Q&A: $10M Inheritance, Living In A Trailer, & 403(b) vs 457(b)

0:00This 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. This episode is brought to you by Palmolive. Family time isn't just the big moments. It's weeknight dinners, sitting around the table, everyone talking all at once.

0:39So when the plates are empty and the sink is full, use Palmolive Ultra. Palmolive's most powerful formula removes up to 99.9 % of grease, leaving your dishes sparkling clean. And the new convenient pump makes cleaning even easier, so you can spend less time tackling dishes and more time together. Shop now at palmolive.com. Hey everyone, and welcome back to the Rich Habits Podcast question and answer edition. These are our Thursday episodes where every Thursday we sit down and we answer your questions as if we were going through whatever you're going through. You can ask us questions on Instagram at richhabitspodcast or you can email us your questions at richhabitspodcast at gmail.com.

1:20We've got a ton of emailed questions today, but we also answer those Instagram questions all the time. So don't feel like we're favoring one medium over the other. We love your questions, however you get them to us, including inside of the Rich Habits Network. And be patient, everyone, because we do get hundreds of messages a month and we just go through them and try to pick the ones that move the needle the most, not just for the person asking it, but for everyone watching these episodes. So just be patient with us. I promise we're going through them and we hope to answer your question very soon.

1:57Now our first question comes from Riley B. Riley says, hey Austin and Robert, I have a couple questions and I'm looking toward y 'all for some advice. I just turned 19 years old and I plan on redoing a trailer that was just given to me. It'll cost about$5 ,000 to completely renovate it. I also want to get married in May of 2027 and that should cost$3 ,000 but my fiance's family said they'll help out with some of the money. I'm also about to start Fire Academy in September, which is 10 weeks long with no income. I make between$2 ,400 and$3 ,200 a month at the moment. I have$7 ,600 in a savings account and plan on putting at least half of that into a high yield savings account on public.

2:38And I just started investing into stocks this month because of you all. I'm buying VOO. I have$700 invested and I plan to put in$400 a month toward the S &P 500. I'm also still figuring out my Roth IRA, putting in about$400 a month over there. Funny enough, I also have$5 ,000 in a CD that matures in March of 2027. After I get the CD, I plan on putting all of that into my stocks. So my question is, what direction should I take with my money knowing that I want to renovate this RV so I can live in it while also getting married in May of 2027? Really cool question. Congrats on being 19 years old, Riley, and caring about money to begin with.

3:22You are certainly in a just league of your own because you are so young thinking about money. A couple pieces of advice I'd give you. I would pause on the contributions toward your public taxable brokerage account and instead redirect that money all toward maxing out your Roth individual retirement account. The reason why is the Roth IRA is tax-free growth where your taxable brokerage account on public is not. So right now I'm seeing$400 a month toward the Roth IRA. Let's get that to$625 a month in the Roth IRA, which will annually max out that Roth IRA at$7 ,500 a year. and at 19 years old, maxing out your Roth IRA, I mean, dude, you're going to have like three or$4 million of tax-free money in this account if you consistently contribute and invest into this every single year for the next, call it 40 years.

4:16I mean, oh my goodness. The other thing I'd consider doing is figuring out what to do with this, you know, 10 weeks of no income. 10 weeks is about two and a half months. You're making between, let's call it$2 ,400 $3 ,200 a month. You're saying that I'm assuming you can live off of that$2 ,400 to$3 ,200 a month. You have$5 ,000 in the CD. You have$7 ,600 in the savings. You've got some money floating around here. Let's call it$10 ,000,$12 ,000 that you can tap into to sustain your life and sustain your lifestyle while you go with no income. I love the idea of working at the fire academy. I have a close friend that's a firefighter, you know, he's making 70, 80,$90 ,000 a year doing that.

5:01If I were you, I'd figure out, okay, can this$7 ,600 that I have in my savings account be enough to sustain me for 10 weeks with no income, knowing that on the other side of that 10 weeks, I'm going to now be making 4 ,000, 5 ,000,$6 ,000 a month, which I think Robert is a pretty good, you know, return on invested time there. Definitely. Riley is crushing it. But my main question here is, and I don't think we have the answer to it, but I'm going to put it to you as well, Austin, is he says$5 ,000 to redo a trailer. Now, I don't understand what this is for. Is he redoing a trailer you think that he's going to live in, so therefore he's investing$5 ,000 into a trailer that is going to give him a residence?

