George is torn between paying down his student loan debt (which he deferred) or buying a househack. Which is better for his long-term goal of reaching financial independence?
Hanan wants to figure out if a backdoor Roth IRA conversion will work for her. She also wants to investigate whether a Vanguard Institutional 500 Index Trust and a Vanguard Institutional Total Bond Market Index Trust are ideal. Are trusts different from index funds or mutual funds and if so, how?
June and her husband netted $400,000 from the sale of some golden parachute ISOs. They want to help their children pay for college and are trying to figure out how to strategically use this money. Should they pay off their home, buy rentals, fund 529s, or Roth their 401ks?
Mario is curious to know: is his two-fund portfolio at a 90/10 split is a good asset allocation for his Roth IRA?
Vivian is worried about bridging the gap between when she retires and when she claims Social Security. Will her plan of doing a Roth conversion ladder work out the way she hopes?
My friend and former financial planner, Joe Saul-Sehy, joins me to answer these five questions. Enjoy!
George asks (at 2:07 minutes):
I’m 24 and I live in southeast Michigan. I’m torn between paying down my student loan debt versus buying a househack.
I have a total of $130,000 in federal student loans – $26,000 in my name, and $104,000 in my parents’ names. I earn $76,000 per year, invest in my workplace 401k, and I have a three-month emergency fund. I don’t have any revolving debt.
Thanks to the CARES Act, I deferred my student loan payments from March through December, and saved the $20,000 I would have paid towards my loans.
I’m torn between two options:
- Use the $20,000 to pay off my highest interest rate student loan (7.2 percent interest with eight years remaining).
- Use the $20,000 as a downpayment on a $300,000 duplex househack. I’d apply for an FHA loan with a three percent interest rate.
The first option will free up $200 of cash flow each month, which will accelerate my debt avalanche and result in less interest paid over the life of the loan. The second option will reduce my rent by $200 per month, and I’d start to build equity sooner.
My job is stable and my emergency fund will stay funded in either situation. If I expect to see returns greater than 7.2 percent on my $20,000 over the next eight years, is it better to invest?
My long-term goal is to reach financial independence (FI) by 60 with a combination of rental properties and my 401k. I’m eager to start on this path, but I want to be responsible while I still owe six-figures in student loan debt. What should I do?
Hanan asks (at 16:21 minutes):
I’m 28 years old and earn $100,000 per year. I recently opened a Roth IRA, but in anticipation of earning above the income limit in the next year or two, I want to know how a backdoor Roth IRA conversion will work for me. Is there anything I need to plan for ahead of time? Will having a Roth IRA account already open affect the conversion process?
I also have a 401k with Merrill Lynch through my employer. I have 80.5 percent of my assets in a Vanguard Institutional 500 Index Trust (BLCSP). The remaining amount is in a Vanguard Institutional Total Bond Market Index Trust (BTBMK).
The risk assessment for both of these states that they aren’t mutual funds, nor are they publicly traded or listed on exchanges. How much do these bonds differ from a Vanguard S&P 500 index fund? What’s the difference between a trust and an index fund, or a mutual fund? Are the trusts less than ideal?
June asks (at 29:12 minutes):
My husband and I were able to sell out of some golden parachute ISOs, netting us $400,000. We sold the stock to diversity out of that asset, and to fund our children’s college. Now we’re not sure if we should use this money to buy more rentals, put more money into 529s, pay off our home, or Roth some of our 401ks and use this money to pay the taxes.
We’re a little late to the college funding game as I didn’t realize that the FAFSA looks at your oldest child’s sophomore / beginning of junior year. For us, that’s the 2022 tax year, as our kids are 10, 12, and 14.
For FAFSA student aid purposes, our expected family contribution is 20 percent of our annual income and 5.64 percent of our assets for 10 years. This leaves 40 percent of our net worth unprotected. The protected items that are not affected by your expected family contributions are:
- Home equity
- Value of retirement accounts
- Value of any small business
- Money in 529s
- Personal assets (clothing and cars)
- Life insurance cash value
There’s a small asset protection allowance of $992 per year as well.
We have a 30-year home mortgage of $200,000 at a 3.5 percent interest rate. We max out our retirement accounts every year, and my husband started making catch-up contributions as he turned 50 last year. Almost all of that is in pre-tax income, and we have hundreds of thousands of dollars in it.
My husband’s small business and my law firm are just getting started. They don’t have any value yet. We’d like to keep $100,000 in our emergency fund, and the remaining $300,000 is in stocks. We have another set of ISOs valued around $50,000. Of course, we have no control over the value of these stocks – so far, one has gone up around 20 to 30 percent per year.
We’d also like to buy our first rental property or two with some of this money, and we plan to begin a donor advised fund, too.
What should we do with the rest of this money while still preserving $100,000 in cash?
- Should we open a 529? We have a $10,000 tax deduction starting this year in the state of Michigan, and we only have one year to do that – at least with this money – so we don’t know if we want to contribute more than $10,000.
- Should we pay off our home? It’s at a low interest rate, but our rentals will be, too.
- Should we Roth some of our 401ks so we have cash in five years? It’s retirement money, but because of the unknown value (which could be a huge amount for our ISOs), we’ll get hit with the 5.64 asset percentage on those funds. We may not have the cash to pay that out-of-pocket for college – neither of the ISOs are liquid. We shouldn’t need to use the Roth IRAs if we choose this option, but we’d like to have the flexibility. We can also use some of the $400,000 to pay the taxes.
- Should we buy more rental properties? I understand they show a tax loss for the first few years because of depreciation, and we could use that to get our income and assets down, which would help.
We don’t mind having student loans because we can help our kids pay those off later, and we know we can’t fix our retirement later. Do you have any advice?
Mario asks (at 52:38 minutes):
I’m 41 years old. I invested my Roth IRA in a two-fund portfolio: VTWAX (Vanguard Total World Stocks) and VBTLX (Vanguard Total Bond Market). It has a 90/10 split – 90 percent stocks, 10 percent bonds.
Can I get your opinion on this allocation?
Vivian asks (at 1:01:29 minutes):
I have a question about rolling over a Roth 401k. Sixty percent of my 401k is in Roth, post-tax money, and I also have an IRA with pre-tax money.
When I retire in four years, I plan to do a Roth conversion ladder to get as much of my pre-tax money into post-tax money. I want to retire at age 65, and I don’t plan to take Social Security until age 70. I will live off of my Roth 401k during that five-year period.
I also have $100,000 in a taxable brokerage account and I have $100,000 in cash. However, I found out that the transfer of my 401k Roth into a Roth IRA will cause the five-year rule to begin again. This isn’t triggered until I open the Roth IRA.
Can I open a Roth IRA today, even though I’m over the maximum income? I want to take part of my IRA pre-tax money and convert it – maybe $5,000 or $10,000 – and pay the taxes on that. When I retire in four years, I would then roll over my 401k Roth into this account. Would the entire balance be available to me to withdraw from in 2025? Would I need to start over? Or would I not have access to the remainder of the funds until 2030?
Resources Mentioned:
- Isolating IRA Basis For More Tax Efficient Roth IRA Conversions | Michael Kitces
- Rollovers of After-Tax Contributions in Retirement Plans | IRS
- Don’t Let the Pro Rata Rule Trip Up Your Roth | MarketWatch
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