Afford Anything - Ask Paula: Is Your DIY Investing Strategy Holding You Back?

Episode Date: August 28, 2024

#535: Melissa and her partner are preparing for the best earning years of their lives. Could they benefit from automated tax-loss harvesting and transition from DIY investing to a robo-advisor? An anonymous caller just learned something surprising about their Roth 401k and feels squeamish about making future contributions to this account. What’s Paula and Joe’s advice? Hampton is following up on a question from Episode 524 to spark an intriguing discussion on the generational tax advantages of a Roth IRA. Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode535 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, when you were a financial advisor, I suppose that meant that none of your clients worked with Robo advisors. You know, that is far more of an old guy question than you know. There was no such thing as a Robo advisor back when I was easy, Paula. Easy. Oh, sorry. So look at me assuming that you were a financial advisor in the era of the internet. In the modern era. Yeah. In the modern, in modern day, in the brat era. There was no such thing. And ETFs weren't a big deal either then either. I spent a good amount of my time, by the way, making sure that the mutual fund managers that I was recommending were actually good ones. The idea of indexing was not a thing. And stocks were sold in one-eighth increments rather than with cents. That is true too. Now we can

shut up about that. What's the deal? Well, we're going to answer a question today from a caller who's wondering whether or not she should work with a robo advisor. We're also going to talk to someone who has some questions about rolling over a Roth 401k into a Roth IRA. And then keeping with the Roth theme, we're going to talk about what to do with an inheritance if that inheritance comes from a Roth account versus a pre-tax IRA. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade-off.

And that applies not just to your money, but to your time, your focus, your energy, your attention to any limited resource that you need to be. manage. So what matters most and how do you make choices accordingly? That's what this podcast is here to solve. This show covers five topics, financial psychology, increasing your income, investing, real estate, and entrepreneurship. My name is Paula Pan. I'm the host of the show. Every other episode, I answer questions that come from you, the community. And I do so alongside my buddy, the former financial planner, Joe Saul C-high. What's up, Joe? I think you're going to just call me Grandpa Joe. Grandpa Joe.

Oh, grandpa Joe. Grandpa Joe. Well, tell us another story, Joe, about the good old days as a financial planner. Well, in this modern day and age, there are robo advisors. And Melissa is wondering if she should use one. Let's hear from her. Ooh. Hi, Paula and Joe.

My name is Melissa. I've been listening to the podcast for about a year. And I really appreciate that the answers to questions are truly expansive and teach me a great deal about investing. My question is about robo investing in something that Joe mentioned on a recent podcast. For background, my partner and I are in our early 50s. Our mortgage is paid off and our last kid is finished in college, with those costs already set aside. We have about $1.6 million in retirement accounts and about $400,000 in taxable brokerage account, mostly total market index funds. We've always been DIY investors, initially with no-load mutual funds and more recently index funds. With an upcoming job change,

we are entering our highest earning years in the next decade. And with much lower expenses, we will have more cash to set aside into investments after maxing out tax advantaged accounts. We will need some of that money to bridge us from retirement in 10 to 12 years to age 70. And I'm wondering if it makes sense for us to look at robo investing through something like the Schwab Intelligent portfolio because we will be in a higher tax bracket. So tax lost harvesting may be of value. and we will have more defined goals for that money. My partner prefers an aggressive portfolio. I would like to mitigate some of the volatility

given that we will have a sooner need for that money than the usual 30 to 40 year timeline that we think about when we are investing. I appreciate your guidance and really thank you for a wonderful podcast. Melissa, thank you for the question. And first of all, congratulations on everything that you outlined on being in your early 50s,

having $1.6 million. The last kid is finishing college and you've already accounted for all of those costs. Your mortgage is paid off. You are very, very well set up. And the fact that you are so well set up in your early 50s tells me that you spent your 20s, your 30s, your 40s building to put yourself into this position. So big congratulations to both you and your partner for the decades that I know that

it took to be able to get to such a great position today. I think where we have to start, Paula, is so, okay, Joe said something that she's responding to, but she did not. say what it was. But I think, Melissa, what you are referring to is the fact that I said the wrong demographic is using robo advisors. It is ridiculous for someone in their 20s to buy like a robo advisor with eight funds or 10 funds or whatever number it is when, frankly, for long-term goals using the total stock market index is a much, much better way to go. Just buy, it is far more important that you are investing than having perfect asset allocation.

