Afford Anything - Ask Paula - Where Should I Keep My Money if I Want to Retire Early?

Episode Date: August 20, 2018

#146: My friend and former financial advisor, Joe Saul-Sehy, joins me to answer a multitude of questions on retirement savings and investing, so let's dive in. Elyse has two questions: 
#1: Through her job, Elyse has a 401(a) hybrid. Right now, she contributes 0.5% as her employer will contribute 2.5% only when she contributes 4%. Should she contribute the full 4%, or keep her contribution as low as possible, save it, and invest it on her own (which is what she's been doing)? #2: Elyse also has $18,600 invested in a mutual fund through her bank. Everything that she has read says to invest in index funds. So, should she pull her money out of the mutual fund and into Vanguard to avoid high fees? Anonymous also has a few questions:
 She has a 9-year job history with the state and local government, during which she has been enrolled in the Florida pension plan. Her new job offers a 457 Plan and/or a 403(b) Plan to supplement the pension earning. Her first question is: is a 403(b) better than a 457 Plan? Or should she enroll in both? Second, in her most recent job, she had a 457 deferred compensation Vanguard account which has $22,000 in it. Should she roll the Vanguard account over into one of the above plans, or leave it alone? Lastly, she has a 3-month old and wants to put a lump sum of $10,000 toward an account she can make contributions to, but she isn't sure which account would be best. Florida has a pre-paid program, but are there better options? Rachel has a question on retirement accounts as well!: 
Rachel recently left a government job where she had a TSP. In addition to that, she also has two IRAs - a small traditional IRA and slightly larger Roth IRA. She's actively contributing to the Roth IRA. When she left her job, she started an S-corp, and as she looks forward to business picking up, she wants to know how to best organize her retirement savings moving forward to make it easier to manage. She's also interested in tax optimization. What actions do we recommend she take? Stephen, a new listener, asks: 
If we're following the 4% rule route, does it make sense to fund an HSA, Roth IRA, Traditional IRA, or 401(k) at work? Or should we put all of the money in a Vanguard fund? Essentially, if you're planning to retire in 10 years or less, which is more beneficial: splitting up your money, or focusing on one account? P.S. If you have a question you want me to answer on an upcoming Ask Paula episode, leave it here! Learn more about your ad choices. Visit podcastchoices.com/adchoices

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

Answering these two questions is a lifetime practice. There are no simple answers. This podcast is here to help you explore it. My name is Paula Pan. I'm the host of the Afford Anything podcast and the founder of Afford Anything.com. Every other week, we answer questions that come in from you, the community. And today I have former financial advisor, Joe Saul Seahy, here to help me answer these questions. What's up, Joe?

Paula, we're doing it again. I know. You're back. So excited. Y'all can't see this, but he's wearing a T-shirt that says hashtag podcaster. I have to remind myself that I have my dream job. I get to go on the air with Paula Pant and answer letters. Look at, I've got goosebumps.

Letters, is that what people used to send before email? Oh, listen to you. Is that another old guy joke? Welcome to Old Guy Joke podcast. I'm Paula Pant. Well, our first, actually it was a voicemail. Our first online voicemail comes from Stephen. Hey, Paul, a new time listener.

Really appreciate what you do. My question is, if we are following the 4% rule route, does it make sense to fund a HSA, a Roth IRA, a traditional IRA, or a 401K at work, or rather just put all of the money into a Vanguard fund? What are the benefits if you're going to be retiring within 10 years or less to splitting up your money or just focusing on one account? Thanks a lot. Steven, that's a fantastic question.

First of all, for the sake of everybody who's listening, I'm going to quickly define 4% rule and set up the situation so that that way anybody who's tuning in for the first time, anybody who doesn't typically listen to finance podcasts has a level of background about what you're asking. So, Stephen, it's clear that from your question, you want to pursue financial independence, you want to retire early. And what that means is that you are trying to build up a large enough portfolio such that you could withdraw 4% of your portfolio per year. year and live on that. So in other words, if your cost of living is $40,000 per year, you would need a portfolio of $1 million because 4% of $1 million is $40,000. And boom, you can retire, you're financially independent. Awesome. Life is good. So you're following the 4% rule and your question is, given that you are following this rule, is it more advantageous to be in some type of a tax

advantaged account, such as an IRA, a 401k, or an HSA? Or is it better to be in a taxable brokerage account? And so that is the question that we're about to discuss. So that's the background for anybody who's new who's wondering what's going on. So a couple of thoughts that strike me right away. First of all, any type of tax advantaged account, 401K, IRA, HSA, 403B is essentially a contract between you and the government in where, you, which the government gives you specific tax-related advantages in exchange for you promising not to touch that money until you reach a certain age. So rather than think of it as a quote-unquote retirement account, think of it as an account that you have promised not to touch until a particular condition is met. Now, that being said, there are plenty of ways that you can access funds within these accounts.

There's something called the SEPP 72T rule, which we covered on a previous podcast episode. We'll link to that episode in the show notes. But that's one way in which you can tap money that's within these accounts. Also, money that's in a Roth IRA, the principal contributions that you make to a Roth IRA, you can withdraw penalty-free at any time. If you want to withdraw the gains, that's different, but you can withdraw the principle anytime you want. Money that's in an HSA account.

If you pay out of pocket for your health-related costs and save you, the receipts, then you can keep that money in your HSA account, allow it to grow tax-deferred, and then withdraw that money anytime you want to, so long as you have receipts from qualified medical expenses to back up those withdrawals, even if those qualified medical expenses happened 5, 10, 15, 20 years ago. So there are plenty of ways that you can access money within tax-advantaged accounts. That being said, there's more complicated. associated with that. There's greater record-keeping responsibilities associated with that. It's not as simple as tapping the money that's in a taxable brokerage account. So fundamentally, I think the

question really is, do you want the approach that is simpler and hassle-free and worry-free? Or do you want the approach that has tax advantages but is more complicated? Well, to your point, Paula, you went over the rules excellently, as always, but there's One other thing we don't know, which is when he talks about 10 years until he's going to want the money, where does 10 years get him? Because once you get through all of those rules that you talked about, that's going to determine whether these tax shelters actually make sense or not. So if it's after 59.5 is 10 years from now, then fantastic.

