496 | Mailbag: Roth vs. Trad, $35k Roth to 529, Combining Finances | Rachael Camp

25:28And the other one people don't think a lot about, but it's state income tax. So if you're going from a state that charges 10 plus percent and all of a sudden moving to a 0 % state income tax, that's a 10 % swing or vice versa. Anytime you see that big swing, that might be an opportunity to jump on that. Yeah, that is fascinating. And I assume, and there's no way, just like we can't give personal advice to the 100 ,000 plus people listening to this podcast, there's no way that we can talk to the rules of all 50 states. So we'll leave that to you to do your own research. But conceptually, it's important to think about.

26:09So I imagine, Rachel, and I'm taking my CPAs hat off because I'm not in practice at all, but I imagine there are different rules depending on the state and how they tax certain things. So again, we'll leave that up to the listeners to look into, but very, very important. So, okay, this is wonderful. I'm following along. So where are we going from here? Yeah. So that's what I would say is the biggest thing is you first have to understand where's your tax bracket normally, where's the big swing in the tax bracket, what am I spending, what percentage of my income, and then jumping on those big changes and going all Roth or all traditional in those years.

26:45Now, I think it's fair to say 10 % to 12 % Roth, 22 % to 24 % when there's no clear direction and you don't have a big swing, then you can actually split the contributions. I don't think that's a bad idea. And then 32 % plus, I think it's fair to say traditional most of the time, unless you're one of those people who is 37 % anticipates always being in a really high tax bracket, and you actually see 32 % tax as an opportunity to go Roth. That's the way that I think about it. But I also want to make sure that just because I say Roth and traditional is not diversification, it doesn't mean that I don't advocate for contributing to both accounts.

27:27Because the end result here is that when we do fully retire or move to part-time to take a step back. We want full control over that marginal tax rate in retirement. And if we're 100 % traditional, we have no control. If we're 100 % Roth, we might be missing out on opportunities to fill up that lower tax bracket. So it still comes back to this mix of traditional and Roth and taxable. It's just a matter of when do we jump on that opportunity. And the big one I haven't mentioned yet is that when you retire and your income drops, that's a great time for Roth conversions and to get money over in a low tax bracket.

28:07Yeah. And that is huge. And for anybody interested in more info on that, you can just Google Roth IRA conversion ladder, choose FI. And we have a couple of case studies from a handful of years ago, but they're very, very relevant. The conceptual framework is the same. So that'll be outside the scope of us going into the precise mechanisms of the conversion ladder. But yeah, I mean, Rachel, that's what I talked about before, which is, oh, wow, there is, especially if your income is zero and you have then this standard deduction, let's say you're married, filing, join, and who knows what the standard deduction will be then, it'll probably$40 ,000 or something.

28:43Assuming you had$0 of income, and again, assuming it's a$40 ,000 standard, you could pull$40 ,000 out of, convert $40 ,000 from a traditional IRA to a Roth IRA and basically say, okay, government, please tax me. But then you get this standard deduction and it wipes it down to zero. So it is a$0 taxable event, which is, I mean, that's again, the holy grail of five basically. Yeah. I'm really curious, Brad, your approach to this. So that's kind of the framework and it's designed for you to sit down and customize it to yourself. And I hope that's enough clear direction to do so. But I think really the overwhelming point is, is outside of these extremes, you know, 10 to 12 % raw, 30 plus percent traditional, it's such a close toss up that the more impactful thing that you can do is to jump on the years where there's a big change in income.

29:36Yep. I think that is wonderful, wonderful analysis. And I will answer your question and give you a little, little sense of, of where I'm thinking, but for people out there who asking the question, okay, is this, this is generally Roth versus traditional. So this counts for both 401k and IRAs, right? Yeah. So we didn't clarify that in the beginning, but we have Roth and traditional 401ks, Roth and traditional IRAs. And actually this is a good point where most of us are forced into some combination anyway. So even if you decide I want to do traditional 401k and you do that up to the maximum, the limit, then we have our IRAs available to us, but most of us cannot make a deductible traditional IRA contribution anyway.

30:18There's income limits for a deductible IRA contribution, and most of us are above that. So as a result, then we have the Roth IRA. And again, that has income limits, but we can do the backdoor Roth. So a strategy I really like is a traditional 401k, combine it with the backdoor Roth. Or if you like the Roth 401k, again, this is another forced split scenario here. A lot of the times they just changed this, but it's still the case for most people. Your employer match is going to be traditional. So you're already having that combination there as well. So even when we look at maxing out retirement savings and optimizing everything, we're usually forced into some type of traditional and Roth combination anyway.

31:04That is really cool. And yeah, I think both of us would very obviously say, please get your employer match, right? Like in this case, I don't think the people who are looking at this question and answering, okay, is it Roth versus traditional are curious. Oh, I might not contribute. So obviously they're contributing, please get your match. That's so important. So yeah, I mean, I guess for me, the way that I've always looked at this is, you know, some of these phrases that we use at Choose a By, which there is control what you can control. And I think that suggests, okay, I can control my tax deduction today, which has always led me to say, all right, traditional IRAs and 401ks make more sense.