Perfect asset allocation is confusing to people. You don't understand all the different asset classes that are there. And frankly, you don't need them. What you need to do is shovel more money in. And then the bigger ridiculousness is that robo advisors talk about this idea of tax lost harvesting. Well, if I've got $400 and it makes a dollar, am I really worried about tax lost harvesting? Just complicating my tax situation. So there is no reason for a lot of the things that a robo advisor offers when it comes to a person starting out investing. Keep it simple.

Use the total stock market. Now, when you get to the point that your portfolio's movement on a daily, weekly or monthly basis is more money than you're putting in during that same time frame, then I think it makes sense to get analytical about your approach. Being more analytical, what I would prefer people do, Paula, calculate what's called the efficient frontier at that time for them and diversify appropriately. The good news, the Robo Advisor things that she's talking about are way, way, way, way, way more in that direction than the total market index, which I think people should start off with. So yeah, I like it. And by the way, tax loss harvesting, if it's inside an IRA, you can't do any tax lost harvesting. I've seen people go, oh, I do it for the

tax loss harvesting and it's all inside my IRA. It doesn't matter. There's really no such thing and it doesn't really help you. But for money outside of IRAs, now that tax loss harvesting at the end of the year can sometimes give you substantial tax savings and can be a real benefit to either using a few different positions as you're on the efficient frontier or by having something like the Schwab portfolio she talks about do the same thing. You know, Joe, the concept that you were talking about, that the rules that apply when you are young and your contributions are relatively low are different than the rules that apply when you are more experienced and you have higher contributions and a higher portfolio balance.

A person who really talks about that in depth is Nick Majuli. He's a Stanford educated data scientist who was our guest on episode 375, afford anything.com slash episode 375. And he talks quite a bit, then he frames it in mathematical terms, so he shows you the math around it about exactly that idea. When you're young and relatively at a lower income than you likely will be, and you have a relatively smaller portfolio balance than you likely will have, at that stage, the biggest lever that you can pull is earning more and contributing more. So focus on the income and the contributions when

you're in your 20s because... That's your impact. Yeah. What are you going to eke an extra 25 basis points out of nothing? By having the perfect diversification. I have the perfect diversification with $100. I've got... Right, exactly. Yeah. I've got eight different funds with $17. It is ridiculous, you know?

Yeah, exactly, exactly. Right. But Melissa, in your case, I think a robo advisor makes a lot of sense for exactly the reasons that we're discussing. You have a $1.6 million portfolio. That's actually a substantial amount of money. It's not the $5,000 portfolio that some people have at the time that they go into robo advisors. Yeah, again, it isn't my favorite. My favorite is based on your specific game plan,

finding that spot on the Efficient Frontier. But Robo Advisor, Directionally, is headed that way. Second, Paula, I want to talk to all the Uber geeks giving advice to people they don't know on the internet, who when somebody says, hey, here are my 401k choices. What should I choose? Immediately they go either VTI or VTSAX, which is total stock market index, the Vanguard approach. That's a great place to start. And Uber Geeks who have drank the complete Kool-Aid that this is all anybody should use, you are losing substantial money. And I believe a lot of you that are giving this advice are people that have a great button-down

budget. You understand tax loss harvesting. But when it comes to investing, you don't realize that J.L. Collins' advice, is for beginners. It's specifically, it is not the optimal path to wealth. It's not the best path to wealth. It is the simple path to wealth that gets beginners to calm down, relax, and invest. And it's not me saying this, by the way. Paul Merriman, who's a phenomenal friend of Jail Collins, who wrote also former guest on this podcast. Who wrote the Simple Path to Wealth, Jail Collins. These two guys are friends. Right. Paul Merriman has done all of the research to say that if you go

toward the efficient frontier. You're going to be way, way, way, way, way, way, richer. And often with a lot less risk than you have in VTI or VTSAX. So while VTSAX and chill is phenomenal for a 25-year-old with no money, it drives me crazy when I see you telling people that are 50. That's what they should do because you are wrong. You're 100% wrong. Horrible advice. Wow. I've never seen Joe, You haven't ranted like this in a minute. It's because in the last week, I've seen it like five times. I'm like, oh, my, stop being suboptimal. And you know what's cute, Paula?

