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Are Trump accounts worth pursuing for your kids or grandkids? How do you balance the idea of leaving behind
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traditional assets, Roth assets, and taxable assets for the next generation? How can a donor adise fund optimize your
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charitable giving? And last, a question inspired from another podcast that some of you might listen to. Is the certified
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financial planner designation a good sign or a bad one? All that and more on today's Ask Me Anything episode. Welcome
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to personal finance for long-term investors, where we believe Benjamin Franklin's advice that an investment in
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knowledge pays the best interest both in finances and in your life. Every episode
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teaches you personal finance and long-term investing in simple terms. Now, here's your host, Jesse Kramer.
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Welcome to Personal Finance for Long-Term Investors, episode 135. I'm Jesse Kramer. By day, I work at a
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fiduciary wealth management firm helping clients nationwide. You can learn more at bestinterest.blog/work.
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The link is in the show notes. By night, I write the best interest blog and I host this very podcast. I also put out a
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weekly email newsletter. And all those projects help busy professionals and retirees avoid mistakes and grow their
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wealth by simplifying their investing, taxes, and retirement planning. Today is our 15th AMA ask me anything episode.
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Before we dive in, we'll do a quick review of the week. New York Knicks 786 wrote a uh five-star review on Apple
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Podcasts and they said, "A refreshing take on personal finance. Five stars.
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Jesse is the voice of reason in the personal finance podcast world. His takes are helpful and you can feel the
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sincerity when he educates about any financial topic. Subscribe. You won't regret it. Well, thank you very much,
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New York Knicks. I'd be happy to send you a Supersoft podcast t-shirt. So, please drop me an email to
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[email protected] so I can get that sent out to you. And now on with the ask me anything episode.
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As a reminder, these are real questions from listeners just like you. So, please
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don't hesitate to email me a question uh to the email address jessebinterest.blog.
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I read every single email that you guys send me. On to the first question today.
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all about Trump accounts, Yogi and Nick and a few others. You all wrote in and asked me about Trump accounts. So, first
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I'm going to explain how they work. Then I'm going to compare and contrast to
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other similar accounts. And last, I'm going to tell you how I'll be thinking
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about the Trump accounts, not only for my own family, but but also for the clients who I work with who I'm kind of
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giving them advice on Trump accounts. So, first, what exactly are these things Trump accounts? So when the the one big
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beautiful bill act OB or some people call it BBB when it was signed into law last summer, so summer of 2025, it
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created a new type of savings account nicknamed the Trump account or maybe just outright named the Trump account
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which can be opened and funded beginning July of 2026. So the accounts will be open this coming summer, summer of 2026.
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In simple terms, a Trump account is a modified version of a traditional IRA. So that in and of itself, I think that
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should help us understand how to frame these accounts in our minds. They're most similar to a traditional IRA.
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However, it can only be opened and contributed to on behalf of children prior to the year of their 18th
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birthday. So for children under the age of 18, standard IAS are only rarely used
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by children since they require the owner, the child, to have earned income to be able to make contributions. But
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Trump accounts are different. They are meant explicitly to be funded by well for minor children with no income on
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their own. So the goal here is to incentivize giving children some sort of head start on their retirement savings
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from an early age. Trump accounts use tax deferral. So again, interest and dividends and capital gains inside a
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Trump account are not taxed until they're withdrawn from the account. So this tax deferred growth very similar to
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other tax-free tax deferred growth or taxfree growth. It resembles traditional accounts and Roth accounts and 529s and
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HSAs. all those qualified accounts we're already familiar with. Trump accounts
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are also designed to accept contributions from many different sources, which is kind of interesting.
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So, parents and other relatives of course can contribute. Employers of the parents or employers of the children by
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the time they're teenagers, they can contribute. But even certain charities and government organizations can and
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will contribute to Trump accounts. Right now, there's this Trump account, basically a pilot program going on, and
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it's for children who were born in 2025, 2026, 2027, and 2028. And those children
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from those four birth years will receive $1,000 from the government in their Trump account. Now, other children under
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the age of 18 can have the Trump accounts opened for them, but they will not receive the $1,000 unless they were
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born again in 25,26, 27, or 2028. And if you need to open a Trump account on behalf of a minor in your family, you
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can do so via a federal website, which we can throw this link in the show notes. It's trumpaccounts.gov
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or via a form that you can submit when you file your taxes. It's form 4547. And an important note is that to open
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this account and to receive the $1,000 seed money, you need to opt in. And I'm
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pretty sure this is true because I've actually heard both. I've heard that no,
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no, the account will be open for you. But at least when I was doing all the research for this episode, multiple
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sources, including, you know, some of the big custodians out there, said, "No,
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no, you need to opt in. It won't be automatically opened for you." So, you
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need to go to trumpaccounts.gov and open the account or file that tax form. It's
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probably easiest, I would assume, to go to trumpacounts.gov, although I have to admit, I haven't done this myself yet.
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Anyway, Trump account contributions are limited to $5,000 per year, but that number will be indexed for inflation,
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meaning it'll go up over time, much like you're used to with 401ks or IAS, those
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contribution limits. And the $5,000 limit does actually have two exceptions. The first exception is that initial
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$1,000 gift from the government that doesn't count towards the $5,000 limit.
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And then the second exception is contributions from charitable organizations. And I believe I have this
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right where you might have seen there's a a 6.25 25 billion with a B billion
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dollar gift from Michael Dell and his family. He's a guy who came up with Dell
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computers. And I believe that's going through some sort of family foundation
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or just some charitable foundation that he set up. And so his contributions to the Trump accounts of his choosing. So
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it's not actually going to all Trump accounts. his donation is only going to
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the Trump accounts of the children who live in particular zip codes that fall under a particular average income level.