I would do it specifically because I think that when you talk about the 4% rule, we don't need to segregate it account by account. You're looking at your entire balance and you're not going to use all the money. once. So we'll take money out of the account that's the easiest or the best to get at at the time, but I would use tax advantage shelters as much as I possibly can. But for me, it's all based on how old are you going to be when you want that money so that we can put it in the right tax shelter. Right, right. So Stephen is 49 right now, and he wants to retire in 10 years. He'll be 59 at the time, so no big deal. But if Stephen is 22 right now, then yeah, it's definitely a different

ballgame because fundamentally then his challenge is to have two different plans for his money. Plan A being how he will tap his money between the age of X when he retires and the age of 59 and a half. and then plan B being how he will tap his money from the age of 59 and a half onwards. Here's something else I know, even if he is 22, 23, 24 years old. He's going to want money after 59.5. So to some degree, I would still use the tax shelter for a portion of it. Oh, yeah, absolutely. Absolutely. Because once you're 59 and a half, then tapping the money is easy, no problem. By the way, I've just got to say, only in the world of finance do 59-year-olds celebrate their half-birthday? Happy half-birthday.

It's like Christmas in July. Like, what the hell's that about? No idea. I do still celebrate my half-birthday, actually. Did show off. I do. I do. I celebrated turning 34 and a half.

That is fantastic. I celebrated 34 and a half just a week ago. Oh, congratulations. Aren't your twins 22? How does that happen? Technically it could. Technically, yes. Yeah, probably not.

I'm celebrating my 34 and a half birthday for the 15 and a half time. Oh, wow. Yeah. So I agree, absolutely. For the money that he's going to tap after he's 59 and a half, use traditional retirement accounts for that. For the money that he's going to tap, the basket of funds that he's going to tap prior to the age of 59. and a half, then it becomes a trade-off between tax-advantaged complexity versus non-tax advantage simplicity. But I agree with you, Joe. That being said, one of the easiest approaches

is to withdraw the principal contributions to your Roth IRA. I mean, you don't have to go through any fancy SCPP-72 rigmarole for that. You can just withdraw that. No mess, no foul. But to your point, those are the rules we want to stay away from. When you talk about messy and complicated. I've done 72T back when I was an advisor. The SEPP rules are ugly. And even if they fit at the beginning, they often don't fit later on. And you find yourself in this quandary of, I got to keep taking X amount of money out and my whole life has changed and I don't need it anymore or I need significantly more. And I've already made this decision about how much I take out every year. That plan is so difficult to have last all the way through. So the 72T stuff is

what I'd stay away from. The rest of it, not that big a deal. And by the way, just in general, people spend time first, I think, deciding whether they save or not and decide when to save. And then the second thing they spend a lot of time on, once they become a good saver and they begin investing, they start thinking about asset allocation and diversification. And they do a good job of that. You know, the thing that even great savers and great investors don't get enough is a good tax strategy. They don't pay enough attention to making sure the money has a great tax-sheltered approach. And I think part of that, Paula, is because we spend a lot of time talking about one end of the stick, which is how do I get money in? And to have a good tax strategy, we have to ask the question,

how the hell am I going to take it out? Because that's the only way you know whether it's going to work or not. So how would a person like Stephen start to develop a good tax strategy? Well, start off with the income stream that you think you're going to need. And for most of us, we really don't know. And if you're far enough away that you don't know, take your lifestyle today and just run that out using any online calculator. How much money am I going to need these different years in the future? And then, based on your savings rate right now and the money you've accumulated, you can also

use a calculator to figure out how much money you're going to have at different points in time. So I want to know from 59.5 through the time that I project myself. passing away, how big does that ball of money need to be at that point? And then also, how much money do I need to save today for that point onwards? So if Stephen's looking at an early retirement, some financial independence, let's say at age 50, I would do two different calculations. I would figure out how much he needs 59 and a half and after, and then how much he needs between 50 and 59 and a half to start setting up his two different bags of money. Wait, you say 50, assuming that Stephen is 40 right now and that 50 is when he'll retire.

Yeah, I'm sorry, assuming that he wants to retire at 50, right? Okay. But then here's the next thing I do. I would err on the side of, I'm going to need more money earlier. So that money that I need from 50 to 59 and a half, I would pad that at the risk of having a little bit too little in the tax deferred account, specifically for the reasons we're talking about. I don't want to be in a situation where I've maximized taxes so much that all of a sudden I've got to use some of these creepy rules like 72T.

I don't want them. I think you and I both share the same philosophy that simpler is better. And the more that you can avoid having to use SCPP 72T, the better. By the way, for people who are listening who want to know what this crazy tax rule is all about, it's kind of complicated, so I won't go into all the details here, but we did a previous episode in which we described how to tap money that is in traditional retirement accounts through these complicated rules. And we will link to that episode in the show notes. The show notes are available at afford anything.com slash episode 146. And again, we'll link to that episode in the show notes. And without going into detail, if you don't want the whole picture, but you just want a little bit of it, you have to make an irrevocable decision. based on the amount of money that you saved and your life expectancy and the IRS gives you three different ways to calculate this thing based on how much money you have and how much money you'll take out and you have to stick with it for five years or until 59 and a half,

whichever's later. Right. So basically it's a giant headache that should be avoided if at all possible. Such a pain. Unless you're retiring, I mean, if you're retiring at 30 or something, Again, if Stephen is 20 right now and he wants to retire by the time he's 30, and then there will be a period of 29 years, 29 and a half years when he's going to need to tap this money. Okay, cool, fine. You know, I can see a case for complexity then. But Stephen's 45 right now and he wants to retire at 55. Let's not bother. Press the easy button.

