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Hey, before we start this episode, if you're looking for a nerdy personal finance Christmas present, look no
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week. I'll reach out to you and you can let me know if you'd prefer a shirt or
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one of the books. Happy holidays. Welcome to Personal Finance for Long-Term Investors, where we believe
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Benjamin Franklin's advice that an investment in knowledge pays the best interest both in finances [music] and in
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your life. Every episode teaches you personal finance and long-term investing in simple terms. Now, here's your host,
00:01:24
Jesse Kramer. Welcome to Personal Finance for Long-Term Investors, episode 124. I'm Jesse Kramer. By day, I work at
00:01:31
a fiduciary wealth management firm helping clients nationwide. You can learn more at bestinterest.blog/work.
00:01:36
The link is in the show notes. By night, I write the best interest blog and I host this podcast. I also put out a
00:01:41
weekly email newsletter, all which help [music] busy professionals and retirees avoid mistakes and grow their wealth by
00:01:46
simplifying their investing, taxes, and retirement planning. And today is our 11th AMA ask me anything episode. I'll
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answer questions today about picking a 15-year versus a 30-year mortgage or vice versa. Uh when it makes sense to
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stop funding a health savings HSA account or to start using that account to refund your own past medical
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expenses. Third, an interesting specific question about balancing Roth conversions, ACA, healthcare premiums,
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and capital gains. You know, how do you uh balance these different interests in any given tax year without accidentally
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shooting yourself in the tax foot as it were? And last, should a confirmed DIYer
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or a confirmed boglehead even consider hiring a financial adviser? But first, we'll do a quick review of the week.
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This one comes from weather guy number two, who says, "Fivear review. Excellent
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personal finance insights and perspective. Thank you, Jesse, for your well-th thoughtout information and
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content. I'm so glad I found your blog and podcast. Your deep dives on the most
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relevant and important money and estate planning concepts and ideas are insightful and delivered in a way that
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is easier to understand for both the novice and experienced DIYer. I truly appreciate the time you put into this
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and your wise counsel. Keep up the great work. Well, weather guy, thank you very
00:02:56
much for those kind words and a super soft podcast t-shirt can go your way in the mail. Weather guy, please just drop
00:03:02
me an email to jessevestinterest.blog. Send me your shirt size and mailing address and we will get you a super soft
00:03:08
podcast t-shirt sent out your way. Thank you, weather guy. And now on to our first AMA question. John G wrote in and
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asked, "Why should you pick a 15-year mortgage over a 30-year mortgage and vice versa?" So, first, let's start with
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some obvious trade-offs, or at least the things that most consumers would notice
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right away. A 15-year mortgage comes with all the following. Usually, it has a lower interest rate. And if you
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combine that lower interest rate with the half the loan term, right, 15 years against 30 years, there are two obvious
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reasons why the 15-year mortgage would involve significantly less interest overall. You know, a 30-year mortgage,
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here's just an example. A 30-year mortgage at a 6% interest rate that borrows $400,000. So, that'll just be
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our baseline. 30 years, 6% rate, $400,000 of borrowing. You'll obviously pay the $400,000 in principal back, but
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that loan is also going to end up including $463,000 in interest. A 15-year mortgage, though,
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at that same 6%. It doesn't even have the lower interest rate, even though we
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know it probably would. But if we just assume the same exact 6% interest rate, also borrowing $400,000, that loan is
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only going to have $27,000 of interest payments. $27,000. And again, that was against $463,000
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for the first mortgage. But the payments themselves on a 15-year mortgage are higher because you only have half the
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payments to repay the full loan. So again, if we look at the same loan as above, the 30-year loan that we quoted
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above would have a $2,400 per month payment in principal and interest, while the 15-year loan has a $3,400 per month
00:04:43
payment. 24,400 on the 30-year loan, $3,400 on the 15-year loan. And that means that your monthly household cash
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flow is certainly more negatively impacted during those 15 years. And therefore, a buyer, a borrower would
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risk defaulting on the loan if they cannot keep up with those monthly payments. And and since the monthly
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payment is higher for a 15-year loan, 15-year mortgage, financial planners consider it to some extent an extra
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forged savings. You know, in other words, instead of taking the monthly savings from a 30-year mortgage and
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investing the funds into a a money market account or the stock market, you're essentially taking your extra
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money every month, and you're investing it in your house, which over the long
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run is likely to appreciate. So, maybe that'll turn out to be a good thing. And
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that also means that the 15-year mortgage has less affordability. You know, if your family limit on household
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spending is $2,500 per month, period, well, that's the maximum payment that you can afford to make. And the longer
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your mortgage, the more house you could afford for that same $2,500 per month payment. And actually, just now, I
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haven't dug into the details of this at all. I'm recording this on Sunday,
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November 9th. And I think some news stories about this particular topic came out on Friday, November 7th, involving
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50year mortgages and and something. President Trump, I think, wants to standardize some sort of 50-year
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mortgage. And whether good or bad, you know, that same $2,500 per month payment over 50 years could buy you even more
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house than a 30-year mortgage could. It's just a matter of if you want to be
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in in that level of housing debt for 50 years or 30 years or 15 years or 10 years or not at all. So, I do want to go
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down a slightly different argument right now on this mortgage debate, and I call
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it the invest the difference argument. And the argument goes like this. So, let's revisit our scenario earlier where
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a 15-year mortgage required $3,400 per month payments and our 30-year mortgage required $2,400 per month payments. And
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let's imagine two people, one in each scenario. They're paying off their
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mortgage, but they're also long-term investors like all of us listening, and
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and they're looking to put some of their money to work for the long run in in
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some sort of long-term investments. And you can compare these two people and you
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could say, "Well, in years 1 through 15, the lower payment, the $2,400 per month
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payment, it's $1,000 lower than the $3,400 per month payment. That might allow that person to invest an extra
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$1,000 per month that the 15-year mortgage borrower, they they just don't have that extra $1,000 a month right
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now. So, for the first 15 years, having the 30-year mortgage allows you to save and and invest an extra $1,000 per
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month. But then in years 16 through 30, the 15-year mortgage has stopped. That higher monthly payment has stopped. And
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thus, that allows the first borrower with a 15-year mortgage to quickly catch up to some extent, right? They can plow
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the full $3,400 a month that was going to their mortgage. Now, they can start investing that. And meanwhile, the
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second borrower, the 30-year mortgage, they're kind of still stuck at that $1,000 per month investment amount. We
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can look at these two kind of compounded returns over the full 30 years and we could vary our anticipated investment
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returns or we could vary the actual interest rates on the mortgages too which would affect the monthly payment
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portions or at least the way the two monthly payments compare to one another. And we could ask, does one of these two
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investors end up in a better spot after 30 years? you know, does having the 30-year mortgage, which allows you to
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start putting more money away sooner in some sort of investment account, does that end up doing better than the
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15-year mortgage? And it's worth doing any sort of precise math for your specific situation. But if I look at
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this situation, and I assume mortgage rates about where they are today, which is 6%. And I assume long-term stock
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market averages, which is a a 10% nominal return, we can use that. I will say I recently published an article
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where I'm I'm more and more inclined to use something more like an 8% nominal
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return. It's up for debate, but either case, pick your number based on kind of
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the assumptions that you want to bake into your financial plan. And yes, this is a a situation where the mortgage uh
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rate is fixed. It's not affected by inflation. And so the investment returns
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should also be not affected by inflation, which is why we want to use nominal returns here, not real returns.
