This Will Change How You See MONEY…

21:06Brian Preston:We hold the thing up again one more time. Max out retirement. Max out your employer sponsor retirement plan. This is the point where after you've done the HSA, after you've done the Roth, now you can go back to the 401k. And there are still, even without a match, 401ks can still be incredible benefits because you can get tax deferral on current income if that's what makes sense for you. You might be able to get Roth growth on that if that's what makes sense for you. So even without the employer match, employer sponsor retirement plans are a fantastic savings vehicle because there are still tax incentives, even if it's not like free money tax incentives.

21:41Brian Preston:So yes, VidX, I think that doing a Roth is a great idea so long as you're working through the financial order of operations in the right way. And congratulations to your wife for heading back into the workforce. That's exciting. VidX, thank you for the question. If you would like a MoneyGuy Tumblr, just email winner at moneyguy.com and we will send one out to you. All right. um abtahi r has a question for you what doesn't why doesn't buying term life insurance and umbrella insurance come after step four in the foo should we focus on building wealth with hsa and roth ira if we can't protect in case there's a big oopsie i think this is a misunderstanding can you clear it up it's it's for sure a misunderstanding um so we do some episodes oh my gosh what's the name of these episodes.

22:33Brian Preston:We're really going into the archives. It's like financial planning 101. We walk through the pyramid. Yeah, financial planning 101. Is that what it's called? Did I just nail that? Yeah. Awesome. That's in the title. So we walk through some content, Tahi, where we'll talk about when you're like designing a financial plan, you kind of work up this pyramid. You start with sort of the baseline, then you move to the next, and you move to the next. Well, the financial order of operations is specifically about like, where do I deploy my dollars when I'm ready to start building wealth for the future. I'm ready to start like building towards the future.

23:05Brian Preston:Before you even get to that step, before you even start doing that, one of the things you have to make sure that you have covered is risk management. Risk management is kind of like that very bottom of the pyramid, that very bottom of the pyramid, that baseline. So if you're someone who has people depending on you, maybe you have a spouse or maybe you have children or there are other people that depend on your ability to produce income for their livelihood and their well-being to an extent that if you were no longer here, they would be in a very difficult, tough spot. We would argue that you have an insurable need on your life.

23:44Brian Preston:And one of the best ways that you can solve that is by inserting insurance to be able to protect against that need. So life insurance, specifically term insurance, is a great way to do that. Oftentimes for a brand new family starting out and they're We're like, oh man, hey, I really, I'm so gung-ho. My wife and I, we just got married. We just had a brand new baby. We're ready to start saving. We've listened to the show. We want to open up that Roth IRA. Let's do it. The very first question we asked was, hey, that's awesome. Before we get there, let's talk about some of the risk management stuff.

24:16Brian Preston:Where are you in terms of your life insurance? Do you have a will in place that says, hey, if we get hit by a bus, here's the person that's going to take care of our kid. Because if you think that conversation is hard and it's a different, I mean, you've got young kids, it's a hard conversation to have. But it's worth having now because you, and it's true, you always say how much harder will it be if you're not here to even speak into it, right? That's exactly right. You would rather make that decision than have someone else try to guess what your decision would have been. So we tell people in that stage, hey, yeah, you got to make sure you have a will in place.

24:48Brian Preston:You got to make sure you're covering that. Well, part of that risk management is also, hey, make sure you have life insurance. If you're someone who has assets that are built up, you want to make sure you properly insure those assets through your auto coverage, through umbrella insurance. So those are not steps of the financial order of operations. Those are kind of riddled through. That's risk management. Now, you may be someone who is young and just starting out in your career, and you're not married, and you're early on, and you don't have any assets. You don't own anything yet. There's a good chance you don't need life insurance.

25:23Brian Preston:Yeah. Right. So like, no life. There's a good chance if you're early on in your career, you may not need umbrella insurance yet either. So it's one of those things that those things will be part of your financial life. But when they become part of your financial life, they have to become a top priority. So it's not like a step in the foo. It's a step in the life cycle that you're in. It's just yeah, it's it's depends on your situation, not what step you are in the foo. So that was a great explanation. And the nice thing is term life insurance. I mean, we can't speak totally blanket statement here, but it's not crazy expensive.

25:57No, it's super cheap. Especially for young families who really do need it. So it's totally reasonable to fit it into the FU wherever you are.

