Q&A: How Do You Maximize a Mini-Retirement?

29:21Offer letters, onboarding materials. So you save lots of time. You get direct access to certified HR experts, and it's quick and simple to switch. I've been using Gusto since 2017 or 18. It's been a long time. I remember I was living in Las Vegas at the time and I brought on my first team member, a woman by the name of Erin, who ended up working with us for six years. That was when I got on Gusto and I'm still there today. Try Gusto today at gusto.com slash Paula and get three months free when you run your first payroll. That's three months of free payroll at gusto.com slash Paula. One more time, gusto.com slash Paula, G-U-S-T-O dot com slash P-A-U-L-A.

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30:54Welcome back. Our next question comes from Leigh. Hi, Paul and Joe. This is Lee from Oregon. I'm hoping you can help me think through what to do with$125 ,000 left over in my 529. I'm 31 and my husband is 33. We have a great income. We're debt-free other than our mortgage. We both do have master's degrees and neither of us have an intention of going back to school. We do have a four-month-old son. I could potentially use the 529, but my parents are setting up a 529 for him that will be fully funded. I don't know how much, but it will be enough. So I'm not anticipating that he will need it either.

31:34I have been rolling over 7k per year into my Roth IRA, but since that's capped at 35 ,000 for the lifetime, there still be a substantial amount left over once I'm done rolling it into my IRA. We've already taken out 30k the last two years to put on our mortgage but since it's taxed at ordinary income instead of capital gains plus the state income tax from the great state of Oregon and the 10 % penalty for non-educational purposes it's been giving me some heartburn to take it out but I'm not really sure what else to do with the money since I don't see anyone in my family needing it for education.

32:10My husband and I do have a goal of paying off our house and I'm working hard towards that So hopefully we can be financially independent enough for one of us to stay home with the kids. The 529 money would help toward that goal, but it would not totally pay off our mortgage. Any advice on how to think through this would be great. I love the show and appreciate you helping so many people with personal finance. Lee, thank you so much for the question. First of all, congratulations on everything. You are handling your personal finances with attention, with care, with intent. And it's clear that you're making some very, very excellent financial moves.

32:46So let's talk about what to do with this 529 money. The first thing that I was going to say, and this is something that you're already doing, is to roll 529 money into an IRA. You are already doing that. That's wonderful. You're doing that until it maxes out. I would do that up to the full$35 ,000, get the maximum Roth IRA contribution that you can out of that 529 money. beyond that for the remainder of the 529 money after the Roth IRA transition has been maxed out. What I would suggest is that you have a conversation with your parents and say, hey, thank you so much for volunteering to put money aside for our son's 529.

33:32Here's the situation. We don't need that money placed in a 529 specifically. we're not asking for any more money, but whatever money you were planning on contributing, would you consider putting that same equivalent amount of money towards our mortgage payoff? Because that would be much more beneficial for us than putting this money into a 529. I think if your parents understood the situation and the constraints around the accounts that you're managing, they might be willing to do that. If they want the money specifically to be for the child, they can put it in what's called an UTMA or UGMA account for them.

34:15That may affect your child's ability to get financial aid in the future. But you know what, Paula? If they're going to have plenty of money between the 529 plan and a brokerage account, so it's meant to be for the child specifically, then a lot of that assistance will be off the table anyway. I would present that as a second option if they truly want to be for their grandchild and not for you. I also, Lee, I hear two different goals in the question that you've asked because I hear the goal of allowing one parent to stay at home. And I also hear the goal of mortgage payoff. Now, it's possible that the two goals could relate to one another.

34:55So it might be the case that, and I didn't hear you state this directly, but it might be the case that you would like to pay off the mortgage such that you free yourself of a major bill. And once you have freed yourself of that mortgage, you freed yourself of that big bill, you would feel more comfortable making an income adjustment such that one parent could stay at home. Maybe that's the transition here. And that's one way to look at it. But a different way to look at the situation is that there are two separate goals that are independent of one another. One goal is mortgage payoff, and the other goal is for one parent to stay at home.

35:34Maybe the mortgage payoff does not need to happen prior to one parent staying at home. Maybe there are ways to adjust your budget such that one parent can stay at home even while you continue to have a mortgage. Yeah, we don't know enough about the situation to answer that, but that's certainly an avenue I would explore. It's a vein I think we need to look at. I think also taking money out of the 529 plan, you already have done the$35 ,000 maximum into the Roth IRA. You also mentioned that you and your husband have no intention of further education, which a lot of people don't know, Paula, that you are allowed to change the beneficiary.