5:44Or do you think he's rebuilding a trailer that he's going to flip and sell for profit? That's where we're a little bit light on the information here. Everything else you said, Austin, I think is fantastic. Riley, congrats. You're miles ahead of your peer group because they're not thinking about how do I set myself up financially. They're thinking about where am I going to party this weekend or where am I going to go do this, that, or the other thing and blow money rather than set up your future. So Riley, I love where you're at. I wish we knew more about the trailer part. I'm assuming you're going to renovate it and live in which in that instance, I give you the big thumbs up.

6:21I love that. If it's going to be a livable unit for now, maybe for the next couple of years and you can turn it into a rental. Yeah, that's a good call out. I think I would be even concerned because like$5 ,000 to redo a trailer to live in, assuming you are trying to live in it, Riley, and like that is your deal here. You have to compare it to two other situations. One, living at home, which I think you might be living at home right now and being able to do that for free for a little bit longer. But of course, that's not forever. And then two, actually renting an apartment, you know, how much would you save by living in a trailer and not paying rent, but still paying for utilities and things like that and the rental slip and things, you know, at the park and things of that nature.

7:05And then you're like, okay, great. I'm saving every month, let's call it$450 versus renting an apartment, this$450 that I'm saving. How long is it going to take you to recoup that against your$5 ,000 investment rate. You have to think about it like that. Weirdly enough, though, I would see and look at this$5 ,000 remodel of a trailer, perhaps even as a distraction. I wonder, you know, you mentioned that this trailer was given to you. Can you sell the trailer as is for two grand, you know, 1500, two grand, and now you've got more money to invest in this Roth IRA, because that's going to compound and turn into, you know, a ton more money in retirement versus like having a trailer.

7:43If you did sell the trailer, where will you and your fiance live once you get married next year? Can you get a cheap apartment for maybe, you know, 1200 bucks, 1500 bucks a month now that you're making more money as a fireman, and maybe your fiance has got a full time job, like does your fiance want to live in a trailer, you know, so like, I just I would think of this trailer not as the end game, but instead as like a an option, because money gives us options. And if you now have the option to perhaps, you know, say, I've got some money here that I can put. But here's what I would not do is I would not take$5 ,000 from your$7 ,600 in savings and do it to remodel this trailer.

8:20I would take that$7 ,600 and use it to live off of while you go 10 weeks with no income, knowing that the income at the other side of that as a full-time firefighter is going to be$60 ,000,$70 ,000,$80 ,000, much more than the $3 ,000 you're making right now per month. I like that take for sure. Our next question comes from Ming-Hu. Ming-Hu says, Hi, Austin and Robert. My husband and I have been listening to the Rich Habits podcast since last October, and it has completely changed our perspective on money. Since then, we've worked hard to build our financial foundation, and we'd love your advice on what our next step should be.

8:55We're both 30 and recently moved to a state with no state income tax because of my new job. We're also expecting our first baby in late September. Wow, congratulations. First baby. That's a big milestone. Our financial picture is as follows. My new salary is $80 ,000 a year. My husband earns$150 ,000 plus about$30 ,000 more per year from his side hustle. We have our base of$100 ,000 across our accounts. We own a rental property. The rental property has $360 ,000 of equity and it's at 6.75 % interest. We are not making any cash flow on that. We have $30 ,000 in student loan debt and our living expenses are about$4 ,000 a month.

9:37Now here's the crux of my question. My new job at this$80 ,000 a year salary is offering me a couple different avenues for my retirement investing. I have a mandatory retirement plan that I have to contribute 6 % of my salary to and my employer contributes 6 % as well. I have an optional 457B that I can contribute to as well as an optional 403B. Should I contribute to the 457B and the 403B on top of my mandatory retirement contribution of 6 %? And if yes, should it be traditional, Roth, or a combination of the two? Robert, walk everyone through perhaps what the 457B is, the 403B, and if she should choose the traditional, the Roth, or a combination.

10:26This is a great situation because both the 403B and the 457B are both employee-sponsored plans, and they're both tax advantage retirement accounts. But, and here's the difference, a 457B allows penalty free withdrawals as soon as you leave your employer, while the 403B applies the traditional 10 % penalty for withdrawals before the age of 59. So make sure you understand that distinction for anyone that has these options. The 403B plans are common normally for nonprofits, schools, healthcare organizations, whereas the 457B plans are common for state and local government workers. So just make sure you understand the difference between what you're getting yourself into, because with the 457, the main difference is no penalties for early withdrawal, especially after you leave the company.

