Sarah O Sahara’s parents sold their rentals and business of 24 years. They’d like to create a trust for their grandkids with boundaries in place to avoid entitlement. How should they structure this trust?
Renee and her husband are in their 60s, and most of their retirement funds are in pre-tax accounts. They have federal tax credits they’d like to use to move these funds into taxable accounts. Is this a sound strategy?
Anonymous “Yvette” in Canada has a fully paid off condo that she wants to turn into a rental once her new townhome is ready. Should she mortgage against the condo to reduce the mortgage on her townhome? Are there any tax benefits to having a mortgage on a rental?
Luis’s wife wants to start moonlighting in her field. Can she open and contribute to a Solo 401k even though she has a TSP account with her 9-to-5 employer?
Russell and his partner want to emigrate to Canada in the near future. Should they move their investments into Canadian funds?
My friend and former financial planner Joe Saul-Sehy joins me once again to answer your questions. Enjoy!
(Have an investing, entrepreneurship, lifestyle, or decision-making question you’d like us to answer? Submit it here!)
Sarah O Sahara asks (at 2:40 minutes):
My parents sold their rentals and their business of 24 years. As my siblings and I are in our 30s and 40s and doing well financially, my parents want to create opportunities for our descendants. They have six going on eight grandkids, ages three to 12.
They don’t want to foster a sense of entitlement in the kids, so they want boundaries in place. My dad’s idea is to create a trust that the descendants can use for school, opening a business, or a down payment. He would also make the withdrawal a low-interest loan to 1) make the trust last longer and 2) give the borrower some skin in the game.
We would stipulate that draws cannot start for five to 15 years. The seed money would be $3,000, and $1M – $1.5M or more would be rolled in over the next five years.
I’ve already read the book What Would the Rockefellers Do? and Entrusted. We’ll also work with an attorney. But I’m curious — what are your thoughts on leaving this sort of legacy? Any advice for us?
Renee asks (at 20:34 minutes):
My husband and I are in our early 60s, and we’d like to retire in the next few years. My husband owns a business, and due to some strange business issues, we have a lot of federal tax credits built up. We’re wondering if we can use this to our advantage, as most of our retirement funds are in pre-tax accounts.
We don’t plan to withdraw from our investments right away — my husband’s business buyout will take care of us for the first few years. However, down the road, we’ll need to withdraw funds from our pre-tax accounts. (We have almost no money in Roth IRAs or HSAs.) I also think our tax rate will be higher in retirement.
Given our situation, does it make sense to take a bunch of money out of our pre-tax IRAs, apply the federal tax credit, and then reinvest the money in our taxable accounts? My understanding is that it will be taxed at capital gains rates when we withdraw, rather than the federal income tax rate. Any advice?
Anonymous “Yvette” asks (at 27:20 minutes):
I’d like advice on how to optimize our housing situation. My husband and I live in Vancouver, Canada, and our household income is $250,000 per year. Our condo, which we bought in 2014 for $510,000, is paid off. The current value is over $900,000.
In May 2019, we bought a pre-sale townhome in North Vancouver for $1.3M. It’ll be complete in about four months. We plan to put 20 percent down and we’ve been pre-approved for a mortgage to cover the other 80 percent.
We’d like to keep our condo as a rental. We’ll list it for $3,000 per month and we think it’ll net $2,400 per month.
Here’s my question: instead of mortgaging 80 percent of the townhome, should we instead mortgage $500,000 against the condo and use that money toward the townhouse to reduce the mortgage?
I’m wondering if there are any tax advantages to having a mortgage on your rental property as opposed to your primary residence, and if those advantages are significant enough to warrant having two mortgages. What do you think?
Luis asks (at 40:05 minutes):
My question is about Solo 401ks for people who are employed in a 9-to-5 job.
My wife works for the federal government and dollar cost averages each paycheck to max out her TSP account. Her employer matches her contributions up to five percent of her salary, which comes out to around $6,500 this year.
She plans to moonlight in her field, and we think she’ll bring in around $3,000 per month on a 1099 contract basis. We think it might be a good idea to create an LLC and open a Solo 401k for at least a portion of the moonlight funds.
Do the contributions from her regular employer count against the employer contributions she can make from moonlighting?
We’ve also read that she should choose to be taxed as an S-corp to maximize the Solo 401k contributions, but I’m not clear on why. Do you have any insight?
For context: we view her TSP, her Solo 401k, my 401k, and our respective IRAs to be retirement funds that we’ll tap once we’re 59. We don’t intend to use the money in these accounts for early retirement. Any advice?
Russell asks (at 48:25 minutes):
My partner and I want to emigrate to Canada in the future. My partner will be a nurse in two years, and I’ll be a licensed contractor within the next year.
Neither of us have any debt, and we’ll most likely have $100,000 in liquid assets, if not more, when we’re ready to make the move.
What’s the best way for us to invest this money? Should we invest it in Canada? Will I be forced to move funds over? Or does it not matter?
Four years ago, I started investing with Acorns, and I’ve since built a modest portfolio there. We’re completely financially stable, have a safety net, and are able to add into savings with money left over afterwards.
Resources Mentioned:
- 7 Habits of Highly Effective People by Stephen Covey | Book
- #307: The Tax Risks That Could Blow Up Your Retirement Plan with Ed Slott | Podcast
- Generation Skipping Trust | Investopedia Article
- Opening a Small-Business Retirement Plan | Vanguard Article
- LLC vs S-Corp vs. C-Corp by Mike Piper | Book
- Acorns | App, Affiliate
- Qapital | App, Affiliate
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