The Personal Finance Podcast - How Will The Realtor Commission Changes Impact Home Buyers? - Money Q&A

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Starting point is 00:00:56 Find your advisor at IG Private Wealth.com. On this episode of Money Q&A, how will realtor commission changes impact homebuyers? Let's dive in. What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of MasterMoney.com. And today on the Personal Finance Podcast, we're going to be answering your questions on this money Q&A. If you guys have any questions, make sure you join the MasterMoney newsletter by going to

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Starting point is 00:02:15 and you'll be able to find us there. Now, today we're going to be answering four of your questions. The first one is, how will the new relator fees impact me as a home buyer? The second one is how to properly budget while spending on a credit card. The third one is someone is using a Vanguard advisor, and should they fire that advisor and they're talking through those situations? And then the fourth one is, what do I do if I over-contribute to my retirement account? We're going to talk through some of the options that they are going to have based on that specific situation. So we got an action-packed episode here. So without further ado, let's get into it. All right, the first question is, can you talk about what is happening with realtors and their commissions? I know the rules have changed, but are

Starting point is 00:03:00 sellers still agreeing to pay commissions for the buyer's realtor or are buyers actually doing this now? We are considering selling our house. And if we buy, we don't want to end up paying realtors on both ends for both transactions, if that makes sense. So that makes complete sense. And we're going to talk through some of these changes. And I think on a previous money Q&A, we kind of went through some of these changes as some of the legal proceedings were going on. And they are still currently going on now. Nothing is fully set in stone yet. But here is kind of what's happening that might impact you. And I want to kind of talk through this with everyone because there's going to be a lot of shifts that are going on. And if you know how realtor commissions are handled, typically how they're handled right now,

Starting point is 00:03:37 is that the seller will pay the commission, and the buyer really doesn't have to pay the agent anything. So you go find yourself a buyer's agent, and you go and you buy a house, and typically you don't pay anybody for that transaction. Most of the fees that you were paying are going to be on your loan and or, you know, there are different fees associated with the money that you're borrowing. But typically, you do not pay any agent fees when you are the buyer. But a lot of this is possibly going to be changing now because traditionally, obviously, since that seller paid that commission, they were giving away 5 to 6% of their homes value just to that agent. Now, traditionally, you know, 2.5%, 3% is on each side is typically what it looks like. And so on the new rules,

Starting point is 00:04:21 as of August 17, 2024, the National Association of Realtors are NAR, no longer allows listing agents to offer compensation to buyers' agents on MLS listings. Instead, buyers' agents will need to have written contracts with their clients. and the buyer will now negotiate the agent's fee directly with their representative. And so what that means is now buyers will now be more directly involved in understanding and negotiating the fees paid to their agents. What a lot of people say is it's going to bring more transparency to this process. Now, how this impacts sellers is that sellers are no longer obligated to offer this compensation

Starting point is 00:04:58 for the buyer's agents, which could reduce the cost of selling a home. And a lot of times, the agent structures traditionally, I want you to think about this on the seller side first. So a lot of times the agent structure traditionally, when home prices were at 150 grand on average, you know, this could make a lot more sense where the, you know, 6% goes from the seller side. And they can pay for the buyers and the seller side. But the average home price right now is about $400,000 across the U.S. And a lot of places, you know, it's a lot higher than that.

Starting point is 00:05:26 And so you're paying, you know, $24,000 off the sale price of your home just to pay for some of these commissions. And so a lot of sellers just did not like that transaction. it was a bad deal for them. You know, they pay nothing going in, but they pay everything going out. And so they lose a lot on that transaction. And you can actually end up at a loss on your house. If you are pretty much break-even, then you have to sell your house. You're paying commissions that are very, very high.

Starting point is 00:05:49 Now, one thing buyers can do is as you start to look at buying houses, you can offer a pay. I'll buy this house from you at asking price, but you need to pay my agent's commission. So now everything is pretty much negotiable. There's going to be a lot more negotiations going on. I think the process of buying a home might get a little slow. because when you get lost in these negotiations, you're going to have a lot of people negotiating and walking, negotiating and walking because these prices just may not be worth it for these buyers' agents.