26:06Brian Preston:You know, term life insurance is one of these interesting ones. I've never had someone complain about paying for it who received a benefit. I've never heard someone say, oh, this is too much life insurance. That's not a thing that happens. And I've also never had someone complain about paying for it and never having to utilize it. Meaning, oh man, I bought a 20-year term and I'll live 21 years. No one's ever upset at that. That's like a wonderful thing. Life insurance, in our opinion, is a temporary solution to a temporary problem. them. If you're doing things the way that you're supposed to be doing and you're building wealth the way that you're supposed to be building and you're moving along in your financial journey, the way that you're supposed to be moving along, odds are at some point you're going to be self-insured.

26:53Brian Preston:Meaning you no longer, if you were to get hit by that bus tomorrow, you don't need the life insurance company to step in and take care of your loved ones. You have built an army of dollar bills large enough that it can do that for you. So life insurance, you want to get the most amount of coverage you can at the lowest cost possible. And you just want to race to get to the point where you actually don't need it anymore. And if you do it that way, you're doing life insurance the right way. That's good stuff. So, Abtahi, if you would like a MoneyGuy Tumblr, since it is a Tumblr day, we'd love to send you one.

27:25Just email winner at moneyguy.com. And apparently there was a poll about who should make the Transformer sound, because Brian's out.

27:34Brian Preston:Who won? Unfortunately, me. There we go. are you going to do that? It does make me, I'm going to borrow your Tumblr. Yeah, go ahead. This is a Money Guy Tumblr, but it's also a koozie for keeping your drinks cold. If you would rather use that, are you going to open your drink? I was going to wait to see if you're going to do the quack, quack, quack, quack. Oh, look at that. She did it. That's actually pretty good. It just sounds like a duck. I'd rather hear Brian. One of the answers was Brian on speakerphone and I wish I could have followed through on that, but we don't have that queued up. Our tech team would have been pretty upset if we would have tried to pull that one off.

28:08I just start calling Brian right here. But yes, Tumblr Day. We're excited to give those away. And Aptahi, make sure you email winner at moneyguy.com.

28:18Brian Preston:I'm curious. Have you guys checked out the Compound Interest Calculator yet? I mean, we've been talking for a little bit now. I'd be curious. Are people using it, guys? Are people checking it out? Oh, yeah. Awesome. We're getting odds. Cool, cool, cool. You know another great way to use it is if you have someone in your life, like, oh, man. Oh, my gosh. I forgot to say this. so my daughter uh she just turned 10 um and one of the things we did is uh me and mom did an overnight just just the three of us right special and it was awesome like we went and we like stayed downtown nashville and did all these like fun little activities well one of the things i thought hey baby you're now at this point hey you're you're like six years away from driving right like it's and one of our favorite things to do is like when i get home uh she'll be like hey dad can i help you drive and like i'll put her in my lap and we'll drive around the neighborhood because that's a cool thing to do.

29:06Brian Preston:Um, and she looks, I'm like, Hey baby, you realize like we're six years away from this. So I said, Hey, one of the things we need to do this summer before, like we start back up on school and stuff is we got to go to the bank and let's go like open, you know, open up your first bank account. And like, you got some money from your birthday. Let's take that and deposit that and start working through that. Well, one of the things I'm going to do is I'm going to sit her down with this compound. I'm going to, I'm going to show her the wealth multiplier. Cause that's a cool tool at moneyguide.com slash resources.

29:31Brian Preston:But then I'm also going to like walk her through this compound interest calculator. So that way she can see, Hey, okay. If I, if I help around the house and I put this money to work and I save this much and I just do that, she'll be able to see. And what's great about it. And we did this on purpose. A lot of the stuff we do like wealth multiplier, uh, is targeted for retirement. Like, Hey, okay. If I, at age 21,$1 turns into 88. One of the things I love about the compound interest calculator is you can do it over a more finite, shorter time period. So what I'm going to show her is, hey, baby, if you just invested until you're 20, so from 10 to 20, over the next 10 years, here's what that could turn into, or here's what that could turn into by the time you're 25.

30:15Brian Preston:And it's going to be super, super fun. So I would encourage you, if you have young people in your life or people that are just starting to figure out about money, use the compound interest calculator as a tool to show them how money can work for them. Yeah, no, that's really good. It definitely helps you kind of customize some of these money guy principles even more so moneyguy.com slash resources thanks for checking it out already to our live stream folks okay natalie k has a question all right it says we are at step five of the foo and are starting to save for our first home in two to five years how much should be set aside for after purchase costs on top of the emergency fund?