36:18So you can change the beneficiary back to yourself or to your husband and then use it for your education. Clearly, you already know that. I just didn't know if our Afford Anything audience knew that, that that flexibility exists when it comes to the beneficiary designation. Another consideration, though, the definition of education is a lot wider than I think a lot of people think that it is. So as an example, our mutual friend OG from Stacking Benjamins is a pilot. If you go to a certified flight school, that 529 money can be used for certified flight school. If you decide that you want to take cooking classes or golf instruction or some other sport or activity instruction, it can be much, much wider, I think, than a lot of people think.

37:14So if those things are on the bucket list, then I may look deeper into what certifications are necessary and ask the institution if 529 money can be taken out to pay for that tuition for the expense of learning, whatever that thing might be. Right. Remember also that 529 money can be used for K-12 educational expenses. And so if you have any plan of sending your son to a private high school, perhaps 529 money could also be used for that. The only other possibility that I know of of avoiding taxes are actually if your child has any special needs, an ABLE account, you are able to change 529 money into an ABLE account, achieving a better life experience account.

38:07For the vast majority of people, that's not an option, but that's the only other way that I know to avoid taxes altogether. I think beyond that, Paula, it's much more about minimizing the tax bills. So let's walk through this. You're going to pay the 10 % penalty on the earnings that come out of the account. The money comes out of the account pro rata, meaning every time you would draw money, it's going to be a portion of it is your contribution and a portion is going to be the gain that it had. The 10 % penalty is only going to apply to the gain, not to the money that you put in. The gain also is going to be taxed as income.

38:51So again, not the money you put in, but just the gain going to be taxed as income. I think the only way to minimize that tax is to make sure that you're not in a higher tax bracket with that money. So if you're right on the tax bracket line and next year you think you're going to have less income, I would try to withdraw the money strategically during lower income years to at least save a couple percentage points on the tax bill. Which could dovetail nicely with one parent staying at home because their overall tax bracket would decrease at that time. Yeah. It's not going to get rid of the penalty, not going to get rid of the taxes, but it will make it a little bit less of a kick in the butt.

39:36There's also the possibility on the topic of changing the beneficiary, dedicating a portion of it to nieces, nephews, other family members along the horizontal branches of the family tree. I don't know about that. Everybody's values are different. But if it's my nephew, my nephew's college fund versus paying off my mortgage, Paula. I'm sorry, nephew. Well, you have eight nieces and nephews, Joe. I do. That's a lot of college funds. Nine. Nine. You have nine. No, wait a minute. That's only on one side of the family. I have. Oh, that's right. 14. Wow. 14. Wow. You have a big horizontal family. Why, thank you.

40:21Both of my parents were one of six children. So I have a lot of cousins. So you've got a bunch of cousins. Yeah. Well, mine too. I mean, we talk nieces and nephews, but my dad had 16 brothers and sisters. Wow. Yeah. So there you go. I've got tons of cousins. There are sea highs all over the place. We'll take it over. In any event, that's also a possibility. The other thing to consider, and Joe, this goes back to what you were saying when you discussed pilot school or culinary school. In your retirement, would you have any interest in pursuing some qualified educational program just for fun, just as a retirement thing, not as part of your career, but just because retirement is that part of your life where you have the time and the freedom and the flexibility to be able to study something just because?

41:17I don't know. I don't even know about waiting for retirement for that. I like doing it now. It's always fun to learn a new skill or to have a new hobby. I love to cook and there's nothing that takes your mind off of the day than a sharp knife. I'm going to play that snippet at your trial, Joe. Well, with a vegetable. That's going to be, I believe that's admissible evidence. I'm talking about with a vegetable. If I've got to cut vegetables for my salad, then I'm not thinking about what happened during my day. It's a nice way to take the focus off whatever was driving my day. But on the whole, I think the number one thing, if your parents would agree to taking the same amount of money that they were planning on putting into a 529, and if they would agree to put it in some other type of account, that would be the best approach.

