Q&A: Donating $8M, Borrowing $36K For A “Career Start” Loan & $6M In Single Stocks

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0:57hey everyone and welcome back to the rich habits podcast question and answer edition brought to you by public.com these are our thursday episodes where we answer your questions as if we were in your shoes going through whatever you're going through now again this is from my perspective and robert's perspective so maybe you agree maybe you don't agree but that's okay because that's what's so fun about the show. We're all just talking about personal finance and investing and having a good time doing it. If you have a question for us, please email us at richhabitspodcast at gmail.com, or you can DM us on Instagram at richhabitspodcast.

1:31Yes, we definitely love these Thursday episodes, and it's just so much fun because we always say personal finance is personal, and we get to dig into all the crazy questions you guys throw at us and take it off the dome and do our best to shed some light and just bring a ton of value because we all go through things, life gets in the way, and it's fun for us to try and give everyone those little nuggets of advice to help you guys figure it all out. And we've got some really good questions teed up, but before we jump into the actual Q &A, we've got to give a major shout out to public.com. It's really important for everyone to understand that this is our reality, that if we don't start investing toward our futures and building a nest egg, we will have to work forever.

2:21So if you want to stop working a nine to five job or your hourly job, you have to have portfolio income that's going to supplement your lifestyle in the future. And the easiest way anyone can begin investing towards their future is by using public.com. They make it incredibly simple to build a multi-asset portfolio, including ETFs, stocks, bonds, crypto options, and more. They also offer access to industry-leading yields of up to 4.1 % APY for your emergency fund. And for a limited time, you can earn a 1 % match on all of your IRA deposits, IRA transfers, and 401k rollovers. That's$1 ,000 of free money for every 100k you rollover into their platform.

3:05So if you're listening, you've got an old 401k that's sitting on a silly, boring brokerage account. Roll it over, get your free money, and start investing. Yes, fund your account in five minutes or less. Just head to public.com forward slash rich habits to claim your 1 % match today. Paid for by public investing. Full disclosures in the podcast description. All right, Robert. Our first question is coming from Jackie H. This is via Instagram DMs. So again, Rich Habits podcast on Instagram. Jackie says, what's up, fellas? Jackie from Ohio here. I love to listen to your podcast while I'm walking.

3:39Thank you for all of the advice. I share it with my kids all the time. Thank you, Jackie. That's so nice of you. So here's my question. We're in our late 50s and have several million dollars invested in the stock market, but our financial advisor has always discouraged us from investing into ETFs. As we listen to your advice and agree that we should switch from growing our wealth to maintaining our wealth now that we're getting a little bit older, is there a smart way to rebalance our portfolio without incurring massive capital gains taxes from selling our individual stocks and now using that money to buy index funds and ETFs?

4:14We have SEP IRA accounts, not Roth accounts, because we're small business owners, so we don't have any protection that we know of from taxes. Thank you so much. So Jackie, good news for you. The IRA in SEP IRA stands for Individual Retirement Account. transactions that take place inside of your individual retirement account are all tax free you can buy and sell and trade and do anything you want inside the account without having to incur capital gains taxes this is why for example you know let's say robert puts seven thousand dollars in his roth ira this year maybe eight thousand because he's over the age of 50 and has the catch-up contributions and then let's say that eight thousand he puts it in gold gold's up 40 percent year to date, he wants to now sell that gold only, you know, nine or 10 months into the year, he's not going to owe short-term capital gains on his 40 percent gain on that gold because it all took place inside of this bucket that is called the IRA.

5:13Now, if he did that in a taxable brokerage account that is maybe a public.com, a Fidelity, a Schwab, a Vanguard, he would definitely owe short-term capital gains on that transaction in that taxable account. So yes, you absolutely can sell your single stocks and take some profits and put them into index funds and ETFs all inside of your SEP IRA or other retirement-specific accounts without having to incur a short-term or a long-term capital gain on the transaction. Now, where you will incur taxes on a SEP IRA is on the withdrawal of the money. So all of the money that you put into your SEP IRA, you wrote off against your taxable income over the last several years, right?