Starting point is 00:06:16 Now, overseas, it's actually a lot more common to pay one to two percent commissions and fees. And so that's the other question that could come into play is, hey, will there be more transaction brokers in play instead of someone coming in and just being the agent on the buyers and the seller side? Will there be just more transaction brokers that's just operating for the seller and the buyer at a much lower commission because that can happen in a lot of situations where a transaction broker, which is an agent actually representing both sides, will, you know, take a lower commission because they are just doing the transaction. And it's a much cheaper way to actually go about selling a house.

Starting point is 00:06:50 Now, how this impacts buyers, buyers will now need to budget for paying for their agent's commission. So it's going to typically be around 2 to 3% of the sales price out of pocket. And this can be a challenge because this already increases the amount of cost that you need to buy a home. as if it wasn't already hard enough to buy a house for most people, now it could increase in terms of, you know, paying two to three percent agent commission, depending on what you agree on. Okay. Number two, then all of a sudden, now you also have to come up with a cash for a down payment.

Starting point is 00:07:17 And then lastly, you have to pay closing costs on all of your loans and everything that you're going to borrow money on. And so this is going to be something where it could get pretty, pretty expensive. Now, I think there are some additional changes that will come about here, and I want you to be equipped when you start negotiating. There's a couple of ideas that I have. And I'm just going to throw out a bunch of random ideas on how you can make this better for yourself as a buyer.

Starting point is 00:07:40 Because as you become a buyer, now that you have to pay two to three percent commission, it could be very different. Now, one is a lot of times what realtors want is they want to have this transaction be pretty quick. What they don't want to do is show you 100 different houses and you end up never buying. Why, they made $0 for showing you 100 different houses. And so what they want is to make their time worth it. So could you offer a real estate?

Starting point is 00:08:02 X amount of dollars for each house they show you. Instead of paying a commission, they're making an hourly rate for showing houses. And this is what a buyer's agent could do as well, as you can make $50 per house that you're showing, ends up being about $50 an hour, you know, because you've got to drive to the location, show the house, close the house up, go to the next location. And so because of this, this could be one thing, and I'm just kind of making this up as we go here, that you could find buyers agents who are maybe new to real estate and need to make some money. And they'd be willing to show you the house for a certain set amount every single month. Then if you put an offer in, you can say, hey, I will put an offer in. If I want you to write up the contract, then maybe you

Starting point is 00:08:41 offer them $100, $150 for that contract. If the transaction goes through, I will pay you an additional $500. Something like that, where you're paying significantly less than you would be on the commission fees, but they're making an hourly wage, and really they just want to make sure their time is honored, and it is worth their time to be doing all of this for you. That is one way I would consider structuring this because you can get really creative on how this is going to work. This is a negotiation between you and that buyer's agent. And so something like that would be something I would talk through with the buyer's agent. Typically, a lot of people when they find their buyer's agent in the past, they would go and they would just, you know, their mom's best friend who they knew were looking

Starting point is 00:09:17 out for their best interest. That's who they would kind of go with. Nowadays, though, you're going to have to probably interview a bunch of different buyers agents. And if you can come up with some sort of deal like this of exactly what you want, what you want to pay for looking for houses and what you want to pay if they send in a contract. And if you want to give them a bonus or something like that, if it gets accepted, I would have this kind of written out and standardized, and I would send it out to a bunch of different buyers agents in the area to see which one can accept that for you. Because I think that's something where maybe some newer buyers agents might want to do that, or some agents who just want to actually make more money and make some dollars

Starting point is 00:09:50 for their time. Maybe they're seasoned agents, but they just want to make a certain amount of money per hour. Then that would be another option for you. So that's the creative route that I would take. That's the creative considerations I would make when I started to think through some of these options because I do not really like the percentage option because if you buy a house for $500,000, that means you're paying $10,000 to $15,000 in addition, out of pocket out of already having to pay all these other costs that you have to come up with. I mean, it's hard enough to come up with a down payment for a house. And a house really is not that great of an asset to begin with. And so when we have all these things factored into play, really now a house becomes even a greater