This is what's cute. Is that people tell me, they go, well, you know, I'm going to have enough money. I'm going to be fine. Well, good for you. But you got this community of people around you that could really, really use your help and your support. And imagine, imagine the people you can bring along with you. If you weren't so focused on being suboptimal with your money. But we get so focused that, oh, this is whatever.

everybody I should do. And I'm with the cool kids because I say VTSAX. You understand where it's headed, but I don't think you understand where VTSAX really fits in the in the whole thing. So Melissa, not aimed at you. Melissa's headed the right way. I think there's great. But oh my goodness, Paula, this baloney. I'm like, haven't you heard? We've been ranting about this forever. And we still got these Uber nerds out there saying stuff that is just horrible. You know, the thing that's interesting about the phrase VTSAX and chill, I'm glad you brought that up, because that's a popular internet meme that, you know, like that's a, in the personal finance community, you hear that all the time. And for those of you who are tuning in, who are beginners or who are just tuning into a personal finance show for the first time. What are they freaking out about? If you immerse yourself, if you immerse yourself surround sound in personal finance content, you're going to hear VTSAX and Chil. And you're right, Joe, it's what got you here won't get you there. The things that you do that are

appropriate when you are a beginner are not the things that will get you to the next level. That's true in investing. It's true in business. I was just listening to an episode of Billion Dollar Creator with Nathan Barry. He did an interview with Ali Abdal, who is a popular YouTuber with five or six million YouTube subscribers. And Nathan Barry and Ali Abdel had this great conversation about exactly the concept of what got you here won't get you there, what you do when you're growing your YouTube channel from zero to your first 10,000 subscribers, those habits are great at that level. But if you try to apply those habits when you're growing your YouTube channel from 5 million to 6 million subscribers, the same habits that got you success as a beginner

are the ones that will at best hold you back, if not cause you utter collapse and failure. when you're at a higher level. So one example of that, when you're a beginner, as a beginner entrepreneur, you say yes to everything. Every opportunity you say yes. Every interview request, you say yes, yes. When you get more advanced, you have to be far more selective with your time, far, far more selective, right? Perfect example of what got you here, won't get you there. I spoke with Mark Randolph, who's the co-creator of Netflix, and we had a phenomenal discussion. And he said the frustrating thing is when you first start off as an entrepreneur, Paula, also, you need people who are, they love your brand, they love what you're doing, they're jack of all

trades. And he goes, and the sad thing is those are not the same people that will work when you to several million dollars. When your sales change, now I need people who are niche and understand specifically finance, understand specifically marketing. Every business goes through this growing pain of this person who was my right hand person who I absolutely loved is not the same person is going to be. He goes and it's horrible and it stinks. And I know that we want a VTSAX and chill forever. But if you're doing that, you can do so much better. And you're like, well, so what? I have enough. Don't tell me that. Don't do that. Don't do that to yourself. Don't do that to your community. Especially when these same people, Paula, that say that are so smart. Like they're so

smart in every other area. But it is definitely a wonderful problem for Melissa to have that her portfolio is big enough that she can focus on things like tax lost harvesting, again, to your praise of Melissa's situation. You get to this point and being more analytical is going to pay some serious dividends. Right. Do you have any particular tips from Melissa, given the fact that she is not on the typical 30 to 40 year investing timeline? Like she talked about wanting to mitigate the volatility. given the shorter timeline, the shorter time horizon. I love that. I'm glad you brought that up because I'm looking at my notes and that is a note that we haven't addressed. I'm with Melissa's partner. I really like aggressive portfolios as well, but there's two reasons to have an aggressive portfolio, Paula.

