Aug 13

Childfree Wealth Podcast Ep. 37: Where to Hold Investments

The Childfree Wealth Podcast, hosted by Bri Conn and Dr. Jay Zigmont, CFP®, is a financial and lifestyle podcast that explores the unique perspectives and concerns of childfree individuals and couples. In this episode, Bri & Dr. Jay continue their discussion on investing & dig deeper into where you should be investing.

If you haven’t already, listen to Investing 101 & Invest in What You Understand. Through a quiz format, Dr. Jay asks Bri to explain different accounts. With a variety of accounts available, it’s important to understand the different types of accounts, the tax implications, & when you can access your money.

Resources:
2023 Important Tax Numbers
Podcast: Investing 101
Podcast: Invest in What You Understand
Course: Saving & Investing

Be sure to join the conversation by emailing us at [email protected], following Childfree Wealth on social media!

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LinkedIn: https://www.linkedin.com/company/childfree-wealth/

Disclaimer: This podcast is for educational & entertainment purposes. Please consult your advisor before implementing any ideas heard on this podcast.

Transcript

Dr. Jay

So if you've been following Childfree Wealth podcasts, and by the way, if you haven't liked, subscribed, followed, do all those things. I have no clue which ones you do, but hit the buttons below the take. But if you've been following, we're on a series talking about what to invest, how to invest, where to keep it, and the basics of investing.


So today we're going to dive into where to keep your investments. In the last episode, we talked about what you should invest, but it's kind of like what accounts and where do I put this  & how does it impact taxes and all that. And I had given you guys a clue last time that Bri just finished her series 65, which is the exam to become an investment advisor representative.


So I'm going to continue, we're going to quiz Bri, by the way, once again. She got no warning, but at least she got the last episode. Did fine. So, you know, we'll throw her under the bus this time. We're going to talk about where and like the accounts and all that and dive in. Is that okay, Bri?


Bri

I'm up for it.


Dr. Jay

You passed the last one. So this one, we're going to be good. All right. So when people talk about where we're talking about accounts, so let's start with what's a brokerage account?


Bri

A brokerage account is going to be typically taxable because it is one you can open up on your own and invest in. You can put money in whenever you want. You can take money out when you want. You are going to have multiple tax consequences. You are going to pay, taxes going in, taxes going out and taxes on the gain.


So you've got three different tax implications there. But anybody can open that up to invest for… you don't have to wait till a certain day or age to take it out.


Dr. Jay

Yes. A brokerage account. You’ll also hear it called a taxable account. It's just kind of that basic. One of the things kind of quirks on this, a brokerage account as a couple, you can actually have a joint. We're going talk about retirement accounts in a minute and that's individual account. You can open at any of the big name places.


You know, people ask me, you know, who do I recommend? I don't. I just go whoever is cheapest. I often say Vanguard or Fidelity because they tend to be the cheapest. You know, there's other ones. If you have a place you like, go for it. All of their technology kind of sucks a little bit but it's just brokerage accounts.


Buy and sell stocks and bonds and things like that in there. Now, before we go to like a brokerage account, sounds like a place I put my money & I invest things. But isn't that a savings account?


Bri

No, because a savings account is holding your money. You are not investing in different things like stocks, bonds, ETFs, mutual funds, anything like that. You're just holding your money in a savings account, whereas in a brokerage account you have to pick an investment. You contribute money into the account and then from there you pick your investments that you are hoping will go up in value over time and make you more money.


Dr. Jay

Yeah. Key thing here, people often put savings and investing together as one word. And it is because, like, we're putting money away for the future. Yes. Savings account is I want my money in a bank, I want to earn some interest, it'll be there when I get there. Brokerage. You put money in, you have to actually invest it. We have risk that comes with that.


The odds of your bank going bankrupt is very low and if they are, they're protected by FDIC. We've run into a few of that lately. But a brokerage, you buy the wrong stock.. it's on you. There's no insurance saying sorry. You know, and brokerage accounts are set up like you can do whatever you want. One of the ones and just kind of a tangent on this, you will see things called robo advisors, which is just a brokerage account with some math on it and they say you should invest in this, you should invest in that.


Remember we’re following the rule of only investing in things you understand. If you can't understand what the robo advisor is doing, you can't do that. I think the other one to kind of fit in here, Bri brought up a great point, I've seen a lot of people put money into the brokerage account or the IRAs or other things, and then never invest it.