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It's just kind of interesting how they how that gets done. But those contributions will not count toward the
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$5,000 maximum. But when it comes to the contributions that maybe the the normal
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contributions, the one that your parents will be making, maybe your grandparents
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of of the child, uh when it comes to the contributions that you're going to make
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on behalf of your kids or even I have a feeling that some employers will start using Trump accounts as a employer
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benefit, it gets a little bit confusing because the contributions that you as maybe a parent or grandparent make,
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those contributions are made with after tax dollars and they are not deductible.
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They're non-deductible. So, that's a little different than what we would call
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traditional IRA contributions cuz those usually are are made with either pre-tax
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dollars or they are deductible. However, the contributions that an employer makes
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on say on behalf of a child, those are pre-tax. And what that means is that the Trump account owner is going to have to
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pay income tax in the future upon withdrawal of these pre-tax contributions that are coming from the
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employers. And then charitable contributions and the $1,000 from the government, those are also considered
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pre-tax dollars, meaning that the Trump account owner owes income tax on those contributions later. And so basically
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every Trump account out there, at least many, many of them, if you are going to be adding your own money to a Trump
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account, let me put it that way. If you're going to be adding your own money
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to a Trump account, it's going to contain a mix of pre-tax and after tax dollars. And then any and all growth
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inside the account is also going to be considered pre-tax. So a quick kind of re-examlanation there. Your
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contributions themselves are after tax. But as your contributions begin to create investment growth, that growth is
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considered pre-tax. And that's clearly a negative feature compared to how most
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tax advantage accounts work. Most tax advantage accounts if the contributions are after tax like a Roth or a 529 then
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the growth is all taxfree at withdrawal and if the contributions are all pre-tax
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and deductible like a traditional account then then fine I'll take the tax break right now this year when I make
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the contribution and then I'm okay with the growth being pre-tax too because
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you're giving me the tax break now but the tax treatment here of the Trump accounts it's kind of this logistical
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challenge it's a bit of a suboptimal mathematical challenge because you pay tax on the contribution upfront. The
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money grows yearover-year inside this account and it it is sheltered from taxes year-over-year. So I guess in that
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way there is quote unquote tax-free growth. But the problem is that on the far end all of the growth then becomes
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subject to income tax on the far end. and and the way the taxes occur both on the beginning contributions and on the
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far end that's different and suboptimal when compared to either a true traditional account or a Roth account.
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And then there's a logistical challenge because the account owner, well, typically the parents if the child is
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under 18, and then the child themselves when they turn 18 and over, whoever the account owner is is going to have to
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track, is going to have to to maintain and and monitor and track the pre-tax versus the after tax portions of the
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account on an annual basis. Now, some of you might already be familiar with this
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practice if you're doing backdoor Roth contributions or Roth conversions and
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you're familiar with IRS form 866. This form 8606 needs to be filed every single
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year. Meaning, we're asking parents to file this form from ages 0 to 18 for their kids. And then the kids are going
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to be filing the form from age 19 or whenever they're claimed, they aren't
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claimed on their parents' taxes, whatever age that is, up until age 60, possibly beyond age 60 because it's a
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retirement account. They can't touch it until they're 59 and a half, except for
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a couple exclusionary reasons. So if one year of the form 8606 is missed, then the entire account will be considered
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pre-tax and therefore the entire account will be subject to income tax upon withdrawal. And many of the dollars
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inside a Trump account, maybe not most, but many of them will end up being taxed
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twice if this occurs. And from a logistics point of view, I I do think there's a technical term that we can use
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for this scenario. The technical term that I would use is a dumpster fire. I really think the execution of this,
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they're either going to change the way this has to be tracked or a ton of people are going to be are going to make
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innocent mistakes when it comes to the tax filings around a Trump account. So, let's do a little interesting example
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here with some numbers. I'm welcoming a baby in March of 2026. And when I look
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and see when this episode is going to come out on I think April 1st is when this episode's coming out, maybe when
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you're listening to it. I sure hope we have a baby by now. I might be out of
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pocket a little bit because of that baby, but yes, we are welcoming a baby ourselves. And this baby born in 2026
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will qualify for the $1,000 seed money from the government. And let's just say
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that we also contribute the $5,000 maximum each year. And we know that maximum will go up over time based on
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inflation. And let me also assume for now an 8% rate of return. By the time our baby is 18, the account will be at,
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by my math, $250,000, about 45% of which will be our contributions and 55% of which will be
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growth. Now, losing track of the contributions in that case would be a major downside. That said, by the time
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this baby reaches retirement age, with the contributions still being $115,000, the growth might be in the millions.
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Thus, the growth will dominate the account and therefore losing track of the contributions wouldn't be the most
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painful thing in the world. But it's still just it's not great. You're paying
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tax on those dollars twice if you lose track. Now, these Trump accounts are designed to be long-term vehicles,
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right? Any withdrawals before the children are 18 are highly restricted and then when the child turns 18, the
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accounts will likely be transitioned or actually rolled over to a traditional IRA. Maybe some of it does end when the
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child is in their 20s because the account could be rolled over to a traditional IRA, but some of those
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logistics actually are still being ironed out. For the most part, the Trump accounts or at least the money inside of
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a Trump account, those qualified dollars cannot be touched until age 59 and a half with very few exceptions such as
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certain educational expenses. That's one exception. Firsttime home buying is an
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exception. starting a business. And actually, you can also do um substantially equal periodic payments,
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otherwise known as 72T annuity payments from a Trump account. Now, investment options are limited. I I might say
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surprisingly limited, but certainly limited inside of a Trump account. Equity mutual funds only, stocks only,
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and they have to have at least 90% of their exposure to US stocks. No leverage is allowed, which I'm I'm fine with
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that. and expense ratios are capped at a tenth of a percent 0.1% and I'm fine
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with that too. But it's just interesting that if you have money inside of a Trump
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account, it is going to be invested in the US stock market. It's pretty much
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the end of the story. But now are Trump accounts the right or the best vehicle for your kids? Now, how do Trump
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accounts compare to 529 education plans, regular custodial IRA accounts, or these
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Utma or UGGMA, these kind of trustlike accounts that you can set up for your kids? The answer is that Trump accounts
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are not as good as a lot of the other options. For example, if your goal involves education funding, then 529
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accounts are better on just about every single metric. You can save more, you can diversify more, you get much better
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tax treatment, and you can convert some of those $529 to Roth for free if you need to. Let's go on to another goal. If
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your goal involves simply gifting money to your kids, well, then I would argue that an UGGMA or UTMA account is much
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better. You can gift more to them per year. you can diversify more. Even though those UGGMA accounts don't get
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tax deferred growth, they do receive what's called kitty tax treatment. KI DD
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IE as in a small child, not as in a small cat kitty tax treatment. The kitty tax basically says that the first chunk
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of investment income about $1,400 this year. The first $1,400 of investment income for a child is totally taxfree.