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And at the end of the day, it's a lot of preamble, I know, the math becomes pretty stark and pretty clear. The
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person with a 30-year mortgage actually comes out on top because they were able to put more money to work for the long
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run from an earlier age. And I think this should kind of make sense because it's as simple as this. Would you rather
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put more money toward a 6% loan where you know your return is a guaranteed 6%. Or would you rather put that money
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toward an investment that I just told you, right? I have dictated in my spreadsheet will return eight or nine or
00:09:31
10% per year. [snorts] The choice is just as obvious as I've defined it, right? 10% or 9% or 8% is all bigger
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than 6%. So I would rather put money toward an investment that I am saying will return 8 or 9 or 10% per year
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instead of putting that extra money toward a 6% loan. Now, of course, the hard part and the nuance and the real
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devil in this in the details because we we realize that the 10% stock market return or 8% is simply not guaranteed.
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The question then becomes how confident do you want to be that the stock market will return that 8 n 10% per year over
00:10:08
the next 30 years when we really zoom out? Or even how confident do you want to be that the stock market will return
00:10:13
7% per year over the next 30 years? because the math still works out well if we choose to compare a a 6% return from
00:10:20
loan repayment versus a 7% return from an investment. Then we need to take that math and I think we need to layer on top
00:10:28
of that math the feeling of debt. Uh this one is certainly personal as I speak into this microphone. I am many
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hundreds of thousands of dollars in mortgage debt and yet I don't really feel that bad about it. I don't lose
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sleep over it. To me, I see my mortgage payments as a form of rent and I see my emergency fund as being able to pay that
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rent for many, many months if it needs to. And while I would love to be free of that debt, I mean, who wouldn't want to
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be free of debt? I don't necessarily feel a burning desire to to rid myself of it. Kind of my brain is at this
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all-in good time perspective. That's how I feel about it. It'll it'll be paid off
00:11:03
in good time. But other people don't feel that way about their debt. Some people are truly allergic to debt, like
00:11:08
oil and water. They do lose sleep over debt, no matter the interest rate. And to that person, I'm not sure if my
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investment math from a couple minutes ago will do them any good. To them, that 15-year mortgage, you know, get out of
00:11:21
debt ASAP, that's the clear path to them. And ultimately, I I don't see any
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major issues with that. It's just like when, you know, some retirees are comfortable with a 7030 portfolio,
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others would rather have a 50-50 portfolio. Maybe others want to have a 3070 portfolio. I mean, we know the
00:11:37
math, right? We we know that one is very likely not definitely but very likely to
00:11:42
outperform the other over the long run. One of those three investors is certainly likely to be less volatile
00:11:48
than the other two over the long run. We know that one of those retirees will likely be able to outspend, outgive,
00:11:54
outbequest the others. And does that make one portfolio right and another one wrong? I don't really think so. as long
00:12:00
as we know going in kind of eyes wide open how our choices are going to affect our our long-term outcomes. And back to
00:12:08
mortgages, we should also talk about liquidity. I think that's an important topic, something I've seen written about
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and spoken about plenty. So, it's not like I'm inventing a new idea here, but
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I do think it's something that most of the 101 info doesn't seem to cover. So,
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let's say you have $50,000 in your bank account in your emergency fund. you owe
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$200,000 still on your mortgage and you're asking yourself, should you use some of the 50k to pay down that
00:12:30
mortgage? Now, on the one hand, you're reducing your debt. Yep, you're reducing
00:12:34
your future interest payments. Terrific. That's great. But on the other hand, you
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are taking a very liquid part of your personal balance sheet and you are transferring it to an illquid part of
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your balance sheet. In other words, it's very easy to turn cash into home equity,
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but it's not nearly as easy to turn that home equity back into cash. And I know
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helilocs exist, home equity loans exist for sure. It's certainly not impossible
00:12:58
to turn home equity back into cash at all. But before you ever throw extra money at your mortgage, I do think it's
00:13:05
worth asking, do I have any liquidity needs that I can think of, is this truly excess cash wasting away on my balance
00:13:12
sheet? Or here's another great litmus test question, and and that is, do I need to make this extra mortgage payment
00:13:19
right now? Or would I simply feel more comfortable waiting 3 months, 6 months, 12 months before making the extra
00:13:24
payment? Because the mortgage is still going to be there a year from now and the impact from the extra payment will
00:13:29
still be really strong, really great if I wait this extra 12 months. Do I feel so comfortable making the extra uh
00:13:36
mortgage payment right now that that I'm just I'll go ahead and do it or would I
00:13:40
feel considerably more comfortable by waiting 12 months? I think that's an important question to ask yourself. And
00:13:45
in a parallel way, taking a 15-year mortgage is akin to making extra forced mortgage payments every single month.
