, is because of this tax situation that Renee's in, she's going to get a chance to use it in a way that she wouldn't have gotten to use it in her 20s. And Paula, that also nullifies. That also means that she doesn't have to worry about capital gains tax versus ordinary income tax or taxes if it's a dividend.

doesn't have to worry about any of that if it goes to a Roth IRA. Absolutely. And to be clear here, that doesn't mean, Renee, that there's not going to be any tax. For people that have never done a Roth conversion, whether Renee moves this money to a Roth IRA or to a regular brokerage account, she is going to have to pay the tax one time. So there will be a tax consequence, which is why you want to work with a great tax person, a CPA who knows what they're doing in this scenario. but after that, when I say she doesn't have to worry about capital gains taxes, like in her question, after that point, she pays this one-time tax, and a Roth IRA, she'll never have to worry about it.

Thank you, Renee, for asking that question. Enjoy your upcoming retirement. You know what else is a powerful one-two punch? What's that? USA and Canada. Let's go Canadian. All right. Well, then our next question comes from one of our Canadian callers. We've got two. this time. Let's see. One is Anonymous and the other is Russell. Do we go with Russell or do we go with Anonymous? What do you think, Joe? I think Russell has a great idea for us that we're going to save till the end. Anonymous has a great question that's different than the two we've had.

So let's go with Anonymous. Ooh, and every anonymous caller gets a nickname. Joe, what show are you watching right now or what movie have you recently seen? I just finished watching a Disney show called Big Shot. And for anybody that has family and the Disney Plus channel, it was really fun. It stars John Stamos. Oh. How about that? Whoa, blast from the past. And they dress him up to look a lot like Rick Petino, who was a coach that had some problems

when he was at Louisville. And in the show, John Stamos's character had some problems. And now he's gone from being a great college back. basketball coach to coaching at an all-girls college prep school. And he's used to doing men's basketball and getting his way. And now he's not going to get his way anymore. And it's pretty fun. By the way, David E. Kelly is the producer here. And he produced some big hits like the practice and Boston legal, some big 90s and early 2000 shows, among many, many others. But I love Yvette Nicole Brown, who's in this show. She was on community as well. She is hilarious.

Whenever I see her, she's this great character. So why don't we call her Yvette? Perfect. Well, then our next question comes from Yvette. Hi, Paula. This is Anonymous from Vancouver, Canada, and I have a question for you on how to best optimize my husband and I's housing situation. First off, I'll give you some info about us. So our household income is 250,000 a year. We currently own our condo where we live and have fully paid off the mortgage. We bought it in 2014 for around 510,000, and the Vancouver real estate market is pretty crazy, so the current value is more than 900,000. In May 2019, we bought a pre-sale town home in North Vancouver for $1.3 million and put 10% down at that time. The townhouse is near completion. We're about four months out now, and we have another 10% save up in cash,

ready to go towards a down payment when we take possession. We've been pre-approved for a mortgage for the remaining 80%. When we move into the townhome in around four months' time, we're planning to keep our condo and rent it out for approximately $3,000 a month. When we take off straffees and maintenance, raining day fund, etc., we're thinking it will bring in around $2,400 a month. All right, so now for my question, is there any benefit to remorgeting our rental property instead of putting the full mortgage amount onto our townhouse, which will become our primary residence? When thinking is, could we mortgage 500,000 against a condo and use that money to put more of a down payment on the townhouse to reduce a mortgage there, at the end of the day, it would still be the same amount in mortgage, just split across the two properties.

The reason I'm asking is I'm wondering if there are any tax advantages to having a mortgage on your rental property as opposed to your primary residence, and if those advantages would be significant enough to warrant having two mortgages as opposed to one. Thank you for taking my question. I love the show, and I look forward to hearing now on the air. Thanks again. Yvette, thank you so much for asking that question, and congratulations on the situation that you're currently in.

I will preface this by stating, I do not know Canadian tax code. My knowledge is U.S. based only, and so I'm going to. going to answer this. In the way that I would answer it if somebody who lives in the United States was asking me this question, who lives and owns property in the United States, the advantage to having a mortgage on a rental property is that you can deduct the interest portion of those mortgage payments from your rental property income. And so having a mortgage on a rental property means that you reduce your income, thereby reducing your taxes. Reducing your income also has additional consequences related to, for example, in the United States, it would be related to things