You need to not only put the money in, but then you need to take a next step and actually buy something.


Bri

Yep.


Dr. Jay

All right. So let's go to the next one. What's an IRA?


Bri

An individual retirement account and that you can open up if you have earned income earlier and put money in. You can also open one up if you have a spouse making income, and that's called a spousal IRA, but that is where you put the 2023 limit is $6,500. So you can put up to $6,500 in there, invest it and then you cannot pull it out before the age of 59 and a half without either meeting certain requirements or having tax implications like penalties.


Dr. Jay

Yeah. So the IRAs, the bucket. And now then we get two types of IRAs, Roth and traditional. What's the difference between Roth and traditional?


Bri

Traditional. You're going to pay taxes when you take the money out. Roth You're going to pay taxes on it now. So it's like, do you want to pay taxes on the seed or do you want to pay taxes on the harvest?


Dr. Jay

Yeah. And keep in mind, with the traditional, it's going to lower your income taxes this year. So you get that benefit, but then you pay it on the way out. One of those kind of little side notes, if you are if you're doing student loans, and doing like an income driven repayment program, you might want to use a traditional to drive down your income so your payments lower.


That's kind of like one of those things. Otherwise, I'm usually going down the Roth path just because I tend to believe that taxes will go up over time. If you know you're going to like have a period of your life where you're going to have lower taxes, ttraditional might make sense, but we got a whole different class on tax planning.


Yeah, I'm not trying to go there, but what I'm trying to do is help you understand which type of account changes it. Now there is a limit for income for Roth. You have to watch that. There's also a limit for the traditional deductibility, if your employer offers a 401(k). We will actually link to a handy sheet for taxes for 2023.


If you're listening in 2024, ignore that all and find another one.


Bri

Look for the new numbers.


Dr. Jay

Now. So what's a 401(k)?


Bri

A 401(k) is going to be offered by your employer. It is also another sort of retirement account where you can put money in and the employer can provide a match to you. You can put substantially more money into a 401(k) than you can an IRA. You can not take that money out until 59 and a half. So it's just another bucket, but one that your employer offers to you.


And as the employee, you can either put it into a traditional, traditional side or Roth side. Most or some companies do have an option. Some companies won't. But you want to check out your specific company because we can't tell you whether or not they do.


Dr. Jay

Yeah. So here's a kind of weird one that people get confused by. They'll say, “Well, I make too much money for a Roth.” Aha! You might make too much money for a Roth IRA. There's no Roth income limit for a 401(k), there's a contribution limit. The part that the employer puts in is always going be traditional, but as of current tax laws, there's some weird things they’re trying to talk about, but the Roth component, you can do that.


The other one on the match. So like people say, well, I put like 3% in and they match dollar for dollar or whatever it is. Weird math, 6%, they match half. Some of the employers now have an option that if you pay your student loans, they will give you the match towards your 401(k). It's kind of a weird one, very rare.


But if you might want to see if you have student loans, if they're willing to give you that match, even though you're not putting it in the others, they may automatically opt you into your 401. K and say, hey, you got to put 3% automatically unless you opt out. That's fine. I remember last episode we talked about, you got to invest this stuff. 401(k) is going to be in a mutual fund. IRA You got a lot more flexibility in what you invested. So, Bri, that’s a 401(k), but what’s a 403(b)?


Bri

So a 403(b) is similar to a 401(k), but for non-profits.


Dr. Jay

Yes, nonprofits. Government. There's some weird like checkboxes. And by the way, if it sounds like we're talking like random numbers, those are all IRS numbers for a 401(k) has to do with a line in the IRS code that is. All that is also with a 403(b), there's some additional catch up rules if you’ve been there for a longer time and you're older, so we'll kind of skip over that. How about a 457(b)?


Bri

It’s a deferred compensation plan. So some companies will offer them for different employees. Once I've seen are for senior leaders or people who have a base salary, but depending on your company, they might offer that. So it's something to check in to, but it's you make the money now and you get it later.


Dr. Jay

Yeah. So if you work for a nonprofit, you may have both a 403(b) and a 457(b). The bonus is, a 457(b) you're saying I'm going to put my money there and traditional or Roth again, but I can take it out when I quit the job. See, there's a difference. So I might quit the job at 50 and have access to it now instead of 59 and a half.