42:16That would certainly be the simplest of all of the things that we've discussed. So thank you for the question, Lee. Best of luck with both of the goals that you've outlined, paying off the mortgage and structuring your budget such that one parent can stay at home. And remember, one doesn't have to necessarily precede the other. They can both be pursued independently of each other. Before we move to the next question, let's hear from a previous caller who took our advice on how to find remote work. And that advice paid off. Hi, Paula and Joe. This is Pedro calling again. I was featured on episode 605 and I wanted to give you guys an update.

43:05If you remember my situation, I was called back into the office as a Fed and I was looking for a way out. Both of you gave me very sound advice on looking for a job that was at the intersection of tech and government. You know, instead of dropping resumes, just trying to find connections and people who could refer me to these new jobs, right? That's exactly what I did. And I'm happy to say it worked pretty well. I landed a job that does government contracts, both at the federal and state level. I am loving it so far. I'm one month in. Their culture is 100 % in line with my values. They're 100 % remote, for starters.

43:52A lot of the employees, including my immediate supervisor, actually are digital nomads. I found more than a job. I found a community and I'm really appreciating the work that I'm doing there. On top of that, I got a match on all the benefits I had at the government, plus a 30 % pay increase. And as I said, the job is 100 % remote. So it's exactly what I was looking for. And I'm already planning my next RV trip to Alaska. So I have to thank both of you for giving me such sound advice. It's really a privilege to be part of this community. Thank you, Paul and Joe. I hope Danielle has stayed around to hear that call.

44:42Wow. Because Pedro went searching for it, Paula, and look at what happened. Right. When Pedro called episode 605, we'll link to it in the show notes, he really wanted to find fulfilling work that was fully remote, that paid well, but that also allowed him to take these adventures with his family. And now here we are. So congratulations to you, Pedro. You built this. You did this. You put in the effort. You made the connections. You reached out to people. You forged those relationships. You did the hard work that got you to the position that you're in right now. So big congratulations to you. This is for me, the power of going out and looking at life as a science experiment.

45:31I mean, when Pedro first took that new job, he didn't know it was going to be a perfect fit. He didn't know that the community was going to be there with a bunch of like-minded people. He just knew it sounded good. So chasing that opportunity, that is just fantastic how well it fit. That warms my heart. That's super cool. Yeah. Yeah. Thank you so much, Pedro, for calling back with an update. I love it when people do that. If you're someone who's listening and you've previously called in with a question, I would love it if you could call back with an update. These are some of our favorite moments, hearing how it all turned out.

46:08And just to be clear, when we give this advice, the advice truly is to just try. I love hearing that it worked out really, really well. But Paula, I have to say in your wildest dream and in my wildest dream, we would, Pedro, go try it. It's going to be perfect. Like we would never, you're going to get a big raise. It's going to be a bunch of like-minded people. It's all going to be perfect. No. I always think in probabilities, right? There's a distribution of possible outcomes and your outcome could fall anywhere along that, that probabilistic distribution. Sure. But you give yourself a better shot, a better likelihood of a positive outcome if you take a couple of key steps.

46:56Yes. And for that reason, our advice focused on the input of what to do, not on the outcome. The inputs are better. The chance of the outcome being better increases substantially. And I think we're seeing that today, you know, with more and more of our audience uses AI. We're learning that using AI to do your homework for you is a waste of time. It's horrible. But if you have great inputs, which takes an education to get great inputs, and it takes direction and a sense of purpose and knowing exactly what you want, as you focus on better inputs, guess what happens with ChatGPT? It becomes better and better and better.

47:40Right. But Pedro, that's great news. We're going to take one final break to hear from the sponsors who make the show possible. And when we return, we're going to hear from someone who spent around$45 ,000 in order to pick up the pieces after a FEMA designated disaster. That's coming up right after this. This Friday, the NBA on Prime tips off with their debut doubleheader. First up, Boston brings the action to the garden as the Celtics face the New York Knicks. Then out west, it's a battle of the superpowers as the Lakers try to poster the relentless pace of the Minnesota Timberwolves. The Celtics and Knicks, who has the most hustle in defense?

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50:44Welcome back. Our final question today comes from Melanie. Hi, Paula and Joe. This is Melanie. I've called in before and I love both your shows. This time, I have a natural disaster and tax question for you. I was looking into the one big beautiful bill act, and I saw that there is tax relief for disaster victims included in the bill. I then found the Federal Disaster Tax Relief Act of 2023, which was not passed until December of 2024, long after I submitted my 2023 tax return. However, it provided tax relief retroactive for tax year 2023. In 2023, I experienced a FEMA-declared natural disaster where I spent around$22 ,000 on demo, a new furnace, furniture, and other repairs.