31:46I'm absolutely controlling. Something you said before is, and this is not you saying this about yourself, but what people think is, I believe tax rates will increase. And I wrote this down in capital letters believe because it really becomes like this, you know, people start getting into politics and like, oh, this and that with the debt and there's no way taxed the public, you know, you can imagine all these conversations, but at the heart of it, it's belief. Nobody can prognosticate the future. And you can look and say, all right, we have historically low marginal tax rates, yada, yada, yada.

32:21That makes sense. But like you so wonderfully went into like, But okay, there's usually, there's some give and take here in terms of, all right, when the marginal rates are much higher, well, then maybe there are larger deductions and things like that. So it's not like a fait accompli that it's like a guaranteed tax rates are going to go up. It is belief. And they may go up, they may go down, they may stay the same. I have no idea. So that's why I've always leaned towards control what you can control. But, you know, Rachel, you have, it's a very compelling case to say, all right, look, that's all well and good.

32:54but if you can lock in 10 or 12%, go for the Roth. I mean, that's pretty hard to argue against. And so, yeah, I mean, if I were in a situation like that, it would be pretty hard not to do the Roth. I still, I still am holding onto that, that Holy grail of like, man, if I put everything in traditional and I could do Roth IRA conversion and pay zero, like I would just feel like the coolest person alive, you know, like the coolest five person alive. And I think that is very plausible for a lot of people. So I don't want to make it sound like this is some like ridiculous, like it's like an inside straight in poker or something.

33:28No, this is very plausible and people are doing this. So, you know, as you can tell, Rachel, I'm going back and forth because there's no right answer. And I think that is ultimately what your analysis here for the last 35 minutes went into is like, look, there's a lot of things to consider. You're ultimately guessing it's tax rate arbitrage. It's a guess that said, can you do things that make a higher likelihood of success? And I think that's where your analysis of, all right, look, 10 to 12%. Yeah, most likely Roth. 22 to 24. Yeah, you can kind of pick either. And then 32 and up. All right, look, you should do traditional in all likelihood.

34:02So I think those are really good rules of thumb. I think that's just a great analysis. And again, we're not giving financial advice to anybody. But hey, look, you can run with what Rachel just spent the last 30 plus minutes talking about. I think that is really, really going to be effective for you. Yeah, it's a bet. and some people are comfortable betting big. Some people want to hedge their bet. So I don't fault anybody for being careful and using a mix and maybe giving up some optimization just so they feel more comfortable. And for some people, honestly, that's locking in a Roth. Now, I would be very careful if you're locking in a Roth at a 32 to 37 % bracket and just make sure that that makes sense for you.

34:45I've seen scenarios where for some people that did make sense. actually. So I can't say there's any scenario that I haven't seen because it really is just so customized for the person. I actually have a client, really high tax bracket, but he wants to pass the assets on. He was never going to spend them. He wants to pass them on in a tax efficient manner. That's Roth. That's going to be traditional IRA. And we've considered the tax bracket of his children as well and brought that into the analysis. So it just goes to show that there are so many different scenarios and you have to run this for yourself with only the variables that you know.

35:20If you were to follow a rule of thumb, if that client was to follow a rule of thumb and put everything into traditional, he'd be passing on his children quite a big tax hit, which he was not the point of his money. So should be customized to you. And there's so many things this impacts again, like health insurance premiums. If you're going to retire early, you have a higher taxable income. That means you no longer get subsidies for health insurance. That could be a$10 ,000 annual expense, IRMA, Medicare surcharges, so many other things that this could impact your taxable income, which is why I advocate for having a mix because then we have some control over the marginal tax rate.

36:00Yeah. This is great. Jay, you're welcome. That's 35 plus minutes, but jokes aside, I think that is going to be really useful for the FI community. I think this is really, really important. And yeah, like you said, that last consideration is that silent partner, right? And like, can you lock in certainty? Like, all right, look, that gives a little more credibility to Roth then. So there's a lot of things to think about, but you have now been armed with a whole lot of details. Thanks for listening to Chooseify and for all your support of our mission here. The absolute best way to support Chooseify is when you sign up for your next rewards credit card to use our cards page at chooseify.com slash cards.

36:40I keep this page constantly updated, so it should always be the top resource for you. Thanks for being part of our community and for your support. All right, Rachel, let's move on. We got, I guess, two very, very similar questions about this new law that you told me went into effect January 1st of 2024, where basically 529s can be converted to Roth IRAs up to$35 ,000. Now, both Jacob and Chloe sent this almost identical questions in. So this is something that I don't know a ton about. So I don't know if the 35K is a lifetime thing. I can't imagine it's annual, but talk us through how somebody should think about this.