5:57Because a SEP IRA is a pre-tax retirement account, just like a normal 401k is a pre-tax retirement account, or a traditional IRA is a pre-tax retirement account. So that means you wrote that off your earned income, right? Your taxes on an annualized basis. But now as you withdraw the money out, that's when you owe the taxes. So you will be taxed at your normal ordinary income tax brackets on the withdrawals. Think about that as ordinary income, but you will not be taxed on the transactions or the sales, which also like Robert, isn't that weird that Jackie's financial advisor, one, didn't explain this to them.

6:32And two, also doesn't, they don't want them in ETFs and index funds. Like what? I mean, maybe they're just in a bunch of mutual funds, which I guess is similar to an ETF. So I could get, you can understand that, but mutual funds are also expensive. Yeah. Well, I was going to say, let's back this train up first and foremost, and they need to have a serious talk with this financial advisor because I assume he's not a fiduciary. I assume because of that, he is taking commissions and that's why he's trying to dissuade them from the ETFs because they have lower fee structures than mutual funds and target date funds and who knows what else.

7:05So yeah, I really have a problem with this because no one with that much money should be in individual stocks and just mutual funds. There's no world that people should not have index funds and ETFs in their portfolio. It just doesn't make sense to me. So I think Jackie, the first thing she has to do and anyone else listening, have a serious conversation with your financial advisor and say, hey, I've been learning a lot over the past few years. I want to understand better this portfolio allocation and why. And just really dig deep because you want to also understand the fees that they're taking.

7:42If they're a fiduciary, they should only be taking a percentage of the total assets under management. And in this case, you have a few million dollars. So I assume it's probably three quarters of a percent, maybe 0.80 of a percent, but you should definitely understand all of that. So Austin, I think your breakdown of what they're not being taught is perfect, but they also need to ask these deep, hard questions to understand why this person is dissuading them away from ETFs and index funds. So let's be very clear here. You have several million dollars invested into the stock market via a SEP IRA account.

8:18Let's say that 4 million of your 6 million is profit. And it's all in these single stocks that are up hundreds of percentage points. You can literally sell all of those single stocks that are up hundreds of percentage points, cash in on that profit, not owe a diamond taxes on the transaction itself, but only owe taxes on the money you withdraw from the account. So let me just make that super, super clear. It doesn't matter how much you have in profit in this account. Like retirement accounts, if you make the transactions inside of these accounts, like they're not taxable. The taxes only happen specifically for pre-tax retirement accounts, like a SEP IRA, when you take the money out, then you owe ordinary income taxes.

8:57Now you could take out, I don't know, 50 or$60 ,000 and have a small little bit amount of taxes, right? Very low taxes. or you can take out$7 million or$6 million, whatever's in the account and have a very high tax bill. So you've got to work with a tax accountant and your financial advisor and everyone else to make sure that you're kind of taking out the right amount of money there that makes sense to you. But Jackie, have some of those serious conversations with your financial advisor. If I had several million dollars, I would be, oof, I'd be all over this one. Yeah. And I want to click back one more time that so many people out there will not even pick a financial advisor.

9:32It'll be someone that knows this person and says, you should try them. I've worked with them and they did great. But it's weird to me because if you're going to get heart surgery, you get multiple opinions. When you're going to get your car looked at, when there's something bad happening with your car, you get multiple opinions. LASIK surgery, multiple opinions. Yet people will take all of their money, give it to someone and not even understand their strategies, their fee structures, what has been their past performance with other people's portfolio. So just anyone listening to this podcast, as you're building your wealth, get multiple opinions and understand the fee structure.

10:10And if it aligns with your portfolio desires and your risk tolerance, it's so incredibly important. So our next question comes from Fernando CM. Fernando CM says, thank you guys for all of your work. I've been listening and sharing the podcast for the last two years. I'm 26 years old, married with a two-month-old. Our combined income is$180 ,000. We have around$175 ,000 in a brokerage slash retirement account and another$30 ,000 in savings in a high-yield cash account on public.com. My wife has$50 ,000 in student loans and$18 ,000 remaining on her car. We're planning to move to St. Petersburg, Florida.

