Ask Us Anything: Questions From the Audience

Mindy:
Welcome to the BiggerPockets Money Podcast, Show Number 142, where Scott and I answer your most pressing questions.

Scott:
Understand if it’s really changing the math for you, or are setting them into a new bucket where it really does change your approach, or it’s having a very modest impact, and it doesn’t really change what you’re doing. If you’re going to pay them off early, you continue paying them off early. If you’re not going to pay them off early, you are going to invest anyways, and this just confirms that even more.

Mindy:
Hello, hello, hello, my name is Mindy Jensen, and with me as always is my astonishingly well-rounded cohost Scott Trench.

Scott:
Man, well, these introductions are just coming full circle every week, Mindy. Thank you.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, and to show you that by following the proven steps, you can put yourself on the road to early financial freedom and get money out of the way so you can live your best life.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, search your own business, or just have simple money questions answered, we’ll help you build a position capable of launching yourself towards those dreams.

Mindy:
Scott, today we have a different kind of show. We don’t have a guest today. It’s just you and me answering questions that come directly from our listeners. They have some great questions, and some of them are questions that we hear over and over again. We hope that this helps clear some of these things up. You can always ask a question in our Facebook group, which is filled with people just like you, and you can find that facebook.com/groups/BPMoney.
Scott, before we even start with the questions, I want to give a huge shout out to Anita, who is paying down her debt. She posted in our Facebook group, “Hey Mindy, another debt paid off. $2,800 balance in the books. Thanks for caring, guys.” What I really like about that is it can kind of seem braggy to tell people in real life, “Hey, I just paid off another debt,” and they’re like, “Wow, whatever. I just racked up more debt,” which oh, that’s so judgy of me. That sounds kind of snotty, but we understand what a huge accomplish …

Scott:
That’s okay. I don’t think it’s snotty.

Mindy:
Well, like, “Oh, I just wracked up another debt.”

Scott:
We’re a money show. We don’t like it when you take on more debt, right?

Mindy:
Yes, unless it’s a tactful strategic debt, like a mortgage. But we do understand that this is a huge accomplishment. Nice job, Anita. Congratulations on paying off another debt, and I can’t wait to hear you say, “I am totally debt free.”

Scott:
That’s right. Yeah, I saw that post as well. Like to give her a shout out. I also want to get everybody in the Facebook group a shout out for a selfish reason. Mindy posted that it was my birthday a few weeks ago in there and 100 people sent to me very terrible and awesome jokes, that there’s one about a pickle that I particularly relished.

Mindy:
Oh, God.

Scott:
There’s a lot of really good. Just thank you, everyone. I want to give a shout out. All right.

Mindy:
Did you say it was awesome or awful?

Scott:
Both.

Mindy:
They were horrible jokes. But yes, happy birthday, Scott. Welcome to the other side of 30. Our first call in is from David Paray. Let’s go ahead and play his question.

David Paray:
Hey, Scott, Mindy, it’s David Paray. John and I were talking after I saw your Facebook post. We wanted to know why people think the VA loan is worthless. Obviously, that’s not a joke. I was curious to hear your thoughts on the trend going around, where real estate investors, at least some, are trying to convince people to liquidate their TSP or 401(k) under the premise that “stocks are risky”. And just curious what you guys think is the best balance there, because I believe both of you are in the fire community where you believe that stocks have their place in the portfolio and 401(k)s, and I would love to hear your thought. Thanks. We’re calling in from sunny San Diego, California out here in Camp Pendleton. Have a great day.