37:23What's even the high level? Let's just start there. What the heck happened? Yeah. So there's a very valid concern of overfunding a 529. So basically, this was Congress's solution to leftover 529 funds. So you built up a 529, your child did not use all of the money. Now we're stuck with, oh, no, are we going to be taxed and penalized on the gains coming out of this? So this is a solution. Now, there's a lot of rules and there's a lot of gray areas with this sale. So some people aren't acting on it yet, which I think makes sense because Congress has not clarified everything. So let's start there and just understand that while we have some guidelines, not every question has been answered.

38:08So there's, well, let's explain how it works. So essentially you get to transfer $35 ,000 over from a 529 to a Roth account. The beneficiary of the 529 has to be their Roth account. So if you're, let's just say your child's name is Sam, Sam is the beneficiary of a 529 that you set up. It has to be Sam's Roth IRA that the money goes over into. Now, the other thing is, and I'll bring this up to say, there's almost a way people wanted to see if they could get around this and make themselves the beneficiary and then convert it over into their own name. There is a 15-year requirement that the account has to be open for.

38:50So this isn't... They're not letting you do a hack on this. There's no shenanigans of last minute. Yes. They've made it really tight here. The account has to be open for 15 years and then you can start converting it over into the beneficiary's Roth IRA. Now there's a limit for how much you can convert every year. And that is the annual Roth contribution limit. So if you were to start this year for 2024, that's$7 ,000. So you could convert$7 ,000 over into your beneficiary's Roth IRA. The beneficiary does have to have earned income and it's not a double dip. You can't contribute$7 ,000 as a regular Roth contribution and do this conversion.

39:34It's, it's, they add up together to the$7 ,000. Oh, interesting. Okay. Now, do they have to be able to qualify for Roth IRA as it is, or like based on income and such, or is this outside the scope of that? No, this is the weird thing. They have to have earned income. So your child has to make at least 7 ,000 if you want to do the full conversion, but income limits don't apply. So, you know, normally there is a phase out for Roth IRA, where if you make a certain amount of money, you cannot contribute to the Roth. as it states today, those income limits do not apply to this conversion. Hypothetically, your child could make a million dollars and you could do this for them.

40:13Interesting. So, okay. That's good to know. That's really, really important. So I guess my first question is the 35K limit. So we're using this hypothetical of Sam, right? Is that 35 ,000 for Sam as a human being or is it 35 ,000 for, okay, let's say I'm Sam's dad, I can do$35 ,000 and then my wife could do$35 ,000. It's a great question. They haven't clarified. Really? That's the big, yes. Oh, goodness. That's the most important thing. Yes. We don't know if, say you do the full$35 ,000. So for the next five years, for simplicity, it takes you five years to roll over$7 ,000 a year. If there's another$35 ,000 in the account, can we add a different beneficiary and do it for them?

40:56We don't know yet. Okay. And the other question is, if you change the beneficiary, does that reset the 15-year clock? I'm just going to answer the same question. We don't know. We don't know yet. Okay. So the listeners who wrote this question, one of the reasons some people maybe aren't talking about it yet is because there are so many gray areas still. One of the most important gray areas there is how the states are going to treat this. So federal, we're saying from a federal tax perspective, there is no federal tax. That doesn't mean the states have to follow that. So actually my home state, Indiana has already come out and said, if this goes or when it did go through, but we will probably recapture some of those tax credits.

41:42Indiana has one of the best deals for a 529 contribution. They do a tax credit, 20 % tax credit, not tax deduction. Yes. So Indiana, they've given this big benefit. they're saying, we're not fully on board yet. We might recapture those tax credits if you do this. Yikes. Because right, in essence, they are incentivizing college savings, right? So that's why they set this up as a, ultimately states could do tax deduction or tax credit, but that's why Indiana is really saying like, oh man, we really care about this. We're going to give you a tax credit. So for the listeners, the difference here, tax deduction just kind of comes out of your income.

42:19So let's say like we were talking about before, let's say you're at a 10 % marginal bracket, a$5 ,000 tax deduction is only worth$500 to you if your marginal rate is 10%. Whereas a tax credit is a$1 for$1 reduction in your tax liability. So let's say you owe$2 ,000 of tax liability to the federal government and you got$1 ,000 tax credit, poof. In this case, half of your federal tax liability is gone. $1 ,000 is gone. There's$1 ,000 left. So you can see a tax credit is worth vastly more than a tax deduction. Yeah. And Indiana is essentially saying here, we gave you that tax credit in past years, but if you're going to do this, we might take it back.

43:03Now it hasn't gone through yet. So you have to look at how your state is going to treat this, but that's a big unknown is if the states will follow suit and consider this a tax-free conversion or rollover, or if they are going to enact some tax on this. Now, the other caveat here is another little rule for this is that you cannot convert over earnings from money put into the account in the last five years. So we have to separate out those gains on contributions from the last five years. Who's tracking that? I have no idea. I don't think anyone would come out with a good way to track it. So they're trying very careful and it makes sense for people not to try to use this as a way to get more money into Roth accounts when their intention was never to save for education.