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And then the next chunk of $1,400, the next chunk of investment income is taxed at the child's tax rates, which very low
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and typically zero. And then only after that is additional investment income taxed at the parents tax rates. And so
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practically, if we think about real numbers here, looking at the type of dividend income generated by some sort
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of broad ETF, you could probably have a $200,000 UGGMA account generating $2,500
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a year in dividend income and pay zero tax on that growth. And you could easily make the argument that the UGGMA
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actually has uh better tax treatment, really, it's after tax value, that it's
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certainly better than a Trump account's after tax value. That being said, what's
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my personal plan involving Trump accounts? Well, I'm definitely going to set them up for my current and future
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kids and opt into any free money that is provided, right? It's free money. If
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additional free contributions are made by charitable contributors like the Dell family that I mentioned earlier, or by
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the government, okay, so be it. If one of our employers, my wife, my my employer, my wife's employer plans on
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contributing, so be it. That's free money. But I'm not planning on contributing any of my own dollars to
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the Trump account unless both of the following are true. our 529 accounts appear fully funded or even overfunded.
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And then second, our UGGMA accounts for our kids are overfunded kind of above and beyond the kitty tax threshold. Now,
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considering the cost of college and the fact that we don't even have enough spare money slashing around to have
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opened or funded the UGGMA account yet, you probably won't see me adding any
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dollars to my kids Trump accounts anytime soon. So, Nick Yogi, and I apologize to the rest of you who asked
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about Trump accounts. I hope that answers your question. Free money is fine. Having another kind of semi- tax
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advantage place to invest is it's better to have more options than fewer options,
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but I would put Trump accounts basically at the bottom of the different ways that
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you can uh that you can save qualified dollars for your children. So, thank you for the great question. Here's a quick
00:15:46
ad and then we'll get back to the show. Did you know my written blog, The Best
00:15:51
Interest, was nominated for 2022 Personal Finance Blog of the Year, and it's been highlighted in the Wall Street
00:15:57
Journal, Yahoo Finance, and on CNBC. I love writing, especially when that writing is to share financial education.
00:16:04
And I usually write one or two articles per week. You can read them all at bestinterest.blog.
00:16:10
Again, the web address is bestinterest.blog. Check it out. All right, the next question is from Paul U. Paul asks,
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"Should the owner of a large traditional IRA who plans to leave it to their heirs
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upon their death and who has a sizable taxable account too, should that person convert the entire IRA to a Roth IRA and
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use the taxable account to help pay the subsequent tax bill?" By the way, this
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person is already taking RMD's required minimum distributions from the IRA. Paul, interesting question. Great
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question. Now, as always, listeners, let's break down the question a little bit before we dive into the answer.
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We're talking about three different buckets of money here. We have an elderly person. We know that because
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they're already taking RMDs. This person has a large traditional IRA. They have
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presumably no or very few Roth dollars. Uh that wasn't really part of the question, but I'm going to presume they
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basically have no Roth dollars and they also have money inside a taxable brokerage account. Uh the first thing
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worth pointing out is we don't want tax fears, especially tax fears for our heirs, right? The fact that our heirs
00:17:10
might inherit some taxes from us. I don't think we want those tax fears to change the lifestyle decisions we make
00:17:15
today. I wouldn't want to tell this 75-year-old, "Hey, don't pull money from
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your taxable account right now. I know you want to take that trip to Europe, but don't you realize that this
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withdrawal is going to slightly negatively affect your taxes for your grandson who's going to owe taxes in 20
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years on the inherited IRA he gets from you?" Like, I don't think that's a good
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argument. It's a total failure of prioritization in my mind, but okay, let's assume that's not happening here.
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So first I think we should ask ourselves how do these different monies get taxed
00:17:43
to our individual in question while they are still alive. That's the first question. So withdrawals from the
00:17:48
traditional IRA those are taxed as income. RMDs are one example of that taxed as income. Roth conversions would
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be another example. Roth conversions are taxed as income. And then next assuming
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some money does eventually end up in the Roth account. How is that taxed? Well, it's not right. You're subject to the
00:18:06
income tax on the conversion. But once it's in the Roth account, any and all
00:18:09
future taxes there are zero. And last, how is the taxable account taxed to this person while they're still alive? Well,
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any capital gains that are withdrawn from that account are taxed at capital gains tax rates, which are better, lower
00:18:21
than income tax rates. Okay, so now we understand there uh that's how those three buckets are taxed during life. But
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now let's ask ourselves, how are those three buckets of money taxed when our
00:18:32
individual dies, when this retiree dies? So, first I'm going to make an assumption that this individual will be
00:18:37
leaving assets to a non-spouse heir. If it's a spouse, that certainly changes
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things. I'm assuming it's a non-spouse. So, let's start with a traditional IRA
00:18:45
because again, if it's the spouse, well, the spouse just assumes ownership of the
00:18:48
IRA assets as is. But if it's a non-spouse who inherits the IRA through what's called an inherited IRA, that
00:18:55
inherited IRA is subject to the 10-year rule, meaning the account must be emptied in 10 years. And those
00:19:01
withdrawals over those 10 years would be subject to income tax. The Roth IRA is very similar. There's a 10-year rule,
00:19:07
except those are Roth dollars, so there's no income tax on those. A taxable account is inherited at what's
00:19:12
called a stepped up cost basis, which effectively wipes out all of the capital gains embedded in that account. and
00:19:19
therefore wipes out any of the capital gains taxes along with it. So now that we know that, we need to ask ourselves,
00:19:26
this is a bit of a a would you rather game. Would you rather mess around with these accounts right now while the
00:19:30
account owner is alive or after death? Well, the Roth dollars are easy. There's
00:19:34
no difference. Besides, we're assuming that the Roth account is currently empty. So, let's just get that out of
00:19:38
the way. The taxable account is pretty clear, too. You would much rather leave behind the taxable account to your heirs
00:19:44
than mess around with it during your life. because if you mess around with it during life, you'll likely be paying
00:19:49
some level of capital gains taxes. But if you wait until death, you leave it to your heirs, then poof, those capital
00:19:55
gains taxes are gone. So, that one's pretty clear. And that leaves the traditional IRA, which is the gray area.