30:55Good question. Because you definitely want that emergency fund or at least very close to it to be left after you purchase the house. You never know what's going to happen, right? Especially with a new house.

31:04Brian Preston:Honestly, this is a pretty hard question to answer, Natalie, but it's the right question to be asking. I'm always amazed, specifically with young people, when they're like so excited to buy their first home and they're like, I'm going to save, save, save, save, save, save. And they're like, oh, I'm going to go, I'm going to go buy this house and I need a$20 ,000 down payment. And they, you know, in their savings account, they hit$19 ,995. And they put that last$5 and hit 20 ,000. They go buy the house. And I'm like, whoa, slow down, slow down. If you put all of your money in the house, what you don't recognize is that after you close, after they hand you the keys, the costs don't necessarily stop there.

31:46Brian Preston:I remember for me, I bought my very first house when I was 21 years old. It was not a wise decision. It was foolhardy of me. And I literally remember I got the keys. I went and I'm like, look at this mansion that I live in. And then I noticed every window I could see straight outside, right? And I noticed that if someone was standing outside, they could see straight inside. This is like bathroom windows, bedroom windows. I was like, oh my gosh, I got to have something for these windows. And I was like, oh, I'll just look up some blinds. and I looked up and I was like, oh my gosh. So I literally had to, I went to all your windows, right?

32:21Brian Preston:So I went to Home Depot and I bought a bunch of like$8 paper blinds. What doesn't, I know that sounds silly, but like it added up because there were a bunch of windows. You were young too. It's not like you were, you know. And so like, I didn't even think about that. And then I was in the house for like, gosh, I think maybe a week and a half, two weeks. I closed in summertime or like early spring and, and the grass started growing and I was like, oh my, I don't have a lawnmower. I gotta go, I gotta go buy a lawn. And like, you don't recognize that there's all these different costs. So Natalie, how much do you save up?

32:50Brian Preston:Well, it depends on a few factors. One of the factors is what kind of home are you buying? Are you buying a home that has been built for a while that someone else has lived in for a while? Are there things that might need to be coming? Like maybe it's going to coming up on the time to put a new roof on or maybe the HVAC system. You kind of know that. Like if it's an old HVAC system, you got to be ready for that. That's right. That's right. So one, how much should you have saved up? It depends on, and this is where you have to kind of put on your math brain, probabilistic outcomes. Like what's the probability that if I buy this house and it comes to utilities, I have to like replace the refrigerator, replace the washer and dryer.

33:31Brian Preston:I have to, you know, you fill in the blanks of the things that you think you might have to do and say, I'd say, okay, what do I think those things could be over the first year? Well, I'd like to have at least a big chunk of that covered. Now, the great thing is, is if those things don't happen, you're okay. You have that money sitting there and then you can kind of continue to build, but you don't want to take your emergency fund all the way down to zero. You don't want to be so lean that all of a sudden the HVAC goes out and you're like, oh my gosh, I can't, I can't fix this. I have no capital.

33:58Brian Preston:The only solution is to put it on the credit card and then you get yourself into a really bad spot. So I would look at the home that I'm buying. I have my emergency fund sitting there. I have my down payment that I'm going to use. And then I would figure out, okay, what are the likely and probable additional costs, whether that be window treatments or furniture or utility or not utilities, appliances or other things like that. And then what are the maintenance items I might have? And I'd come up with just a spreadsheet of the potential costs. And then I figured, okay, where is my comfort zone with all these likely expenses I could have?

34:34Brian Preston:And what's the probability that they'll happen? And I would shoot for that number. I wish that I could tell you it was, oh, well, you just need exactly. And there are some rules of thumb. You can go Google it. There might be like 1 % of the value of your home, but that stuff is total crap because the 1 % of a brand new home versus 1 % of a 35-year-old home is just different, right? So I would think about realistically, what expenses do I think I could incur? And I'd shoot for that number to have so I knew that I've got some liquidity post close. Yeah, that's a good answer because it certainly is one of those that depends, but you should think about these factors.