43:54They're trying to make it because there is a risk of unused 529 funds. They're trying to give a solution to that, but they have to make it so airtight so nobody is using it for other scenarios. That's why we have all these little rules with it. And that certainly makes So, I mean, let's actually look at prior to this. So before this 35K thing came into existence, I guess let's clarify when someone pulls money out of a 529, what's the tax on that? So like for both federal and state, like what are the ramifications of, okay, look, I put in$5 ,000 a year for my child's first 10 years. So I made$50 ,000 of contributions.

44:34Let's say hypothetically it doubled. It's worth a hundred K now. and I have$100 ,000, 529, and I have to pay 25 grand for year one of freshman year of college. What happens in terms of mechanically from there? If you're taking money out for education expenses, tax-free, you're good to go. If you're taking money out for anything that is not an education expense, you are taxed and penalized. That's a 10 % penalty on the gain. So your contributions, you can always take back out. They're not going to be double taxed, but it's just the earnings of that money where there is that penalty and that tax that you will pay.

45:14Gotcha. Okay. And right. When the money went in each year, so that$5 ,000 in my hypothetical, you would have paid tax on that for federal, right? And then depending on the state and what the maximum state tax deduction is, you might have paid zero or minimal state income tax, right? Correct. So each state has their own rules. We already mentioned Indiana, which has a state tax credit. Most of them I see as a state tax deduction. And we're usually looking at limits at 10 to 15 ,000 for a married couple that you are allowed to deduct for state income tax. Some states don't have any deductions, don't have any benefits for using a 529.

45:53So you just have to look at it on a state by state basis. Okay. This all makes sense. And like you said, there's still a lot, a lot we're waiting on. So I think your analysis of that was right. That like a lot of content hasn't been created around this online because it's just tough. It's tough when we don't have the answer. So we're excited that this exists, but like you said, it's not some like hack. There's no, unless you're playing some crazy long-term game of like, okay, look, 15 years from now, I'm going to be able to do this at a fairly small amount at the end of the day,$35 ,000. If you're planning 15 years in advance for a kid who's maybe going to get scholarships and not need this, and so I can do this for$35 ,000, it's probably not worth the return on hustle there.

46:38But that said, I don't think most people are doing this. So for people who are concerned about oversaving, this can really make the difference, especially if it's going to be maybe$35 ,000 per account per beneficiary. I'm thinking about myself, right? We will say, yeah, nobody knows. But I have an account for each of my daughters. My wife has an account for each of our daughters. So are we going to get 135 ,000 per both of them, or they're going to be four 35 ,000s in essence? So we will see. Yeah. It's the first year that this went into effect. So they should be issuing guidance soon. We should be able to have a little bit more clarity, especially if they want people to use this.

47:18But we don't have those answers yet. I think if you're in a scenario where you've had an account funded for 15 years, it's been at the same custodian, you just want the same beneficiary and you want to transfer it over. And it seems like your state is okay with it. That might be the scenario where you can feel comfortable doing it now. Anything outside of that, where you have, you changed the beneficiary or you don't want to do it if you can only do it for one beneficiary that we have to wait for guidance on. Okay. That makes sense. And like you said a few minutes ago, this is subject to the annual Roth contribution limits per year.

47:54And the beneficiary has to have earned income over the amount that is converted, right? Yeah. Whatever you're converting. So if you want to convert four, they have to have 4 ,000. If you want to do the full seven, they have to have at least 7 ,000 earned income. Right. So this is not something, yeah, there's no gaming this. I like that, which is great, right? I mean, obviously there's some gray area here, but hopefully they'll figure it out and we will be back on a future mailbag to update it. So I think that was great. Let's move on to the next question. I guess while we're talking about 529s and I guess potentially college and children and such, Kelly wrote in, my wife and I have three girls, seven, four, and one, and I've got 529 set up already for all three.

48:38My grandparents are at the stage of their lives where they're trying to gift as much of their wealth to family as possible. So for the past few years, I've been depositing that money into each kid's 529 account. The oldest two girls have approximately$100 ,000 so far in their account, which I feel is plenty at their age. I'm wondering what to do with the money this year. Each kid has a check for$36 ,000. Would you keep pumping it into the 529? Should we set up their own bank account? Can we deposit into my wife and I's account and we can put it into a brokerage account, something better? So in essence, Rachel, question, question, question, question.

49:10What do we do? So this is clearly an enviable position, but Kelly is trying to figure out where do they go from here? And also there's that interesting thing of the 36 ,000, which maybe we can touch on that because there's gift tax rules, right? So I suspect that's why that arbitrarily seeming number of 36 ,000 is actually a very precise one. Yeah. So I guess we can address gift tax first. And this is where a lot of people get confused, but you can gift a certain amount every single year. And the limit is$18 ,000 for 2024 for single and then$36 ,000 for a married couple. Now, this is the confusion.