00:20:01
So, technically speaking, if you're really digging into the math, you would want to ponder, you know, what are my
00:20:06
current tax rates as a 75-year-old here in retirement? what level of income taxes am I paying on my withdrawals from
00:20:12
this account versus what are my heirs tax rates at whatever stage of life they're going to be at when they inherit
00:20:19
this money and then for the 10 years after what level of income tax would they be paying now every situation is
00:20:25
going to be different but most of the time I would say that a retirees IRA withdrawals during retirement will be
00:20:31
taxed at lower rates than their heirs withdrawals after the retireese's death
00:20:36
and there are two reasons for this and again it's it's a general rule Every
00:20:40
single specific case is going to be different, but it is a good general rule. And the two reasons for that
00:20:44
general rule, the heirs withdrawals will be happening over a 10-year runway, whereas the retirees withdrawals might
00:20:49
occur over a 20 or 30 or 40-year runway. The 10 years naturally will tend they have to be higher on average. Those
00:20:56
withdrawals have to be higher on average and thus are more likely to be subject to higher income tax rates. And then the
00:21:02
second reason, the heir's withdrawals will likely coincide with their working
00:21:06
years when they already might be earning significant income. So those are two simple reasons why the retiree is likely
00:21:12
to pay lower taxes. So, if you have a retiree with a million-doll IRA withdrawing $50,000 a year in addition
00:21:18
to $50,000 of social security income and you compare that to a 10-year rule heir
00:21:24
that their heir might have to abide by withdrawing more than $100,000 a year from the IRA in addition to earning
00:21:30
their own income of 70 or $150,000 or let alone $300,000 a year. It's not even
00:21:35
close. The retirees tax status will be much better. So now going back to Paul's
00:21:40
question, should the owner of this IRA, who does plan to leave it to their heirs
00:21:43
upon death, should this person convert the entire IRA to Roth and use taxable dollars to pay the subsequent tax bill?
00:21:51
Now, if we're only looking at the retiree, not really caring about the heir at all, and hoping to minimize the
00:21:56
retireese's taxes, then I would argue that the withdrawal order of operations,
00:22:02
which by the way was episode 121, if you want to go back and check that out, I would say that the the retirement
00:22:08
withdrawal order of operations would suggest that they want to pull on their taxable accounts first and their
00:22:13
traditional account second. The reason is that withdrawing basis and capital gains from that taxable account is
00:22:19
better than withdrawing pure income, pure taxable income from the IRA. But if this person does care about their heirs
00:22:26
tax situation, and one of their goals is to minimize the overall tax scenario between both of them, the living retiree
00:22:32
and the future heir as in their taxes, then we go back to what we just said a couple minutes ago. The IRA taxes are
00:22:39
likely lesser for the retiree than the heir. the taxable account capital gains are definitely lesser for the heir than
00:22:46
the retiree. So if the goal is minimizing total taxes, then the retiree would want to spend down their IRA and
00:22:52
not spend the taxable money if they can help it. But then I mean I think there are other ways to analyze this situation
00:22:57
too. Maybe the best way to frame it mathematically speaking is simply by asking how do we maximize the total
00:23:03
long-term after tax portfolio? It doesn't matter whose it is. I mean how do we maximize the total long-term after
00:23:09
tax portfolio? You know, in other words, qualified accounts grow taxfree. So even
00:23:14
though yes, we're paying income tax on those dollars eventually. Maybe it's not
00:23:17
ideal. The tax-free growth along the way usually more than makes up for the fact
00:23:22
that you're paying income tax on the tail end. What we don't want to do here
00:23:26
is run into a situation where we're choosing the proverbial 100% of a grape over 50% of a watermelon. Depending on
00:23:33
the the accounts and the tax rates in this specific situation, this question does involve the metaphor of
00:23:39
differentized fruits. so to speak, and the various fractions of those different sized fruits. Often the taxable account
00:23:44
would be the grape, and the tax deferred account might be the watermelon. And prioritizing the taxable account,
00:23:50
ensuring we keep 100% of our grape, that we don't realize any capital gains during life. That might be too much
00:23:56
grape and not enough watermelon. So Paul's question asked specifically about
00:24:00
Roth conversions. We know that Roth conversions add taxable income into our life. And we always want to ask, is
00:24:06
adding more taxable income, is that worthwhile? at what tax rate? And again, are we choosing to pay income tax so
00:24:13
that our heir doesn't have to pay that tax? And is that really the the right
00:24:17
prioritization? Enough beating around the bush. Let's say this retiree really
00:24:21
really really wants to make the Roth conversions so that their heir doesn't have to pay those taxes. In that case,
00:24:27
the question would become, how do we best pay those Roth conversion tax bills? Do we use the taxable money to
00:24:33
pay it or do we make additional traditional IRA withdrawals to raise the money to pay the tax bill which yes adds
00:24:41
even more taxable income into our life? I would bet that 95 98% of the time for retirees this answer would be a
00:24:47
no-brainer. You would use the taxable money to pay the Roth conversion tax bill. It does not make sense to make
00:24:54
extra withdrawals from the traditional IRA to pay the Roth conversion tax bill. Paul, I hope that helps you out. And the
00:25:02