Scott:
Well, this is a tricky question, I suppose. Look, I think that we’ve interviewed hundreds of people on this show alone. I’ve met with hundreds more for coffee, I’ve interacted with thousands of people online. The vast, vast majority of the folks that I see building sizable portfolios are doing so with a combination of both real estate and stocks on bigger pockets. That’s specific to the BiggerPockets community, which skews real estate.
Some of the louder voices in the community, the folks who … You come on bigger pockets and you post 10,000 times to our forums, right? Are you going to have a bias towards real estate investing? Yes, you are, right? That’s why you post 10,000 times to our forums. That’s why you might come on our podcast, right? Those are the types of people who really eat, breathe and sleep real estate investing. If you listen to our shows and those kinds of things the skew of our guests, I think, is going to somewhat reflect that investor who’s more concentrated in real estate maybe than the silent, but very large majority of investors on the BiggerPockets platform. As a general framework, I’d say that most of the people I’ve talked to tend to have a balanced portfolio with real estates and stocks involved in there. Real estate’s great, but they’re not probably as concentrated as maybe it might appear from some of the content that we consume on BiggerPockets in general. That’s first.
The question then, should I liquidate my 401(k) because stocks are risky and go into real estate? I don’t think so, and I don’t do that personally. I’m keeping the money that I’ve got in my 401(k) and my after-tax stock brokerage accounts, and I’m investing in those index funds for the very, very long run, and I’m not touching them, I’m not liquidating them, I’m not changing it. I’m accumulating. I have my strong savings rate, and I accumulate savings every month. But I play some of that to additional incremental stocks within those 401(k)s. Well, I really contribute mostly to a Roth IRA, not a 401(k) anymore. That’s a whole nother story. We can certainly get into that though. Then my after-tax brokerage accounts, in addition to piling up some money to be able to invest in real estate on a regular basis. I think there’s a balance, and I think it’s personal finance and investing just personal, as you like to say, Mindy. But that would be the general framework I would respond to in responding to David’s great question there.

Mindy:
Okay, I have a little bit more that I want to say about that, because I can’t believe anybody is recommending liquidating your 401(k) or your TSP. The TSP, for those of you who are not in the military, is basically the military version of the 401(k). Actually, I found out that’s the government employee version of the 401(k). I thought it was just for military, and I learned that that’s not the case. But anyway, I want to mention something about the dramatic price drop in March, which is COVID and Coronavirus, and all this is where this is coming from. All the rebounded growth since March is practically back up to the top.
Yes, it’s hovering around and moving. We’ve got some volatility in the stock market for a variety of reasons. But if you look, if you saw the market peak in December of 19, and pulled all your money out, and put all of your money back in at the bottom in like mid-March or April, you’re a genius. Do you know how many people listening did that? Zero. Not 0.1 or one even, zero. Zero people listening to this show did that because you can’t time the market. I’m not saying anybody is silly for suggesting. You know what, I am saying, they’re silly for suggesting this. You can’t time the market. Everybody says this.
Jim Collins, JL Collins was on Episode 116, which was titled Long-Term Investing: COVID Changes Nothing. If you are investing for tomorrow, you probably shouldn’t be in the stock market at all. But if you are investing for long-term, which is what we’re all doing, the stock market is going to have its ups and downs, but it almost always goes up into the right.

Scott:
That’s right. Long-term, nothing changes, I think, about my investing core philosophy, right? I’m investing this next month, so they’re very, very long term. I’m not selling. I know I’m going to get markets like the COVID environment over the next 30 years in which I plan to invest, so I’m patient. We’ve discussed that at length. I think, now that I’m thinking about it, I think what David’s really trying to get at is the, hey, I think Congress in March passed a resolution that says you can withdraw money from your 401(k) or TSP that normally would incur a 10% penalty, but that penalty is being waived.
Look, when you withdraw, let’s say you withdraw up to $100,000, I think is the limit from your 401(k), knowing now that you’re not going to have to pay that penalty, I think you have three years to pay back those taxes and replace any money that you took out under that rule. Should I take that out of my 401(k) and invest in real estate, maybe is more specifically the question that maybe is more nuanced there. To that, I’d say, I don’t know. I think that would depend on an investor-specific situation/ I could see a situation in which someone’s sitting there, and they’ve got most of their net worth in home equity in their 401(k). They don’t have much liquidity in the form of cash with which to invest in real estate. They’ve spent hundreds or hundreds of hours, maybe even 1,000 hours reading content around real estate investing and feel ready.
Maybe under that circumstance, this is a reasonable opportunity to attempt your hand at real estate investing if you feel it you really clearly understand the rules around that withdrawal, are willing to pay the taxes on that, and feel that you can get that excess return while still having a balanced portfolio. What do you think about that one, Mindy? That’s a controversial topic that I think hasn’t had a clear answer.