49:50That's not the limit. That's just the limit before you have to file a gift tax return. So a lot of people think, okay, that's what I can gift tax-free. That's actually not true. It just means that if you gift over that amount, you gift 40 ,000 to a grandchild, you now have to file a gift tax return because everybody has a lifetime gift tax limit. And so it's just going to subtract from that. So the 36 ,000 essentially is not subtracting from your lifetime gift tax limit, but anything above that would be subtracting. Yeah. And this is really, really important for people to understand. So there's the annual exclusion.

50:31And then there's the lifetime, basically gift and estate tax. It's the same pot basically for the gift and estate. So like Rachel just said, every year there's this gift tax exclusion, which currently for 2024, it's$18 ,000 basically per person, per human, and then per person you're gifting it to. So let's just say my, this is not the case, but let's say my mom and dad wanted to give myself and my wife, Laura, the maximum. So my mom could give$18 ,000 to me. My mom could give$18 ,000 to Laura. My dad could give$18 ,000 to me and$18 ,000 to Laura. So that's how it works. It's each individual can give to each individual basically.

51:16And like Rachel said, it's basically just like, I think people actually probably go too far in terms of trying desperately to stay under that number. Because realistically, then all that happens if you go over is it just kind of gets subtracted out of your lifetime estate tax exclusion, which currently it looks like just from a quick research in 2024 per individual is$13.61 million or for a married couple, it's 27.22 million. So unless you're worried about having more than$27 million to giveaway, the gift tax and estate tax that you'll ever pay is$0. So it's actually just a record keeping issue.

51:56So I mean, listen, if you have$100 ,000 to give away, and you feel like doing it, you're not nobody's paying any tax on this. At the end of the day, unless you have more than $27 million. Yeah, estate tax is definitely one of those things where there's some weird fear around it when it applies to such a small percentage of the population. Now granted, this is always on the chopping block. There's a lot of people who want to see that number brought down. There's always talks of it being halved. And then we'd be looking at 13 to 14 million. So really not a concern for most people. Now it's convenient.

52:32If you want to look at it from a convenience perspective, you don't have to file a gift tax return if you just stay under that limit. So you could certainly do that. But as far as just transferring wealth on, and again, I don't know them, so I don't know their total estate. If it was really high, if it was$30 ,000, $40 million, they might be trying to gift during this time to avoid that. Or they might just be gifting because they prefer to see this used by their children, their grandchildren now. So as far as where should this money go and how should we direct it, they mentioned the 529s and how they're really built up already.

53:07And this is a perfect segue from what we just talked about with the risk of overfunding of 529. So sounds like the listener might be concerned about overfunding the 529, which is a valid concern because if we blow up this 529 to a huge amount and we can't take everything out for education expenses, then again, those earnings, they get taxed and penalized. And we only have about 35 ,000 here to play with to transfer over to the Roth. And we don't know if that's per child yet. Right, right, right. But that's the concern. So then we start to think about, okay, what's the next step? So they bring up a brokerage account.

53:44I'm always a fan of a brokerage account for many reasons, just because of the flexibility. I don't know if this is important that the money stays in the children's name, but it sounds like they may have the option to put it in a brokerage account in the parent's name. The difference here that would be important is one, control over the account. So if you keep it in your name as the parents, you maintain control of it. So if you're concerned at all about your child turning age 18 or 21, depending on the state, and then having all of this money at once, that's a valid concern, then you could retain control and distribute it as you see fit.

54:21Okay. So I actually just want to jump in real quick, Rachel. So in this case, let's say the grandparents gave the money to the children, but then could the parents create a brokerage account in their name with that money? So this is where we have to classify as this a gift to the children or a gift to the parents. If it's intended to go to the children, then it should stay in the children's name. Again, when we're thinking about that gift tax exclusion, I don't know if they're gifting to the parents as well, but that would be a valid concern. Now, the APMA always gets brought up too. That's a custodian account that is owned by the child, but the custodian retains control of it until the age of majority.

55:02And that's again, 18 or 21, depending on the state. So a lot of people always wonder if they should fund an UTMA for their child. Again, we have that concern of, are you okay once your child reaches age of majority to have control over the account? Is there any way that you want to be careful when your child access the funds? The other consideration here that's really important is FAFSA and how this is calculated. So anything that is in the child's name, any assets are going to be given a heavier weight in the expected family contribution calculator. So this is probably common sense, but when they're looking at this calculation, if the child has assets, they expect that child to be using a larger percentage of those assets to fund their education.