next question is from Steve from upstate New York. Fellow Upstater Steve, how are
00:25:06
you? Steve says, "I do significant charitable giving, let's say $25,000 a
00:25:10
year with my donor advised fund. The DAFF donor advised fund. The DAFF is mostly empty, so I'll add more to it
00:25:17
using appreciated shares from my brokerage account." The question is, should I frontload the DAFF with many
00:25:23
years worth of charitable donations now, or should I only contribute to the donor
00:25:27
adise fund, the DAFF, shortly before I use those funds to donate to charity? Will the fees from the DAFF outweigh the
00:25:34
tax benefit? Well, uh this is good timing. I just yesterday, the day before I'm recording this, I gave a seminar to
00:25:39
a group of uh nonprofits here in Rochester about how their donors can make more tax efficient donations. So, I
00:25:45
think I'm prepared to answer this question for you, Steve. Let's break it
00:25:48
down. a donor advised fund. A DAFF, it's a charitable giving vehicle administered
00:25:53
by some sort of public charity. Fidelity Charitable, for example, is a popular DAFF option. There's a upstart company
00:26:00
called Daffy that I think a lot of people are using. I'm sure there are many other options out there. A DAFF
00:26:04
allows donors to make taxdeductible nice taxdeductible contributions of cash or assets. Donors immediately receive a tax
00:26:12
deduction. They can invest those donations in some sort of fund for tax-free growth, which is nice. tax
00:26:18
regrowth and then later they can recommend grants to qualified nonprofits. Now, those last few points
00:26:24
are really the important ones. Donors immediately receive a tax deduction and can invest the funds for tax-free growth
00:26:31
to then later recommend grants for nonprofits. So, to do a little compare and contrast, let's imagine Steve is
00:26:37
making these donations without a DAFF in place. Let's start with that one. He's
00:26:41
just donating appreciated shares from his brokerage account directly to a charity. The charity receives the full
00:26:46
value of the shares which they appreciate. Steve does not realize any capital gains for his appreciated
00:26:52
shares, which is good for his tax bill. If half of the investment was capital gain, that me that would mean that for a
00:26:58
a $25,000 donation like he's talking about, it would save him something like
00:27:03
1,900 bucks on his tax bill. That's not nothing. That's good to know. Steve can
00:27:07
also claim the donation as an itemized deduction on his income taxes. However, because he says he's donating $25,000 a
00:27:15
year, and depending on how he files his taxes as either single or joint, his standard deduction, if he's filing
00:27:21
joint, would be north of $30,000 a year. So, the $25,000 donation, which is also
00:27:27
a $25,000 tax deduction, won't really count if he claims a standard deduction
00:27:32
of $30,000 a year. It basically means like he he doesn't get any tax benefit
00:27:37
for this really large donation. At least he doesn't get an income tax benefit, I
00:27:40
should say. he gets a capital gains, he wipes away a capital gains tax like we just said. He just doesn't get an income
00:27:45
tax benefit. And then with the rest of his shares, you know, Steve retains his shares inside of his taxable brokerage
00:27:51
account, which is great, phenomenal for flexibility, but it also means that there will be future years dividends and
00:27:56
income taxes that he will owe taxes on then. Well, how or why does the donor adise fund help here? As Steve alluded
00:28:04
to in his question, Steve could quote unquote frontload multiple years of donations all at once. So, to keep the
00:28:10
math easy, let's look at four years worth of donations because four times 25,000 gives us a nice even $100,000.
00:28:17
Steve could take $100,000 of appreciated stock, donate it into the DAFF all at once. And right up front, that would
00:28:24
wipe out about $7,500 worth of future capital gains taxes. Pretty nice. Okay, there's some tax savings. Over the next
00:28:31
four years, he would make individual donations to his charity of choice. Now, the charity, they're not going to notice
00:28:36
the difference. They're still happy with $25,000 a year. We already said Steve
00:28:40
doesn't realize any capital gains on his appreciated shares. Check that one off.
00:28:43
That's the same as before, but it's still good to know. But now Steve can
00:28:47
claim the entire $100,000 donation as one itemized deduction in one tax year. So that $100,000 deduction will dwarf
00:28:56
any standard deduction he could have claimed, meaning that Steve will truly see a really large tax savings from this
00:29:02
charitable contribution. Now the DAFF does charge an annual fee which is a negative change from the old plan that
00:29:09
we started with of donating directly from the taxable account and then once the money goes in the donor adise fund
00:29:13
right this is irrevocable you cannot revoke it you cannot change it once money goes into the DAFF it is not
00:29:19
coming back out Steve has lost his flexibility and his liquidity but as long as he's sure he wants to donate
00:29:25
this money that should be fine because we also know the assets inside the DAFF they grow taxfree but now instead let's
00:29:31
assume that someone uses the DFT the donor adise fund. So they pack they bunch $100,000 worth of donations into
00:29:38
year one. So boom, in year one they would claim $100,000 of itemized deductions. Then in years 2 through 4
00:29:44
they would just claim standard deduction, right? Even though they're not donating anything more, so they
00:29:48
don't really have any itemized deductions in year 2 through 4. They just claim the standard deductions. So
00:29:53
over those four years, whereas our first person claimed $25,000 a year for a total of 100, our second person claims
00:30:02
100 in year 1 and then 161616 in the next 3 years. So they get to a total deduction of $148,000.