Mindy:
That is a good point, and not what I took from David’s question, but I can see now that you’re saying that, that maybe that’s what he was asking. Okay, so I would say, is there a time limit that you have to withdraw these funds? Do you have to withdraw them in 2020? I’m not quite sure.

Scott:
That, I do not know.

Mindy:
Okay.

Scott:
Let’s see. The devil’s in the details. Right?

Mindy:
The devil is in the details. Let’s just say that you have to withdraw in 2020. If you don’t have a place to put the money, then no, you should not withdraw the money. If you are watching your market, and you’re seeing deals, and you find a smoking hot deal, and you don’t have the funds for it, and the funds are in your 401(k), and you know your market, like you said, you’ve done the research, then I can see an argument that that would make sense, that you pull the money out because there’s no penalty, you pay taxes either over the course of three years, or all at once in three years. But keep that tax bill in the back of your head, because you are going to have to pay taxes on it. Unless you have an incredibly lucrative career, you may not have the money in your prepaid tax amount to the government, and you will have to come out of pocket to the government to pay that tax bill. Make sure you have the funds to do that in advance so you’re not scrambling.

Scott:
I think it’s as long as you’re fitting a pretty specific set of circumstances, right? That person who doesn’t have, is responsible financially, has that financial foundation, but just has most of their liquidity in their, or most of their net worth maybe in their home equity and retirement accounts, hasn’t built up the high savings rate, or the after-tax assets with which to invest, and has also put in that long slog of hundreds of hours listening to the BiggerPockets real estate podcast and lots of books and those types of, and feels ready to invest, maybe in that very specific circumstance, we’ve got a good case to go ahead and withdraw early. Because you’re not just going to spend it on a boat, you’re going to put it into something that maybe even can produce excess returns over the next 30 years, far better than the 401(k). That’s a pretty specific situation, but I could see that being a reality for some people.

Mindy:
Yes, I completely agree with that. Let’s recap. If you are well-educated and well-capitalized, with an eye on the tax bill that you will be paying on any funds that you don’t return to the 401(k) before the three years is up, and a smoking hot deal, it could be argued that that’s a good move. If this is your first property, if you’re not well-educated in real estate investing, if you just see a property that’s cheap, then no, you should do more research. It’s always better to lose out on a potential investment than to make a really bad choice.

Scott:
Yeah. I’d be really uncomfortable the entire time I’m going through that process, even if I am reasonably close to that mold that we just described in that sort of circumstance. It’s just once the money goes into the 401(k), for me, it’s gone. I don’t touch it again until I’m at retirement age and I know that, right? That’s my philosophy all along. The 10% penalty can be that, or the removal of that 10% early withdrawal penalty could be the catalyst to put a cut in a couple of very specific situations in a position where that makes sense from a long-term perspective. But I think you’re going to have to be really honest with yourself and critical about whether that’s a good move for you to … How’s that for a very thorough answer to David Paray’s great question there?