like health insurance. You know, if you are under a specific income threshold, for example, you may qualify for health insurance subsidies. If you're over that income threshold, you would not, if you're buying your own health insurance through the individual insurance marketplace. And so in the U.S., that income reduction has not only tax benefits, but also could have depending on your personal situation, other ancillary tax benefits as well. Now mortgage interest on a personal residence, again in the United States, is still deductible, but there were some changes made to the laws in the Tax Cuts and Jobs Act. One is that the standard deduction is higher, which means fewer people are going to itemize deductions. The second is that there are

limitations on the amount of mortgage interest that can be deducted from a personal residence. So if you were U.S.-based, all else being equal, it would probably be better to bias that mortgage interest payment towards a rental property, all else being equal, so that you can have that reduction in income. However, all else is not equal. And here's where the conversation turns away from tax benefits and towards the interest rate that you would pay on that loan. the interest rate that you are going to pay on a mortgage, if that mortgage is taken out as a mortgage on a rental property, is going to be much higher than the interest rate that you would pay on a primary residence. Now, given the fact that you currently live in this condo, the condo that you plan on keeping as a rental, the first question that I would have back to you is, if you were to take out a $500,000 mortgage against the condo, could you take that out as a primary residence? loan? Could you take that out as an owner-occupant loan? If so, that's going to have a dramatic

effect on the interest rate that you pay, and that's going to change the conversation. If you can't do that, if a lender will not approve you for a primary residence mortgage on that condo, given the fact that you're imminently about to move into this townhome, then you would want to calculate whether or not any tax savings that come from having a mortgage on a rental property would offset the fact that you would be paying a much higher interest rate on that property. But again, that depends on how the tax code is set up in Canada and it depends on what type of loan you can qualify for on the condo. Yeah, that was the only take that I had was that, of course, if there are tax benefits,

may be offset by the fact that you're going to pay a higher interest rate on that loan. Yeah. So basically, it's gather the numbers and then just run. calculation, gather the numbers, plug them into a spreadsheet, and then you'll quickly know what the costs are. And once you know what the costs are, then you'll be able to make a decision. But without knowing what interest rate you would pay on both the condo and the townhome, without knowing what variation in interest rate we're talking about, I mean, that's a piece of data that you would need in order to be able to run those numbers. And similarly, the specifics

about the mortgage interest deductibility on a personal residence, yeah, the tax treatment of that. I mean, even here in the United States, that has shifted pretty significantly in the last few years compared to how it used to be. So have there been any legal changes in Canada? I don't know. I'm not a Canadian tax person. You just play one on a podcast. I play an American on a podcast. American on the podcast. Exactly. I am an American. Yeah. And that's the thing. When you're asking questions about lending, financing, banking, taxes, I mean, these are you. are very nation-specific, right? What's true in the United States is not going to be true in Canada, and what's true in Canada is not going to be true in the UK. And so everything that we

talk about on this show is made by and intended for a U.S. audience, to be completely frank, and I hope that our international listeners, including Canadians, learn high-level concepts that can be applied worldwide, but anything that we say related to taxes or banking or lending or laws, I mean, anything we say is said from a United States perspective. The thing I like about Canadian banking, though, is that they use that play money. That doesn't look anything like real money. The loony? I love the loony.

And Bordons? What's Bordons? You're looking at me like you don't know. Borden's a $100 bill. Oh, yeah. See, I did not know that. He was the prime minister during World War I, and he's on the Canadian $100 bill. Wow.

You have some incredible Canadian money trivia knowledge. When your podcast's name is stacking Benjamin's, you better know the other $100 things for your international people. I wonder who's on the 100 rupee in Nepal. So, Yvette, your homework assignment is to, number one, talk to a lender, find out what type of loan you can get for that condo. Number two, find out what the interest rate implication of... of that loan is, you know, what type of interest rate could you get for that condo? How does that compare to the interest rate that you get on the townhome? Plug those into a mortgage calculator.

Find out what that amounts to in terms of the cost difference. And then, number three, talk to a Canadian tax professional. Find out what the tax treatment is when it comes to mortgage interest on a personal residence versus a rental property in Canada. and find out what your projected savings would be, and then number four, plug it all into a spreadsheet. So that's your homework. Thank you so much, Yvette, for asking that question.

We'll come back to this episode after this word from our sponsors. Joe, we've got one more representative of the U.S. and one more representative of Canada. Which question should we take next? I think we go with U.S. I think we're going to save the big Canadian thing. Russell has a great idea for us, and I think it's going to be a showstopper. So let's put that as the encore at the end. Well, in that case, our next question comes from Luis. Hi, Paula.