10:50We were looking at duplexes with this 5 % Fannie Mae program, but most of them are super expensive right now. What do you guys think about looking into purchasing a single family home? Are there any benefits on living in it for one to two years, then moving and using it as an investment property? Or should we rent initially and look into buying after we are more settled in the area? Any thoughts are greatly appreciated. Thank you guys once again. Well, Fernando, good news for you. Robert lives in St. Petersburg, Florida, so I'm sure he's going to give you some tips here on places to live. But for me here, I would do what Robert did, which was I'd live in the area for one, two, three years, figure it out, and then buy something more permanent.

11:27But I'll let Robert take this one away. Yeah, 100%. You're going to love St. Petersburg and exactly that. I would move to the area, rent, where you think you're going to want to buy in an area that you like. Do that for one or two years. Learn the area, learn what you like, learn what you don't like. And one of the cool things about St. Petersburg is there is a ton of multifamily In every neighborhood, almost every neighborhood has single family homes with ADUs. They have duplexes, triplexes, quadplexes. They are everywhere. And right now, I would say you've got about a year window where prices are suppressed because these rates have been so high.

12:05I think St. Petersburg is an incredible buying market right now. And so that's what I would do. I would definitely do the rental, learn the area because you're going to find the restaurants and what grocery stores you like and the coffee shops. Whatever floats your boat, I would do that rent and start digging in right away. Get on Zillow, start driving around and learning the area because, man, there are some incredible, incredible neighborhoods where you could buy either the single family or the duplex, triplex or quadplex. And in my opinion, I think the single family home to using it as my first rental property is a cool playbook, right?

12:43That's what I did. It's a very interesting and effective playbook if you can get the right price for it. Now, that's the thing. When it comes to multifamily properties, it's a lot easier to cash flow them, right? It's a lot easier to actually make money because you're splitting the mortgage or you're able to reinvest elsewhere. Like there's a lot of things there that can help you do that. where with a single family property, what's hard about that sometimes is like, if the numbers don't work, then it's never going to work, right? So like, if your mortgage on the single family is $3 ,500, which is very common in America right now is to buy a home and have a$3 ,500 a month mortgage, and you can only rent it for$2 ,800, it just doesn't make sense.

13:21Like people will make the mistake of all negative cash flow, however many dollars a month, and hopefully the price goes up, or, you know, hopefully I can refinance and then they end up losing, I don't know, 10 grand in a year on a stupid decision like that. So if I were you, if you wanted to go the single family route, make sure that it's a place that you feel good about and you feel comfortable living in for five, seven, 10 years, right? Do not go into this hoping that the numbers work in one or two years. Yes, interest rates will likely come down so you could always refinance in the future, but that's not a guarantee.

13:54Rental markets are always unpredictable. So there's a lot of things here that if I were in your shoes, I would prioritize finding a duplex that makes sense, finding a multifamily situation that makes sense. If I can't find one, I would then do the single family route, make sure that it makes sense to me as a actual father, a man with a family, right? Someone who's trying to lay roots and really begin to grow their family here in St. Petersburg. That makes me happy first and foremost. And then if the numbers shake out to be rental in the future, Awesome. If they don't, that's fine. I bought this to raise a family, not to turn into a rental property.

14:29If I wanted to get a rental property, I would go and do that separately. Yeah, I love it. And we just looked at a deal. And if I was looking to buy a home, it would have been a deal I would have loved to do. And it's a single family home that is right in a beautiful area walking from the beach. And it had an ADU on it that was just a small ADU, but a really nice garage studio. And that one could have been purchased for$480 ,000 in which you'd be right in that range Austin alluded to. I think the all-in cost would have been around$3 ,100. But you'd be in a beautiful neighborhood with an ADU to offset some of the cost because the ADU would rent for$1 ,000.