There are tradeoffs to both decisions. Do some combination of the two, you'll certainly want to be in a four-war. 1K IRAHSA for the money that you're going to tap after your 59 and a half. When it comes to the money that you're going to tap prior to that age, a lot of that answer is going to depend on how old you are right now and how old you will be at the time that you retire and whether you are looking for a tax optimized approach or a life simplicity approach. Our next question comes from Rachel. Hey, Paula. This is Rachel from the Ozarks. I had called and asked you a question. question a while back now about property management companies for real estate investing. I do have a short update on that. I did buy some houses and duplexes and whatnot. I never found a property

manager. I ended up doing it myself and actually owner financing a lot of them to buyers to make the management part less labor intensive. So that's a whole other story though. I'm actually calling today because I have a question for you. It's regarding my retirement accounts. I did recently. leave a government job, so I have a TSP with that former employer, and that is all allocated to a traditional TSP. There's no Roth money there. And then I also have IRAs, a small traditional IRA, and a slightly larger Roth IRA. And I'm currently actively contributing to the Roth until I hit my limit. When I left my job, I started an S-Corp. So this year, you year I probably will only be contributing to the Roth and continuing to pay off student loans and

invest in real estate. But looking ahead to next year, hopefully as business picks up, I'm kind of curious what the best strategy would be moving forward in terms of my retirement accounts. I don't really want to do a self-directed IRA or anything like that because I already have a good chunk of money in real estate. But I'm trying to figure out whether it would be good for me to keep the TSP or roll it over somewhere, and also the traditional and the Roth IRA I have are both currently with TRO price. So I feel like I kind of have all this money scattered around, and I'm trying to figure out how to make it easiest for me to manage and also do some tax optimization. So I was curious if you and hopefully Joe have any suggestions on kind of how I should organize things going

forward. Thank you so much. Joe, you are happy to hear Rachel's question. You called her your best friend after she mentioned your name. She is. Yeah, Rachel is my BFF. We're going to do a great job of answering Rachel's question. Uh-oh. Now we've set the bar high.

Oh, boy. We'll do a better than mediocre job. How's that? Rachel, so first of all, congratulations on everything you've done. With real estate and with all your savings and now you're starting a business, you've got an S-Corp. You sound like you're doing great. So congratulations. with regard to how to make new contributions into a retirement account moving forward as you are self-employed via an S-Corp.

You've got a couple of options. One thing that you could do is set up a solo 401k. You mentioned that you don't want to do a self-directed IRA. I totally understand that. You could set up a solo 401k, and in fact, this solo 401k can be either traditional or Roth. If you set up a Roth Solo 401K, here's the really cool part about that, the employee contributions that you make to a Roth Solo 401k would have the Roth designation, but the employer contributions that you, in the form of your company, makes to your Roth Solo 401K, would have a traditional designation. And so you can have both pre-tax and after-tax contributions to a Solo 401k, depending on whether you're contributing. from the employee hat versus the employer hat. And that helps her do something that it sounds like she wants to do, which a lot of her questions revolve around account consolidation.

And being able to have those on a single statement, a single screen, is going to make life pretty easy for her too. Yeah, exactly. The complication, I have a Roth Solo 401K set up through Vanguard. And the only complication there in terms of managing it is that I have two separate logins. I've got my login that's personal to me as an individual, and I also have a separate account login at smallbiz.vanguard.com in which I log into the account in the form of my employer, Afford Anything LLC. So to that extent, it does get a little bit more complicated in that you have two accounts with two logins. But other than that, everything's housed through Vanguard, and I can contribute to my solo 401k in both the Roth and the Trad format, depending on which you're in. hat I'm wearing. And I think that's one of the cool ways to go about making new contributions into a retirement account as somebody who is self-employed and who runs their own company.

Which brings up the Thrift Savings Plan issue. I have to say this. The Thrift Savings Plan is one of the best retirement plans in the United States. And it's weird saying that our government actually does something that has a really efficient cost structure that is incredibly well managed. Thinking about that in Washington usually don't jive, but man, the TSP is good. And I don't know that there's a really good reason to move that money when with technology, you can set up something like a personal capital account as an example, mint.com. you can set up one of these app dashboards so you can have your money in different places and still be able to look at it as if it's all one thing.

So with regard to that thrift savings plan, the only reason I would move it is if she doesn't want to check in on it, maybe once a year, which is not a lot, to just make sure that the cost structure hasn't really changed, the options haven't gotten worse, that they've done some weird stuff with the Thrift Savings Plan, but so many people are big fans of that plan, Paula, I don't think I'd go near it. Yeah, absolutely. I think that if you want to be able to view all of your accounts in one dashboard, create an account, a free account with an organization like Personal Capital. It'll allow you to see everything in one dashboard, and then you can continue to have your money spread out at different institutions as it makes sense to do so.

And with regard to T.R. Price, I'm a fan of the T. T.R. Price cost structure. But, by the same token, she didn't mention what fund she has, Paula. So I'm not sure how well those funds reach the goal. I want to make sure that the assets that are in the fund are funds that actually are right for the time frame. Right. But that's more a question of asset selection than brokerage selection or fund selection. Yeah. So my point is, is that, you know, I don't, I don't know if that's something she was considering moving to. The question was about the TSP, but she mentioned the TRO price. And a lot of times that people are aggregating accounts. They'll move them altogether. Another reason why I'm not sure that whether she does that or not, I would, just like we said

to Elise, I go to Morningstar.com and look up her specific funds and make sure they're funds that reach her goal. Yeah, but that being said, I mean, I think it's great, Rachel, that you have both traditional IRA and Roth IRA accounts. I agree. Tiro Price is a great institution. There's no reason to move it. And it sounds as though everything, your portfolio overall, is pretty well structured. So assuming that the underlying funds that are in there are efficient, then I don't see any problems. The thing to remember, and I'm saying this now for the sake of everybody who's listening, is that the type of account that you have, whether it's a TSP or an IRA or a 401K or a 401A, as we've just talked about, you can conceptualize these accounts as coffee mugs. These are the structures that hold the investments that are inside. It's important to remember that when we have these conversations,

there's the question of which coffee mugs do I have, and then there's the question of what liquids do I put inside the coffee mug? Do I put coffee inside of it or do I put tea or water or tequila? And I'm saying this for the sake of everyone listening. Do not conflate the question of what type of account should I have with what underlying investments should I hold inside of that account? And it happens far too often. Right.

So, Rachel, I don't think that you're doing that. You seem to be knowledgeable enough that the question that you are asking is accurate, which is which coffee mugs should I have. But again, for the sake of everyone who's listening, when you are considering this within your own financial life, make sure that your questions are structured in an accurate way. Are you asking about the investments themselves, or are you asking about the accounts that they are held in, the coffee mugs that they are held in? I should mention anyone who's listening who is self-employed and wondering what type of retirement account to use, you do have a choice between either a solo 401k or a CEP IRA.