One is that aggressive portfolios have paid the last many years. You've gotten used to the fact that, hey, if I put my foot on the gas, my portfolio goes and it goes really, really, really, really well from about 2008 to with, you know, a few notable exceptions, right? The beginning of the pandemic, the little hiccup we had a few weeks ago. But mostly it has been up, up, up for the stock market. That chasing returns, I like being aggressive because it works in chasing returns, I think is a trap. It's a monster trap. If you are aggressive because you're okay with that roller coaster and you understand that longevity is in our favor where we may live longer than ever, where you need our money to last longer than ever, then being aggressive is not a bad thing. So I'm very

curious to get into much more from a psychological perspective, Paula, why does Melissa's partner like being aggressive? I personally think that there is definitely a middle ground. And you know what's cool? You can be aggressive, but at the same time, diversify better. And this is another great thing about going in the direction. About the efficient frontier. Yeah. She now, you can add more, more aggressive assets to your portfolio. And it actually smooths out the entire ride in the aggregate.

It's so cool. Now she'll have several different funds with amounts of money in them that are substantial and make sense and will drive the portfolio. So you've got some up and some down. And so at any point, she can stay aggressive. But at any point, she also has a far. more options to pull from if she decides the goals have changed. What I really liked about her question, though, and about a statement she made, she talked about a statement I made. This is what I love about

hers. She was talking about when she'll need the money. And I think that instead of looking at your continuum between being aggressive and being conservative, instead looking at different continuum of when am I going to probably need this dollar and investing that portion of the portfolio based on when I'm going to need it, she may be more conservative with the money she's. She's going to need 10 to 15 years later, then she will be with the money that she needs in 2025 years. She could stay aggressive with part. She could be more conservative with the other part.

He's also in a much more scientifically designed portfolio with these intelligent portfolio she's talking about, which means she's more diversified. She's conservative when she needs to be. She's aggressive when she needs to be. It doesn't have to be one or the other. Her partner can have some money in the aggressive. She can have money where it needs to be more conservative for the more immediate term bucket. So it's a great, great question.

Right. What did you think of that question? Mentally, I'm bucketing the uses of her money into two buckets. There is the bucket in their 60s and then the bucket in their 70s plus. My feeling is go aggressive with the 70 plus bucket. Yeah. You know, sure, you don't have 30 or, well, actually, you kind of do. You do have 30 or 40 years on that, at least on a portion of that.

You know, if you're in your early 50s and I don't know precisely what age they are, let's say they're 52, 53, 54. If you're 54, oh, 40 years from now, you're going to be 94. If you plan on living until you're 100, or at least you're planning your retirement as though you're going to live to 100, then there is a portion of your money that you are investing for 40 years. I love the bucket thinking for the people that are new to this. Thinking about your money and when you're going to spend it is so much better than trying to choose. The most popular question that I used to get was always, so what's the best investment? And the best investment is based on that bucket. I hear that a lot when I, just in casual

conversation, when people say, so, so what do you do? And I say, oh, I host a finance podcast. Oh, so what's the best investment? What's a great thing I should be investing in right now? Right. Right. As though it's some type of a one size fits all silver bullet. You know what I always do? I tell people, I'm like, well, about six years ago, I told people, start investing in Nvidia. And take a look at what happened. That's all me, frankly. Well, I mean, technically you did, Joe, six years ago, more than six years ago,

you told people to invest in a broad market index fund. I did. Microsoft. Right? And yeah, and look at how big of a chunk Nvidia occupies in a total stock market index fund. So see, you had that foresight. You're welcome, America. I'm just waiting for the letter from Nvidia's CEO.

Joe, thank you for keeping the stock price going out. You know, NVIDIA CEO started the company. He started NVIDIA when he was 30. And look at him now. Right? Yeah. 1993, he was 30. That was when he started NVIDIA.