55:50So assets in the child's name are given a heavier weight than assets in the parent's name. So that's where we have to be careful is what are the assets owned by the child? What are the assets owned by the parents? Now, a really popular solution that a lot of people do for children's education is have a 529 or an account owned by the grandparents, because that's not given any weight in the expected family contribution. So if they have that option, if you have that option where either you can be the custodian as the parent or the grandparent can be the custodian of a 529, and we believe we have a chance here with FAFSA and and giving aid to the child, then we would actually want to hold the assets in the name of the grandparents for the child as beneficiary.

56:34Okay. Yeah. That, that makes a ton of sense. So yeah, the, the FAFSA, this is something that's so important and yeah, it's a real bummer, but I think the last that I heard, and I believe this is accurate as of now that assets in the child's name, so not in 529s, but just assets in the child's name gets essentially taxed and it's not actual tax, but it's how I think about it. It's taxed at 50 % for that effective family contribution. So if they have$40 ,000 in a, like you said, a brokerage account, which might be that UTMA account, well, 20 ,000 of that is essentially the college is going to say, all right, you got to fork over 20 ,000.

57:16So I think of that as like a 50 % college tax, which is just really, really unpalatable. And it's funny, Rachel, because we have set up these UTMA accounts for my kids. And I'm like, over my dead body is 50 % of this getting taxed by a college that first year. My thought is, they don't have a ton of money in there, but that money can be used for anything since it's not a college account. So my older daughter is getting ready to drive and we're thinking about getting her car. Now, I guess theoretically we could just take the money out of there and have her purchase a car that way. And then 50 % of it doesn't get taxed by college in two years.

57:59That's a viable strategy, right? Yeah. When we put money in an Atma, it is an irrevocable gift to the child. So when we do that, if we take money back out, it has to be for the child. Okay. So an interesting, and we don't want to get into the legality of things, but my mind keeps spinning like, okay, well, does that mean that the car has to be titled in my daughter's name? Does she have to own it? I wonder. So we can't answer that on this, I assume. But needless to say, this is a brainstorm that I had about 45 seconds ago. And that's what's fun about this is like, okay, you can think about this kind of stuff.

58:34And I'll obviously have to look into that based on what Rachel just said. So I'm not like jumping into doing this, but right in that case, it would, you know, it very clearly would be her car and for her use. So, I mean, I think that passes the smell test, but I would need to look into that a little further. Yeah. You know, sometimes I bring up FAFSA with clients and they kind of wave it and they say, Hey, we're, we're way above it. It's not even going to be a consideration as far as aid. We are just assuming that we are completely going to have to, you know, take care of that. So it might be a consideration for you.

59:06If you're close there, it might not be. That would be something where you have to look at your income, your assets, and see what your expected family contribution is. It might just be an irrelevant point. But they also bring up a bank account. And so I think it's interesting to think about the points of the money and how it's going to be used. When we talk about 529s, we're obviously assuming it's going to be used for education. But they ask about parking it in a bank account. And if the point is to build wealth for the child, for them to start their wealth building journey, then of course, we'd want to look at investing the assets rather than having them sit in cash.

59:41There's that concern with a child who's very young and will have a very long time until they need the money that that money is going to lose to inflation. So unless that bank account was going to be used to spend the money immediately, I don't think it makes a lot of sense. But again, that's the question of what's the purpose of the money and how do we see our child using the money? Yeah. And in this case, Kelly's children are seven, four, and one. So like you said, I mean, if you were to start investing this and it compounds over the next nine decades or thereabouts, that's some real, real money.

1:00:14So another possibility is once they start having earned income, you can start putting money into Roth. So that can come, it doesn't have to be the literal dollar that you earned. It doesn't have to be that exact dollar bill. It can be any amount, but the limit is the amount that you have as earned income. So that's a possibility to do for this extra money. And yeah, I mean, I think just kind of going back to the general question is, yeah, I mean, look, you've got $100 ,000 in accounts for a seven-year-old and a four-year-old. And just with compounding, by the time that seven-year-old is 18, if that money hasn't doubled, right?

1:00:51If it's not 200 grand, something probably went terribly wrong with the investment strategy and similar or really more so for the four-year-old then. So, I mean, for me, and again, you can never give advice. We don't know the situation. The student might be going to a four-year college at$100 ,000 a year, and then maybe they are undersaved. But for me, having 100K in an account for a seven-year-old and a four-year-old for college, considering any uncertainty and are they going to get scholarships, yada, yada, yada. And I think there are some mitigating factors for that. So as I say it out loud.

1:01:25I think there's potential ways that if you do get scholarships, there are some ways to access the money. But nevertheless, is$100 ,000 enough for a seven-year-old and a four-year-old and a 529? I mean, for me, yes. I think hard stop, end of story. I would then start looking elsewhere. And like Rachel said, you can set up a brokerage account. I know we have UTMAs, I believe, through Vanguard for my girls and just start investing in VTI or something similar as what we did and just kind of let it ride. And that'll be their account. And it'll revert to them entirely when at that age of majority. And yeah, I mean, just think of it as what would you do for yourself?