And there are pros and cons to both. I personally like the solo 401 structure because you can have a Roth solo 401k. And having that Roth designation, I think, is a pretty cool benefit. and that's a benefit that you cannot get if you choose the ASEP IRA designation. That being said, SEP IRA also has its own bank of benefits as well, including the possibility of potentially being able to contribute more overall to a SEP IRA depending on the income that comes into your business. So that is what I would say to anybody who's considering what type of retirement account

to set up as somebody who is full-time self-employed. We'll come back to this episode after this word from our sponsors. You've been listening to me talk about Beach Body on Demand for a while now. Have you gotten your free trial yet? Beach Body on Demand is a company behind P90X, Insanity, the 21D Fix, the Brazil buttlift, the three-week yoga retreat, and lots of other programs. They've got celebrity super trainers like Shaline Johnson and Tony Horton and over 700 workouts for all fitness levels, ranging from bodybuilding to weight training, to yoga, to even dance workouts.

I really like the T-25 program by Shanti for two reasons. Number one, it doesn't require any extra equipment, so when I'm traveling, I can still do it. And number two, it's only 25 minutes, which is, in my opinion, I like that better than doing it for an hour. 25 minutes takes away my excuses. I can easily not have an hour, but I've got 25 minutes. You can work out on your schedule. Workouts are as short as 10 minutes, and plenty of them don't require any extra equipment. And you can access it from your computer or tablet or smartphone anywhere, anytime.

What are you waiting for? Join over 1 million people currently on Beach Body on Demand. Right now, my listeners can get a special free trial membership when you text Paula to 30-30-30-30. You'll get full access to this entire platform for free. All the workouts, the nutrition information, and support, totally free. Again, just text Paula P-A-U-L-A to 30-30-30. Text Paula to 30-30-30. Would you like to earn up to a 7.5% annualized return while supporting the

growth of solar energy in the U.S.? Check out Wonder Capital. Wonder wants more businesses to have solar energy, and they're doing this by bringing financing to the underserved commercial solar market. Here's the thing. Smaller entities have a hard time getting access to solar. Big solar projects get Wall Street funding,

but there's not enough funding for solar projects for groups like hospitals, churches, schools, and municipalities. That's where Wonder Capital comes in. They finance smaller solar projects with an average project size of around $400,000. They financed about 200 solar projects across 20 states to date. The money they use to fund these projects comes from investors, and that is where you come in. If you invest with Wonder Capital, you could receive an interest rate of up to 7.5% annually. You choose from a variety of diversified

solar funds, and you only need to make a minimum investment of $1,000. If you'd like to help businesses go solar while earning up to 7.5% annually, check out of a lot of $1,000. out wondercapital.com slash Paula. That's wonder with a you. W-U-N-D-E-R-Capital.com slash Paula. Wondercapital.com slash Paula. And remember, wonder with a you. Wondercapital. Our next question comes from Elise. Hey, Paula. My name is Elise. I am 26 years old. And I am really trying to teach myself about finances and investing. It's been really different. learning on my own, but I am starting to pick up on some things. However, I have two questions for you

that I can't seem to figure out on my own. The first question is, through my work, I have a 401A hybrid, and I am only contributing 0.5% right now because my employer will only contribute 2.5% when I contribute 4%. So I don't know if I should contribute that 4% and let the employer contribute 2.5, or if I should keep my contribution as low as possible, save that money and invest it on my own, which is what I have been doing. My second question is that I have $18,600 invested in a mutual fund through my bank. Everything that I have been reading is saying to invest in index funds all the way, do you think that I should pull that money into a place like Vanguard and invest in, best that way to avoid the fees. Thank you so much. I appreciate everything that you do. Bye.

Elise, first of all, congratulations on being 26 years old, having 18,600 in savings, and thinking about your financial future. That's awesome. You're starting young and there's nothing that can replace the power that comes from starting in your early to mid-20s. So congratulations on being on the right track. First of all, you mentioned that when you contribute 4%, your employer contributes 2.5%. Absolutely, no matter what, keep a minimum 4% contribution in so that you can get that employer match. There's no reason not to get the employer match because that is, a lot of people refer to this as quote-unquote free money. I like to take a different viewpoint of it. I view this as part of your compensation. This is money that you've earned through the work that you do.

and you are turning away those earnings if you don't get that employer match. An employer match is the only, quote unquote, guaranteed return in the world of finance. So absolutely get that, contribute the 4%, get the match. After, however, you've contributed that initial 4%, then it might be worth looking into other types of accounts, such as a Roth IRA because you'll have more flexibility, more autonomy, you'll be able to choose the brokerage that you want to set it up with. You can go into Vanguard if that's what you choose or some other low-fee brokerage. You'll have more control over that money. Well, and part of that, Paula, also depends on her goals, like we told Stephen. So depending on when you need the money, it's going to also depend on where you put it. Right. After the match. Right. Right. Absolutely. And again, I'm a big fan of Roth IRAs because if you do want to retire early, as we told Stephen, you can withdraw the principal portion of your Roth IRA contribution.

at any age, penalty-free, that type of account gives you a ton of flexibility in addition to giving you all of the tax advantages that come with it as well. While we're on this topic of accounts, I want to talk for a moment about the 401A hybrid that you mentioned. I'm glad you said that, Paula, because for me, too, a little bell went off in my head when she said 401A because we don't see those very often. And at least you probably want to go back and look at your paperwork. because it's going to be really important to know whether that is a 401A, and we rarely see those, or a 401K. Let me explain what the difference is between these two. A 401A is what's called a money purchase plan. And what that means is that your employer usually decides everything.

They decide how much money you can put in it. They decide who can get into it. Usually it's only key employees at work. So it's not available to everybody. And they also often decide which investment it goes into. So you don't have a lot of choices. It's more of an icing on the cake plan for key people that I see. A 401K is much more like a 457 plan.