35:11And that was a great answer. So Natalie Kay, if you would like a MoneyGuy Tumblr, since we answered your question, we'd love to send you one. Just email winner at moneyguy.com. This episode is brought to you by Facebook. So you were scrolling on Marketplace and there it was, the bike you'd been searching for. You sent a message and it turned out the seller was super chatty, kind of funny, and an avid cyclist. The next thing you know, you're in a cycling crew. Well, a community cycling group. The thing about Facebook, you might find more than what you're looking for. From a browse to a bike ride, this summer, find more on Facebook.

35:51Brian Preston:Hey, Chicago. Class it up with Crocs. You know back to school is coming in fast. So why wait to find your new fave footwear. Step into a local croc store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up, it shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest croc store today. renata has a question for you how do raises factor into how much you should have saved by age i'm in a lower paying job hoping to switch to a better paying job in the industry soon i'm 25 and almost have one times my income invested but now it says am i behind right and i think this is a great question because we do a lot of kind of episodes about benchmarks milestones what you should have by age, which is super helpful.

36:51But some people have kind of varying incomes or big life changes, whether in the positive direction or the negative direction. So how do you factor that in to know if you're still on track?

37:01Brian Preston:So financial mutants, they have this problem all the time. We, and by the way, I'm saying we, because you're in good company. We just like a little, we're like, we're like a good pet. We just want like a little scratch behind the ear. We just want to like a little, just like, oh, good boy, good girl, right? Like that's what you want. and so that's a lot of these milestones that we talk about hey by the time you hit 30 you ought to have one time your annual salary saved up and or by the time you hit 40 you should have three times your annual salary saved up so on and so forth and we're like man i just want to check the box i want to be able to say that i did it but you know i'm 29 years old and i get this big pay raise and and i was going to have one time but now i got this pay raise or i changed jobs or I move vertically and now I'm not there.

37:45Brian Preston:Oh no. Am I behind? Well, are you behind? No. Has your lifestyle automatically adjusted to that new income? No. Are you probably right where you should be? Absolutely. Do now you have a great opportunity to be able to save more and build to try to get back to that metric? Absolutely. So what are some tools that you can do? And we tell this people all the time. There's a great formula you can use. Dr. Stanley wrote about at Millionaire Next Door. You take your age, multiply it times your income and divide by 10. That'll tell you where you should be if you want to be an average accumulator of wealth.

38:21Brian Preston:If you want to be a prodigious accumulator of wealth, you double that number. But what we found is for young people, that's a hard thing to do, right? That's a hard metric to hit. So we, you know, sprinkle a little money guy dust on it to change the formula touch. And we said, hey, why I want you to do this. Take your age, multiply it times your income, and then divide it by the number 10 plus how many years until you turn 40. So if you're 32 years old, it would be 10 plus eight. So your denominator would be 18. Well, that will tell you, okay, where you should be. Well, Renata, you're having the same question.

38:56Brian Preston:Well, my income just went out. If you're going to do any sort of these formulas or use any of these things, if you're someone who has variable income, there's nothing wrong with averaging your income over the past couple of years. Okay. I make this income now, but over the last three years, it averaged to this or over the last five years. That's totally an okay thing to do knowing that, hey, with this raise, I'm going to have a higher burden of responsibility saving because here's what I don't want you to do. Oh, okay. Well, Bo said I was good because I'm almost at one times now. Yeah. So I got this raise.

39:30Brian Preston:We're going to go live large. And don't, don't mishear me. I want you to increase lifestyle. I want you to enjoy the fruits of being able to make more money, but not all of it. So if you get a raise or you get a bonus, maybe go like the 60, 40, Hey, here's what I'm going to do. I'm going to let 60 % of this go to savings, or maybe if you're in a already a fantastic, 40 % of this go to savings. I'm gonna let the remainder of it go towards lifestyle. That's okay. So long that as your lifestyle creeps up, so too does your savings behavior. So that you don't find yourself in a spot when you are 35 or 45 saying, oh man, I'm behind.

40:09Brian Preston:My savings rate didn't keep up with my lifestyle. So long as you're protecting against that, you're okay. So don't be so hard on yourself. And a matter of fact, celebrate and congratulate yourself. Hey, I just got a raise. Hey, I just change jobs. I'm increasing my income. Those are all net positive, good things. Now turn that increased income, turn that shovel into real wealth. Yeah, that's really good. And we always break it down for you. So I love that we explain that millionaire next door formula and how we changed it. But remember, if you want to go just have that calculated for you, go to moneyguy.com slash resources because we actually have a prodigious accumulator of wealth calculator for you.