11:20So just keep that in mind. I think they're great options. And I didn't know this until today being asked this. You can contribute to both of them simultaneously. So that is a great advantage because these are tax advantaged accounts to be able to allow you to do both at the same time if you have the funds and choose to do so. Yeah, I didn't know that either. Right. So both plans share the same basic employee contribution limit of twenty four thousand five hundred here in twenty six. But four fifty seven B limits are completely separate from your four three B and four one K limits. So in a 403B, you know, that employer matching contribution, they don't count toward that personal 24 ,500 employee limit.

12:06In a 457B, any employer contributions do count toward that. It's very interesting. But if you asked me like point blank, what would I do? I would prioritize the 457B because you're able to withdraw that money penalty free if you need to. If you leave your employer just gives you that extra flexibility. And then those limits count separate from a 403B and a 401k limit. So I think that's really interesting. I would choose the Roth as well. Want to get as much money as possible inside of that Roth. You know, when you start thinking about maybe flipping over to a traditional, like the reason why we always encourage people to contribute via the Roth variant of any type of retirement plan is because we don't know what the government is going to have tax rates be in the future, Right.

12:51Tax brackets have changed our entire lives. They're up, they're down. I think the max tax bracket back in the day used to be like 80, 90 percent. And now it's as, you know, as high as 37 percent. Then it was 30 other. I don't know. It's all over the place. Right. So like with the way that the U.S. debt is spiraling out of control, I have a weird feeling that they're just going to raise taxes on citizens in perpetuity into the future. So you can funnel as much money as possible into these, you know, after tax retirement accounts, those limits won't be impacting you, those brackets won't be impacting you.

13:24So I would choose Roth. But that said, you know, I also can empathize with making I mean, you guys said, you're making 80 ,000 a year, you're also earning 150. So now we're at 230 a year plus 30 more for a side hustle to 60. Like you guys are getting up there, you're paying some taxes. So I would also understand if you wanted to focus maybe on the traditional for some combination of that. But I lean more toward that Roth personally. And I agree with you because thinking about that, they're both 30 years old. It's highly unlikely they're going to stay at the same jobs for all this time until retirement, especially in this modern era of what's going to happen next in the workforce.

14:04So I really agree with it. And I didn't think of that angle of the 457B because then if they change jobs, they don't have all these penalties coming into play. Now, before we jump to our next question, got to give a shout out to public.com, the investing platform for those who take investing as seriously as we do here on the Rich Habits podcast. On public, you can build a multi-asset portfolio of stocks, bonds, options, cryptocurrency, and now generated assets, which allow you to turn any idea into an investable index using artificial intelligence. And it all starts with your prompt. From renewable energy companies with high free cash flow to semiconductor suppliers growing revenue over 20 % year over year.

14:44You can literally type any prompt and put the AI to work. It screens thousands of stocks, builds a one-of-a-kind index, and even lets you backtest it against the S &P 500, all with just a few clicks. Generated assets are like ETFs with infinite possibilities. They're completely customizable. They're based on your thesis, not someone else's. So go to public.com slash rich habits and transfer your portfolio today. That's public.com slash rich habits. Paid for by public investing. Full disclosure in the podcast description. So our next question comes from Sarah. Sarah says, hi, Austin and Robert.

15:15My name's Sarah, and I've learned a great deal from the Rich Habits podcast. You guys provide incredible value. I have a question about rebalancing my brokerage account after learning about your advice. I have$48 ,000 in a taxable brokerage account with 87 % of it invested into single stocks and 13 % in low-cost index funds. I was encouraged to start investing at a young age and one of the ways those around me helped me get started was teaching me about the passive income around dividends. Which is a cool way to get kids interested. Honestly, you just make free money. It seems awesome and fun and it got me hooked.

15:50However, now after learning about your podcast, I think I might be overexposed to dividend stocks, and I'm not maximizing my growth. So I'm wondering if there's a systematic way to go through these dividend stocks and decide which ones to keep and which ones to sell. I'm type A, so systems are my friend. Do you suggest benchmarking against the S &P, using wallstreetfavorites.com for some sort of specific evaluation, or maybe something else? Some of the stocks have appreciated quite a bit over the time I've invested. think 100 to 300 % returns. So I'm just wanting to be wise in my transition to low cost index funds.