Mindy:
Yes, yes. I think that we’ve covered that one. Okay, next up is George, and George has a question that I actually hear very frequently. I’m super glad that he sent it in. He says, “What type of account would you suggest using for your savings to buy your next investment property? It needs to be liquid within a year, for me at least. I currently use Betterment’s big purchase savings account. So far, the growth has been very good. But I would love to hear Mindy and Scott’s advice.”
I’m going to take this one first and then let you chime in later, Scott. In this environment of super low mortgage interest rates and super low interest rates in general, you’re not going to be finding a great deal on a savings account. When he says that he uses, or so far the growth has been very good, I should have asked him for further clarification, like what does very good mean? I have what I consider to be a high yield savings account and it pays me 0.8%. High yield used to mean double digits in the ’80s. But you’re not going to be finding these super good deals, and frankly, I’d rather have a 30-year mortgage at 2% than a high yield safe rate that their savings account that pays me what? 2%? 1%? I’d rather have that mortgage.

Scott:
Yeah, I keep my saving. I don’t think I have a wonderful answer to this question, frankly. I wonder if I should go and check out Betterment’s big purchase savings account. This show is not sponsored by Betterment, I don’t think. But I don’t use that. Maybe I should go check it out. I keep my money in Ally savings account. Ally is also not a sponsor to this show. We’re just plugging all of these things that I use, but yeah, I keep my money in Ally in my savings account, and I get probably around that 0.8%. The interest rates have lowered recently because of the lower interest rates in the Federal Reserve.
Look, I think the answer is if you’re saving up for your next investment property, and the timeline is pretty short, some kind of high yield savings account, maybe a money market account, maybe even a CD or something that with one year return, it’s just I don’t think there’s a lot of good options right now for savers that are looking for a very stable, low volatility way to earn yield on your savings. I don’t think it’s a good environment for that. We’re talking about the difference between maybe a 0.75 and a 1.25, maybe up to 2%, if some listeners can get creative. But let’s go ahead and post this in the Money Facebook Group as well, and see what some of our listeners come back with. Maybe we’ll get some more good suggestions about that.

Mindy:
Yes. Scott, you mentioned the big one that is always recommended. Ally Bank is an online bank. They don’t have any physical locations, if I remember correctly, so they don’t have to staff it with people in their physical locations, and they pay the highest rates, which right now, is 0.8. Before it dropped, it was one. You’re just not getting a really great high yield. They call it a high yield savings account, but high yield is definitely a misnomer here. But yes, we will post this in the Facebook group and if you have a suggestion that pays you higher than 0.8 currently, please chime in and let us know.
Okay, back to taxable accounts. Ryan writes in, “I was planning on using a taxable account to bridge the gap between early retirement, semi-retirement, and age 59 and a half. After listening to Episode 18, I’m really interested in the Roth conversion ladder approach as well. When using the Roth conversion ladder, can you only withdraw your original contribution after five years, or can the growth be withdrawn as well?” Episode 18 featured the Mad Fientist, so I went to him directly and asked him, and he confirmed that you can only withdraw the converted amount. And he shared a link to his epic tell-all article called How to Access Retirement Funds Early. We’ll include a link to that in our show notes, which can be found at biggerpockets.com/moneyshow142. Scott, do you want to give a little bit about the Roth conversion ladder for people who are listening and they’re like, “What is that?”

Scott:
The Roth conversion ladder at the highest level is this concept of putting money into a tax-deferred retirement account like a 401(k). Then let’s say that you earn 100,000, $200,000 a year, a high income, relatively speaking, just help me articulate this example better, right? You’re earning a high income, you’re in a high tax bracket. Every dollar you put into the 401(k), which is tax-deferred, you’re deferring income while you’re in a high tax bracket.
Then suppose you retire early, or you take a year and travel the world. That year, or in those years after you leave your job, you’re now in a very low income tax bracket. Maybe you are at a 35% income tax bracket while you’re earning money, right? Every dollar, 35 cents of that has gone to the federal government. Well, when you retire, maybe you’re earning a low amount of income, and your tax bracket is closer to 20%. Right? Well, that’s when you would remove money from your 401(k) and convert it into a Roth. You can do that penalty-free, but you incur taxes. But your taxes now are being taxed at a 20% tax bracket in those later years, right? That’s the basic, basic framework behind the idea of why this Roth conversion ladder is a powerful approach.
Getting into more specifics on this show, I’m going to overwhelm and I’m not the expert, I have never done it before. That’s why we called the Mad Fientist, and he is the expert, and has a wonderful article about it. Go check out that article. You can find the link to it at biggerpockets.com/moneyshow142.