00:30:10
So by using the DAFF, this donor indeed gets $48,000 more in deductions over this 4-year period. Now we have to
00:30:17
assume a particular marginal federal tax rate. who knows, 24%, 32%, maybe it's
00:30:23
one of those two. You take that percentage, you multiply it by the difference in deductions, which was
00:30:28
$48,000, and you get something between $10,000 and $15,000 in federal tax savings over these four years. You also
00:30:35
get the small tax savings along the way, which is fine because the DAFF assets grow taxfree. Now, yes, the DAFF does
00:30:41
have fees, typically somewhere in the half a percent to 1% per year range, depending on the size of the DAFF. And
00:30:47
for today's example donation, Fidelity staff would charge about6% per year, resulting in something like $2,000 in
00:30:54
total fees for Steve over the 4-year period. Now, the federal tax savings between 10 and $15,000 dwarfs the fees
00:31:02
of $2,000. Now, there was a nice little magic combo that made it so advantageous
00:31:08
for Steve that bunching made so much sense for him. One of the keys here is that Steve's individual annual donations
00:31:14
are mostly, if not entirely, overshadowed by the standard deduction. But that if he bunched a few years of
00:31:19
them together, now that would grow far beyond the standard deduction. So that made it very worthwhile for Steve to
00:31:25
think maybe I just do four years of donations all at once. But as a counter example, I'll use myself. We donated
00:31:31
about $3,000 in 2025 to four different causes and we file jointly, meaning our standard deduction is $32,000.
00:31:39
Now, if we wanted to bunch many years of donations to truly get the advantage of
00:31:43
itemizing our deductions, we'd want to do something like, I don't know, $60,000
00:31:48
in a DAFF contribution. But I've got two problems with that. Cuz first, the question is, am I going to frontload 20
00:31:54
years worth of charitable commitments all at once? A DAFF is irrevocable. You can't change it. And then second, the
00:32:00
question is, can our balance sheet, right, can kind of the cash we have on hand in the bank, can that support an
00:32:06
irrevocable $60,000 contribution to the DAFF? Now, for me, the answer there is no and no. So, I'm not going to be using
00:32:12
a DAFF anytime soon. But based on the details that Steve shared with me, shared with us, he's making his
00:32:18
donations using appreciated stock. He's totally fine with moving, say, $100,000
00:32:22
of that stock all at once into a DAFF, and giving it over four years. He is in a sweet spot where using the daff is
00:32:28
just fantastic. So, thank you Steve for the great question. Here's a quick ad
00:32:33
and then we'll get back to the show. Serious question. Why do podcasters constantly ask for ratings and reviews?
00:32:40
Yes, they do help highlight our shows to new listeners. They help strangers find
00:32:44
us on Apple Podcast and Spotify. It's totally true and a good reason to ask for ratings and reviews. But I have
00:32:50
something more important, at least more important to me. I want to know if you like this stuff. I want to know if you
00:32:56
like my podcast episodes, my monologues, my guests, the information I share with
00:33:00
you and the stories I tell. I want to improve and make your listening more enjoyable in the process. So, yeah, I
00:33:06
would love to read your reviews. And sure, if you throw a rating in there, too, that's great. If you like what I'm
00:33:12
doing, please share it with me. It's such a great feeling to read your feedback. I'd love to read your review
00:33:18
or see a rating on Apple Podcast or Spotify. Thank you. And then last, a couple listeners, Greg and Lucy, and
00:33:26
then Steve, another Steve. Three different listeners reached out to me independently and asked me some version,
00:33:31
different versions, but I'll paraphrase some version of the following question.
00:33:35
Jesse, did you listen to Bigger Pockets Money episode 77? We thought it was something you'd be interested in. What
00:33:40
did you think? So, listeners, I'm going to link to Bigger Pockets Money episode
00:33:44
77 in the show notes. I'll encourage you to listen to it, too. The episode is a
00:33:48
conversation about different fee models in the financial planning industry. something you've probably heard me talk
00:33:52
about before. Hosts Mindy and Scott had on a guest. The guest was a CFP who works for the website Nerd Wallet's
00:33:59
wealth management division. I know Nerd Wallet had a wealth management division,
00:34:03
but I get it. I understand why they do. So, they had on a CFP, a certified financial planner who works for
00:34:08
NerdWallet. Overall, I thought the conversation was very reasonable and fine, and I'm enough of a maybe a
00:34:14
student of the industry, so to speak, to say that, you know, yeah, you know, we know different fee models exist,
00:34:18
different conflicts of interest exist. We know that price is what you pay and value is what you get. And sometimes you
00:34:23
just don't get enough value to justify the fee. I'm sure I listened to their
00:34:27
conversation with with some implicit bias. I know I did. But at the same time, I thought their conversation was
00:34:32
totally reasonable and fair. But yes, you know, since some of you listeners were asking me, there were some things
00:34:38
that I just didn't see totally eye to eye with them on. And there were three
00:34:41
things in particular. So I'll just talk about them really quick here. So first,
00:34:44
I I found that Mindy and Scott, they talked about the certified financial planner. So again, the CFP credential in
00:34:50
a way that I I've really never heard before. And they spoke kind of on behalf
00:34:54
of the FIRE community in a general way that I don't know, I I consider myself
00:34:57
part of the fire community, the financial independence community. And the way they spoke about the way that
00:35:02
the fire community looks at CFPs, it kind of took me a back. So at one point in response to a comment about
00:35:08
commissionbased product sales, like insurance products, which listen, I'm not a huge fan of commission-based
00:35:12
product sales, but Mindy said, "That has historically been my anti-CFP stance. my
00:35:18
anti- financial planner stance in general. I don't know why they're going
00:35:21
to be recommending these things to me. Is this going to be a really great product for me or just another really
00:35:26
great product for their pocketbook. And then Scott backed her up and he said, "The CFP industry actually has now, at
00:35:32
least in the fire community, that instinctive response, oh CFP, they're going to sell me life insurance." I
00:35:39
think that's actually starting to get embedded in the instinct, the instinctual reaction to these type of
00:35:43
services. So, those were a couple quotes from them that again did not put the CFP, certified financial planner
00:35:48
credentials in great in a great light. But then I got confused about a minute later after those quotes. Scott said, "I
00:35:55
think that a CFP is almost a required designation for someone that I consider hiring for financial planning services."