16:26It's a really good question, Sarah. Unfortunately, I don't know how old you are. But just by kind of talking through this, I'd imagine you might be in your early 30s, maybe in your late 30s, maybe early 40s. Here's what to do. Just don't contribute more money toward the dividend stocks. You can keep your dividend stocks. It's all of you know, let's call it 40 grand you have in these dividend stocks. Rock and roll. That's great. That's going to be a drop in the bucket for the millions of dollars you're going to have to your name in retirement. I would just let them do their thing. If you like them, they work, they're cool, like it's they're accretive toward your wealth building journey in your portfolio.

16:59But all net new dollar bills, they're going toward those low cost index funds until that$40 ,000 of dividend stocks makes up only 10, 15, 20, 25 % of your total portfolio, which means you are going to be doing index funds for a couple hundred thousand dollars more of dollars, right? Like you're going to be focused on these and you're going to be building, building, building, building into them. That's my take. What about you, Robert? Yeah, I'm going to go a little bit different take and then we can talk about it. I think because we don't know the age here, assuming this person is 30 years old, 35 years old, that time frame to flip this from 87 % single stocks and 13 % low cost index funds could take years or maybe even over a decade or two decades, I would almost rather see, and of course we have to look at the tax situation here, of maybe trimming these dividend stocks down now, flipping some of that capital over to these index funds we talk about, and then all new net capital is going into these index funds we speak of.

18:05Because I would just hate for 15 more years of growth to be kind of held down and capped because she is so heavily invested in these dividend building single stocks. So that's the only difference I would make. Definitely need to do that differently because assuming you're getting these dividends and we love dividends, but we also have them proportionally throughout our portfolio to be where it should be. Austin mentioned 10 or 15%, not 87%. So that's what we want to look at. So that's the only difference I would take from you, Austin, of your breakdown. And that is I would probably sell some of it off first and get that money moving.

18:45But we'd have to do a lot of math to figure out if the benefit of making that change, maybe selling off 40 or 50 percent of these dividend stocks and migrating that money over to the index funds, if it would be more beneficial long term to do it sooner than later. Yeah, I'm sure it would be. I totally agree that like doing that would be a good long term move. I just have this weird feeling that our friend Sarah here is a prudent investor and she's investing maybe$20 ,000,$30 ,000,$40 ,000,$50 ,000 a year into the stock market anyway. And within one year, she's going to have the exact same amount of money and index funds that she has in these, you know, dividend stocks.

19:26But, you know, maybe like, let's like think about this, Robert, maybe a framework I would use because you're very type A, Sarah, is I would benchmark every total return, not just the price return, because dividends should be total return. I would benchmark the total return of these dividend stocks against maybe the S &P year to date, maybe the Dow Jones year to date and see how they've performed. I would also, hey, maybe you might have some losers in that portfolio. You might have some stocks in the red. Maybe let's cut some losers. Those are the first ones we sell. tax loss harvest against those losses and use that to offset any gains of laggards, which are not losers, but they're lagging the total performance of the S &P year to date.

20:05Maybe you want to cut off and trim to Robert's point some laggards in this sort of portfolio you have. You can use the losses to offset the gains of the laggards and hopefully come out with a very small if zero tax bill because of this. But again, the biggest takeaway between both Robert and I is all net new dollars, index funds, right? Let's focus on those index funds, the ETFs, the VOO, QQQ, DIA, VXUS, AIQs of the world. And let's make sure that you've got hundreds of thousands of dollars compounding for you over time in those index funds. Love where your head's at, Sarah, you're doing such a great job getting invested here.

20:45Let's just try and make that a little bit tighter. Now our next question comes from Sam Z. Sam says, Hi, Robert and Austin. My name is Sam, and I've been listening to the Rich Habits podcast for a while now. Thank you, Sam. Sam says, I really appreciate how you make complicated financial topics practical and understandable. I also enjoy the different perspectives that you both bring to the show. My wife, Jen, and I have three children, five, three, and one. We've worked hard to build a strong financial foundation for our family, and our biggest priority right now is to make sure that we start building wealth for our children as early and intelligently as possible.

21:19Our two older children have$20 ,000 each in their 529 plans, and we automatically contribute$150 per child each month. My youngest has a Trump account with that initial$1 ,000 government contribution, and we've not added to that account yet. The children do not currently have any other savings or investments. Jen and I use the standard benefits available through our employers, including 401ks, HSAs, and life insurance. We also have a small residential real estate portfolio that we have inside of an LLC and plan to continue growing it as a part of our family's long-term wealth building journey.