Starting point is 00:10:27 liability on the buyer's side. You're going to pay it either way when you sell your house or when you buy it. But it really does make a huge impact because buyers traditionally, especially if it's your starter home or your first home, it could be a big, big impact to that. And so I would get creative with what I want to pay. That's exactly how I would actually approach this if I was in this situation, is I would write this up. I would write up exactly what I want to pay, like a guideline of what we're willing to do here. And I would start to interview agents to say, here, here's what we're willing to do. We will pay you on an hourly rate. So it's a win-win situation for you. you. You could show me 100 houses, but you're going to be making X dollars per house you show me. It's

Starting point is 00:11:01 either an hourly rate or per house. I'd probably do it per house just to make it easier on the math. That way you don't go just look at random houses with the folks. You're actually optimizing your time and you're optimizing the agent's time. And I would kind of try to set up some of those negotiations that way instead of doing a percentage because the percentage is going to end up costing you way, way more. So let's say you do 25, 50 bucks a house. Agents may try to start charging something like $100 a house. I don't know what they're going to end up doing. But if they're going to end up doing, but if start to do something like that, I would try to negotiate that first. And so if it's at 50 bucks a house, you go look at 10 houses. That's 500 bucks. Cut it in half. It's 250 bucks if you can get them

Starting point is 00:11:37 to do it for 25 a house. And then what you could do is from there, then start to give them, hey, if we put offers in on these houses, here's how much I'll pay you because they have to take about an hour to write up the contract and send it off and get you to sign it and all that kind of stuff. And then you can pay them a bonus if it gets accepted or, you know, if you just want to do the hourly rate and offer that hourly rate, more power to you, whatever you can do in that scenario. But agents want their time to be valued, because a lot of times they're not when real estate agents are taking people around. And I know it's hard for them to. Most of their time is spent actually not serving you. Most of their time is trying

Starting point is 00:12:10 to find clients. And so it's a really weird situation because you feel like they're really not doing enough. And they're working their butts off trying to find clients. And so it's a weird catch 22 on the way it's currently operating. And it really does need to be changed. So there needs to be some definite changes going forward. And so as a buyer, what I would, would do is consider all of these things. Start talking to buyers agents if you want to buy a house. Find one who's willing to do what you're willing to do. But restructure the way that you have this setup. You're not paying commissions on this. And if they want to have a commission, try to get them to negotiate the commissions into the contract that you send in for the seller. So you can say,

Starting point is 00:12:48 hey, I'll buy this house at asking price, but you've got to pay my buyer's agent commissions. And you can set it up that way too. So getting creative with this is the name of the game. anything when it comes to real estate. And that's kind of how I would approach this. Just knowing that, hey, you're going to pay your two to three percent for the listing agent. Some listing agents might even do it for less depending on who you get. But that 2% to 3% range is what you're going to end up paying for selling your house. And then when you go to start buying a house, I would do it at an hourly rate or a per house visited rate. And then each contract sent in would also be X amount of dollars as well. That's how I would personally set it up. And that's just a kind of a creative way. I don't know if

Starting point is 00:13:21 anybody else is talking about this. I've never heard that before. And if not, I would try to be, you know, one of the first folks actually structuring it in this way. And that's kind of how I would think about it. So I hope that helps. If you have any other questions, let me know. And then let's jump to the next question. So lately, I've been noticing how fast things are changing at home. The kids are growing like crazy. Clothes don't fit anymore and routines are changing. And it just hits you. Life is expanding. And when your life grows, your responsibility grows with it. That's something I've been thinking about more this spring, making sure the safety net we have in actually matches the life that we're building.

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Starting point is 00:16:18 I am able to pay it off in full, but feels like I'm always a month behind and not really tracking it. In this digital age, how do I get a better handle on money with credit cards without wondering why the bill is so high after the fact? A video on this would be super helpful. Thank you so much. So wonderful question. And I want you to think of one thing first to start this off. Okay. A credit card is not an instrument to use when you swipe your card and then after the fact you figure out if the money is there. A credit card is a tool to use where you get points, you get value, you get benefits out of that credit card. In addition, you also get financial protection out of your credit card and more financial protection than even a debit card because a

Starting point is 00:16:57 credit card is a buffer to your bank account. Whereas a debit card is connected to your bank account, the credit card is the buffer to your bank account. But you should never, ever make or spend on a transaction on your credit card if the cash is not already in your bank account. And this is the psychology that most people need to take when they open up a credit card. The reason why most people get in trouble with credit cards is because they don't already have the cash in their bank account and they start swiping their card and getting out of control without tracking anything. And so where you are and how you feel is how a lot of folks feel in this world. And so I think it's really, really important to kind of think through and set this up.