15:06So the numbers can work even in St. Petersburg. Just make sure you do your research. So our next question comes from Mr. and Mrs. W.

15:24They say,

15:45loan besides our mortgages, and we don't have kids and we don't plan to have any at all. We travel a lot, almost every break we get as teachers, and want to continue that both now and into retirement. So here's our question. If we sell our primary home, we could use the proceeds to pay off our rental, move in, and still have around$300 ,000 in cash. Our plan would be to max out our Roth IRAs and four 3Bs each year and put their remaining money into a high yield savings account. Would that put us in a stronger position for an early retirement or are we better off keeping our current home and continuing as we are?

16:22Thank you so much for all you do. Mr. and Mrs. W, I am so freaking proud of y 'all for being teachers in your 40s with millionaire status. I mean, 600k equity in your primary, 500k equity in a rental, you all are crushing it. So congratulations on being millionaire teachers in your 40s. When it comes to investing and building a well-diversified portfolio, Robert and I lean toward the stock market because the stock market has three main benefits, in our humble opinion. The first benefit is tax advantages, specifically if you're able to invest in the stock market via a tax advantage account, like a Roth IRA, or, you know, any of these like, pre tax, like there's just there's a lot of tax fund stuff that can come when you invest via these retirement accounts.

17:11So that's one benefit. The second benefit is liquidity, right? I can go sell my million dollars invested in the markets right now and have that in my bank account tomorrow. And then three, you have this long standing 90 100 year track record of call it 10-12 % annual returns. And if you're lucky, maybe more, sometimes maybe less, but average about call it double digit returns. With that being said, that is why we highly encourage all of our audience to have the vast majority of their wealth invested into these index funds and ETFs we talk about. You all, however, are on the flip side of that. You have very little invested in the stock market, but you have a lot in real estate.

17:51Now, there's tons of perks that come with real estate, if it's the depreciation, the appreciation, the stability of it, the cash flow in a couple instances here, right? So like having a lot of money in real estate is cool. Because you said you hope to retire by 55 or 60, when I hear the word retire, that means one thing. That means my portfolio is supplementing my income. And for a portfolio to supplement your income, you either one, have it paying you cash via rental properties or real estate investments that are cash flowing on a monthly basis, or two, your investments are rising so much so quickly that you can cash out on some of them, realize a long-term capital gain against them, and use that money to supplement your life.

18:38That's very much how a lot of people plan to retire, those two methods. Now, I don't think you're doing either of those methods at the moment. You've got$350 a month that you're netting, which is peanuts, in my humble opinion, against half a million dollars in equity. For example, the S &P is up 14 % year to date. If you had that same half a million dollars of equity invested in the markets, you would be up$70 ,000, right, of profits of unrealized gains. But unfortunately, you guys are only up about maybe three or 4 ,000 depending on the month to month there. So like when you think of a cash flow to equity ratio, very bad.

19:12And then again here, I always believe that if you want to retire early, you should have a pay for mortgage, right? Mortgage is the largest line item in a lot of people's expenses. And so if you're in your 60s and 70s, you shouldn't have a mortgage anymore, in my humble opinion. So if I were in y 'all's shoes, I would do what you said. I would sell the primary residence, take the$600 ,000 of equity. If you want to pay off that rental, go for it. Now you've got freed up the biggest line item in your budget to aggressively invest that money now every single month into the markets. You're going to have$300 ,000 in cash, max out the Roth IRAs, max out the 403Bs, and dump as much as you can into a public.com bridge account, right?

19:56So this is a normal taxable brokerage account we call a bridge account because it's going to bridge you into retirement when you retire early here. and make sure that money is invested in such a way where it will double every seven years. So VOO, VGT, QQQ, VTI, all the index funds and ETFs we talk about, you will have, in my humble opinion, and Robert, feel free to disagree with me, but by investing this$300 ,000, you'll probably have more in seven years from a wealth perspective than if it was just cash flowing a little bit every month with a rental property. Yeah, 100%. I agree with you. The only thing I would change is I would seriously consider waiting just a little bit longer because here's why.