00:13:53
You are intentionally making yourself less liquid for the next 15 years. That can be totally reasonable and totally
00:13:59
okay, but you want to think about it first. So, John, thank you for the excellent question. Here's a quick ad
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and then we'll get back to the show. I send a free weekly email to thousands of
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00:14:22
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retirement, and you can sign up for free at bestinterest.blog. Now, moving on, both Jeff and Tad had
00:14:58
similar smart questions about HSA accounts. Essentially, their questions boil down to when does it make sense to
00:15:04
stop funding an HSA account and or to start using that account to actually pay for your medical expenses or refund your
00:15:13
own past medical expenses. And and for some background, of course, there is a little bit of an assumption built into
00:15:18
this question, but it's a very reasonable assumption. And that assumption is that there is a quote
00:15:23
unquote best way to use an HSA health savings account. Uh many people might think to use their HSA as a place to
00:15:30
make tax-free deposits. Yep, we all know that. And then use that money to pay the
00:15:34
near-term current medical bills. We've got a daughter here at home and and she
00:15:39
goes to the doctor and my wife and I, we go to the doctor. And so some people would say, "Oh, you know, max out your
00:15:44
HSA, Jesse. $8550 for a couple this year in 2025 and then just turn around and immediately use some of that money just
00:15:52
to pay your medical bills." And that's fine. You're still getting that tax-free
00:15:55
deposit upfront, which is great. But a numerically better way of using an HSA, at least historically, involves
00:16:02
depositing that money into that account taxree. Excellent. Investing that money and then waiting, right? Investing that
00:16:09
money because the HSA is a taxfree growth account just like your 401k or IAS are. There's no annual taxes on any
00:16:18
sort of capital gains or interest or dividends in the account. Awesome. And then we we wait and we let those
00:16:24
investments grow. And again, they do so taxfree. And then some years or even decades down the road, you could use
00:16:30
today's HSA dollars that you save today for those future medical bills. And the
00:16:34
capital gains again on your investments are totally free at that point, right? You can withdraw money for a qualified
00:16:41
need in the in the future. Totally taxfree. And the best part and and this is kind of that secret tech that some
00:16:48
people know about and and some people don't is that you can save medical receipts during the interim years and
00:16:53
decades and then retroactively reimburse your past expenses using HSA money. You
00:16:59
can keep that in your back pocket during retirement, especially if you happen to
00:17:02
be close for some sort of um income cliff like a whether it's a state cliff,
00:17:07
an Irma threshold, an ACA threshold, something like that. If you need some extra money in retirement or maybe in
00:17:13
your early retirement years, one thing you could potentially do is reimburse yourself from your HSA using past
00:17:21
receipts that you have saved, thus injecting some extra cash flow into your life from your HSA totally tax-free by
00:17:30
reimbursing yourself for previous expenses, previous medical expenses. Thus, you've kind of solved your in-ear
00:17:36
cash flow need without realizing any extra taxes and therefore without pushing yourself above whatever income
00:17:43
cliff you were worried about. That's pretty sweet. But there's a a possible
00:17:46
downside here. And I should say there's a possible downside with the HSA account
00:17:51
in general. And this downside is going to steer us back toward the heart of the question. When does it make sense to
00:17:56
stop funding an HSA or to start using the HSA to refund your own medical expenses? And the downside is the risk
00:18:03
of dying with HSA money on your balance sheet. And of course, this requires the caveat that always exists, which is that
00:18:09
dying stinks for many, many reasons, and money shouldn't really be that far up
00:18:13
the top of the list. But the show is about financial planning and long-term investing. So, of course, we're going to
00:18:18
talk about it from the money angle. If you have complaints about that, I get it. Thank you in advance. And you can
00:18:22
send your complaints to uh scream into the void at bestinterest.blog. That's
00:18:26
the email address for all of our complaints. Like many qualified accounts, you need to name a beneficiary
00:18:32
on your HSA. Now, for many married people, they will name their spouse. Makes sense. And that's fine because if
00:18:37
your spouse inherits your HSA, nothing really changes. They get to use the HSA funds the same way before and after your
00:18:44
death. And by the way, HSA funds can be used for any medical expenses in your direct family, whether yours, a spouse's
00:18:51
medical expenses, or a child, assuming that child is a tax dependent. So that that tax dependency test really is the
00:18:58
metric of merit when it comes to who can uh use your HSA funds for their medical
00:19:03
bills. But back to the whole beneficiary thing. So again, we as we said, not a big deal if your beneficiary is your
00:19:08
spouse. They get to use the HSA the same exact way you would have. But what if you don't have a spouse anymore? What if
00:19:14
your spouse inherits your HSA, but then they die and they leave the HSA to another heir, say a grandchild or or
00:19:20
just one of your children or or a grandchild or something like that, just a non-spouse heir. When a non-spouse
00:19:26
heir inherits an HSA, the account ceases to be an HSA on the date of the owner's
00:19:30
death, and the entire fair market value is included in the beneficiary's taxable
00:19:35
income for that year. The beneficiary must pay ordinary income tax on the full amount. So, in case that kind of flew
00:19:42
over your head because it was all a bunch of, you know, tax and estate planning jargon, you've got $50,000 in
00:19:48
an HSA. You leave it to your son and you die. On the day you die, the entire $50,000 HSA moves to your child as
00:19:58
taxable money. No longer as HSA money, but as taxable money. And it's all $50,000 are considered taxable income to
00:20:05
your child all in that one year. There's no 10-year rule like there would be with
00:20:09
an IRA. It's all taxable money all at once. So, that is a lot of unintended taxable income for your heir. And it
00:20:18
might essentially entirely negate all of the tax benefit that you realized from your HSA in the first place because
00:20:25
we're taking some of what otherwise would have been lower capital gains tax rates on your HSA growth. you were
00:20:33
negating capital gains taxes inside of the HSA wrapper, but now we're taking
00:20:38
