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