Everybody can put money in. They match it, which was kind of also what set the bell off in my head. And you have a choice of investments in a 401K and a 457. Now, a 401A and a 401K are similar in one way that's different than a 4157. 57 plan. 401K and 401A are part of IRS rule 401. And because they're part of this same macro rule, part of that code says that these have certain creditor protections. 457 does not have that creditor protection, meaning that if you work for an entity that might

be a little shaky financially and all of a sudden the creditors start coming after them going, And no, we want to be paid now. Technically, and you rarely see this. So I don't want to scare everybody. 99.9% of the time, everything's fine. But there is this potential issue that with a 457 play and the creditor can go, we want that money. And all of a sudden, the lease doesn't have the money she thought she had.

And Joe, you're talking about creditors that go after the employers, not creditors that go after you personally, correct? Yes. And there's one more distinction. 457s are offered a few different ways. They're offered by government entities and by non-government entities. Generally speaking, if it's a government entity, this has been set up with a separate set of protections and creditors can't get at that money.

But if it's a private institution setting up a 457 plan, it is open to creditors going after that money. So it also depends, at least, if it's a 457, which type of... company you work for. And you know the answer to that, whether it's a private company or a public company. But regardless, it is rare to see a 401A in which the employer contributes any type of a match, which is why Elise's position is so unique. Yeah, because you wouldn't call it a match with a 401A, generally speaking, the employer puts in all the money. She mentioned it was a 401A hybrid. Yeah. And the word hybrid, I'm thinking station wagon,

and truck together? Right, right. Hybrid like it's electric, half electric? Right, because fundamentally, these accounts are named based on what section of the tax code they reflect. You can't exactly have a hybrid account insofar as an account reflects a given portion of the tax code or a different portion of the tax code. You can't cafeteria your tax code. Right. I want a hybrid between my HSA and my Roth IRA.

I would love one of those. Could be a killer? Me too. I mean, there are loopholes. There's the backdoor Roth IRA. I suppose in that way, conceptually a person at the 30,000 foot level might interpret something as a hybrid. But again, you just can't cafeteria the tax code. Let's do two things here.

Number one, first of all, Elise, probably the first thing you want to do, and the expert here is your HR department, go talk to them and get a 101 level, what the heck is this thing? Because they'll be able to walk you through it. Most HR department people that I've ever worked with when I would go, used to go into companies and help explain how company benefits work to the employees. They would always complain that not enough people would go to them and ask them. These people, they're the ones that work with the different companies that give you benefits. So that's first thing. Second thing is, let's assume Paula for now then. that we've kind of talked about the difference between these,

that she has it right and she can choose investments in either one of those plans. She wants to go to a place called morningstar.com and take a look and see how those investments look inside of them, assuming that she works for a company that doesn't have financial trouble and that she doesn't expect to have financial trouble or it's a government agency. So she doesn't really have to worry about the whole creditor protection thing. look at the difference between the investment choices by using this site Morning Star. There you can see how the funds have competed against their peers, how they compete against the index, or maybe they are the index, and how the fees in the different funds look versus other funds.

And speaking of fund selection and fees associated with funds, that takes us to the second portion of Elise's question, which is that she has $18,600 in a mutual fund, and she, She's wondering if she should withdraw that and put that money into an index fund. Joe, you and I might have different answers to this question. My answer is yes. Put it in an index fund because I come from the school of thought that indexing is the way to go. You cannot consistently beat the average. And therefore, funds in which you have to pay a premium in the form of an additional expense ratio or a higher expense ratio are not worth it. because you will over a long-term aggregate average, you are not statistically likely to do better than the underlying index.

So buy the underlying index in the cheapest way possible and leave it at that. And by doing so, your portfolio is likely to do as well as or as poorly as that underlying index. So my way of answering this question would be absolutely move that money out of mutual funds and put it into a lower fee. passively managed index funds at a low-fee brokerage like Vanguard or Charles Schwab, then leave good enough alone. And then at that point, your decision becomes not the selection of the underlying security, but instead asset allocation. And you're smiling. I totally am. Because you know where I'm going with this. Yes, I suspect I know exactly. So the reason, this is just a note for the broader audience, part of the reason that I have Joe on the show is that he and I disagree and it's good

for people to hear both perspectives. I am 100% a follower of John Bogle. These people are referred to as Bogelheads. John Bogle is the founder of Vanguard. And Bogleheads, or fans of John Bogle, are people who very much believe in and preach the gospel of passively managed index investing. That is the camp in which I sit. But I know, Joe, you are not a Boglehead, so take it away. I'm not a Boglehead. Don't call me not a bogelehead. What are you doing to me? Here's the thing I do think, though, I think that if I run a fun company, if I run any company, let's say I run a cupcake company and my cupcakes are all blue and everybody else's cupcakes are yellow, I'm going to continually pound the blue cupcakes or better button. I'm going to pound that button over and over and over. And Vanguard's done a fantastic

job of that message. I think it's an important message. I don't think it's the number one message. What I would do is this. The first thing I'd do, Elise, I'd go to morningstar.com, because I don't know what fun you have now at the bank. I hear the bank, and I'm totally with Paula. I go, you were probably sold a load of crap. Like, this was probably junk that made somebody a bunch of money, and it probably wasn't you. And it probably is an actively managed fund. And it probably is underperforming. Now, that said, I don't know what you have. So the first thing I do is I go to morningstar.com. I would look up your fun and see how competitive it is. I would see how well that fun meets your goals. Is it in an asset class that has anything to do with your goals or not?

And then if it's a fund that is doing all the things you need to do, maybe it is an index fund now. Why would I move it? I don't know why I'd move it. Maybe. There may be one reason to move it, which is just making sure all your stuff you can see on the dashboard. because being able to account for all your stuff is a big reason why you win. But assuming that you have other ways of doing that, why would I move it just to move it? And if it was sold through your bank, some of the brokers at banks are not fantastic salespeople. And the way that they smooth things over instead of selling this big fat end fee, because they got to be paid. Instead of selling the big fat front end fee, they may have told you that there's no fee unless you sell. it for maybe the first six years. That's what's called a B share. Or there's a C share. We're going to get

an alphabet soup here. If it says C on the end of yours, there might be an alt, no matter when you sell it, there might be a 1% or 2% fee to sell it. And I don't know what your capital gains tax is that you're going to pay for selling it, because when you sell it and you move it, there's going to be a tax. So I don't know what any of these things are. I don't know what fun you have. I also know this. I know that if you're in a decent fund family and you're not in the right fund, you might be able to avoid a lot of the paperwork headaches, a lot of the complications of moving it. By the way, it ain't that complicated. But you might be able to avoid all that just by moving it to a better fund in the same fund family you're already in today.