00:36:01
So, that kind of confused me. I think they both said that they look at CFPs with a lot of suspicion, but then they
00:36:06
Scott also said that a CFP is a requirement for hiring somebody in the first place. And that that was more in
00:36:11
line with what with what I'd always understood. Well, and then Scott ended by saying, "So I both respect the CFP
00:36:18
and my alarm bells go off when somebody introduces themselves and they say, "Oh,
00:36:22
I'm Monica CFP." So like I said, listeners, I don't think I've heard the
00:36:26
CFP credentials characterized that way before. The way I've always thought about them, I go back to this Wall
00:36:31
Street Journal article by the great writer Jason Swag. It's the 19 questions
00:36:35
you ought to ask a financial adviser before you work with them. And one of those questions is tell me about the
00:36:40
credentials of you or your team. Like who who's going to be doing the work for
00:36:44
me? And what Jason Zwag says is, listen, there are a million different credentials out there. It's kind of like
00:36:50
alphabet soup, but the ones that matter the most are CFP, CFA, and CPA. CFB, certified financial planner, CFA,
00:36:59
chartered financial analyst. So that's kind of the the hardest, most rigorous
00:37:03
exam license in uh investment research. And then CPA would be a certified public
00:37:08
accountant. So CFP, CPA, and CFA, those are the ones that I've always heard of
00:37:12
as being the gold standard. So that was the first thing that I I kind of found myself disagreeing a little bit with
00:37:16
Mindy and Scott on. The second thing, Mindy and Scott both spoke about the business of financial planning because
00:37:22
of course they were talking about fees, right? And so when you're talking about
00:37:25
fees, you're talking about running a business. And they talked about the the
00:37:28
business of financial planning. In my opinion, I'm not sure they really put on
00:37:32
their business owner hat for that conversation. You know, at different points in the conversation, they alluded
00:37:37
to what they called full service financial planning costing, at one point, I think they quoted $900 a year.
00:37:44
At another point, they quoted $2,000 a year. At another point, Scott quotes $7,500 a year. But then he suggests that
00:37:51
that number is just way too high. I kind of want to pause and think about someone
00:37:55
who's running a business. You know, if you want to provide a service to your
00:37:58
customers, I think one of the first things you need to do is just make sure that your business survives to fulfill
00:38:03
that mission that you want to do. So if you want to provide financial planning, you need to ensure that your firm
00:38:08
survives. And if you're serious about running a financial planning business,
00:38:11
you'd probably look at things like the industry research that Michael Kits and
00:38:15
his team puts out every single year. And his research is very clear and consistent. And one of the outcomes is
00:38:21
that the bare minimum for a client relationship to be even slightly profitable is typically $3 to $4,000 a
00:38:28
year. If you're trying to run a business, maybe you have a couple employees, you try to pay them fair
00:38:32
wages. If your employees happen to be experts, you pay them for their expertise and then you have enough time
00:38:38
to actually work with your clients to dive into details for them. You need to charge them something where you can
00:38:43
actually operate that business and be profitable and you're probably going to
00:38:47
charge somewhere between $5,000 and $10,000 a year. So, the idea that you could just fill up your business with a
00:38:53
bunch of clients paying you $1,500 a year in fees, that would probably be a really bad financial planning business.
00:39:01
It's kind of like saying, "Why doesn't the grocery store sell me beef for $1 a
00:39:05
pound? I demand that someone open a grocery store and sell me beef for $1 a pound." So, I think if you did that, you
00:39:12
would have two options. You would either have the most disgusting beef on planet
00:39:15
Earth, or you would have a store that would go out of business in the next 3 months. Either way, you're going to have
00:39:21
something that you, as a customer, are not going to be happy with. Now, I get it. We don't want our grocery stores
00:39:26
gouging us. We don't want our financial adviserss gouging us either. I am on
00:39:30
board with that. But I feel like this particular podcast conversation in question was too heavily influenced
00:39:36
without necessarily understanding the economics of this business and this industry that they were talking about.
00:39:41
And on that note, the conversation didn't really cover the service model that much. And maybe that's at the end
00:39:46
of the day what was missing. So, and I get it. There's only so much time in the
00:39:50
episode and it's a little bit of a nuance conversation. And when I say service model, what I mean is what are
00:39:54
you receiving for the fees that you are paying? I think restaurants are a perfect metaphor here. Depending on
00:40:00
where you live, you might actually have a Michelin star restaurant in your city.
00:40:03
We don't here in Rochester, but we do have a few restaurants that everyone, I
00:40:06
think, for the most part agrees are excellent tier one restaurants. And a couple of our tier one restaurants,
00:40:11
there's one in particular I'm thinking of that is very well known for its
00:40:14
hamburger. And the last time I was there, the hamburger there, I think, was $35. McDonald's, though, less than a
00:40:20
mile away from this tier 1 restaurant, they sell me a Big Mac for $7. So, there's an obvious price difference
00:40:25
there between the $35 really nice burger, the $7 Big Mac, and I would say that the service model, aka the quality
00:40:32
of the burger, happens to be really obvious, too. Now, that said, I also know that at the tier 1 restaurant, I'm
00:40:39
sure that baked into that $35 hamburger price, I'm paying for ambiance. I'm
00:40:43
paying for aesthetics. I'm paying for things that don't actually change the
00:40:47
the flavor or the nutrition of the burger. I'm paying for things that maybe maybe I appreciate as a patron or maybe
00:40:53
I just don't care about at all as a patron. And yeah, if we wanted to, we could strip out all that fancy stuff
00:40:59
about the restaurant and serve the same exact burger with the the expert chefs in the back for, I don't know, 20 bucks
00:41:05
instead of 35. That's totally fair. I know I'm probably paying for some fluff.