1:02:03That's how I would approach that, Rachel. Yeah, I think that's a great idea. I mean, again, with the 529, it's like the Roth versus traditional where we're almost betting here. And if we want to make a huge bet and say, well, I think my seven-year-old is going to go to med school and going to spend several six figures in college and you bet big on the 529, they do that, you win because that's all tax-free money that's coming out. But the other scenario where that doesn't happen, where maybe they don't go to college at all, maybe they start a business, do something else, then we lose big. So I think for most people, we want to hedge our bets here.

1:02:41And most of us don't have that high of a risk tolerance where we're willing to bet that big. Totally agreed. And that's, yeah, that's basically how, how we did it for our own girls is at first we started saving a lot and then we're like, Oh, I don't really want to have all this money in the 529s. And we have obviously a significant net worth. So it's not like we went out and blew the money on, on, you know, dinners out or travel. Like we were saving the money. It was just in a different spot. So it was just more like, we didn't want to get locked into something. So lots of considerations, but I think we thoroughly answered Kelly's question there, which is great.

1:03:14So, all right, I think we have one more. So this last question came in from Gopal. And the question is, I just got married and we both have our separate nine to five jobs and our own individual bank accounts, checking and savings. Now that we are married, I want to know whether we need to create another bank account, like a joint checking or joint savings account. Should we get rid of some of our individual accounts? If we get a joint account for some of the common household expenses for which we can pull money in our salaries, then since it is only for the monthly household expenses, Should we simply opt for some brick and mortar like Bank of America or Wells Fargo or to make better sense to go with these online banks, which have a high interest rate?

1:03:51So there's a lot of questions here about like, all right, Rachel, they just got married, which is wonderful. Huge congrats. And it sounds like, you know, look, they had obviously separate financial lives and they're coming together. And I guess the key word and I focus on this, this was not capitalized, but I focus on the word need. Right. So do we need to do this? That to me is the word that jumps out out of a couple hundred there, right? So how do you think about this? How do you advise people? I know this is kind of like the third rail of personal finance. Like some people retreat into their ideological corners of you should never combine.

1:04:25You should always combine. Like we don't play that game here at Choose a Vive. We play they. All right, look, we're going to try to educate and you make the decision. But Rachel, how do you think about need to combine, want to combine? Is it good to combine? I think the strong opinions on this are always so interesting. because to me, it's such a personal and a matter of convenience, really. What is most convenient for you and your lifestyle? If you decide that you like to have some separation where you like your own spending account, that doesn't mean you're not taking a stance in any way. Now, if you have a spouse where one of you is working and one of you is maybe a homemaker, we're taking care of your children, then I think that's a scenario where combining finances is often a good solution.

1:05:12But again, for me, it comes back over and over again to just what is convenient. And having these jointly owned accounts is very convenient because either of you can go to the bank or call the bank or take money out. It's just a matter of can you set up your financial lives in a way where it is convenient and organized for you. So a common solution, a thing a lot of people do is just to combine everything. Let's throw everything in a joint account. All the bills will come out of there. We'll spend from there, put everything into a joint savings account, and then have credit cards attached to these banks too, and just have everything pushed together.

1:05:52Because to be honest, this is how the IRS is looking at you. They look at a married couple as basically one person when it comes to taxes. And then from an estate planning perspective, I always like to bring this up with my clients, but it is really convenient to have a jointly titled asset. And again, these are scenarios nobody wants to think through. But if something were to happen to a spouse and the other spouse needed access to the funds, if it's jointly titled, they'd have access that day. So you do want to think about that as far as if something were to happen to me or something were to happen to my spouse, how difficult would it be to get this money?

1:06:30because if things don't have a beneficiary on it or if it's not jointly owned, we have to go through probate, it's expensive, it's inconvenient. And that's a really hard thing to go through when you're already going through a difficult thing. Now, a solution might be a jointly titled account and then individual accounts. Say you like to have some money just deposited into your individual account for spending on hobbies you have and you just like it to be separate. That's fine. That's a way that you can organize it. Just again, make sure your beneficiary is your spouse for convenience. Yeah, that is so important.

1:07:04And we had an episode, maybe one of the absolute best and most important episodes of the entire 650 plus episode run here of Choose a Fi. It was episode 476 and it was entitled Love, Loss and Money, the Shocking Financial Aftermath of a Fi Spouse's Death. And Amy came on and told her story and it was it was really, really just so sad and poignant and really speaks to what you said, Rachel, about like, look, even if you're married and you think everything's just going to go to the other spouse, just simple as can be like, man, these States in the United States have some wacky rules depending on where you live.

1:07:43And just make sure you dot I's and cross T's, like make sure your beneficiaries are named explicitly and don't just assume, just make sure you do that. It's really, really important. And something you said in there was absolutely critical of like, look, if these are your everyday accounts that you're using, don't just take the path of least resistance and say like, oh, look, our rent or our mortgage, it's always come out of this account. That's your house. We moved into it together. Oh, let's just leave it. It's easier that way. No, no, no. As sad as this is and as morbid as it can be, you have to think about what happens in the worst case scenario, right?