I might quit my job at 30 and have access to it. So if you have an option of both, 457(b) iis probably the right answer. There's also other weird plans, and I'm not going to quiz Bri on these because it gets really crazy. But for example, my wife works for a university. They have a 403(b), a 457(b) and a 401(a), which is kind of like what replaced the pensions and she can contribute to all three of those.


So you've got to see what your options are. And like if you have 403(b) and a 457, you can contribute the max in both. That's kind of like, you know, we start like maxing out these accounts. We're maxing out the tax benefits. So the investing itself is pretty simple. Tax planning a challenge, picking out which accounts and why do I want to do this?


You may want to work with a professional on that. When it gets into 401(k)s, 457s, all that fun stuff or 403(b)’s, mostly in the 401k world, you may see an option for what they call Mega Backdoor Roth. Just a cool term. It means I'll fill up the 401k for everything my employer didn't fill up.


Not every place allows that. It's an after tax contribution. It's nice if it's there. If not, not. You also may have options for a backdoor Roth. There's some funky things you've got to do with that. I'm going to strongly suggest you're going to do any of the backdoor stuff, work with a professional, because I spend way too much time cleaning up people's accounts when they haven't done it right and sometimes that costs them in taxes. We're getting kind of into that fancy land. We talked about in the last episode. Do you want your investments to work or you want to be sexy or fancy? Yeah, as we get fancier, as we get further out.


So. Alright, Bri, I'm 35 years old. I'm working a job. I make 100 grand a year. Why? Because a hundred grand is like, seems to be everybody's goal. I want to make six figures.


Bri

Okay.


Dr. Jay

Should I put my money in my 401(k) or my brokerage?


Bri

401(k). Well, no. Take that back. What are your goals?


Dr. Jay

What do you mean?


Bri

What life goals you have? Do you want to keep working forever? Do you want to work until 59 and a half? Do you want to retire early? What do you want?


Dr. Jay

I want to start a business in the next ten years?


Bri

You want to start a business the next ten years. Okay. Do you have any debt?


Dr. Jay

Yeah.


Bri

Okay. How much?


Dr. Jay

I don't want to talk about that on the radio.


Bri

Well, that's going to impact where you put your money. If you've got a lot of debt, you’re going to want to pay that off.


Dr. Jay

So by the way, hypothetical. Not a real one. But I purposely I didn't warn Bri. I was doing this. Even the fact which account should I put it in is a lot like more detail than just put it in your 401k first or do this. You'll see a whole lot of general rules online. But events. Yeah, one of the debates and we should it will have a whole separate episode on should you pay down your debt or invest first but I'm going to say you pay down your debt because it's actually risk free return, which is where Bri was going.


Then I want to save for my goals. Well, if I want to retire, a 401(k) is good and gives me tax benefits. If I want to start a business and I need money in the tax ten years, I might want to put in a brokerage. If I need the money in the next 2 to 3 years, I might want to put it in a savings account.


Bri

Yep. It’s all different.


Dr. Jay

And people go, wait, what? Huh. Okay, here's the bonus, a 401(k). You set it. Forget it takes money out of your paycheck. I love that because it's just like forces you to save money. Is that the right choice for you? I don't know. Depends on your situation. But you know what? Something that's mindlessly investing for your future in general, I'm liking that idea. You can do the same in a brokerage, but then people are more likely to take that money out and use it. Part of the thing about a 401k is that 59 and a half. Now there are some weird ways you can get out money beforehand and you know, there's some weird rules that we're not going to go into here, but you can get it out before 59 and a half, especially if certain life events happen or timing and age.


But it's locked up for a reason. Now, Bri, I… We’re going to go back to my hypothetical. I've now got $50,000 in my 401(k) and I want to start my business. Should I take a 401(k) loan?


Bri

No, I would not touch your retirement accounts.


Dr. Jay

But I need $10,000 to start the business.


Bri

Well, then you're going to have to work and save it. That's what I would tell you, because you're going to have to pay penalties on that for that 401k loan. You're going to have to pay it back as well. So you're probably going to end up paying more between the penalties and having to pay it back and the tax consequences by taking that 401(k) loan then spending a little bit extra time just to save up more money before starting a business.


Dr. Jay

Yeah. And by the way, if it sounds like a plan to starting up a business or not, it just happened to be my hypothetical. I made up so 401k loans. The only time I will tell people save for one k loan is if they have like a medical emergency. Like they can't, you know, like I need surgery, can't afford it.