Starting point is 00:17:37 Number one is I would definitely track spending on all cards. And so I utilize Monarch Money right now. And Monarch Money is amazing at automating this process. You can set up your budget automatically and say, hey, I want to spend $500. per month on groceries and it will tell you, hey, if you spend $501 on groceries, it's going to send you an email and a text saying you spent too much on groceries this month, make sure you go back and double check it. So number one, I would set up some of those automations with Monarch Money.com.com. PFP, you can get one month free. So I would go check that out.

Starting point is 00:18:09 If you want to test it out first, definitely go and do that. But I would set up those alerts and use a budgeting app. Everybody here should be using some sort of automated budgeting app who is listening to this podcast, even if you're doing the reverse bonus. budget because it just notifies you of exactly what is going on with your money. And really, you don't have to do as much as we used to have to do back in the day using spreadsheets or, you know, getting in there and trying to categorize stuff. Now everything is automated, which is wonderful. And we'll dive deeper into money on autopilot into how to do that, by the way, if you're interested in that coming forward. That's our course that we are working currently on,

Starting point is 00:18:42 on total money automation, on how to automate your money completely. And now as you start to make these transactions, one thing that I do is I review. my transactions weekly. Now, when I review these transactions weekly, what I actually like to do is I pay off the card every single week. Now, the only benefit to this and the only reason why I do this is to stay on top of it because I know, and I've been in a scenario where you are, now this is over a decade ago where I used to overspend. And so the change I made and the tweak I made was, hey, I could stay on top of this if I pay off the card weekly. There's no credit score benefit to this. If it is, it's minor, your utilization just kind of stays a little lower. But overall, I make it a habit,

Starting point is 00:19:22 and I usually do it on Friday, is actually have an alert set up in my phone that, you know, notifies me on my calendar on Fridays, hey, check your credit card balance, pay off the card. Check your credit card balance, pay off the card. I do this every single week, and then I will send my wife a text message, check a credit card balance, pay off the card. And we do the same thing every single week so that we both can just have this rolling. And if you use Monarch money, you know, if you have multiple cards and you use Monarch money, you can go check Monarch money and, you know, see, I have a couple of different accounts there, and you can see them all in one place, so you don't have to go to each bank and look at the transactions if you don't want to.

Starting point is 00:19:54 But you don't have to set it up weekly. If you can do it, set it up monthly. But in your situation, I would pay it off weekly because you're getting behind. And a month behind means you're most likely going to be starting to pay interest. In addition, as you start to spend money on your card, if it really gets out of hand, I would start to pre-fund some of the transactions on this card, meaning the cash on hand that you have, every week, if you still want to pay it off monthly, I would move that cash on hand to either a savings account and you could pay the card with a savings account or a separate checking account if you want to get complicated here. And you can do it that way too.

Starting point is 00:20:23 But every dollar you spend, you should already have the cash on hand. In addition to whatever else you already spent on the card, that cash should already be on hand in that bank account. Now, if it continues to sort of get out of hand here where you notice maybe you're a month behind, now you're two months behind and now you're three months behind, stop using the car. that's the easiest answer for most people is you can go back to a debit card for the time being sure you're going to miss out on points in miles and even more importantly you might miss out on a little bit of protection but debit cards have gotten a lot better on their financial protection

Starting point is 00:20:53 now it just takes longer to get your money back if there's some sort of fraud or something like that but just you can stop using the card is the other side of that if it becomes an issue but really the way you treat this the way you always treat credit cards is you treat it like you're spending on a debit card and that's the best way to think about it is always make sure that cashes in your account first. You're tracking the spending with some sort of automated digital money app. And then you're monitoring your goals in progress and then paying it off weekly. Paying it off weekly, change the game for me. I don't know why. I think it's just a psychology thing overall, but it allowed me to just stay on top of it every single week. Utilizing