40:50Brian Preston:I shouldn't have given the formula. I just gave it away. I shouldn't tell. Forget everything I said about the formula. They can do the math, but this is easier. So now they understand it and they can do it the easy way. It's both. I forgot that was out there. I know. It's a good one. It's a really good one. So it'll kind of, you can use whether your income now or that average, like Bo said, and actually see kind of where you fall. And so, uh, you can use it today and then you can use it as a check-in point in the future too. Moneyguy.com slash resources. Can I, can I give one more shameless little plug here?

41:19Brian Preston:Absolutely. So I love calculating your MoneyGuy Wealth Score, right? That's what we call that, your MoneyGuy Wealth Score. We're doing that formula. One of the things that's awesome is if you're someone who uses our net worth tool, right? You can go to learn.moneyguy.com to check that out. One of the things we actually track on there is current year, your current MoneyGuy accumulator score. But in the bottom left, we actually have this tracker that tracks your journey to abundance. And what it's really tracking is where am I? So when I was 25, maybe I was an average accumulator, but now that I'm 30, okay, now I'm moving towards prodigious and it actually shows the path through time.

41:57Brian Preston:So it's really, really exciting if you are someone who's tracking your net worth every year, which you should be, you should be doing that every year. It gets exciting seeing how that changes through time, even with income increases, even with income bumps. Yeah, no, that's good stuff. so Renata great question be sure to go to moneyguy.com slash resources to use that calculator and also email winner at moneyguy.com because we would love to send you a tumblr as a thank you okay Isaac G says which is better you ready for this okay refinancing my house it's currently at a 7.625 fixed rate with 266 ,000 remaining and 29 years left on the loan so first choice refinance my house or max out my Roth IRA.

42:46My wife and I are 23 on step five and can't do both. What do you think? You just gave a very exasperated, like silent sigh or something.

43:05Brian Preston:here here's i'm gonna use my context clues here you owe 266 000 yes 29 years left on the loan do you know raby this is not a trick question you know the normal term for mortgage loans when you take out a mortgage loan you know how long they normally 30 years pretty common so i'm doing some math here, 30 year mortgage, we've got 29 years left. You just bought this. You just, you just went through all of the 7.6 interest rate. It's hurting him. Yeah, I get it. I understand. But you realize every time that you, you close a loan, that's the terminology used when you buy a house. And even when you find it, refinance, it's called closing a loan.

43:47Brian Preston:There are going to be costs associated with that. And the cost can vary from one to 2 % of the value of whatever the low on your work. So you, if you're only one year into this, haven't likely even recouped the costs of the initial, like, like the price appreciation of the home is likely not even recouped the cost that you had for closing on the home. So, okay, you, you could refi and you could use that money to pay for that. And there's some math you could do on that. But man, what I would really think through is one, where are rates currently? Money guy team GPT. What is rates are currently what?

44:26Brian Preston:Six and a half right around there prevailing. 6.5, 6.8 is what they're telling me. So yeah, you could save a little bit on this loan, but what if rates continue to fall? What if we see rates get closer to 6 % or maybe what if we just get crazy and we see rates in five? I'm not suggesting that could happen, but it's not like we're so far below 7.625 that I'm like, oh, you got to capitalize. You got to capitalize. So I would think, and because what you don't want to do is you don't want to get in this habit of every year, I'm just going to refine. I'm going to refine because you're going to spending a ton of money in closing costs.

44:58Brian Preston:So that's like one side of the equation. On the other side of the equation, you're 23 years old. I want you to go to moneyguide.com slash resources. And I want you to look at the wealth multiplier. I want you to look the wealth multiplier for a 23-year-old. Now, I don't have them memorized. I should. But I know the wealth multiplier for a 20-year-old is 88. So every dollar can turn into 88 times. That means that for a 23-year-old, it's still going to be in the high double digits. You have it for me? 57, almost 58, really. Almost 58. So every dollar you invest that you put to work inside that Roth IRA has a potential she'll buy you retired to turn to$58.