First, let me say thank you for the thoughtful and generous advice. I've been listening to you for several years, and you've honestly changed the course of my financial life. My question is about solo 401Ks for people who also have employment at a traditional 9 to 5. My wife works for the federal government and she is dollar cost averaging each paycheck to max out her TSP account. Her employer matches her contributions up to 5% of her salary, which comes out to be about $6,500 this year. She is going to begin moonlighting in her field and we are fairly certain that she will bring in $3,000 per month on 1099 contract basis. Therefore, we are thinking that she should create an LLC and open a solo 401K for at least a portion of the moonlighting funds. My question is, do the contributions from her day job employer count against the employer contributions she can make from the moonlighting?

Also, we have read that she should choose to be taxed as an S-Corp to maximize the solo 401K contribution ability, but I'm not sure I understand why. As a note on strategy, we intend for her TSP account, her solo 401K, my 401K, and our respective IRAs to all be retired. funds that we will tap once we reach 59 years old. We do not intend to use the money in these accounts for early retirement. Thank you for any advice. Thanks to the question here, Luis. I love this, Paula, that with the side gig even thinking about making retirement contributions, because I know a lot of people have side gigs and they go, hey, this is extra money. It's vacation money. And don't get me wrong, vacation money's cool. And this is extra money for our lifestyle. That also is fine. But when I say, I want a dollar for now and I also want a dollar for later so I don't have to worry about later for as long or as much.

I like that a lot. That is some, that's some great thinking. Let's answer both of these fairly quickly on my end. And then Paula, if you've got more, I can't wait to hear. But the first thing is, does her employer's contribution to her 401K count against the amount she could put in if she has her own business? and the answer is no, with one caveat. Every business can have an employer contribution and an employee contribution. So the two businesses will be separate and they won't count.

However, there is for each one of us a maximum contribution per year, no matter how many different businesses you work for that can be put in your name by you or someone else into retirement plans. And so you can't go over that cap. That's the only cap, Paula, that we're worried about that. The second piece is you mentioned that you don't know why you would have to file taxes as an S-Corp to be able to claim more of your solo 401K contribution on your tax return. I would definitely dig into that with a professional because there are professional CPAs that go this far in the weeds. But let me tell you what I do know.

I know that corporations are separate business entities. And so the way I think about this, Paula, is that because they're a separate business entity, they don't allow earned income to pass directly through to your personal tax return, which means wherever you read that means, I'm guessing, that you might be able to claim some things over here because it doesn't pat. Now, the cool thing about an S corporation is that you kind of get the best of both worlds. an S-Corp does pass through, but you also have other tax obligations as a corporate entity. So I think the reason they're telling you that they should do this as an S-corporation is because it's a separate tax return,

there's going to be some other stuff that you can do over there. You can get a little more creative that way because you've got that separate return. By the way, when you have a separate company, that means a separate tax return. It means more time dealing with munition instead of out there making money. And so I look at the cost benefit, and it depends on how much money this side hustle is going to have, right? If it's a few thousand dollars a year, I'd say, forget about it. Please don't file another tax return for $5,000. Right.

Well, he said about $3,000 a month. Yeah. Yeah. And even then, I'm like, I don't know if it's worth all the wrangling you're going to do to get a few nickels. Exactly. So afford anything is an LLC that is taxed as an S corporation. And so, Joe, to your point, it is still passed through income, meaning that even though we are taxed as an S corporation, that money flows through to my personal tax return, meaning the

taxes that afford anything owes show up as the taxes that I personally owe. So yes, S corp income is still passed through income. But it still is a separate tax return. Correct, correct. And it's for exactly that reason that my CPA advised me not to bother electing for S-Corp tax treatment until we were making at least 100 to 150,000 a year. That was what my CPA told me. Of course, your CPA may vary.

But that was the advice that I got. And so when Afford Anything was very young, you know, we did not elect for S-Corp tax treatment for a while. We had to grow into the point where eventually we needed it. It sounds as though if you expect this business to make around 36,000, 40,000 a year, again, consult your CPA. But based on what mine told me, that's not really enough money to justify the additional workload and hassle that comes from electing for S-Corp tax treatment. All that said, I love the idea of making some of that money retirement money. I think that's some

forward-thinking, Louise. Right, absolutely. And Luis, I also want to recommend two excellent resources, and we will link to both of these in the show notes. And everyone who's listening, you can subscribe to the show notes for free at afford anything.com slash show notes. But these two resources. One is that Vanguard's website has an excellent, excellent page that, really a portal that opens up to lots of other pages on opening small business retirement plans. and they have an enormous amount of information about individual 401ks, simple IRAs, SEP IRAs, who qualifies, who's eligible, which one should you choose and why, what are the advantages, what are the drawbacks?