Mindy:
Perfect. Okay. We are now going to hear a call from Lenny. Lenny has a question that kind of tag teams off of this one.

Speaker 1:
Hey, Scott. Hey, Mindy. This is Lenny from Oahu, Hawaii. I’m currently 25 years old, and my job doesn’t offer a 401(k) plan right now. My wife and I both have IRAs, but we’re not maxing them out currently. Our plan is to do $3,000 a year in each of them. Instead, we’re putting the bulk of our savings into a brokerage account, currently using the Robinhood app. My fear of maxing out the Roth IRA instead of putting more money into the brokerage account, is that we want to retire in 12 years when we’re 37 years old. Since I won’t be able to pull the bulk of the money from the Roth IRA until we’re 59 and a half, but it makes more sense to do what we’re doing now and put the bulk of our savings into the brokerage account. Or would you guys advise me to max out our Roth IRAs and put the remainder into the brokerage account? Thanks you guys’ help. Love you guys’ show. Bye.

Scott:
All right, Lenny, thank you very much for the great question. Look, this is a tricky one, right, and there’s people who are going to feel very strongly, and there’s a really intelligent and lively debate about what the right thing to do here is. Okay? Your question is, I think, a really good one. If I put money into the Roth, I can withdraw my contributions to the Roth tax and penalty-free early, but I cannot withdraw the gains from my Roth IRA tax and penalty free early, right?
If I invest all of my wealth into a Roth IRA, and let’s say, I have a million dollars in my Roth IRA at 37, or whatever age, 37, when you plan to retire, I can’t actually withdraw on those gains and actually live out my early life of financial freedom, right? What’s the correct balance here between putting money into the Roth IRA and building up net worth in the brokerage account? Right? Look, I in set for life, I’m plugging myself, I don’t like to do that too much, but in set for life, I think I address some of that conundrum, basically, with the retirement accounts where they exist, they’re good tools to build wealth, but they also are not real in the sense of contributing to early financial freedom, unless you have a good bridge, in the meantime, just put yourself in your family between the time at which you leave your job, and then ultimately go on to reach traditional retirement age. That’s a great problem, because we’re building wealth early in life in the financial freedom and financial independence movement, but a real problem that does need to be addressed.
Look, there’s a set of complicated mathematical calculations that you can do to figure out the right balance towards that, or what I recommend is, look, if you want to retire at age 37, I think the maximum you can contribute to a Roth in 2020 is 6,000 bucks. What’s the maximum? You know what the maximum [crosstalk 00:22:36].

Mindy:
I think it’s 6,000 if you’re under age 50.

Scott:
Yeah. We can create a difficult problem here, or we can potentially create an easy problem, right? What I would recommend, what I would challenge you to do is I would say, “Look, run some math and figure out what the right balance is in the near term. But if you want to retire at age 37, you and your spouse are going to need to accumulate more than $12,000 a year in savings, much, much more.” Ideally, you should be able to put the first $12,000 into that Roth within a year or two after you build out your budget and savings rate, max that out, and then have plenty leftover to invest those after-tax brokerage accounts.
You’re building a tax-efficient portfolio that can be what you use after a traditional retirement age, and also a significant post-tax … I guess they’re all both post-tax. Just a normal brokerage account, right, and have money in there that you’re accumulating, and building, and investing that you can withdraw on in the period between 37 and traditional retirement age. How’s that for a framework to go about answering that, Mindy? Do you have anything to add?

Mindy:
No, I don’t. I still max out my Roth every year because once I stop working will probably be before 59 and a half, and then I will have something to withdraw on that I have already paid taxes on because the Roth, you’re not paying taxes on when you withdraw it.