Starting point is 00:21:28 reminders and other stuff also help. So I would definitely go about those four steps and that will help you tremendously going forward with that credit card. So let me know if you have any other questions, but that's how I stay on top of it. Question number three, and we're going to be talking about Vanguard advisors here. So you mentioned you invest with Vanguard. Yes, I do love them. I have been with them since the late 90s. Awesome. And about five years ago, I decided to use their advisor service. It has gone well until recently when they changed their platform for investors with less than 500K being managed. The choice for those clients was to switch platforms or pay an additional quarterly sum, I believe $70 per

Starting point is 00:22:06 quarter in addition to their advisor fee, which is comparatively low. Investors as myself, can no longer transfer money directly from their IRA to their brokerage account any longer. I was told, if I wanted to continue to do this type of intra-account transfer, I would need to quit the platform. I am now wondering if I should just drop the advisor service altogether. Rebalancing is supposed to occur more often on the new platform. Other than that, my questions are rarely, clearly answered by the advisor I happen to speak to because you get a different advisor every time you call. Would appreciate your opinion on whether I should switch back to self-manage, stay invested in the funds.

Starting point is 00:22:40 They have me in and resume transferring money to my IRA to non-IRA without having to sell and transfer from my personal account. So this is a really good question, and it's one that you've got to kind of weigh out some of the pros and cons. Now, Vanguard Advisor Services, when it comes to advisor, they are comparatively low. And typically the advisor fee for Vanguard Advisor Services is 0.35% typically, but it goes up to like 0.40%,

Starting point is 00:23:04 depending on what you're investing in. And then in addition, they have the funds there. So you can get an advisor and get some random questions answered if you need that for a lower fee. And I think most people who want an advisor, if you want a fee advisor, that's the route to go. Honestly, I like the pay per hour advisor is the way that I would go and just get a financial plan in place. But to me, the way I'm reading this is it sounds like you are not getting the full value that you thought you would get out of it. And if your questions are not getting answered the way that they should, that is going to be one red flag for me up front, is if they're just really not helping you

Starting point is 00:23:37 or really not answering your questions in that way and you're really not getting any additional benefit, it's not a huge, huge deal. Now, you can automatically rebalance your portfolio if you want to, and here's one calculation I would do. If you get this professional rebalancing, if you know what your asset allocation is supposed to be, go ahead and do the math on what they're making every single year

Starting point is 00:23:55 and also look at the opportunity cost of that. So let's say, for example, you had an account and it was $250,000, okay? And over the course of 10 years, you contributed, let's just say, $50 per month. Let's just do some simple math here. The difference in that fee produced would be about $69,407,000 just for that 0.35% fee. It still actually is a big, big impact on your portfolio if you get a 7% rate of return. And so because of this, that's the opportunity cost that you're foregoing

Starting point is 00:24:22 if you just rebalance your portfolio yourself, if you know how to do it. Now, rebalancing is something that I am doing less in less as time has gone on lately. And the reason for that is a lot of times my winner, something like an S&P 500 index fund, for example, is going to be something I honestly want to hold more of as time goes on. I'm really bullish on America. I'm really bullish on the top 500 companies in America. They are driving the entire world economy for the most part. If you go look at an international fund, I'd rather own the S&P 500 top 10 over an international fund top 10 day in and day out. And that's just my personal opinion. And so if you go look at that kind of stuff, really rebalancing has become a little less important to me as time has gone on. Now, if you have a lot of

Starting point is 00:25:04 bond exposure and you want to maintain that bond exposure, I totally get it, especially as you start to approach retirement age, you definitely want to continue to rebalance. It depends on your asset allocation and what your strategy is. And so as time goes on, that's $69,000 to me personally, is going to be something that I would rather figure out, hey, how can I rebalance my portfolio? Because in 10 years, it's $69,000. Let's look at what it would be over the course of 20 years. So over the course of 20 years, an annual fee of 0.35% produces a difference of $246,884. Now that, my friends, is a massive impact on this fee. And so that is where I would consider greatly just rebalancing my portfolio on my own