51:33I spent another$23 ,000 on related costs such as a flood control system, a drain tile system, and sewer pipe repair. I was able to get some financial relief from FEMA and$5 ,000 from my homeowner's insurance. Is there any way for me to benefit from these tax relief bills? Can I amend my 2023 tax return? What information and documentation do I need to ensure everything is done properly? And further, as a more global question, how was I supposed to know about the retroactive bill if I can benefit from it? Should I have received something from FEMA to notify me of the possible relief? I want to make sure that I can benefit from future legislative changes and how a regular person should be keeping up with everything.

52:20Thanks so much for your time, and your expertise. Melanie, thank you so much for the call. And I am so sorry to hear about the, uh, whatever, whenever the word FEMA is part of your call, Paula, that's not good. I want to broaden this out just for a moment for the entire audience, Melanie, just because whenever you either find out there was some relief available, whether in your case, it wasn't available and then it was available or they restated that it's available. Sometimes it's retroactive, like you mentioned, or if you just made a mistake or you figure out that there's some opportunity to take advantage of, you generally, 99.9 % of the cases, you've three years from the date that you filed your original tax return or two years from the day you paid the tax to amend your return to include the new information.

53:18If you filed early, by the way, that three years doesn't start on the day that you filed to say you filed in January or February. It actually starts on the April tax deadline, often the 15th or the 17th of April. So three years from that date. So you're clearly within the timeframe to do that. And everybody listening, If you go back and you find something like Melanie did, you can look three years out. The rest of this question, Paula, is frustrating because when the government announces stuff like that, I mean, they're not going to send Melanie a quick text saying, hey, Melanie, this applies to you.

53:58And if you do get a text like that, it's probably a scammer. Beware. Yeah, because they don't send text messages. They do not. And they don't know your personal situation. It came through on Telegram. Do you think it's legit? I was part of a group chat with people from the IRS. Not at all. So the rest of this then is frustrating. You have to stay a little bit up on what's going on in the world tax-wise. I also think that if you have a complication that you think might have some relief attached to it, But that's a good reason to go reach out to a tax professional, professional tax preparer, who is on top of it and ask the very specific question.

54:46Here is my situation. Do you know, has there been any tax relief about that situation or related situations? Yeah, the primary way that I keep up with changes to tax policy is by asking a CPA or an EA or some other type of tax professional. Their job is to stay on top of the stuff. And unfortunately, the tax code is so complicated and changes so often that you do need somebody whose job is literally to stay on top of the stuff in order to really be on top of it. And the hard part that we can't answer is how do you find out about what you don't know? The answer is if you don't know the right question to ask, it's almost impossible.

55:37It's so frustrating. I think maybe if you think there might be a distinct possibility that your taxes are not complete, well, then I think it might be worth the time to even sit down with a tax professional and have them look through last year's return. I had this happen, by the way, Paula, when I switched tax people maybe four, five, five years ago. My new tax people looked through my last three years returns and said, we found a fairly significant mistake. And I ended up with a nice additional refund with a comma in it. Ooh. With a comma in it. I know. A comma in it. Yeah. Which was very surprising.

56:28So even just getting that second opinion can be a good idea. I also think one of the benefits, if you've been working with the same tax professional for a number of years, one of the benefits of doing that is that they know you and they know your situation and they know the changes that happen in your life, ones that slowly tend to happen over the span of years. If you take on a new rental property or if you start a new business or if just all of those things that happen in the span of a person's life, by virtue of working with the same tax pro year after year after year, they get to track that.

57:07And oftentimes when something happens, you know, they're thinking about you. If there's a particular tax pro that you've been working with for a while and you get married, you get divorced, you have a baby, you, in this case, experience a natural disaster. They know your life. Your tax pro really has a relatively intimate knowledge of your life, of all the details of your life. The issue is with the standard deduction a few years ago going up by a lot, the need for a tax pro for 95 % of the afford anything audience is very, very small. So I will say this, when I first hired Catherine, the woman whose team currently handles my taxes, I did tell Catherine, she made me though, Paula, tell her my story.