But going back to Melissa's question, Melissa, when I think through the two buckets, you know, anytime anyone retires, my brain immediately goes to sequence of returns risk. And what that means in terms of investments and asset allocation is that as you near retirement, a small portion, so this is going to be the third bucket, a very small portion of your money, the amount that you are going to tap in the first two to three years of retirement, make that portion enormously conservative. That's going to be your third bucket. And the reason for that is because you know, with certainty, that you will be tapping that particular bucket of money and you also know that the timeline for tapping that money is fixed. Because once you retire,

It's hard to reverse course. So you know with relative certainty that you're going to be spending this particular money at this particular time, that little sliver just for two or three years should be invested conservatively. The rest, the rest be aggressive with it. And if you want actually a great primer on this, we did an interview with Dr. Wade Fow. We've actually interviewed him several times. He's a retirement researcher. And he talks about how the ideal asset allocation in order to cope with sequence of returns risk is to get gradual. more conservative as you approach retirement, but then after the first couple of years of retirement, get more aggressive again. We'll link to the episode with Wade Fow as well as the

episode with Nick Majuli and Paul Merriman in our show notes for this episode. So if you're watching on YouTube, you can find it in the description below. All right. We are going to take a moment to hear from the sponsors who allow us to bring you this at no cost to you. And when we return, we're going to hear from Hampton, who was surprised by one of the answers that we gave on a previous episode. We're going to hear from him next. And after that, we'll hear from an anonymous caller who has some questions about Roth 401ks and Roth IRAs. Stick around. 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

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W-A-Y-F-A-I-R-com. Sale ends December 7th. Welcome back. Our next question comes from Hampton. All righty, Paul and Joe. Hey, I got a question related to one of your answers from a few episodes ago. I usually tried to predict what your answers are going to be, and I was way off on episode 524, when the last caller, his name was Mark.

He was asked about how to use a $300,000 inheritance for mainly purchasing property, but he had already saved a whopping $80,000 for a down payment, but wasn't ready to purchase for another year. Now, I believe that one of the important things that he mentioned is that this money that he might be inheriting, he thinks is from a Roth IRA, but you immediately gave an answer for a traditional IRA. Now, when you interviewed Ed Slot back in episode 307, I remember Ed talking about inherited versus traditional IRAs and the tax implications. Now, I remember paying very careful attention to that episode because part of my investment strategy is to protect my little beneficiaries from paying high taxes when I move on from this world. Now, he talked about how the Secure Act changed the IRA rules to where those that inherit a Roth

or a traditional IRA have to withdraw the balance within 10 years. So if it's a traditional IRA, then you'd be paying the taxes on that inherited traditional IRA and to lower the tax bracket, it might be wise to take out a tenth of that balance every year for 10 years. But if it's a Roth IRA that Mark is inheriting, and I think Mark said it might be, then it seems like the best withdrawal method might be to wait until the very last minute and at the end of the 10 years then take it out so it will allow as much tax-free growth as possible. So if Mark is receiving a Roth IRA inheritance, I think the wise. this answer is to leave it alone for 10 years so that the 300,000 that he's inheriting

becomes 600,000 at 7.2% interest, and he should use his savings and even some of the emergency fund that he has for a down payment instead of using that Roth IRA that he's inheriting. You did say that all of the tax implications are mute points since he wants to withdraw the money, but man, there is such a massive money advantage to leaving it alone for 10 years. if it's in a Roth IRA that's being inherited. And then at the end of the 10 years, he can easily pay off the house if he wants to with tax-free money.

Now, I'm not an accountant or anything, but I do listen to afford anything. And most people can afford to wait 10 years for that beautiful tax-free growth because that's kind of how I've been planning my retirement. And apparently those that he's inheriting from was planning that for him as well. So thanks for listening.

I just wanted to put in my two cents when it comes to Roth IRAs. Thank you much. I think you got it more like four cents, Paula. Not two. Wow. Wow, Hampton. First of all, I love your voice and your enthusiasm. It's the voice and it's the character and the personality that comes through that voice.

And Hampton, you are absolutely correct. We did not address what would happen if this was a Roth IRA. I talked about what would happen if it was a pre-tax IRA. But we didn't, we didn't go into the raw thing. We also spent 30 minutes on this question, which is amazing how you can spend half an hour on a question. And it's so multifaceted. We got really excited about using it for one thing versus using it for several things,

about the inheritance, about when to use the inheritance. About grief, about the role of grief in deciding how you're going to spend an inheritance. Yeah. And that's what makes this really fun. Right. About mentally bucketing this as one discrete unit. that would be applied to one specific purchase versus spreading it out. Joe and I had a whole debate about that.