all of those gains and we're charging higher income rates to your heir on those same dollars. So, you might
00:20:45
totally negate all of the tax benefits realized by the HSA and then some. And your heir might end up paying more in
00:20:51
taxes than you ever would have if you'd like put the money in a taxable account
00:20:55
in the first place. Like, we're kind of flirting with that territory here. And I
00:20:59
will say I did learn one interesting workaround as I research this question more just in case it ever happens to you
00:21:05
or someone you know the beneficiary can use. So again let's go back to that example and say your child is inheriting
00:21:11
the HSA. Your child is a beneficiary. So in this case the child your beneficiary
00:21:16
your child can use the inherited HSA dollars to pay the deceased person's medical bills almost as if the deceased
00:21:23
person were using their own HSA for their own benefit. And I think that passes the common sense test. The
00:21:28
beneficiary therefore gets a tax deduction for those dollars used in this way. And again, that passes the common
00:21:34
sense test. So, as an example, someone dies with a $50,000 medical bill and $50,000 in an HSA. In the worst case
00:21:43
scenario, the hospital bill would get paid by the estate of the deceased person using their taxable dollars and
00:21:49
then the HSA passes to the beneficiary and is all taxed as income. So, that's
00:21:54
the worst case scenario, kind of taxable on on both ends. But in the best case scenario, the hospital bill gets paid
00:22:00
using the HSA dollars, you know, that the beneficiary has to step up to the plate and and make that payment and the
00:22:06
URSTW $50,000 in the taxable estate stays in the estate to be distributed out at a stepped up basis. You could say
00:22:13
there's a weird thing going on here. The beneficiary is likely just one person,
00:22:17
whereas the estate might be distributed out to many people. So, will the one beneficiary decide to be utilitarian and
00:22:24
use the HSA in this way, thereby saving all the other estate inheritors some serious tax money? This is the corner
00:22:30
within the corner within the corner case. You know, we're deep inside the the daddy longleg spiderweb at the back
00:22:35
of the attic at this point. But I digress. Let's work our way back out of this HSA inception. So, ideally, we do
00:22:42
not want to pass HSA assets down to our non-spouse heirs. I'll say that again.
00:22:47
Ideally, we do not want to pass HSA assets down to our non-spouse heirs. Therefore, the inspiring question here
00:22:55
makes a lot of sense. When does it make sense to stop funding an HSA account and
00:23:00
start using that account to refund your own medical expenses? Most people listening are maybe within 5 to 10 years
00:23:06
of retirement or in retirement itself. So, I think it's important to point out
00:23:10
to all of you listening, HSA money can pay for Medicare premiums. HSA money can pay for most long-term care costs. HSAs
00:23:21
can pay for most long-term care insurance premiums. However, HSA money cannot pay for ACA Obamacare premiums.
00:23:30
That's an important difference. Now, some of you might think you've heard
00:23:33
something recently that that sounds to the contrary of this, but what you've
00:23:37
heard is that many um bronze and lower ACA plans are now HSA eligible, meaning that you can save money in an HSA within
00:23:46
that plan, almost like it was a high deductible health plan, but you can't use the HSA money to pay the insurance
00:23:53
premium itself. So, again, Medicare, yes. Long-term care costs, yes. Long-term care insurance, yes. ACA, no.
00:24:02
Cobra health insurance, in case you're on Cobra, the answer is yes. You can use
00:24:06
HSA money to pay Cobra costs. Here's another really valuable stat, and this one comes from KFFF, a a terrific
00:24:12
healthcare think tank, and this comes from back in 2022. So, we can maybe inflate this number a little bit, but
00:24:17
the stat is that the average Medicare beneficiary, so again, this is someone 65 years or older on Medicare.
00:24:22
[clears throat] The average Medicare beneficiary spent a total of $6,300 on out-ofpocket health care costs. And that
00:24:29
includes their Medicare premiums. So if we inflate it up to today, maybe we round up, we're probably going to get
00:24:35
something closer to like $7,000 a year in healthare costs. And that's out of
00:24:40
pocket again, including Medicare premiums. What I take that to mean to some extent is that between age, say 65
00:24:46
and 85, it's not unreasonable to assume that someone might be paying $140 $150,000 in out-ofpocket costs per
00:24:54
person. And again, this is just the average. Some of us will be lower, especially if we're on the healthier
00:24:58
end. I know that some of us will be higher. I get it. But I'm just saying that because if you're sitting here at
00:25:03
age 55, you have $100,000 saved up in your HSA account. I do think you have some interesting choices in front of
00:25:09
you. One of those choices asks, are you going to be that average person or that average couple who might spend $140,000
00:25:16
per person on out-of- pocket healthcare cost in retirement? Now, personally, I believe in game theory. And the game
00:25:23
theory for most of our investment accounts is well, if I die, then the next person in line inherits something
00:25:29
as good, if not better, than what I had in terms of tax treatment. But as we discussed, that is not the case for HSA
00:25:36
accounts. Therefore, I would encourage us to heavily lean toward securing HSA reimbursements earlier in life. Now, how
00:25:44
early probably depends on your health a little bit, depends on your spouse's
00:25:47
health a little bit. Option one is, you know, use your HSA for your kids and and
00:25:51
not that much for investment growth. That's fine. That's fine. A spreadsheet
00:25:54
will tell you that it's not mathematically ideal, but life isn't lived inside a spreadsheet. Option two
00:26:00
is to try to pay current medical bills out of pocket and letting your HSA compound until age X and then you
00:26:06
reimburse yourself. Well, what exactly is age X? I'm going to say right here
00:26:10
that for me and and if I was if a client was asking me this today, I would say age X is your late 50s. And I'm trying
00:26:17
to be a little bit of that, you know, aerospace engineer like I was in my former career here because we're already
00:26:23
deep in the corner of a corner case. And if [snorts] we look at mortality data, your your late 50s is when mortality
00:26:30
data grows from kind of this very dimminimous and linear growth to a more noticeable and actually exponential
00:26:37
growth. And by the time 65 and 70 arrive, the mortality graph is curving up pretty hard. And because we want to
00:26:45
avoid dying with unspent HSA dollars, I'd rather not see any sort of significant HSA balance by that age. And
00:26:52
again, this doesn't mean that the average person is going to die by 65 or 70. That's not what I'm saying at all.