20:38Right now, and we don't know what you're paying for your interest rates on the mortgages currently, but assuming that you wanna do this deal, and I agree with Austin, you're gonna make way more money for retirement to help you retire early by making this move, but I would wait until mortgage rates come down a little bit more. That might take a year, 14 months, because in that instance, then as you're paying down and you're using this money, you're still gonna make more money getting it invested. But I think you'd make more with the house once it becomes a seller's market versus being a buyer's market like it is right now.

21:15Let me explain. Right now, because rates are high, so many people are sitting on the sidelines, but the people that are buying can name their price in a lot of situations because homes are not moving. So that's the one caveat I would look at is get yourself in a position to get a higher price for the home once rates start to come down. And I don't mean waiting till they come down to three or four percent. But if they keep nudging down little by little and we start to see something in the mid fives, then I think you're going to get much more for the home, giving you that bigger boost into retirement to get this money invested in the stock market.

21:52But I agree with everything else Austin said. The only difference, I would consider waiting a little bit longer because rates are coming down currently. but we want to see them come down a little bit more to get you that extra boost in the cash that would go into those accounts. I think that's great advice. And I think that again, millionaire status, so excited for y 'all. Y 'all are doing something right. I'm not here to say you're not doing something right. I'm just here to help you optimize for the words of hope to retire by 55 or whatever that might be. Right. And so again, the only way anyone can retire is to become financially free, which is defined as your passive income, right?

22:31Portfolio income, rental income, right? Your passive income can completely supplement your lifestyle. Now that's because it maybe gives you a lot of money on an annualized basis, right? You have a lot of investments or you cut down on your lifestyle so much that your moderate amount of investments can offset it. It's a balance that everyone has to navigate for themselves. But at the end of the day, I think you're all going to be able to figure this one out. Very, very smart. Thank you so much for teaching our youth. I cannot imagine being a teacher in 2025. So again, a lot crushing it. So our next question comes from David S.

23:04David says, most questions to you all are from people at the beginning or middle of their financial careers. I'm 76 and nearing the end of mine. I have a net worth of$11.6 million. $11.3 million of that is in the stock market. $3.2 million of the$11.3 million is in an IRA. Cash in money markets and high yield savings is about$375 ,000 and I have no debt. I rent a one-bedroom apartment for$27.50 a month with furnishings worth maybe$4 ,000. I own a 2016 Honda Odyssey and two old bicycles. I have one son who's 38 with one-year-old twins. His net worth exceeds mine by a lot. My son doesn't need a big inheritance.

23:44I've already given him$1.4 million that was in my mother's account when she died in 2021. I'd like to begin giving away 5 to 8 million dollars, which should leave plenty for me to live on and still have some to leave to my son and grand twins. As you can see, I've been very good at saving and never had much interest in spending beyond my necessities. So here's the question. How do I decide what to do with the money? I know that is a ridiculously broad question, but I truly don't know where to start. I don't expect specific answers, but some philosophical concepts of how to help me decide where and how would be very helpful and very much appreciated.

24:20Thank you so much, David. Robert, I'll let you kick this one off. Yeah, this is a wonderful situation, and I'm actually kind of going through this right now. I had a big birthday this year, and I've been thinking a lot about where does all of this go? And so for me, how I have looked at it philosophically is because I don't have children, you do have one. I look at it that I want to take care of the people that are most important in my life. And Austin here is one of those people. My cousins, I have some other people. But it's really all about what makes sense for you. Sometimes at your juncture in life, people look at what are the charitable functions I can do?

24:59or do you want to set up some sort of a trust that's going to give money to a school that you went to maybe? There's just so many things you can do that would be very fulfilling but also make sense for you. But just make sure you understand that you don't want to give away so much because we are living longer lives now. Medicine is better and health is better and all of this. So just make sure you have a plan that makes sense because you can always do this in phases. You can set things up for your son's children. You can set up a local charity maybe that is a foundation for you after you pass.