21:54Our goal goes beyond paying for college. We want all three children to have a strong financial foundation that could eventually help with education, home ownership, investing, rental ownership, or starting a business. So my question is, what are the best practices for wealth building for children from such a young age? Really, really cool question. I love this, Sam. You and your wife, Jen, are absolutely thinking about this correctly because you've already started the 529 plans. I will always encourage parents to have a 529 plan because what's so cool about them is not only are your contributions growing as the stock market continues to go up into the right, but at the age of 18, you are able to now start migrating over money out of the 529 plan into the child's respective Roth IRA.

22:44You want to have a child that is a millionaire, right in their 50s and 60s, you move over up to$35 ,000 from that 529 plan to the child's Roth IRA in their lifetime, you can do that over the course of you know, five or six years with this$7 ,500 cap on contributions every single year. Now the kids in their mid 20s, and they've got$35 ,000 to their name that's going to compound for them. I mean, oh my gosh, so let's like just assume you're doing that. The next thing I would do that I would really consider is you've already got this like rental portfolio, a small residential rental portfolio. My parents never did this to me, but I've seen people talk about on the internet, they would go out and they'd buy a rental property when their kid was one, three, five years old, keep that rental property for as long as they can.

23:33Now the kid is 18, 25, 36. And either the kid, you know, starts doing the rental property and you give it to them. And that's how like they're now doing some cool like wealth building cash flow. The kid lives in the property in college or post college, like there's a lot of different things there. So I wonder if there's a world here where you can dedicate some capital. I mean, I have no idea how large your rental portfolio is. I'm also not sure how much money you guys make. I don't think you told us that either. But I just wonder if there's a world where you could dedicate some portion of this small real estate portfolio you with this LLC you're alluding to, to a child and then letting it do its thing over time.

24:11Again, that'd be cool. I've seen some stuff like this on the internet. I never had that. I knew I did know a friend whose parents like did that funny enough, Robert, they bought a condo in Knoxville when their kid was born. It was like a$60 ,000 condo back in 1996 or 98 or whatever it was. And they kept that condo as a rental. And then their kid when they went to the University of Tennessee and Knoxville lived in the condo. And then it was almost paid off by the time the kid lived in it. And then now the kid has it and it's like their own thing. It's very interesting. So if you can afford that, that's the big thing.

24:46Real estate is expensive. And I'm not trying to just go buy your kid a house. That's bonkers. I very much understand how expensive real estate is. But you're the one that talked about this portfolio that you're trying to build. So maybe there's something there. Robert, what's your take? Yeah, I think the only thing I would add to this would be two part. And that is you could, if you're looking to help set them up for later on, you could add them to your credit cards early on because some banks you don't even at any age, like if you look at Capital One, Bank of America, there's no required minimum age.

25:22And it seems like you guys are very, very good with your money and very smart about it. So you're adding them as a signer onto these credit cards. And then when they turn 18 and they're ready to rock and roll and go out and do their own thing, you've already pre-built their credit score by having them on these credit cards to help them then not have to start out at zero when they turn 18. So that's one that wasn't mentioned. And I don't know if we talked about the custodial Roth IRA. Did you mention that, Austin? I did not mention the custodial Roth IRA, but the kids would have to make income for that to take place.

25:56So maybe they can make that income with working at the, I mean, they're only five, so I don't know what work they can do at these properties, but it's possible. I would definitely consider the custodial Roth IRA as they get older, because then if they can be working, say they go to the properties and help mow the lawn or sweep or do anything, clean up, whatever there may be within these businesses that you're buying and building through real estate. That is another really, really good one because then you have that tax-free growth throughout their lives for retirement, which is different than the 529 plan, but gives you more layers of assisting them to build wealth later on.

26:36I guess the last piece of advice I'd share is get an umbrella policy. Get a two, three, five million dollar umbrella policy. You can buy one for probably six, eight hundred, maybe a thousand bucks a year, depending on how much coverage you need. I've got a policy. I think it's thirteen hundred dollars a year for five million bucks. If I were you, I'd get an umbrella policy because it's not just like, how do I ensure my kids can, you know, build wealth and be, you know, part of this, like this wealth building journey we're doing as a family. but you've got these rental properties, something crazy could happen.