What do you mean by a better fund in the same fund family? You're saying stay within the same mutual fund. Yeah, let's say they sold her. say they sold her a Franklin Templeton Mutual Fund. Big, strong, decent fund family, recommended by a lot of advisors. They work through advisor channels, which means these funds have often have front end or back end fees. But hold on. She's already got it, though. And if she's already paid that front end fee, then I look at the internal management fees, all that's left. The fee she paid up front to get in the thing, usually for most people, it's a sunk cost at this point. So if she can leave it where it is

at Franklin Templeton and find a Franklin Templeton fund that's going to meet her goal, why would I go through a bunch of rigamarole when I can make one phone call and have the fund that fits my goal, keep it where it is. I don't have all that fuss. Well, I mean, I would look at the expense ratio on the fund. Why, just because you have the sunk cost, why continue to pay a high expense ratio when you could otherwise be paying a rock bottom low one? No, but that's what I'm saying. Let's say I have a Franklin Templeton fund that has a fine. Franklin Templeton's internal cost on their funds are not egregious. The egregious part for a lot of investors, if you're not picking yourself, you're paying your broker.

It's the payment to the broker that is where funds like Franklin Templeton end up getting smoked by a fund like a Vanguard fund is because people are paying these front end or back end fees. But that's the price that you pay to have the person help you. I mean, that's one way of paying your advisor. is by having the commission. So if I can find a low-cost Franklin-Tupleton fun, I'm already at Franklin-Toupleton. So, Elise, there's your answer. Joe and I completely have different positions on this.

Although, I suppose if you want to highlight the commonalities between the position that Joe and I both have, what is it that you and I share in common, Joe? Pretty much nothing. I'm kidding. Actually, the cost are important, and it really is about having a fund that meets your goal. If this fund's not meeting your goal and it's an expensive fund, get rid of it.

I think we also both believe that most of the funds that you're going to get through a broker at a bank, probably not the right fund. Yeah, so if nothing else, at least let that be a warning to anybody else who is thinking about buying some funds. Don't get it through a broker at a bank. We'll return to the show in just a moment. Do you enjoy earning interest on your savings? Who doesn't?

Check out Radius Hybrid. It's a free high interest checking account that combines the high interest earning of a savings account with the flexibility of a checking account. You can earn 0.85% APY on balances over $2,500. And there's free ATMs worldwide. There's no monthly maintenance fees, no minimum balance requirements. Your first order of checks is free. There's free online and mobile banking. And you can use it with mobile wallets and you can open an account online in five minutes or less.

So that APY that I mentioned, 0.85% APY, that is 17 times the national average. And it gets even better because if you have a balance of 100,000 and up, you can earn 1.2% APY, and that's 24 times greater than the national average. And also, the rates don't expire. There are a lot of other banks that offer these really high, flashy introductory rates that expire after 6 to 12 months. But these do not. And there's no cap on the balances that earn the API. To open an account, go to radiusbank.com slash Paula.

That's R-A-D-I-U-S-Bank. If you're a business owner, you probably want to know, hey, how's business doing? You don't want to play guessing games on what's ODU or what you owe or whether or not you're in the red. Check out fresh books. They have this notification center that's kind of like your personal assistant. It tells you what has changed in your business since you last logged in. And that way you can see immediately what you need to deal with. You can focus on what you need to get done and get back.

to your real work a lot faster. FreshBooks automates a lot of important stuff. Like, for example, they'll automate late payment email reminders so that you don't have to have an awkward conversation with your clients about past due payments. You can also take pictures of receipts using the FreshBooks app, which makes claiming expenses easier. And they'll handle your time tracking, so you'll know exactly what you did and when you did it. If you have any questions, they've got an award-winning customer service team.

FreshBooks is offering an unrestricted 30-day free trial for all. my listeners. So give them a try for free for 30 days, no credit card required by going to freshbooks.com slash Paula. That's freshbooks.com slash Paula. And when they ask, hey, how did you hear about us? Mention, afford anything. Before we move on to the next question, I want to talk about 529 savings. As you might remember, in the last Ask Paula and Joe episode, we had a caller who called in and said her daughter took out student loans to get through her freshman and sophomore year of college, and then her daughter received a scholarship that paid for her junior and senior year. And as a result of that scholarship, her daughter now has student loans and their 529 is overfunded.

Typically, if your 529 is overfunded, then there are penalties for withdrawing that money. But one thing that we did not know at the time that we answered that question in our last episode, which we have since found out, thanks to you, thanks to a listener of this podcast, is that if the reason of 529 is overfunded is specifically due to a scholarship, there is a waiver of the penalties. So a huge thank you to the listener who wrote in with a link that let us know about that. We have contacted the woman who asked that question and let her know about that. And that's good news. For anybody else who's listening, who is in that same situation or who might be in that same situation in the future, good news. If you have an overfunded 529 plan as the result of a scholarship, there is no penalty to withdrawing the excess contributions to that 529 based on that scholarship. And if you don't have a scholarship and you have an overfunded 529 plan, go get a scholarship. Yeah. Absolutely. So that's what you do. No, seriously, from the correct. Department. Thank you. It takes a village, Paula. It's fantastic. I love when smart listeners go,

hey, you're like 95% correct, but not 100. Yeah, we've got a very smart audience. We brag on you guys all the time. Yeah. I know I'm super impressed with this audience. When I talk to interviewees, when I talk to guests who come on the show and I give them the lowdown of our audience, I'm like, look, these are some smarty pants. Do you use like Northeast slang? They're wicked smart. You say that? I didn't even do that well. As a Midwestern guy, didn't do that. So speaking of a very intelligent audience, our final question comes from Anonymous. Look at that transition.