00:26:58
But what I am saying is that the game theory to me says we don't want to die
00:27:02
with an HSA. So once mortality starts becoming more and more and more realistic, I would rather not have an
00:27:09
HSA on my balance sheet anymore. If you're still working and still contributing to an HSA at that age, age
00:27:15
65 or 70, that's totally fine. I would just recommend spending down that balance to a reasonable degree every
00:27:21
single year. If you're 65 and still working and still contributing to an HSA, I don't think you need to save your
00:27:27
receipts and let the HSA grow anymore, right? I think you're capturing a great
00:27:32
tax advantage on the front end. Maybe you've been capturing it for decades and
00:27:35
decades and decades and now you just need to go ahead and and spend that money. So, back to the uh original
00:27:41
question askers, uh Jeff and Tad, I hope those thoughts help you guys out. Let me
00:27:45
know what you think. Question three is from Allison and I think it's kind of an
00:27:49
interesting question. I wanted to share with it because I want you all to get a little bit of a glimpse inside of some
00:27:54
real financial planning and to get a glimpse inside the problem solving process and some of the communication
00:27:59
and the back and forth and some of the talk around cause and effect cuz there are lots of causes and effects in our
00:28:05
financial lives and I think you'll see that here with Allison. So Allison wrote
00:28:09
into me and you know she said thank you. She heard me on choose FI originally. Awesome. She has a question for my AMA.
00:28:14
Allison and her husband retired early, not crazy early. Uh she's 57, he's 61.
00:28:19
They're selling a rental property in 2026. Okay, so here's an important point. They want to sell a rental
00:28:24
property in 2026. So the capital gains from that rental property will blow up the chances of their income coming in
00:28:31
below the 400% poverty level in order to get ACA premium tax credits. And she knows that their ACA premiums will be
00:28:39
about $3,000 a month in 2026. Uh that's her words. uh and uh they're going to
00:28:45
try to come in under that income threshold in the years after 2026 up until they're 65. Why 65? Well, that's
00:28:52
when Medicare kicks in. So Allison's question is since they don't have to
00:28:56
worry about trying to keep their income below that ACA cliff in 2026, you know, she's kind of saying she's thrown in the
00:29:02
towel. The capital gains from the house are going to blow up that that income cliff for her. So, since she knows she's
00:29:08
going to be after that income cliff, are there other moves she might want to make, they might want to make in 2026,
00:29:14
she's thinking about Roth conversions or taking some IRA distributions so she has
00:29:18
spending money during the years when uh she needs to keep her income low. Thanks
00:29:22
for any thoughts you might have. So, I had some questions for her because at the end of the day, even though her
00:29:28
question was so detailed, which it really was, we still need to collect all of the puzzle pieces before we can
00:29:33
really begin providing good financial planning answers. And anytime in your lives, I know a lot of you are DIYers,
00:29:40
anytime you want to answer a real question about your financial plan, you really can't approach it just from one
00:29:46
angle. You need to take all of the financial plan into account every single time. That's why I've used this analogy
00:29:52
before that financial plans are are kind of like spiderw webs where everything's
00:29:56
interconnected and sometimes you're you're tugging on the web over here and
00:30:00
you really think you're only going to have an effect over on this one side of
00:30:03
the web and you don't realize you're you're pulling all the little strands
00:30:07
all over the web and and you don't know where you might break something on the
00:30:10
other side of the web actually. So what did I reach out to Allison and ask her in response? Well, I asked her
00:30:15
specifically, how much in capital gains are you expecting from this home sale? I
00:30:19
also asked her if she's aware of depreciation recapture because that's a
00:30:23
different type of real estate tax that many people aren't aware of when it comes to selling a second property or
00:30:29
selling some sort of rental property. I asked her if not for the home sale, what
00:30:33
would she expect her AGI, that's line 11 of the 1040 federal tax return, what
00:30:39
would she expect her AGI to be for 2026, depending on life circumstances? And I told her that this year's tax return
00:30:45
might be a good proxy for that. And the last question I asked her, and I was being nosy in her lifestyle, I was
00:30:51
curious if she was aware of the last 2 years in five rule, if that could possibly be a creative solution for her
00:30:56
problem. And if you don't know that to avoid capital gains on a sale of a house, you must have owned and used it
00:31:03
as your primary residence for at least two of the previous 5 years leading up to the sale. It's called the two and
00:31:09
five rule. And sometimes, especially if someone maybe has a second home or um you know, they move out a primary home,
00:31:16
they start using it as a rental and then they go to a second home, it's important
00:31:19
to think, well, if you've lived in the house for two of the last 5 years, you
00:31:23
can totally negate any capital gains. Does that mean you move back into the house for 2 years? Maybe. What's usually
00:31:30
a lot easier is you just sell the house within the five first five years after you've left it or you just make sure
00:31:35
that you you sell the house quickly after you move out to to avoid those capital gains. Allison was nice enough
00:31:40
to respond and she was familiar with the two and 5-year rule, but they don't want
00:31:44
to live there anymore. Okay, they just want to simplify their lives and be free of the rental. She did have some
00:31:48
estimates for capital gains around $210,000 in capital gains, but she also noted there will be realtor costs,
00:31:54
depreciation, recapture, and she was earmarking $35,000 from the sale in order to pay her 2026 ACA cost, which
00:32:02
she was estimating at $3,000 a month. That makes sense. As for her adjusted gross income, AGI, she was saying since
00:32:08
they're both not working, they can kind of create their own income by taking
00:32:11
withdrawals. and between an annuity that her husband receives and some interest income and social security because she
00:32:18
says her husband will start taking social security in mid 2026 when he turns 62. They'll probably have a
00:32:24
minimum of $80,000 in income without taking any distributions. So then after 2026 they'll be able to easily come in
00:32:31
under the ACA cliff. And okay, now she said a couple interesting things here. I know sometimes at least me I I like to
00:32:38
read. I'm easier I'm better at reading than I am at listening. So, I apologize
00:32:41
if you're listening to this podcast right now and some of the details were kind of hard to keep track of, but
00:32:46
Allison said a couple interesting things in her response. So, I wrote back to her
00:32:50
and I said, "As with all retirement tax situations, this is multiaceted. As I
00:32:55
was writing, I was playing around with a 1040 tax calculator. I used Allison's
00:32:59
response to make some assumptions in that tax calculator and I told her I'd recommend that she play around with all
00:33:05
the precise numbers for herself or consult an accountant to doublech checkck the assumptions that that I
00:33:11
made. So I made an assumption of $5,000 in taxable interest, $50,000 of annuity payments, all taxable, $20,000 of social
00:33:18
security, only $17,000 of which is taxable, $50,000 of depreciation recapture, and $160,000 of long-term
00:33:26
capital gains. Now, Allison's original question was about Roth conversions in
00:33:31
this year. And the set of assumptions that I used for her, all those income assumptions I just made put her in an
00:33:37
interesting place called the 27% tax bracket. It's an interesting place because if you look at federal tax
00:33:42
brackets, well, there is no 27% bracket. But here's what's happening actually
00:33:46
under the hood. So, right now, Allison's interest, annuity, social security, and
00:33:50
depreciation recapture are all subject to income tax brackets. Now, I will note for those listening, depreciation
00:33:57
recapture has some pretty interesting income tax rules and limits, but I don't
00:34:01
think those rules will come into play here. And the income in this case, $122,000 minus the $30,000 standard
00:34:07
deduction. That $92,000 becomes subject to income tax, placing Allison and her husband in the 12% marginal bracket.