Starting point is 00:25:43 because over the course of 20 years, it is not worth a quarter of a million dollars to me to have somebody else rebalance that portfolio. Instead, I'd rather have that money in my portfolio because you can draw down an additional $10,000 per year in retirement with that money based on the 4% rule. And so because of that, I would seriously, seriously consider weighing my options when it came to that advisor fee. what I want everyone on this podcast to hear is that even a 0.35% fee is going to make a big difference. The tool I'm using right now, by the way, to look at this is Schwabmoneywise.com slash investment

Starting point is 00:26:16 fees calculator. They have a fee calculator there that kind of compares different fees and what would happen based on rates of return. And it'll give you a really good indicator. I actually love this tool first time using it, but I love this tool so far. And it'll also allow you to produce a report if you want to give it to your advisor and kind of talk through some of this stuff and show that annual fee differential. But the opportunity cost is a big, big impact. Now, let's just look at 30 years just just for kicks and giggle, because this is going to be fun. Holy guacamole. So over the course of 30 years, if you just had a 0.355% fee, the annual fee produces a difference of $658,000. It is just wild the math behind some of this stuff. And so everybody listening, if you have an advisor with a 1% or 2% fee,

Starting point is 00:26:58 you hear me talk about this all the time. I will talk about it to my lungs turn blue because most people don't know how much they're actually spending on an advisor, you need to know that number and you need to do the math on this number so that you understand exactly what you're spending. It is a huge massive impact. And so that's kind of how I would consider it. I'd run the math, say, how long do I plan on being retired for? How long do I plan on having them rebalance? And or should I just learn the skill of rebalancing, which wouldn't take you very long. And you obviously are extremely intelligent just based on your question here. And so I think this is something that if you're comfortable with it, have a conversation with Vanguard, kind of explain some of this

Starting point is 00:27:32 see what they can do. And then from there, you can make your decision based on the math. If it was me personally, my decision, if I'm not getting the value out of this, if I'm not getting more value of the funds that they are putting me in, then I would just continue on with the plan that they gave me. I actually have them lay out the plan, you know, over the course of the next 30 years on what they would do, have them give you that plan. And then from there, you can decide, hey, do I want to use this plan that they just gave me? And or do I need to go with a different approach that I think would fit me more so. So I think that is a really, really interesting question and try out this calculator too. You can run some calculations on it. Again, it's Schwabmoneywise.com

Starting point is 00:28:07 slash investment fees calculator. It's a Charles Schwab tool. And you can see how much you'd be paying. So I hope that answers your question. And if you have any additional questions on that, please shoot me another email and we'll help you any way we can. All right. The last question is about contributions to a traditional IRA and what to do in that retirement account if you over-contribute. And so I contributed to the max in my traditional IRA from myself and my wife in 20. 2022, 2022, and 2024. My wife's are the only contributions in her IRA. We both invest in the S&P and are now worth more than the initial contributions. It turns out I did not qualify for an IRA deduction due to income level and have since amended the 2022 and 2022 returns to correct that.

Starting point is 00:28:51 I understand there are a few options to correct this. An 8606 form, a return of excess contributions, timely and untimely, do nothing and pay the taxes twice on these contributions, or some sort of Roth conversion later when my income falls below at the eligibility level. Any thoughts on how to achieve the best financial outcome to correct this mistake? Love the podcast and learning a ton, hoping to retire in the next one to four years. Thanks in advance for your time and all the great information. Well, thank you so much for listening and thanks for the wonderful question. Number one, though, is an upfront here is based on your specific situation, if you don't already

Starting point is 00:29:24 have a CPA in your corner, I would definitely, even just for this year of looking at this situation, I would definitely have a CPA in your corner that they're going to be able to help address this directly for you. But what I'll do is kind of go through some of these options and kind of talk through some of the pros, the cons, what could possibly happen if you utilize these options. So first is filing form 8606. So form 8606 for people who don't know is used to report non-deductible contributions to a traditional IRA. And since you don't qualify for a deduction, these contributions are considered non-deductible. And you'll need to keep track of them to avoid paying taxes twice when you withdraw the money in retirement. Now, how it works is you go and you file