But yeah, you're right. When it came to the tax implications, I mean, in my mind, since Mark had said, you know, I'm not sure. I think there's a possibility it might be a Roth, but I'm not quite sure. So I think mentally I was like, we don't know if it's a Roth or not. So I'm just going to answer it like it's not. But I think that Hampton, I think that you're correct. We did address, Paula, that if it's a pre-tax, if it turns out he's wrong, it's pre-tax,

here's what you do, blah, blah, blah, blah. Yeah, yeah, exactly. Yeah. So we addressed what he should do if it's a pre-tax, including what the tax implications are for a pre-tax. But since he didn't know for sure if it was a Roth or not, he was like, maybe it might be, I don't know, was what he said in his question. So I want to talk about one aspect of what Hampton's saying here that is really important because often you will get advice to leave money alone because it will make more money where it is, which is what Hampton's saying. And by the way, I'm not going to say Hampton's wrong. I think Hampton in this case is right. But I'll tell you areas where you will get advice similar to what Hampton gave us today

that is wrong. That's very, very wrong advice. Dun, done, done, done. And that is this, Paula. You've said it. I've said it. Don't let the tax tail wag the more money dog, right? There are so many people that are worried about the tax implication.

Oh, well, if it's in a Roth, then I should leave it there and it should blah, blah, blah. That is perfect. And Hampton even talked about where the money could. come from. And because the original caller had the resources in other pockets to make the goal happen and could leave the money there, then Hampton answered that question. There is a tax trap. I'm not anti-annuity, as you know, Paula, but annuities are a tax trap. And the reason they're a tax trap is because of the fact that money goes in and then annuities earn money. And then the interest, different than in a Roth, it's all going to go tax-free.

So what Hampton's saying is perfect, right, that this money's all going to go grow tax-free. But I will see people that will accumulate money for whatever reason in an annuity, and they won't touch it. And the reason they won't touch is because it's last in first out, meaning it makes money. All this growth is sitting there on top of your contributions. You have to take out that growth first before you get to the contribution, which is not taxable because it was your money out of your wallet. It was after-tax contributions.

people don't do it. There's an astounding amount. There's a monster amount of money that stays in annuities, meaning people spend less life. They get less life. They get less living because they don't want to touch the money because I'm going to pay a tax on that money. Don't let the tax tail wag the more life dog. Don't do that. So I just want to say that because I think it's an appropriate time to go, you know what? When everybody says, hey, leave the money alone because of taxes, you really need to work through it. In Hampton's case, yes. If they had done, said, well, we have this annuity and it's sitting here. Hey, you're going to pay a monster tax. Yes, you will. Which is part of the reason why we don't recommend annuities very often, right? Yeah, we really

don't. I mean, we're not anti-annuity. No. They have their time in place. Longevity annuities, very simple uses of annuities, but these bells and whistles, we can get some of the stock market without any of the risk. That's garbage, garbage, garbage. Joe is spicy today. You know. Going back to Grandpa. Do you remember how we had like ginger spice? Remember the spice girls, ginger spice? Ginger spice. Yeah, of course I remember ginger spice.

Like today you're going to start calling me old spice. Oh. Would it be great if they were a sponsor of your show? Oh, man. Didn't Wood Spice have a campaign around, what was that ad campaign? It was a good one. It was like. And now I'm on a horse.

Yeah, exactly. That's the one. That's the one. It was great marketing. Fantastic. Yes. Hampton and Mark, if you're at Mark, we're going to email Mark. to make sure Mark listens to that. I mean, I'm sure Mark listens to all of our episodes.

But we are going to email Mark to make sure that he specifically listens to this episode and knows that we're talking about his question again. Mark's like, wait a minute. You spent a half hour on my thing. But wait, Mark, there's more. Wait, Mark. Yes. By the way, when I'm here next week, all we're going to talk about is Mark's question even more. Mark, yeah. The Mark show. Mark, so one of the things that you'll have to consider, if this is a Roth, One of the things that you'll have to consider is the budgetary element because the current home, the current rent that you pay is somewhere in the ballpark of 2,700, 2,800 a month, if I recall correctly. And the home that you are buying, you want to buy a home that's valued at between 700 to 800,000.