45:36Brian Preston:So I can have this$1 turn into$58, or I can have this$1 go save me 7.625 % in interest this year. While I like the idea of saving the interest, and I like the idea of you not having to pay that, and I like that idea of having a lower rate, when I look at these two and think about what's the most valuable, best use of my next dollar, Oh, man, I think I'm leaning towards that Roth IRA. I think I like the idea of you having an eye towards refinancing. Or let me tell you a little secret, Isaac. You said I don't have enough to refinance or to do my Roth IRA. There's another little thing you may not know about.

46:18Brian Preston:Have you called your mortgage company and asked for a rate modification? That's the language you want to use. You can call them and say, hey, mortgage company, I noticed that rates are 6.5%. And I just got this email from, you know, ABC loan company. And they said they would love to hold this mortgage for six and a half percent rather than me having to move it over to them and take all that and go through that. What if I paid you guys a couple hundred bucks and you gave me a rate modification down to six and a half. And sometimes mortgage companies will actually do that. So it's at least a conversation worth having a phone call worth making because maybe you can get some reprieve on the interest rate, but still not sacrifice maxing out that Roth IRA, because I love the idea of you building those tax-free Roth dollars.

47:06Yeah, so I mean refinancing can be a great thing, but just based on all the things that you shared, you should consider the power of that compounding interest for sure. Isaac, love that question. Thank you for being here. Just email winner at moneyguy.com. We'd love to send you a Money Guy Tumblr as a thank you. All right. You good there?

47:28Brian Preston:Oh, I'm great. I went to reach. I don't know if you saw this. I'm a little confused for a moment. I'm not used to having beverages on both sides. This is where I'll put the empties. Oh, gotcha. And this is where. You have a whole system. It's a system. I love it. Okay. Ronald P. has a question next. If you've maxed out all retirement accounts, 401k, Roth IRA, and HSA, and are able to contribute more, how do you decide between contributing to a taxable brokerage account or an after-tax 401k account? This is a great question, great problem to have, Ronald. So for those of you that don't know, most people are aware that there are two common ways to put money to your 401k.

48:12Brian Preston:You can do pre-tax salary deferrals where you put the money in and you get a current year tax deduction. The money grows tax deferred. And when you go to pull it out in retirement, you pay income tax on it. So I'm not going to pay tax today. I'm going to pay tax later. That's option one. The second way that people can put money in the 401k is they could do a Roth 401k contribution where I don't get a current year tax deduction. So I pay tax on the money. I put it in. It also grows tax deferred. But so long as I meet certain qualifying standards, when I go to pull that out in retirement, it's completely tax free.

48:43Brian Preston:So I can get a tax benefit today or I can get a tax benefit in the future. Those are the two common ways to put money in a 401k. Well, what a lot of people don't realize is there's actually a third way that is lesser known, lesser talked about called after-tax 401k contributions. And what this is, this says, hey, I can put money into my 401k. I'm not going to get a current year tax deduction. It's going to be taxed kind of like the same way that a Roth is. And I'm going to put the money in and the dollars are going to grow tax deferred. And when I go to pull that out in retirement, I'm still going to pay income taxes on the earnings, but I'm not going to pay tax on the original contribution.

49:17Brian Preston:That's the way that a normal after-tax contribution works. What Ronald's asking is, okay, should I take advantage of that or should I do a taxable brokerage account? Well, question number one you have to ask is, does my 401k allow for after-tax contributions? Because it's not a given. A lot of plans, because they want to make sure, that sounded like a chicken. I heard it that time. You ever hear what people say? My because sounds like a chicken. I heard that one. That one was a clock. That one caught me off guard. Okay. That's really funny. That one caught me off guard. Where was I going with this?

49:47Brian Preston:I was talking about after-tax 401k contributions. I was talking about, oh, so the reason that a lot of plans don't have after-tax 401k contributions is because they want to be able to pass testing at the end of the year. There's a couple of different tests you have to make. You have to pass to make sure that highly compensated classes of employees are not discriminated, discriminatorily favored over non-highly compensated. I'm getting way in the weeds. So a lot of plans don't offer after tax, but some do. Well, after tax, so I told you how it works. One of the things you can do is if your plan also allows for in-plan Roth conversions or in-plan rollovers, you can do the after-tax 401k contribution, and then you can immediately convert those dollars to Roth or do an in-plan rollout to Roth.