00:34:14
Wonderful. Then we layer on top of that the $160,000 in long-term capital gains.
00:34:19
Some of those gains will be taxed at 0% but most will be taxed at 15%. Now, what
00:34:25
happens if Allison were to choose to do a Roth conversion? In other words, what happens when we add just one more dollar
00:34:32
of taxable income into her tax return? Right? Let's just say she does a Roth
00:34:35
conversion of $1. The first thing is that dollar of income gets taxed at 12%. Yep, that makes sense. But then also due
00:34:43
to the layering rules, $1 of her capital gains that was previously being taxed at
00:34:49
zero gets pushed up into the 15% bracket. So what actually happens here? What this results in 27 cents of new tax
00:34:59
on $1 of Roth conversion or effectively a a 27% marginal rate. And that quote unquote 27% bracket will affect Allison
00:35:09
for a little while, but then eventually it drops away because all of her capital
00:35:13
gains will then be at 15%. There's no more step up from zero to 15%. And at that point, her marginal income tax
00:35:20
bracket will have matured from 12% up to 22%. So she'd likely have $100,000 of
00:35:27
space in the 22% bracket to execute Roth conversions plus any state income tax for her if applicable. And in summary,
00:35:35
my belief is that most of her 2026 Roth conversions, if she chose to do them, would incur 27% or 22% taxes on the
00:35:43
federal level. But in other future years, if I use those same exact income assumptions as I did before, except I
00:35:51
remove the depreciation recapture and I remove the capital gains because those are one-time things from this the sale
00:35:56
of the house. It appears that she would probably have $50,000 per year of space in the 12% bracket to execute Roth
00:36:04
conversions. So, is that worth doing something about? I think to be honest, it probably depends on the size of her
00:36:10
traditional IRA and 401k bucket. If it's a huge bucket, then it might be worth
00:36:16
accelerating some Roth conversions into 2026, but if it's not a huge bucket,
00:36:20
then it probably won't be worth it. I guess when it really comes down to it in
00:36:24
that case, I would ask Allison and her husband to in their financial plan work all the way out to RMD age and try to
00:36:31
give an approximation of what their RMD tax brackets will be. And if their RMD tax brackets are 24%, 32% or higher,
00:36:41
yeah, well then maybe it makes sense for them to accelerate some Roth conversions
00:36:44
in 2026. But if they're paying lower taxes on those RMDs in the future, then
00:36:50
I don't see the need to do any sort of accelerated Roth conversions in her case. But that's not all. I played
00:36:56
around with the assumption that Allison's husband was going to start collecting social security in 2026, but
00:37:02
I raised my eyebrows at that assumption. I guess what I should say is I included
00:37:06
that assumption in all the income numbers so far in this analysis, but I raised my eyebrows at it because
00:37:12
considering the extra income from the home sale in 2026, I would have Allison consider delaying or have her husband
00:37:19
consider delaying his social security claiming until 2027. I'm just doing some
00:37:24
mental math and it's telling me to definitely analyze that trade-off. One more important note actually is that
00:37:29
Allison and her husband are probably going to be in the um the net investment income tax nit zone for 2026 due to
00:37:37
their AGI being over $250,000. So every dollar of AGI over 250,000 gets hit with
00:37:44
an additional 3.8% tax which makes the whole Roth conversion in 2026 idea even less attractive. And I know that's a
00:37:52
lot. Back to you listeners. I know that's a lot, but those are the kind of considerations and and conversations and
00:37:59
questions and back and forth and cause and effect that should go into any sort of financial planning question. And I
00:38:06
know for a fact that there are plenty of people out there who maybe would look at
00:38:10
Allison's circumstances or what I should say is they would be in Allison's shoes
00:38:14
and they'd say, "You know what? At the end of the day, I'm probably going to be
00:38:16
okay no matter what. So, I'm just going to go with my gut and I'm going to sell
00:38:20
this house and I'm going to claim social security early and I'm going to do a
00:38:24
bunch of Roth conversions, too. And that's fine. And it really is fine cuz in this case, maybe Allison's going to
00:38:29
be totally okay either way. But when it comes to actually trying to optimize what we're doing here, again, taking the
00:38:36
soft side out of it, all we're trying to do is optimize the numbers. There are
00:38:40
ways to optimize those numbers. I mean, that's the point. And if you don't know
00:38:43
all the way that these different things interact and if you don't know all the
00:38:47
ways in which your your actions might actually be costing you money, well, that's where having some, you know,
00:38:53
whether it's improving your own DIY knowledge or leaning on a professional. The fact of the matter is there are
00:38:59
better ways to do this than than what maybe the the average DIYer would think. Here's a quick ad and then we'll get
00:39:06
back to the show. Serious question. Why do podcasters constantly ask for ratings
00:39:11
and reviews? Yes, they do help highlight our shows to new listeners. They help strangers find us on Apple Podcast and
00:39:17
Spotify. It's totally true and a good reason to ask for ratings and reviews.