They've got very, very robust information. We will put a link in the show notes to that main page, the main menu of options page from Vanguard's Small Business Retirement Plans space on their website. The other thing that I will also link to in the show notes is a book called LLC versus S-Corp versus C-Corp written by a CPA. That was a page turdure. Exactly. I got to tell you, I cried. You know, it was better than Harry Potter.

What can I say? And it's written by a CPA by the name of Mike Piper. Mike also has a blog and a platform called Oblivious Investors. he is absolutely fantastic at taking very complicated information and expressing it in a way that is digestible and easy to understand. We will link to that book in the show notes as well. Bright man. Yeah. Mike is absolutely excellent. So, Luis, I would recommend that you check out those two resources. And as Joe said, also chat with the CPA. Are you ready? Oh, Yes, that's right. Russell from Canada. How did I? Look, I'm so caught up in thinking about Luis's question that I forgot what we had saved for last. Yes. And Luis, not that that wasn't a great question. That was fantastic. But Russell doesn't just have a question. He's got a question and maybe the solution to all of our marketing problems. Oh, wow. Well, I can't wait to hear it. Our final question slash comment comes from Russell.

Hi Paula. Hi, Joe. First of all, I want to say I really love what you guys do, but I do think you guys are missing a big opportunity. You guys should start a new show called Stack Anything or Affording Benjamins. That's oddly not the reason why I actually call. So my partner and I are long-term planning to immigrate to, Canada. Myself, I'm going to be a contractor in the next year. My partner is going to be a nurse in the next two years. My question is, as far as it comes to investments for immigrating to Canada, I have a nice, modest portfolio that I keep adding to. That's just, it's a acorns fund. I got it four years ago. I diligently put money into it every day. and it's grown and it's great. And this is extra money for me. I have a healthy three to six months savings.

I live well below my means. Between us, we won't have any debt and will most likely have $100,000 in liquid assets between the two of us, if not more. And I wanted to know how is the best way to have that invested? Should you have it invested in the country that you want to move into? am I going to be forced to move stuff over, or do they not really care? Any insight you could give me is great. Thanks. Russell, thank you so much. By the way, Joe and I, but before we started recording,

we were talking about exactly what a stacking anything brand would look like. We decided it was best to turn that into a YouTube channel where we quite literally just start stacking things, like picking up stuff from the living room and stacking. it all together, kind of like every single video is real-life Jenga. Five million views. Exactly. Probably.

Here, I'm stacking my phone on top of my protein shake. Watch this. Well, you see those unboxing videos where you just see people's hands and they're like opening stuff from Amazon and they get millions of views. Why wouldn't we get millions of views just stacking random stuff? Yeah, stacking anything. There it is. But oddly, that was not the reason that you called in.

oddly. Oddly. I don't know how you feel about this one, Paula, but let me tell you how I feel about it. Cool. I like leaving the money in the United States that you built here, and I like building a separate Canadian portfolio because being somebody who is familiar with the United States, having lived here your entire life, and you're familiar with Canada, I've found that people that live in other countries but grew up somewhere else, they still keep ties there.

and they kind of keep track of both types of money. And it might give you some accounting headaches. If that happens, then don't do this. But for the most part, and for a lot of people, it's really easy to have money in two countries. I don't recommend this, by the way, for the average person, because if you don't have a connection to India or to Japan or to Canada or wherever, or Sweden, yeah, don't just go buy the currency and have two different currencies.

But I do think, Paula, if you're familiar with both of them, having some money in both is going to allow you to play a little bit of an arbitrage game. And you can decide, I'm a guy that lived very close to the border for a long time in Detroit. And we would always follow the Canadian dollar versus the U.S. dollar. There were sometimes where it made more sense to go to Canada. And other times Canadians wanted to come to the U.S. because their money spent more easily there if things were less expensive that way. So for me, I think I would just...

have both, Paula. Russell, the first thing that came to mind when I heard your question is that currency conversion takes a steep haircut off of your money right off the bat. So if you were to make that currency conversion, you'd be taking an immediate hit. That being said, however, living in Canada, your financial life will be tied to the Canadian economy. And so designing a portfolio that reflects your new nation, your new home, your new economy is a prudent way to build a long-term portfolio that's reflective of the country in which you live. I will say, Russell, that there may be some issues that you need to be aware of, which are that you, for your U.S. accounts, you may need to continue to have a U.S. address if you keep those

accounts. If you're working with a financial advisor, financial advisors, because of a lot of of legal restrictions and compliance problems. Often they can't work with people in different countries, and they have to sever that relationship. So there may be some complications, but if you have a U.S. address that you can continue to get mail at for your U.S. accounts, you can continue to leave those open.