50:28Brian Preston:And it's completely tax-free because remember, you already paid tax on it. So it's basically a way of doing a mega backdoor Roth conversion. It's awesome. And here's the other cool thing about after-tax. Pre-tax deferrals and Roth deferrals are limited to$23 ,500 for those under 50. After-tax contributions are not limited to salary deferral limits. They can go all the way up to the section 415 limits, which is$70 ,000 this year. That means that if you're someone who was like well healed enough, you could do like a$34 ,000,$35 ,000 mega backdoor Roth. Okay. So that was all the context of the question.

51:09Brian Preston:Now to actually answer Ronald's question. Hey, which one should I do? It depends on your personal situation. It depends on how you're going to utilize these dollars. If you're someone who thinks, man, I really want to retire early. I'm part of this FIRE movement, I'm part of this FINE movement, I think that I am going to want to access these dollars in my early 50s, mid-50s, I'm going to need that, then the after-tax brokerage may be your best bet because it's going to be the place where you're going to have liquidity to be able to cover that bridge from whenever you retire to 59 and a half, when you get access to all of your other retirement dollars.

51:46Brian Preston:On the other hand, if you're someone who says, hey, you know what? I'm actually probably going to work all the way till full retirement and I've been building up my assets and I really have this after-tax brokerage account available to me or this after-tax 401k option, I might take advantage of this mega backdoor because now what you're able to do is you are able to supercharge those Roth dollars. Instead of just doing$7 ,000 a year, you might be getting tens of thousands of dollars a year in there. So for you specifically, Ronald, you have to answer the question of how am I going to utilize these dollars?

52:18Brian Preston:Which one of these two would be best, dependent upon where I am in my current financial situation, how my accounts are currently structured, like how much do I have in each one of my buckets, and then when am I going to use the dollars? When do I want to be able to access them? Well, if you can define those three things, then you'll be able to answer which one likely makes the most sense for you. Yeah, that was a great answer. Ronald, thank you for asking it. And I hope that that helps you think through. This is this was a great step seven of the food type of question. So congrats on being there.

52:49And I hope that helps. Winner at MoneyGuy.com. Email that if you would like a MoneyGuy Tumblr. Tracy M has a question next. Would it be wise to cash out all retirement accounts to avoid?

53:04Brian Preston:I'm just kidding. I don't even know the question. I didn't even listen to the rest. Well, just listen to the rest. Yes. Yes, would it be wise to cash out all retirement accounts to avoid mandatory minimum withdrawals and put the money into an individual taxable account? I also don't know how old she is, and I wish I knew that. Maybe it doesn't matter, but. Cash out all retirement accounts in order to avoid RMDs.

53:36Brian Preston:Tracy, would it be a prudent strategy? if you were concerned about one day losing your hair to today, go ahead and shave your head. I'm just going bald right now, right? Like, uh, no, I do not think this would be a prudent strategy to employ because what happens if you cash out all of your retirement accounts, what you're going to do is you're going to accelerate all of that income into the current year. You're going to accelerate all of that income and you're going to pay ordinary income tax on all of it. And if you're under 59 and a half, you're going to pay a 10 % penalty. So, okay, Roth assets, maybe not that big of a deal.

54:14Brian Preston:You're not going to pay tax, but as soon as you pull them out, they stop growing tax deferred. So they're not working for you with your IRA assets. They're not going to grow 401k. They're not going to grow tax deferred. They're going to start growing after tax. So are RMDs the big bad wolf that people think they are? Not really. They're not I mean, right now, most people are not going to have to begin drawing RMDs until age 75. And maybe depending on your age, maybe it's 73. But 73 to 75 is when you have to start drawing that. Well, if you're going to retire at age 60 or 65, you're going to have a number of years between the time you retire and between RMDs where you can do some effective planning to try to minimize your RMDs.

54:55Brian Preston:And let me walk you through this. The way that an RMD is calculated is you take the year-end value of whatever all of your IRA or RMD eligible accounts were, and you divide it by some mortality factor. And I don't remember it off the top of my head, but a couple of years, it was like 27.6. So you take, I got a million dollar 401k, IRA, whatever, divided by 27.6. That's how much my RMD is going to be in the following year. Well, for a lot of people, if you don't have huge IRAs and huge 401ks, the RMD may not be a huge number. It may be$10 ,000,$20 ,000,$30 ,000. It's not going to be like these hundreds of thousands of dollars unless you have really big assets or you're much later into the RMD cycle, meaning you're someone who's in your 80s or 90s.