And if you were to take this money and use it as a down payment, that down payment would be 400,000, which means that the principal and interest portion of the payment on the home that you want to buy would be about the same as the rent that you are currently paying, which means that from a cash flow perspective, from a budgetary perspective, if you used this money as a down payment on that home, the cash out of pocket that you are paying towards your mortgage will be not that different than the cash out of pocket that you are currently paying towards rent. There will be property taxes and interest in HOA. But other than that, the cash out of pocket between the two scenarios is relatively similar. If you don't use this money as a down payment, then your housing payments, when you buy that $700 to $800,000 home, are going to be substantially higher than the rent that you're currently paying.

And so that's the other piece to consider. Do you want to leave this money, if it's a Roth IRA? Do you want to leave this money inside of the Roth IRA for additional tax-exempt growth? Or would it be better for your cash flow situation to withdraw it so that your mortgage payment can be similar to your current rent payment? And that's purely going to be a function of how tight is your budget. How much wiggle room does your current budget have? Fabulous. Just a little bit of math.

Yeah. Look at that. Budgeting and cash flow has entered the chat. Let's talk about VTSAX some more then. Chill, Joe. Well, thank you. Hampton's voicemail got us in a good mood. Hampton has such great energy.

Thanks job, Hampton. Thank you so much. Yeah. Thank you so much. All right. One final break for a word from the sponsors who allow us to bring you this at no cost to you. And when we return on the topic of Roth accounts, we're going to have a discussion about Roth 401ks that roll over into Roth IRAs. Stick around. Welcome back. Our final question

today comes from an anonymous caller. Joe, we give every anonymous caller a nickname. Do you have any ideas for this one? I do. Guess where I'm going soon. Chile and Peru. How did you know? It's like I might have told you that. It's like I have marked out your vacations on my Google calendar. Perfect. It's all about me, Paula. It's true. It's true. I have lines on my Google calendar saying Joe and Chile and Paul says is cry a lot. But I am. I'm really excited. I've never been to South America and I'm super geeked about it. It's my first time. And I just watched this cartoon, The Emperor's New Groove, of course, I had to because I'm going to Peru and, you know, alpacas and llamas and Paula's like, I don't even know this movie.

I don't. I don't. I have no. I have a Disney movie. David Spade played a main character. the character, there's a great woman. Her name is Isma. She's played by the amazing Eartha Kit. And by the way, I thought of Eartha Kit because she has an incredible voice, kind of like Hampton. She is a very iconic voice. Iconic voice. Oh, that's a great descriptor. Iconic voice. Yes. So let's call her Isma because I'm headed to Peru, baby. Hi, Paula and Joe. This is Anonymous from Texas. I love the show. I've been listening since it was the money show, but this is my first time calling in. I recently rolled over a Roth 401K from a previous employer into a Roth IRA.

After rolling it over, I learned that I actually likely will have to pay taxes on the part of the rollover that is earnings, as opposed to contributions. Per the IRS website, it says Roth IRAs and designated Roth account only accept rollovers of money that has already been taxed, you will likely have to pay income tax on the previously untaxed portion of the distribution that you roll over to a designated Roth account or a Roth IRA. My questions, is it true that I will have to pay taxes on the earnings part of the rollover? And if so, it turns me off a bit to contributing to a Roth 401k in the future because it degrades the benefit of this account.

I know y'all are big proponents of Roth accounts. Should I continue contributing to Roth 401Ks in the future, despite the tax implications when I roll over? Thanks again. Love the show. Appreciate all y'all are doing. Oh, do you want to give her the good news? You want me to give her the good news?