I know, right? Seriously there. Before we get into our final question, are you not consistently impressed by the people who call in who are in such good positions? Everyone who calls in is like, hey, you know, I've got this money saved here and I've got this money saved there and I've got a rental property and I've got retirement savings. totally on top of my game or I've paid off all this debt and I'm paying attention. I mean, we have a very advanced audience. We do headlines over on the Stacking Benjamin show. And, you know, every headline, Paula, is a statistic about how not enough people are saving. Nobody knows what's going on. And this is clearly not that audience. You guys are the

exceptions to the rule. Absolutely. We're so proud. Our kids are growing up, Paul. I wrote this blog post once comparing whether it would be better to purchase a home or if it would be better to rent for a lower amount and then take the difference and invest it. One of the comments that I got was from a guy who said, oh, you shouldn't even bother asking that question because nobody will actually invest that difference. People will spend it. For the general population, that might be correct. But I approach afford anything in a way that assumes that my audience is intelligent. I approach all of this content in a way that assumes that we are going to analyze a question without having to dumb down the answer on the assumption that you're going to make the wrong choice. And because I think because we give our audience that benefit of the doubt, because we tell people, hey, we believe in you and let's.

let's make the best decision possible, I think people rise to the occasion. So with that being said, let's go to our final question for today, and it comes from Anonymous. Hi, Paula. I'm a longtime listener of the show, and I really appreciate what you do and all your advice. I have a rental property that is paid off in full and an Airbnb that helps to supplement my income. The only debt my husband and I have is our mortgage, which holds a balance of $1,4,000. $43,000. I'll be starting a new job this Monday and we'll be enrolling in some of my available benefits. I have worked for the state and local governments for nine years now and have enrolled in the Florida pension plan for the duration of that time. In the new job, I will

continue to have the pension, but they also offer the 457 and or the 403B plan to supplement my pension earning. In my most recent job, I had a 457 deferred compensation vanguard account that currently has $22,000 in it. My questions for you are, do you recommend a 403B over a 457? Do you recommend that I enroll in both plans? Do you think that I should roll over the Vanguard into one of the plans or leave it alone? Additionally, we had a child and she is now three months old. I would really like to invest a lump sum of $10,000 for her to start an account that I can make contributions to, but I'm not sure exactly what the best step forward would be for that. Here in Florida, we have Florida prepaid program, which saves for college, but I'm curious if

there are better options. I imagine the funds will eventually be used for college, but I have never had a kid before, so I'm not entirely sure if she will need them earlier. Thanks again for all you do. Just when we thought we didn't have enough obscure numbers, Paula, 401K, 401A, 457. If you're playing the bingo game, we now are going to add 403B. We got them all. Take a shot every time somebody says the number four on this episode. Or says just some obscure government number.

In Canada, have I ranted about this? You know, in Canada, it's a registered retirement savings plan. I understand what that is. But then you say to somebody a 401k, what the heck is that? I don't get it. There's a great line from Phoebe on Friends, where she refers to her 401k as her 401k. Well, what about that movie that came out last year about the parents, Amy Poehler and Will Farrell? And they thought that they had a ton of money saved for their kids college because they had a 401k.

They had $401,000, they thought. There it is. Why don't they use some of the 401K that they used some of the 401K that they saved. Turns out they didn't save at all. But seriously, you know, anonymous probably already knows our answer to the first one. The safer of the two plans generally is going to be that 403B over the 457. If it's a government agency, really doesn't matter. I'll take the second one too here, Paula. If your employer offers both, you're allowed to max both. So this depends on your goals and your cash flow. But if you're somebody sucking away tons of money and you can do both,

and your goals are post-retirement age goals, then this is a godsend. You just, you were able to put so much money into these two funds. Absolutely. If you have the ability, I mean, you have the technical ability to contribute to both, but if your budget allows for that, if you have the cash flow to contribute to both, why not? Why not max them both out? The more money you can shovel in there, the better.

When it comes to the question about rolling over the old funds, those funds are with Vanguard. The only thing I ever worry about about funds at an old employer are that the old employer is going to decide to get cheap or they're going to have some other salesperson come in and sell them on something and you're a hostage. So assuming that that money that she's already saved is money she's going to use after 59 and a half, move it to an IRA. She can keep it right at Vanguard, just change over.

there's some simple paperwork that she has through Vanguard, leave it there and just make sure it's a Vanguard fund that meets the long-term goal and do it that way. I wouldn't roll it into the new employer only for one reason, which is that she has the same problem there. She only can choose among the funds that the current employer has. If she just rolls it over to an IRA at Vanguard and knows that's post-59-a-half money, if she does that, she can't, she's going to have.

to go through all those hoops we talked about earlier. If she uses it pre-59 and a half, I think that's her best option where she has the most flexibility, low fees, and a lot of choices. Broadly speaking, I'm often a proponent of a person when they leave their job rolling that money over into a rollover IRA, since that gives you the most autonomy with those funds. Plus, you're cutting ties with your old employer. May as well go the distance and cut those ties. Kick him to the curb. Given that an old employer, plan is probably going to have more fees and or fewer choices than the rollover IRA that you could set up for yourself, you may as well move it to a rollover IRA, give yourself maximum

choice and lowest fees. And that becomes a repository. Whenever you leave a job and you look at the statistics, people are staying with one employer for shorter and shorter amounts of time. So whenever you leave a job, it becomes a nice home base. And the cool thing is, let's say that your current employer doesn't have a good international option and you want a good international option well you can load up on the international option inside of your IRA to make up for the fact that you don't have it in the 403B at your current job meaning that by virtue of having multiple types of accounts in multiple places you can then asset allocate based on account structure yeah i think of everybody tries to do this this asset allocation that doesn't make sense i want

perfect diversification at work. I want perfect diversification in my IRA. I want perfect diversification in my Roth IRA, my HSA. Well, really, all those are kind of extensions of me. And so why wouldn't I consider them all to be part of the same asset allocation and then use each entity for what it does best and the piece of the pie that it handles most appropriately? Absolutely. Absolutely. So, So if somebody comes by, like let's say you've got, let's say you still have paper statements, like who does that anymore? But let's say you have paper statements and your sister-in-law, who knows a little bit about money, happens to see it sitting on your kitchen table.