58:01And she called me the next day and said, wait a minute, I was looking through your stuff, which looked fine before I thought about your story. Didn't you tell me XYZ? And I said, yeah. And she said, that's not in here. And I can see how somebody would have missed it, that that wasn't in here. So even if you don't have that long-term relationship, which I did not with Catherine, just telling the tax person who knows how to convert the story into the language of taxation can be a big win. Wow. That's a good catch. That is good stuff. I will mention this also, and Melanie did not ask, but I have created a tax guide that we update every single year.

58:48We update actually every single month based on what's going on with tax law. You get an email from me that says, hey, Melanie, here's our changes with the one big, beautiful bill, Paula. Oh my goodness. the updates that we made on that tax guide were monster, monster, monster updates. You're still going to need to open the emails from me and you're going to need to see what the changes were to the tax guide. But that is something that I'm very proud of. It's stackybenjamins.com slash guides. We'll link to that in the show notes. And that's the frustration still that I have, even with our guide, is if you don't know what question to ask, even with a guide, how do you come across this applies to me?

59:37And that's when the pro beats everything. And Joe, going back to what you said about how for a lot of people, because the standard deduction is so high, a lot of people don't find it financially worthwhile to work with a tax pro. One thing that I will say to that topic is that working with an EA can be less expensive than working with a CPA. So if you're in a situation where you feel like you can't justify the cost of working with a CPA, an EA is also a great option. And an EA for a lot of people, Paula, I think maybe even closer than to what you want. There are certainly CPAs who do tax returns all day, but there's many CPA friends that I have that don't do many tax returns.

1:00:22And it's a great question to ask, but an EA is, EA means enrolled agent, and that means they are pros at filling out tax returns. And they know the tax code that goes into filling out tax returns the right way. I think that for many of us, an EA might be specifically who you want. And there are a lot of CPAs who will hire EAs to work at the CPA firm. I know my CPA, I work with a CPA because my situation is a little complicated. I wanted a CPA who he also has a master's in tax planning. So I wanted to go with the best of the best. But in his firm, he has a bunch of EAs who work there. Which makes sense.

1:01:05If he's focused on the tax planning portion and the EA is focused on the line by line stuff, that's a marriage made heaven. Exactly. So that's an option as well. But yes, Melanie, you hit on an important topic, which is that the tax code is tremendously complicated and it changes all of the time. And it is not reasonable to expect your average person who has a job in an unrelated field to be able to keep up with all of this. So thank you for the question. Best of luck with picking up the pieces after this disaster and moving ahead. Yeah. Well, Joe, we've done it again. Wow. Some fantastic questions again.

1:01:51Incredible. Joe, where can people find you if they'd like to hear more of you? Oh, we had a fantastic discussion with Shemin Nurmohamed recently. She has a fantastic TED Talk. She is a woman who has worked with IBM and Pitney Bowes and senior leadership. But Paula, she spent a significant amount of her career in France. And what she noticed as a productivity expert is the huge culture clash. When we work 24-7 often to get ahead in the United States, the French take 90-minute lunches. They have this paradox of, I'm going to take the entire month of August off. So in the same vein we were talking about today of mini-retirements and the fact that we need to be rested, She has a new project out that she calls the French paradox, and it's about how embracing leisure the French way can help us transform our work-life balance.

1:02:54And it's a really interesting, granular discussion. Whether you're somebody who has to convince your boss to give you more time off, or you need to realize that, you know what, those days that we don't take, those paid time off days that we leave every year because we think we have to stay at the desk, I think she's going to be really good at changing your mind. Excellent. And that's on the Stacking Benjamins podcast? Wherever finer podcasts are found. Amazing. Well, thank you, Joe, and thanks to all of you for being part of the Afforder community. If you enjoyed today's episode, please do three things.

1:03:31First, share this with the people in your life. Share it with your EA and your CPA. And your French travel agent. Ooh. Share it with all of those people and more because that is the single most important way that you can spread the message of FIIRE. Second, open up your favorite podcast playing app, leave us up to a five-star review, and hit the follow button so that you don't miss any of our amazing upcoming episodes. Third, subscribe to our newsletter, affordanything.com slash newsletter. Let me add a fourth as well. Join our community, affordanything.com slash community, so you can have discussions, lively, vibrant discussions with like-minded people about all of these topics that we discussed today and more.

1:04:14Thank you again for tuning in. I'm Paula Pant. I'm Joe Salcihai. And we'll meet you in the next episode.

1:04:24Thank you.