Starting point is 00:30:02 form 8606 for each year you made the non-deductible contributions. And then you document the amount of your contributions that were non-deductible. And this way, when you eventually withdraw funds from your IRA, you won't be taxed on the non-deductible portions again. So what you're trying to do with this outcome is you're trying to avoid double taxation. That is the key when you file form 8606. And you can keep the money in the IRA growing tax deferred until retirement. Now, number two, is the return of excess contributions. And I know how you feel on this. I've done this once. I had to file a return of excess contributions when I started to increase my income over time. And so if you text the excess contributions early enough before the tax filing deadline, including

Starting point is 00:30:41 extensions, then you can request a return of the excess contribution. And this involves withdrawing the excess contributions plus any earnings on them. Now, there's tax implications here. The tax implications are the earnings on the excess contributions will be taxable in the year they are withdrawn. And and they may also be subject to a 10% early withdrawal penalty if you're under age 59.5. But this option avoids the 6% excise tax on excess contributions, but requires you to deal with the tax on the earnings. So really important to kind of look at this because you can avoid some of the fees if you do it timely. So the importance here is the timeliness of the return of excess contributions.

Starting point is 00:31:21 So this may be something you look at for 2024, and your CPA can kind of help you with that. Now, do nothing and pay taxes twice. That will be the one I would try to avoid if I could because obviously you don't want to pay taxes twice. And so this is definitely something, especially over the course of three years, if you're maxing this thing out and you have, you know, $12, $13,000, $14,000. You really don't want to be paying taxes twice on that. And then the Roth conversion is the fourth option that you mentioned. And so what you could do is convert to the Roth IRA. So another option is to convert the non-deductible traditional IRA contributions to the Roth IRA.

Starting point is 00:31:54 If your income allows, this could be a beneficial move, especially if you expect your income to drop in the future or if you expect to be in a higher tax bracket during retirement. Now, when you do that conversion, you'll owe taxes on any earnings that you have accumulated on the non-deductible contributions. However, the future growth, which is why I love the Roth IRA, will be tax-free and could be advantageous. And one thing to note is the pro rata rule when we kind of talk through this stuff. and this requires you to consider all of your traditional IRAs when determining the taxable portion of your conversion. If you have other pre-tax IRA funds, the conversion may result in a larger tax bill. So this is why when it gets complicated like this, I want you to kind of talk through this with your CPA to make sure you're kind of looking through all these options.

Starting point is 00:32:39 Now, for me, the most simple and straightforward option is filing form 8606. That seems like the quickest and most straightforward one. Then considering maybe the Roth conversion if it will fit in your personal finance. situation and then return of excess contributions. The only one I would not consider at all is doing nothing and paying taxes twice. But those are the three options in order that I would consider personally if I was in this situation and your exact situation. But again, please talk to, you know, a CPA or somebody or even, you know, just get an hour of advice and explain your situation. And they'll be able to kind of help you through that process to make sure that it works out well.

Starting point is 00:33:12 Because these things can get complicated. I know it's one of the most frustrating things to have to go through some of this stuff. And the time that I had to do it, my CPA ended up doing a lot of it for me, a lot of the legwork. And then we just kind of talk through, you know, the implications of what would happen. And we talk through each of these options, too. So I like filing Form 8606. I think that's the simplest, you know, straightforward path in this specific situation. But again, if you talk to somebody, they'll be able to help you to that process, too. But if you have any other questions, I really appreciate this one. If you have any other questions, please reach out to me. Thank you guys so much for listening to this episode.

Starting point is 00:33:44 We cannot thank you enough for investing in yourself because that's exactly what you're doing when you listen to this podcast. If you guys have any questions, make sure you join them master money newsletter by going to mastermoney.co slash newsletter and you can join the newsletter there. Our newsletter is growing rapidly and we would love to have you on there joining us there. In addition, if you're interested in learning how to invest, we have a course called Index Fund Pro. If you go to MasterMoney.com slash courses, an Index Fund Pro can help you learn how to invest in index funds in ETF. There's over 40 videos in there, tons of extras. So make sure you check that out as well. Thank you guys again for listening to this episode and we will see you on the next

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The Personal Finance Podcast - How Will The Realtor Commission Changes Impact Home Buyers? - Money Q&A

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