Scott:
Yeah, I love the Roth IRA. We have a Roth 401(k) at bigger pockets. I’ve maxed it out every year now. I did not when I was first getting started, because I was saving up for a house hack and building that initial liquidity, that first $25,000 in personal net worth above the zero mark for me, I thought I could put to better use in the form of a house hack than in maxing out my Roth IRA. At the time, I did not have a Roth 401(k) through work. At the time I was doing that. But I felt that that was a better option for me, and if I look back, I would do that again. I would not max out my Roth in that first year. I would instead save up for that house hack.
But once I got to a position where I was able to accumulate more than 25, $30,000 a year regularly through my savings rate, I began to max out my Roth every year from there on out. I really think the reason I like the Roth IRA is because, and excuse me for getting even close to the political spectrum here, but I will, I just wonder if there’s a reality which exists 20, 30 years down the road where tax brackets are not higher. It just seems so obvious to me that we’re going to have to increase taxes on the wealthy or the folks, wealth being people that achieve high or high income earners downstream. Any money in a Roth IRA that is not taxable seems like a really powerful investment to me.
I really like that even though I’m in a high tax bracket now, I still choose to invest in the Roth IRA rather than the 401(k), because I think that the tax brackets will be higher downstream, which maybe I’m wrong, maybe I’m right. I have no idea. But that’s how I’m putting my money right now personally.

Mindy:
Yeah, I don’t think that’s political. I think that’s a statement of fact. You can’t increase the deficit indefinitely.

Scott:
We’re going to inflate our way out of it, or tax our way out of it. One helps real estate investors, one helps Roth, or one is a case for Roth IRAs. Right?

Mindy:
Yes. That’s not a political statement. That’s a statement of fact. Okay. Mike has another similar-ish question. “My question about investing platforms. I’m in the early stages of my investing, and to this point mostly use Robinhood. I also have brokerage accounts with TD Ameritrade and Vanguard, although these accounts are not yet funded. I like Robinhood because of the option to purchase fractional shares. I find that if I can invest any amount, I do it more regularly. I may not always have the 160 to $180 to buy a share of VTI, but I do purchase smaller increments multiple times a month. Would I be better off holding out for full shares and buying direct from Vanguard?
Alternatively, I believe that Charles Schwab just began offering fractional shares and know that they come highly recommended by many in the fire community. Although I am not sure if they offer VTI in the fractional variety, and at this point, I am below the VTSAX buying requirement. I saw an article on Forbes this week, and it has me second guessing my choice in Robinhood. I’d like some advice on my best option for an account that I plan to hold for several decades. First, I want to say that the article that he shares will be linked in our show notes. I want to note that VTI and VTSAX are the funds that are specific to Vanguard. But those exact funds, all so similar, you can’t tell the difference, are available in the other platforms as well. They aren’t called VTI, because what does VTI stand for, Vanguard Total-

Scott:
Yeah, I think one is the mutual fund and the other is the ETF. They’re basically equivalent, right?

Mindy:
Okay.

Scott:
Yeah, I believe that the mutual fund is VTSAX, and VTI is the ETF. If you’re investing through Vanguard directly, you’re going to be able to buy VTSAX through your Vanguard account. If you’re not, if you don’t have a Vanguard account, you’re going to buy a publicly traded security called VTI, which is the equivalent of that mutual fund, right? It’s called an Exchange-Traded Fund or ETS.

Mindy:
Yes. But VTSAX, what I wanted to say is VTSAX is the Vanguard Total Stock Market Exchange. There are others. Fidelity has a Fidelity Total Stock Market Exchange. I don’t know what that’s called right off the top of my head, but it’s the same thing. It just has a different name because you’re buying it at a different place. I’m going to let you answer the question about investment platforms, because I just use one.