Oh, Joe, you should do it. All right, Isma, Joe is going to give you the good news. The good news is that Roth 401Ks can be rolled. over to Roth IRAs and you're not going to pay any tax. Except if some of that money was employer contributions, employer contributions are always treated as pre-tax money because it wasn't your money. So that money may be taxed. So if there was a contribution mixed in from your employer that's going that way, that will work almost like a backdoor Roth IRA where the money's going to get taxed one time and then it goes back in

and ba-a-boom, batta-bing, you're good. But the money that was in the Roth 401k now goes into the Roth IRA. But isn't that good news? Not a lot to worry about. Joe, are you saying that she has misinterpreted what she's read on the IRS website? Yes, absolutely. Can I make a guess? Oh, hand in the ear. Hand in the ear. I have a guess. I have a guess. The key word here is a word distributions. Am I right? You are 100% right. You're not taking a distribution when you do a roll over. So the confusing term, the term that got Isma off track, and I knew it the moment that I heard her read that IRS page out loud, the word is distribution. Yeah. Because Isma, a distribution means that you are pocketing the money and spending it on champagne and caviar. That's not what you're doing.

Therefore, it is not a distribution. Now, I wondered why the word distribution was there. And So I went to the IRS website and found the page that you are referencing, and I'm going to put a link to this page in the show notes. So this page, which is on IRS.gov, is a little confusingly worded because the headline says roll over to a Roth IRA or designated Roth account. But the first line on this page, the opening sentence, is, quote, are you eligible to receive a distribution from your 401K, 403? or governmental 557B retirement plan. And then it goes on to describe the process for eligible rollover distributions from these plans into a Roth IRA or a designated Roth account. That's the broader context of the sentence that you read. But you're not taking a distribution, so this page doesn't apply to you. Strategy wise, what I want to try to do, if possible,

is I want to move my money from that Roth 401k over to a Roth IRA that's already been established. And the reason is when it comes to money that's not contributions, money that is the growth on the account, that money has to sit there for five years or 59 a half, whichever is later. And so you want to get that five year clock running as fast as you possibly can. So if you don't have any money in a Roth, well, then the five year clock's going to start the second that you put this money there. If you do have one, I would make sure it goes into that account. Put it into the account that has the five year clock running and you're going to be good. This is also a reason why. Even if you think, Paula, I think people get obsessed with the term max out. Like,

people like, I can't really max out a Roth, so I'm not going to do it this year. I'll wait till next year. Get that five-year clock running. Just put something in so that you start that, because at some point you're going to want the Roth. It's an amazing Swiss Army knife of a tax shelter that the government gives you. And everybody can get money in there. Some people have to do the back door Roth to get money in there. But all of us can put money into a Roth. I would get that clock started as soon as you possibly can. So you're not worried about the five-year rule later on down the line. And so, Isma, there is no reason to sour on Roth accounts. Roth away. Yeah, Roth it up. Roth to your heart's content.

Roth and chill. See, that's a good one. Actually, that makes way more sense. It really does. Yeah, Roth and Chill. I'll take Roth and Chill. That's a great one. I like that meme. Roth and Chill. I like it. I like it. Roth and chill. I think, Joe, I think you just did it. I think you nailed it. I'm going to say it for the fifth time. You're welcome, America. Well, Joe, where can people find you if they would like to hear more of your wit and wisdom? Yes. You can find us at the Stacking Benjamin Show every Monday, Wednesday, Friday. We're joined on Friday by the brilliant Paula Pant, who on Fridays we chat about generally something that's in the news. And we've had some phenomenal Friday chats. We talked recently about this idea of renting everything, renting your entire life. We talked about DoorDash and about Uber and is that killing our ability to get along with other

people. Just some great really often much more philosophical conversations on a Friday that I thought that we would have. Yeah. The conversation that we had about renting everything, Just to be clear, we're not talking about housing. That conversation was about clothing rental sites, renting tools, renting clothes, renting furniture, renting smartphones. I didn't know that you could rent smartphones, right? Renting phones, yeah. How about in the family in there that rented a Christmas tree that it comes in a pot and then you give it back and now you haven't cut down a tree? They can replant it.

Yeah. Pretty wild. Yeah. So, yeah, we had a great conversation. conversation about renting, renting at all. That's on the stacking Benjamin show, and that's what we do on Fridays. Yeah, awesome. Well, thank you, Joe. And thank you to everyone who is listening for being part of the Afford Anything community. If you enjoy today's show, please share it with a friend, a family member, a neighbor, a colleague, your dog walker, your babysitter, share it with the people in your

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