1:08:20So like if that one person passes away, their stuff is frozen. You don't have access to this like at a moment's notice. And then what happens? Like, could you imagine the stress upon like a shock death? And then you're worried about like, is the mortgage getting paid? Is there money in there? Can I transfer money? And like, I can't do anything with this thing. Like, and the clock is ticking on this mortgage needing to be paid. Like, I mean, goodness, like I would say, and this is not, again, it's not like an ideological thing. It's just common sense. Let's just be smart about this. I wholeheartedly understand and agree with people having their own finances to some level.

1:08:55Do your thing. Have your separate accounts funded with $50 ,000. I don't care. Do your thing. But I mean, you're married. There are some practical ramifications of like, look, if things go south here in terms of someone getting severely injured or passing, you don't want to add financial stress to something just because you took the path of least resistance. So yeah, I mean, Rachel, that's how I think about it. Yeah. I mean, I think marriage is a much bigger commitment than adding somebody to your bank account. So if that's the concern, we might want to rethink the whole marriage thing. But honestly, I just always fall back to convenience and simplicity.

1:09:34I think that's the best financial plan. And when it comes to a married couple, time and time again, I see the most convenient and simple solution to be joining accounts. And again, to solve for that worst case scenario, I've seen it before where a spouse has died and the other spouse has had difficulty getting access to the funds. And the spouse who passed away doesn't want that. And most of us, I think, would never want to put our spouse in that situation. So we do have to run through these really sad scenarios, but just to make sure that our spouse is covered. And remember, And even without that scenario, it is just so much more convenient to jointly own this asset and both have access and control over it.

1:10:15Yeah, wholeheartedly agreed. And yeah, some of the more detailed questions here were like, do we need a brick and mortar? Do we need a large bank? I mean, I got to be honest, I don't know that it really matters. I mean, if we're talking to pay bills, I mean, yeah, you're in all likelihood not going to be able to do that out of a high yield savings account that's online. so you're probably going to want a regular checking account. I'm agnostic to whether it's Wells Fargo, Bank of America, or your local credit union or a local bank. You do you. Figure that out. I don't think there's any specified, it has to be X, Y, and Z.

1:10:50No. I think this person will understand that checking, you don't really earn much money on savings you do. So put the amount of checking that you need to cover your expenses and not much more than that, and then put the extra cash into savings in a high-yield savings account. where it can earn the interest, and then you're good. There's really not much to think about it beyond that other than FDIC insurance and make sure that your cash is insured too. Yes. Very, very important. So, all right. We just went through a whole assortment of interesting questions. I think that was a very thorough look through.

1:11:22So Rachel, as always, I really appreciate you being here. And I know you have a lot of irons in the fire. So So where among the many, many places, where can people find you? Yeah. So my business is Camp Wealth. So I'm Camp Wealth. And most places just started a YouTube channel, Camp Wealth, if you want to check that out. And then I have a podcast too with my co-host, Matt Garasik. That is called Becoming Work Optional. You can find it anywhere where you listen to podcasts. Very nice. And thank you for having me, Brad. It was such a great time. Yeah, of course. I love having you on. And yeah, we're going to try to do these mailbags much more frequently.

1:11:56So no promises, obviously, to the audience. if it's going to be 12 a year or six a year or whatever. But as you can tell, I love having Rachel on. And yeah, we're going to just keep rocking and rolling with this. So until next time, thanks for listening to Chooseify. Thank you for listening to today's show and for being part of the Chooseify community. If you haven't already, the best ways to get involved are first, subscribe to the podcast. So you're listening to this on a podcast player, just hit subscribe. And then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand.

1:12:27and I send it out Tuesday morning. So just head over to choosefi.com slash subscribe. And it's really, really easy to get on the newsletter list right there. And I would greatly appreciate it. It's the best way to get in touch with me. You can actually just hit reply to any of those emails and it comes directly to my inbox. So that's the way that I keep a pulse of the community and how we keep this the ultimate crowdsourced personal finance show. And finally, if you're looking to join an in real life community, We have Chooseify local groups in 300 plus cities all around the world. So head to chooseify.com slash local, and you'll find a list of all of those cities in 20 plus countries all across the world.

1:13:08And if you're just getting started with FI, or you have a family member or a friend who you think would be interested, two easy ways. Chooseify episode 100 is kind of our welcome to the FI community. And even though it's a couple years old at this point, it still stands up. and it's a really great just starting point to get an understanding of what is financial independence? What are we doing here? Why are we looking to live a more intentional life where we save money and use it as a springboard to live a better life? And then Choose a Vi created a Financial Independence 101 course. That's entirely free.

1:13:42Just head to choosefi.com slash fi101. And again, thanks for listening.

1:13:53Thank you.