00:39:21
But I have something more important, at least more important to me. I want to know if you like this stuff. I want to
00:39:28
know if you like my podcast episodes, my monologues, my guests, the information I
00:39:32
share with you and the stories I tell. I want to improve and make your listening
00:39:36
more enjoyable in the process. So yeah, I would love to read your reviews. And sure, if you throw a rating in there,
00:39:42
too, that's great. If you like what I'm doing, please share it with me. It's
00:39:46
such a great feeling to read your feedback. I'd love to read your review or see a rating on Apple Podcast or
00:39:53
Spotify. Thank you. And speaking of the average DIYer or just the dedicated, the
00:39:59
diehard DIYer, the diehard boglehead, the last question, thank you Allison, by the way, for the terrific question and
00:40:04
the back and forth. But today's last question comes from Craig who has a simple question. Should a confirmed
00:40:10
DIYer or boglehead still consider consulting with a financial planner? And the short answer is like consider it.
00:40:17
Sure, you can consider it. Maybe for the longer answer, do you follow through and
00:40:21
hire someone? Well, it's certainly not black and white. It's definitely gray.
00:40:25
And for a good analogy, I'm going to give a shout out to my uncle Frank who lives here near me in in Rochester. I
00:40:30
would guess that Uncle Frank is in the top.1% of amateur hobbyist mechanics anywhere
00:40:36
in the world in terms of you know he's that guy who you know who takes apart
00:40:41
all sorts of engines, motorcycle, car, boat, two-stroke power equipment, etc. just for fun and then, you know, cleans
00:40:48
them, figures out what's wrong, fixes them up, puts them back together. He's
00:40:52
an expert mechanic despite the fact that he's never worked as a mechanic. And I
00:40:57
look at Uncle Frank and I say, "Should he ever hire a mechanic?" And the answer
00:41:01
is like, "Well, maybe." And some corner cases, maybe as a small safety check to
00:41:06
make sure that the work he's already done was done right. But when it comes to like 90% of of mechanical issues like
00:41:12
fixing up a car, putting on winter tires, changing your oil, doing your own brake pads, a lot of that kind of
00:41:18
complex stuff, the answer for him is no. He doesn't need to hire a mechanic. But
00:41:22
then I compare Uncle Frank to another friend of mine, Nick. And Nick is a huge F1 racing fan. He's a big fan of cars
00:41:29
and speed. He knows all the European F1 racers. I know like two of them. He knows all of them. In some ways, Nick is
00:41:35
similar to my uncle Frank in terms of that kind of gear head. Loves the idea of, you know, engines and going fast.
00:41:41
But he's also noticeably different because liking engines and liking speed is much different than taking engines
00:41:48
apart and putting them back together. And maybe, you know, Nick is the equivalent of like someone who who
00:41:53
enjoys uh watching CNBC, but has never actually looked at a portfolio himself. And so, does Nick need to hire out his
00:42:01
car mechanic work? Well, yes, because being a fan of race cars doesn't make you qualified to fix your own car. And
00:42:07
when I look at the bogal head and the DIY and the fire world, I see plenty of Uncle Franks who are like true
00:42:15
expertise. You know, they they know so much despite only really ever having to um answer questions about their own
00:42:22
situation. But then I also see plenty of Nicks. So, does Uncle Frank ever need a
00:42:27
financial adviser? Well, let's start by giving the DIY bogal heads their due. If
00:42:31
someone has read the little book of common sense investing, they read all the blogs, they understand asset
00:42:36
allocation and tax efficiency and the role of lowcost indexing, they can rebalance in their sleep, they they roll
00:42:42
their eyes when they hear someone say, "Oh, but but my guy says he can routinely beat the market." Well, this
00:42:47
side's pretty simple. If a DIYer already has all the knowledge, they know how
00:42:50
markets work, how what diversification means. They know why fees matter. They value control, right? They like tweaking
00:42:57
their spreadsheets and and pulling on the levers themselves. that's part of the hobby to them. They distrust
00:43:01
conflicts of interest. You know, we all know to be wary of the commissionbased products and and the free stake dinners
00:43:07
and the investment relationships in this world. We all know the dark side of of salesdriven planning that leads with a
00:43:14
product instead of leading with a process. And and bogleheads and DIYers for the most part are disciplined,
00:43:20
right? A true bogle head stayed the course in 2008 and in 2020. They're not chasing AI stocks right now. They don't
00:43:26
panic when the market drops 30%. If all of that is true, I'm not sure what kind
00:43:31
of alpha, what kind of benefit the adviser is going to add. The DIY route works just fine in this case. But for
00:43:39
even the savviest bogal head, there can be some cracks in the armor. I think for
00:43:44
one, there's complexity creep. You know, once you hit your 50s and 60s, life
00:43:48
stops being a a really neat spreadsheet. you you have to juggle RMDs and Roth conversions and social security timing
00:43:55
and tax loss harvesting and charitable giving and estate planning and healthcare decisions. And while the
00:44:00
simple index portfolio is easy, especially to accumulate, the withdrawal strategy that goes with that and that
00:44:06
goes with all those different moving pieces is is just a different story. Uh there's behavioral blind spots. You
00:44:11
know, knowing that you should stay the course isn't the same as actually doing
00:44:15
it when the market's down 40% and your job feels shaky and and the news headlines are kind of screaming at you.