I would check with, by the way, your individual accounts to make sure that those accounts don't have a problem. people often have accounts in in different countries, but there are still some rules that you're going to have to pay attention to. The final thing I'll say, Russell, and I realize this is not what you asked about, but I noticed that you mentioned that you started investing through acorns. And for people who are unfamiliar with it, acorns is an app. We'll link to this in the show notes as well.

It's an app that rounds up whenever you make a purchase, then moves that money into an investment account. So if you make a purchase for a dollar and 17 cents, acorns will round that up to $2 and put that into an investment account. So you end up investing accidentally. You know, you end up investing more than you otherwise would because of the fact that you're not thinking to yourself, I'm going to budget and I'm going to put this money aside. You're just rounding up every purchase. And I've got an acorns account. It is amazing how quickly it adds up. That that probably speaks to the high number of transactions that I make. But it really is amazing how quickly it starts to add up. They are not paying me to say this, but I am a big fan of not just

acorns, but also other apps like that, apps and programs that help you accidentally invest and help you make more contributions than you intend to. You're a fan of the automation. Correct. Yeah. Not just the automation, but also the kind of the hidden surreptitiousness of it. It's almost like nickel and diming yourself, right? You don't notice these little quote unquote hidden fees.

And in this situation, those quote unquote hidden fees, that rounding up of every transaction is going directly into investments for you. Capital is another app where their structure is a little bit different, and they specifically put money into savings and not investments, but that's another app where they just skim small amounts that you don't even notice. And then over time, it adds up, and then you open up your app, and you're like, $500. How did that get there? What? Yeah, exactly. And I should tell people that capital, of course, spelled with a cue. Yes, yes.

We'll link to both of those in the show notes as well. But I'm a fan of them both. My name is Joe. You spell that with a W. Jow. No idea. Every time I hear capital, I'm like, why the Q? You know, you know, it's going to make sure nobody finds this bill.

Yeah. So thank you, Russell, for asking that question. And congrats on your upcoming move. Yeah, and thank you for the free marketing advice. Yes, stacking anything. So, Joe with a W, where can people find you if they would like to hear more of you? I am three days a week on another show called The Stacking Benjamin Show, which is spelled C. Spelled the traditional way.

We talk a lot about the headlines. We talk to people working on big projects, whether it's somebody that paid off debt, somebody with an exciting idea. We even talked to the Paula Pant every Friday. Absolutely. Which is incredibly exciting. And you'll find all that wherever finer podcast are listened to. Your favorite podcast playing app.

Your favorite podcasts on your favorite podcast app. Exactly. That's app with a cue. Well, speaking of your favorite podcast playing app, please open up that app and hit the follow button. so that you can make sure that you don't miss any of our amazing upcoming episodes. And while you're there, please leave us a review. Those reviews are incredibly helpful in allowing us to book amazing guests.

Also, subscribe to the show notes. You've heard me say the URL a bunch of times, so I won't repeat it. Just kidding. Sike, yes, I will. It's afford anything.com slash show notes. And finally, please, please share this podcast with a friend or a family member. That is the single most important thing that you can do to spread the message. of good financial health.

If you have a question that you would like to hear on this show, go to afford anything.com slash voicemail to leave your question, and we will answer it in an upcoming episode. And if you are interested in learning more about the live event that we are most likely going to host, but we want to know whether or not there's enough interest in it, head to afford anything.com slash event. That's afford anything.com slash event. If we did put this event on, it would be the way.

weekend of August 2021-22 in New York City. So afford anything.com slash event for all the details. Thank you so much for tuning in. My name is Paula Pantt. You can find me at Instagram at Paula P-A-U-L-A, P-A-N-T. This is the Afford- Anything podcast, and I will catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet. here on a podcast, see on social media that relates to finance. All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything Afford Anything produces. And financial media is not a regulated industry. There are no licensure requirements.

There are no mandatory credentials. There's no oversight board or review board. The financial media, including this show, is fundamentally part of the media. And the media is never a substitute for professional advice. That means anytime you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, tax professionals, certified financial planners or certified financial advisors, always, always, always consult with them before you make any decision. Never use anything in the financial media. And that includes, this show, and that includes everything that I say and do, never use the financial media as a substitute

for actual professional advice. All right, there's your disclaimer. Have a great day.