Like, okay, fine. You know, do what you got to do or prevent, like, a bankruptcy. But even then, I'm probably not going to take it for the bankruptcy because a loan they go, “Well, you're just borrowing money from yourself.” Yeah, but it's due immediately. So, for example, if I go to that, start a business example, you take, you know, the person takes out a $10,000 loan business does well, they quit their job six months later. That $10,000 is immediately due or are they going to pay a penalty and taxes are like you're setting yourself up for failure with 401(k) loans.


Yeah, we don't do those. We don't cash out or for one case we let those set and go. That's why we might want to put money in our brokerage or our savings account if we need it. The other thing I mentioned was if you need the money in the next 3 to 5 years ish savings accounts work. Set it, forget it, and it'll be there when you need it. The problem is the stock market over time goes up, but which year it goes up and which year it goes down? Who knows? Okay, I'm not even going to try to guess.


So if I'm saving for a down payment, I'm saving for my business. Whatever…


Bri

Saving my emergency fund.


Dr. Jay

Saving my emergency fund, you got it.


Bri

Don’t invest that.


Dr. Jay

Right. We only invest money that we can set and forget it. The other thing is, if you're going to watch it every day, you can't afford to invest because it's going to, like, stress you out too much. Which may mean you're taking on too much risk or working it through. So. All right. We have brokerage, we have retirement accounts.


One of their account that I want to talk about is an investment account that people don't often think about is an HSA. It's an HSA is a health savings account. Now, you only get access to an HSA if you have a high deductible plan and it meets certain requirements, but it allows you to put money in there. And it's one of the weird things of triple tax free.


You get tax deduction when it goes in, grows tax free, comes out tax free for medical expenses. Now, in general, I'm not going to tell you to pick up a high deductible plan just to get the HSA. But if your employer happens to have one and that's you have to say that one probably gets filled first, you get tax benefit going in & out and here's what happens.


You put the money in, then you can invest it just like an IRA or 401(k) in certain funds and you might. My advice to you is not to spend it on this year's expenses because you roll it over year over year. So for example, I go to the doctor, I have a blood draw, I have a copay, I have all that.


You keep a chart of it. Like Excel, Google sheet of like went to the doctor's office, paid 50 bucks. You can then pay yourself back in the future. So let's say I have 2023. I keep track of all my expenses out of a thousand on expenses, I put $3,000 in my HSA, which might be more than that.


But let's just go with it. And then in 2025, I'm like, I need that $3,000. I can pay myself back for what happened in 2023, in 2025 and no taxes accrue grew into gets accurate so HSA is what I was like fun tools that allows you to get that triple tax benefit. The downside of it is you got to pay more for your insurance because you're paying the deductibles.


So I tend in general to recommend getting the better insurance because I'm just not a lucky person enough that I can take a chance on paying a high deductible. But that's up to you, particularly for the young, healthy folks. Well, if you're not going to use that health insurance anyway, you might want to take advantage of the HSA.


The other one to keep in mind the match on the 401k has some type of cliff. It'll say like three years or you don't earn the match until a certain amount of time. Well let's use the three year example. Well, that means anything the employer puts it, not yours, well, you put it in is yours. The employer puts in.


You don't get that money until three years. It's in your account, but it's not really yours. The average tenure in a job right now is 2.7 years. If you are not going to stay for the three years, you got to assume you're not going to get a match which might change which accounts years.


Bri

Yeah.


Dr. Jay

Bri, think about this. What percentage of your friends are staying at a job over three years?


Bri

Two that I can think of. But that's because they're a few years older than I am. Otherwise most of my friends graduated college three years ago or they're like or something.


Dr. Jay

And the ones who graduated college have had three jobs in the past three years.


Bri

Yeah or they quit working altogether because they’re a mom or something like that.


Dr. Jay

Yeah. So what's happening is the younger generations, the average tenure at a job is getting closer and closer to two years. So the match, well it looks good. Like why people say I say, hey, you should pay off your debt before you eventually go. Except for the 401k match. I'm like, well, are you going to stay the job? And they go, no.


Then you pay off your debt like this is the game. The other one, since we did mention the paying off debt, remember they have debt. You get a tax free, risk free return of the interest. So if you pay off your credit card at 20% interest, I'm getting a 20% return risk free tax rate. Not going to beat that in the market in most cases.


That's why we're talking about some of that. That's we're prioritizing and setting steps.