00:44:21
A truly good adviser is a behavioral circuit breaker in those cases that stops you from from damaging yourself. I
00:44:27
think I've told the story before of of a reader who reached out to me or I think
00:44:30
a listener actually who reached out to me. certainly a a DIYer boghead type person up to this point in her investing
00:44:36
career. And she admitted to me that during COVID, she abandoned the market for a good six months from, you know, in
00:44:43
that March 2020 of COVID because she saw the way that her personal work world was
00:44:48
kind of falling apart around her and she looked at the tea leaves and said, "Society is going to really suffer from
00:44:53
this and I do not want to be invested in stocks right now." And it ended up
00:44:57
being, you know, a 30 to 40% mistake. So even diyers and bogle heads have those behavioral blind spots. The next thing
00:45:04
here is coordination. You know, once you've got a spouse and kids, a business, multiple retirement accounts,
00:45:10
you're not really just managing a portfolio, you're managing an entire financial system. And a good financial
00:45:16
planner is going to see connections that you might not know about or that you might miss. Life transitions are another
00:45:22
great reason to consider hiring somebody cuz retirement isn't only a financial
00:45:26
shift. It's certainly a big financial shift. It's also a psychological shift.
00:45:30
Same thing with selling a business or with losing a spouse or with inheriting big assets. And a good financial planner
00:45:36
helps their clients navigate that change. The change itself, right? It's not just the numbers, but it's the
00:45:41
change itself. Speaking of of spousal loss, actually, that right there is a reason that I've been hired before. You
00:45:47
know, Jesse, my health is in question. I'm in charge of the family finances. No
00:45:52
offense. I'd never really hire you on my own, Jesse, but I need you for the sake
00:45:57
of my spouse so that they have someone that they can work with if and when I die. That's totally reasonable. And then
00:46:02
there's just a second pair of eyes can be a really good reason to hire a financial planner. A one-time review, a
00:46:08
periodic review that can catch mistakes, a missed tax nuance, a suboptimal asset
00:46:13
location, an estate document that is out of sync with what you think it says. Just getting that second pair of eyes
00:46:19
can be useful. So, when might it make sense for the DIY investor? An adviser doesn't have to mean handing over the
00:46:26
keys, right? It could mean a flat fee or an hourly planner every few years just for a checkup. It could mean a a
00:46:32
one-time retirement income plan to ensure tax efficiency. It could be a full-time fiduciary partner who can
00:46:39
glide your flight in for a smooth, efficient landing while you go relax in the back of the plane. The right
00:46:44
question isn't necessarily, do I need an adviser? I think the better question is
00:46:48
what job would I hire an adviser to do? If that job is clear and you find someone who you trust, who can solve
00:46:54
your problems, who works hard on your behalf, it can be a really high ROI return on investment decision. Even for
00:47:00
a bogle head, you know, going back earlier to the the comparison of my uncle Frank to Nick, the Nick equivalent
00:47:05
here is someone who, you know, they love to log into Fidelity and and check their
00:47:09
account balance. But to ask them how their cash flow connects to their goals, how various taxes work, how to optimize
00:47:17
their withdrawal strategy, or simply to ask them why different asset classes perform differently at different times,
00:47:22
to ask them why some stocks go up and others go down. to just to ask them questions that go deeper than the
00:47:28
surface level account numbers and they reply something like, "Well, but the S&P
00:47:32
is up 16% this year and I own VO. Like, what's wrong with that?" It's not that
00:47:36
they're bad investors cuz they're not. It's just that Nick and the Nicks of the
00:47:40
world don't necessarily see the bigger picture or understand the bigger picture. And it's totally up to them
00:47:45
whether to hire an adviser or not. But that is someone who I know can get a ton of help from from a good financial
00:47:50
planner. So in summary, if you're truly, you know, an Uncle Frank type character,
00:47:55
a a self-taught expert who, and I think this is actually an interesting barometer or litmus test, is someone who
00:48:01
when you listen to podcasts like mine or you you read or listen to other experts
00:48:05
out there, financial planners, people who are doing some of the best work in the space, if you're rarely learning
00:48:11
anything new from them, then you might be that true uncle Frank self-taught expert. And if that's you, I think at
00:48:18
most that kind of one-time spot check relationship could do you some good, but it's really up to you. But if you're a
00:48:24
Nick who just kind of likes to see your portfolio go up, but then the rest of the actual financial planning world kind
00:48:30
of feels like a black box to you, then I think you can gain a lot of good out of
00:48:34
a financial planning relationship. And that's coming from some firsthand experience on the other side of the
00:48:38
table. So that's my two cents. Excellent question, Craig. you know, does a DIYer,
00:48:44
does a boglehead need a financial planner? Ask yourself, what kind of questions do I want this financial
00:48:49
planner to answer for you? And then ask yourself, are you more like an Uncle Frank? Are you more like a Nick? How do
00:48:54
you find someone who you can trust all the way down the line? Thank you, cuz that was a great question. And all you
00:48:59
listeners, thank you as always for tuning in. Thank you for writing, just sending in amazing questions. At this
00:49:04
point, I will be honest with you, I'm probably getting more questions than I
00:49:07
have time to provide answers, at least under this current regime, even though I'm doing one AMA episode every single
00:49:13
month. It's just awesome place to be and and the questions are fantastic. So,
00:49:17
thank you. Thank you for writing so many amazing reviews and fivestar ratings. And please send your AMA your future AMA
00:49:23
questions to my email address, jesseb bestinterest.blog. Thanks for tuning in to this episode of
00:49:29
Personal Finance for Long-Term Investors. If you have a question for Jesse to answer on a future episode,
00:49:35
send him an email over at his blog, The Bestin Interest. His email address is [email protected].
00:49:42
Again, that's jessevestinterest.blog. Did you enjoy the show? Subscribe, rate,
00:49:47
and review the podcast wherever you listen. This helps others find the show and invest in knowledge themselves. And
00:49:54
we really appreciate it. We'll catch you on the next episode of Personal Finance
00:49:58
for Long-Term Investors. Personal Finance for Long-Term Investors is a personal podcast meant for education and
00:50:05
entertainment. It should not be taken as financial advice and it's not prescriptive of your financial
00:50:10
situation.