00:41:09
And from my seat inside the financial planning industry, there are some McDonald's out there. There are some
00:41:15
Applebees out there. There are also some Michelin star restaurants out there. And
00:41:19
I think that the bad stories and the bad feelings, including what Mindy and Scott
00:41:23
talked about in their podcast episode, they tend to come from when a McDonald's
00:41:27
restaurant is charging Michelin prices. And many of the customers, clients, they
00:41:32
simply don't understand the quote unquote cuisine well enough to recognize that fact. I think that is one of the
00:41:38
roots of this entire issue. It's one of the reasons why Scott and Mindy had that
00:41:41
bad taste in their mouth about financial planning. It going back to food, right?
00:41:45
We have all eaten enough food. At least most of us have eaten enough food to understand at least on some level the
00:41:51
difference between a McDonald's Big Mac and a Michelin star gourmet burger. Right? You don't have to be a food
00:41:56
critic or an expert to tell the difference because you've eaten enough meals in your life. But far fewer people
00:42:01
have interacted with financial planning enough to understand which restaurant they're getting their financial advice
00:42:07
from. Most people can't tell the difference between the McDonald's and the Applebees and the Michelin star
00:42:11
restaurants. I do see that. I really do. But back to the topic on hand. If you're
00:42:16
trying to run a genuinely helpful and beneficial and valuepacked financial planning practice, but also you're
00:42:23
selling your services for $1,500 a year, then all of a sudden you've become a a
00:42:27
you're trying to be a Michelin star restaurant, but you're trying to sell
00:42:30
your burgers for $7 a pop. And I'm sorry, that's likely not going to be profitable. And at the end of the day,
00:42:36
you're not going to fulfill your mission. The business will likely falter and fail. So, the first thing you have
00:42:40
to do is run a survivable, successful business. And that explains sometimes why the fees are what they are. My third
00:42:47
thought or critique of the episode, maybe this is a little unfair of me. I don't know. But I will say, you know, in
00:42:52
this episode they put out that was had plenty of honest and fair critiques about incentive structures and how
00:42:58
people are getting paid. Sometimes I think they even went as far as to call into question the the moral fiber of
00:43:03
anyone who gets paid for advice because of the conflicts of interest that they pointed out. So, in the middle of that
00:43:09
conversation, whoever runs Bigger Pockets Money, and it's probably production team or something like that,
00:43:14
decided to run advertisements for their chosen budgeting app and also for their chosen trading platform, including the
00:43:20
words, "You've got your core holdings, you've got some recurring crypto buys,
00:43:24
maybe even a few strategic option plays on the side. Stocks, bonds, options, crypto, it's all there." Okay, so when I
00:43:32
heard that, you lost me a little bit. It's hard to criticize conflicts of interest during the show, but then
00:43:37
encourage your audience to sign up for recurring crypto buys and strategic option plays during the ad break. That's
00:43:43
all I'm saying is is I think we we do all get paid somehow. Here on this show,
00:43:47
I I try to be clear with you. I'm not here to sell you mattresses. I'm not
00:43:50
here to sell you um like nutritional powders or whatever it is. I also I don't sell budgeting apps. That would at
00:43:56
least be more in line. in Bigger Pockets Defense. They're they're selling a a
00:44:01
brokerage firm or custodian. They're selling a trading platform. They're
00:44:04
selling a budgeting app. At least that has to do with personal finance. And I've been tempted to do stuff like that
00:44:08
here, too. But I don't I don't really want to sell you guys those things. At
00:44:11
the end of the day, what I think about is I I work as a financial planner professionally, and I'm interested in
00:44:17
doing more of that. I really like to do that. And my hope is if I provide you with really good education and I answer
00:44:22
the problems and I make you realize that, huh, some of this stuff is complex actually and some of it gets more
00:44:26
complex over time and it's nice to have someone who can provide me answers that
00:44:30
some of you will just like many of you have reach out to me and say, "Hey, Jesse, I might want to come work with
00:44:35
you. Can we talk more?" That's the thing I'm selling here. Not going to shy away
00:44:39
from it. That's what I'm selling here. So anyway, I thought to myself that we
00:44:42
all sell something for the most part. Maybe there's some content creators out
00:44:46
there who literally are selling nothing. I mean, more power to them. That is really, really awesome. But here on
00:44:51
Bigger Pockets Money, they were selling a budgeting app and a trading platform. And I get it. Everybody's got conflicts
00:44:57
of interest in some way, shape, or form. You just kind of have to be aware of them. And if you want to call them out
00:45:00
and let your listeners know about it, let your audience know. So, I'll end with this. I just wrote an article
00:45:06
called the Long-Term Investors Order of Operations. I can link it in the show notes. And number five on my list of 10
00:45:12
things that I think people long-term investors 10 things that they should do and I think they should do in order.
00:45:18
Number five is to pay attention to cost control. I wrote investing isn't free.
00:45:23
Costs are vital to understand. Every small cost counts and those costs compound over many decades. You should
00:45:29
understand your expense ratios, advisor fees, commissions and trading costs and other places where you're paying to
00:45:35
invest. But it's still true that price is what you pay. Value is what you get.
00:45:39
Cost is just 1/ half of an important fraction. Value is far harder to measure, but equally important to
00:45:45
understand. And listeners, I stand by that. If you decide to seek out professional guidance from an adviser,
00:45:51
from an accountant, from an attorney, from a personal trainer, a plumber, a roofer, a mechanic, just remember that
00:45:56
price is what you pay and value is what you get. And thank you as always for listening to Personal Finance for
00:46:01
Long-Term Investors. >> Thanks for tuning in to this episode of Personal Finance for Long-Term
00:46:06
Investors. If you have a question for Jesse to answer on a future episode, send him an email over at his blog, The
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Bestin Interest. His email address is [email protected]. Again, that's jessevestinterest.blog.
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and invest in knowledge themselves. And we really appreciate it. We'll catch you
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on the next episode of Personal Finance for Long-Term Investors. Personal Finance for Long-Term Investors is a
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personal podcast meant for education and entertainment. It should not be taken as
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financial advice and it's not prescriptive of your financial situation.