55:42Brian Preston:So I do not think that RMDs are something you have to be terrified of. They're something you want to plan for. If you're someone who's going to be in a situation that's going to have very large RMDs later in life, I would argue that early on in your retirement, you want to start planning on strategies to potentially begin to mitigate that. Those might be Roth conversion strategies. It might be tax bracket maximization strategies. For example, hey, maybe this year I want to use my living expenses for my IRA. I'm going to pull out$80 ,000 and that's what I'm going to live off of. And so I'm just going to pay at that tax bracket and I'm not going to go any higher.

56:16Brian Preston:and I can do that for a number of years to buy that balance down, or I'm going to convert those to Roth and then I don't have to worry about RMDs anymore. And even when you get to RMD age, or actually it's not even when you get to RMD age, when you get to age 70 and a half, there's another strategy where you can do qualified charitable distribution, qualified charitable distribution. So if you're someone who likes to support causes and wants to give to nonprofit 501c3s, you can, rather than taking your RMD and paying ordinary income tax on that, you can opt for some part of it or all of it to go to a qualified charity and it never actually hit your tax returns.

56:52Brian Preston:It's a huge tax planning benefit. So there are a number of ways that you can navigate big RMDs. This is what I try to tell my people. And look, you'll have people like, oh, RMD tax bomb, and I'm going to blow through Irma, and oh my gosh, it's all these horrible things. Let me remind you, if you're blowing through Irma and you're getting hit with Medicare surcharges and you have these huge RMDs, your problem is that you have a lot of money. That's a pretty good problem to have. For a lot of folks, what's going to happen is when the RMDs take place, it's just going to replace the living expenses they already had anyway.

57:35Brian Preston:So, hey, I need $100 ,000 to live off of and my RMDs happen and that covers$30 ,000 of my hundred. There you go. A lot of our clients, when they hit RMD age, it doesn't change anything because they were already distributing more than the required minimum distribution anyways. So before you start trying to solve a problem that you may not have, make sure that you actually have that problem. We see so many people implement good solutions to problems that don't exist. Meaning, hey, I did this thing because I heard someone say I should do this thing. And I said, well, why'd you do that thing? That didn't actually solve a problem that you have.

58:20Brian Preston:I'm getting older. I want to put my son on this account and I want to put my daughter's name on this home and I want to get all these assets out of my estate. And I'll say, okay, great. I love that idea. Are you worth more than$30 million? Oh, you're not. If you're not worth more than $30 million as a couple, you don't have an estate tax issue. So don't try to begin solving a problem you do not have. RMDs fall into that exact same category. Yes, they should be planned for. Yes, there's something you should consider. But for most people, you're going to have opportunities if it is a problem to solve that problem before you get there.

58:56Good stuff. I figured you were probably going to say no here, but I really appreciate the thoroughness of that answer. Tracy, I hope that helps you. And also, I really hope that you'll email winner at moneyguy.com so we can send you a Money Guy Tumblr as a thank you. Thank you so much for joining us every Tuesday at 10 a.m. Central right here on the live stream here on YouTube. And thank you for checking out that compound interest calculator. We're so excited about it. And be sure to go to moneyguide.com slash resources so that you can see that new tool, but also all of our free resources that we made just for you to hopefully help continue these conversations and just continue to help build that confidence in your specific financial journey, because we know personal finance is personal.

59:39So be sure to go check that out at moneyguide.com. And we want to know what you think too. So comment below if you use that new tool and if you like it and let us know.

59:47Brian Preston:So hopefully you guys can tell our hearts. We love that we get to do this. We love that we get to share sound financial information with you. It's the reason why we spend resources, we spend time, we spend effort to create these tools to make them free so that you can utilize them. Because we really do believe that there is a better way to do money. If we can be part of your financial journey, helping you do money better, then we are all for that. Thank you so much for tuning in. As always, go to moneyguy.com slash resources. Check out all of these free resources, and we will see you back here next Tuesday at 10 a.m.

1:00:23Brian Preston:I'm your host, Bo Hanson, here along with Revy. The Money Guy team, out. The Money Guy Show is hosted by Brian Presson and Bo Hanson. Brian and Bo are partners with Abound Wealth Management. Abound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities laws and regulations. A Bound Wealth Management does not render or offer to render personalized investment or tax advice through The Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment, or legal advice.

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