Scott:
Yeah, I guess there’s two parts here that I’m getting, right? One at one is-

Mindy:
What’s the best platform?

Scott:
Yeah. One is, should I use Robinhood, given a little bit of controversy they had earlier this year? The second is, should I buy in fractional amounts, or should I save up to buy whole shares and purchase less frequently? Right? Look, I think the answer, let’s start with the second one first, the one about the increments versus whole shares, look, I don’t think this is a high stakes decision, frankly from my point of view. I think it doesn’t really matter. You’re not going to look back in 30 years and detect a noticeable difference in your net worth by investing in smaller increments more regularly or in larger increments once a month.
If I’m going to try to get my mathematical brain in this, and go really, really analytical, I suppose that buying in smaller increments more frequently is actually better than buying in large increments once a month, because you’re getting a little bit more money, a tiny bit more money into the market a little faster, right? If you’re looking for the optimal approach, you’re having more time in the market if you’re buying smaller increments faster. I just do it once a month because it’s easier, and that’s just my cadence that I have for investing. Look, I don’t think it really matters either way there. I think you do you, and if you’re excited to get more money in the market right away, great. That will encourage more savings habits and keep you with less cash to potentially spend on something else. I think that’s how I would answer that first question.
The second question is about brokerage accounts, and specifically, Robinhood, and some of the controversy that happened with that. We’ll link to the article referenced in the show notes, of course. But basically, I think the way I understand it as it happened, and please someone correct me if I’m wrong here, but I basically understand that the Robinhood app crashed or was inaccessible during a period in which the market was tanking back in March, right? Maybe it was high vault. Who knows what caused that crash or what caused that inability to access the account? But people were unable to trade temporarily because the app crashed. Right?
I think it sounds like there’s been some sort of SEC or FINRA investigation into that outage, basically. Right? Does that mean I should no longer trust this major brokerage with millions of accounts and instead go to a Charles Schwab, an E-Trade, a Vanguard, or another brokerage? Look, I use Robinhood. That news alarmed me slightly. But honestly, it’s just a little bit of a pain to sell all of my stuff in Robinhood and switch over to another brokerage. Right? I’m not super concerned about that because it sounded to me like the outage was a technical thing that affects traders. I’m not a trader. I dump money in once a month, and I let it sit for 30 years.
For me, that’s not really a major concern. But I certainly recognize that as maybe like a growing pain of a new entrant into this space. I think the investor should factor that outage in somewhat to their decision making if they’re choosing a new brokerage. There’s a lot to like about Robinhood. It’s easy, but there’s also other good brokerages like Charles Schwab, Vanguard, Fidelity, E-Trade, all these guys that I think are reasonable options out there. Again, I don’t think that the brokerage account for me is a high stakes decision. I would be very happy using really any of those. I just pick one and put it all in there for ease of use and ease of consumption. What do you think, Mindy?

Mindy:
I think that that is what I was thinking about saying, right, as you were saying at the end. You don’t need an account in this brokerage, and this brokerage, and this brokerage, and this brokerage. I also misspoke and said I only use one. I actually use both Fidelity and Vanguard. But that’s because when I was setting up the accounts, whoever I was setting them up with was either Fidelity or Vanguard. I’m not sure why we have both, but we do, and it’s no big deal. It’s easy to track with two. Once you get all of these things going, it’s harder to keep track of where they are. Look at the fees being charged, find the one that you’re most comfortable with.
Frankly, I like Fidelity best. I think their customer service is fantastic. When I said that VTSAX has an equivalent at Fidelity, it does. It’s called FSKAX, which doesn’t quite roll off the tongue as easily as VTSAX does. But don’t let that stop you from investing with Fidelity just because their index fund initials don’t roll off the tongue so easily. I find that they’re both equally easy to use.

Scott:
Right?