It goes, why do you have all this money in an international fund? You can go, oh, wait, there's more. If you put that with this, it's perfectly diversified. Right. And you could do the same thing with dividend paying stocks as well. But ones that are inside of tech shelters. I mean, unless you're taking the money every month, but if it's inside a Roth or a regular IRA, have the dividends pay out there so that you're not being taxed on the dividend, you can just reinvest it later.

Let's talk about the final piece of her question, which is investing for her child. These prepaid programs that states have, I love them in theory. In practice, they drive me crazy because of the fact that things are changing so quickly when it comes to college. and when you put money into a prepaid program to lock in tuition rates today, we've seen, we've seen this game change too many times in too many states, not knowing how fair that game's going to end up on the end. I don't know that I would do that.

And so it isn't about them being a bad deal. I've done the math on some of these plans, and I love them in theory. I just don't like betting that far into the future. talking about 18 years from now, that things are going to be close enough that the state's going to honor their end of this bargain. So seeing that they already haven't in some cases, and they changed the game, I would go with a 529 college savings plan instead. Now, there's bad news. The 529 plan in Florida, I just looked up. Not a phenomenal plan. Not the world's worst plan. But the cool thing is this.

when it comes to 529 plans you don't have to choose the one that's in your state you have a lot of different choices so i'm going to give you three that i like and then i'll point to the one i like the best so first of all there's the nevada plan i like buying it through you promise at you promise dot com because you can sign your credit cards your debit card up with you promise you can tell sisters brothers relatives friends parents that don't have kids to sign their cards up too and you'll end up with a little bit of extra money that you promise pays you on top of a first rate plan that's run by vanguard the thing that that you have to know if you use you promise is what you promise why they're giving you money you promise wants to watch you shop now they

don't care about joe age x you know lives in town y they care about the second half of that that i'm age x live in town y if you're a really private person and you don't like that exchange, a little bit of money for them getting to watch wherever you swipe your card, then don't do it. Just go with the Vanguard plan. Two others, though. So they're a big data aggregator.

That's exactly what they're doing. They're taking your data and they're selling it and they're giving you a piece of that pie. I used You Promise for my kids. It ended up being a few free books in college that I got for my twins. Yay, a few books I didn't have to pay for. Those books are expensive, by the way.

It wasn't a ton of money, but it also wasn't, I think I got like $250 worth of stuff added to my You Promise account. I'm going to jump in here and just say, you don't, even though Joe, I know you're talking about setting up a Nevada 529 plan through You Promise, you actually can also set up a U-Promise account without having a 529 plan attached to it. Yeah, okay. I have a U-Promise account, and so, and I've got four grand in there at this point. I've got it linked to a Sally Mae account, and I've got four grand in there at this point. and I've got four grand in there at this point, even though I don't have children and I don't have any 529 plan set up.

But just say that. Just say that. Just jump in and say the cool thing about You Promise, because you're right, you don't have to have it attached. I just like the 529 plan that You Promise has. So we can even, we can even talk about that. But jump in about You Promise. I mean, I was going from the 529 angle, but why don't you cover You Promise then from the not 529? Oh, I think I just did. So You Promise is just a website in which you log into that website and use it as a portal when you are going to any other sites, such as you can log into UPromise and then use that as a portal to go to priceline or hotels.com. And as a result of using it as a portal, you get a small commission on everything that you've purchased. And over time, that adds up.

And rather than just accumulating those funds in your UPromise account directly, because that's not FDIC insured, it's not an actual legit financial institution like a bank or a credit union, you can then link you promise to an actual bank account with Sally Mae, in which case then your money has the protection of being held at a legitimate financial institution. And then you can sweep that money from you promise into your Sally May account. Right. And I just, I linked it directly into the 529 plan, which you can also do. Right. Exactly. Yeah. So you can link it into a 529 plan or into a bank account. Yep. Love that option. Two others I like. I like the T-Row price plan, which is the El Alaska plan. And Fidelity, who already had a plan, their unique plan in New Hampshire, just got better

as Fidelity dropped their fees on their 529 plan. There's already pretty cheap plan. Now it's a really inexpensive plan as well. So I might look at any of those three. So, Joe, you said that you would name three and then talk about the one that you like the most. Which one do you like the most? My favorite of the three for me is the You Promise slash Vanguard plan, the Nevada plan. I really like that one. But, you know, what I talked about about privacy and you promise some people, if you're really private, then if you're just comparing the three 529 plans to each other, I like them all. I think you're going to do great with any of those three. Awesome. Well, those are our questions for today. Is that it? That's it. Joe, thank you for joining

us. Where can people find you if they'd like to know more about you? Thank you. Well, you can find me, Paula, headed on the road because we're taking the Stacky Benjamin show to three cities coming up in September and October, September 25th, we'll be in Orlando, and we're going to have Paula Pant is going to be one of the stars of that show. We'll be at the improv. And then we're coming to Kansas City, Missouri, to the improv in Kansas City on October 9th. And then we're bringing the show to Detroit, a suburb north of Detroit, Furndale, and we'll be at Go Comedy Improop Theater there on October 24th. So I hope that, I hope people can join us at stacking benjamins.com forward slash tour. We'd love to see as many people as possible.

That's awesome. What gave you the idea to take the show on the road? You know, our show is so light as if anybody's listened to it, they know. It really is made for comedy clubs and we have so many crazy things that we could do if we could not just be a podcast for a few days. So we had all these exciting ideas and we thought, let's take it on the road and have some fun with some of these other things that we can do that I'll leave as a surprise if we're with a face-to-face audience. All right. Well, thank you so much, Joe. And thank you to everybody who called in with a question. If you have a question that you would like answered on a future episode of the Afford Anything podcast, head to Afford Anything.com slash voicemail. That's

affordanything.com slash voicemail, where you can leave your question. You can grab the show notes for this episode at Afford Anything.com slash episode 146. And if you enjoyed today's episode, please do three things. Number one, most importantly, share it with a friend or a family member. That's the number one way that you can support the show. Number two, subscribe to this show in your favorite podcast player so that you don't miss any upcoming episodes. And number three, leave us a review. Thank you again for tuning in. My name is Paula Pan. I am the host of the Afford Anything podcast. I'll catch you next week.