Mindy:
Yeah. Pick one. Like you said, with Robinhood, they were down for 17 hours on March 2nd. March 2nd, for those of you who don’t remember, was not the free fall day that we had on the stock market. It was beginning, the market was starting to soften for sure. But like Scott said, this wasn’t a malicious outage. This was an overflow of members and growing pains of a new company, I would say.

Scott:
You wonder if just people were starting to panic, and so everyone was checking their accounts and logging in, or trying to trade, or whatever, and that overwhelms. I don’t know. Who knows, right? You just wonder about those types of things. I imagine that if I’m Robinhood, and I’m this billion, billion dollar company, multi-billion dollar company, that I’m going to make damn sure that that never happens again on my portfolio. Look, maybe I’ll get screwed at some point with that, but I just don’t see the need to … I like how easy it is to use. It’s on my phone, and I buy my stocks with it. It may not be the best choice. It is for me, and I use it.

Mindy:
Exactly. Leslie sent a note in, “What does it mean to have a self-directed investment account?” We throw around the term self-directed solo 401(k), self-directed IRA rather frequently. I actually have a self-directed solo 401(k). My husband is self-employed, and I work with him, and if you are self-employed with no other employees other than your spouse, no other full time employees, you can have a self-directed solo 401(k). If that is an option for you, I highly recommend looking into it because it can expand your investment options.
Scott, we both work at BiggerPockets.. BiggerPockets offers a 401(k). Do they offer every single investment option there is under the planet in their 401(k)? No. Most 401(k) options are fairly limited. Here, you can choose this fund, this fund, this fund, or this fund, and that’s it. That’s just because a fund manager, a 401(k) fund manager is going to have to keep track of all that stuff. It’s way harder for them to do all that. They just offer smaller options. Is that fair, Scott?

Scott:
That’s right. Yeah, the 401(k) offered through BiggerPockets is not self-directed. We choose from a pool of funds, maybe 20 or 30 funds, one index fund or one or two index funds. I dump it all into the index fund with the lowest fees, of course, and go from there, right? A self-directed account, this is very confusing, but my Robinhood app, or E-Trade, or Fidelity, if you choose, whatever your brokerage app, that’s probably going to be a self-directed brokerage account, which means that you can just choose any publicly traded security, basically, and type in the ticker symbol, and buy or sell shares, and maybe even options depending who set that up, stock options, those types of things. Put some calls.
That is a version of self-directed. Sometimes we also use the word self-directed to talk about a retirement account in a sense that goes even beyond that, where we talk about, hey, not in addition to being able to buy any stock through your retirement account like a ETF, or a specific company, or whatever in a brokerage capacity, there’s also options with your retirement accounts, just to confuse you even more, that allow you to buy things like real estate, or alternative assets, or private investments with your retirement account money. That’s where you might need to talk to a self-directed IRA company or custodian to give you that enhanced optionality even above and beyond what you get with an E-Trade account on your retirement account. You can go to E-Trade and you can set up a brokerage account that’s after-tax, which is any dollars you have leftover. You can go there and set up an IRA. You can go there and set up a Roth IRA. You can set up all these different options.
But perhaps with some of these big brokerage, it’s just a little bit more difficult to buy a rental property, for example, or invest in a private company, or those types of things. For those options, that’s when you’d want to go and think about a self-directed 401(k) or plan like that.

Mindy:
Yeah. If that is an option, if the self-directed is an option for you, I would definitely recommend checking it out because we have additional benefits available to us as solo entrepreneurs that aren’t available to Mindy, the W-2 employee, and that 401(k). It’s a great thing to look into more. I have a good article from motleyfool.com that I will link to in the show notes as well that gives a little bit more information.

Scott:
Now, I want to nerd out here for one more second here because I enjoy talking about this stuff. Luckily, this is my job also. All right, so let’s talk about that. We have these concepts. Let’s say that you are, “Hold up, that’s interesting. Scott said maybe I can convert my 401(k) into a self-directed 401(k), or something like that, where I’ve got a little bit more control, I hire a custodian, done with the paperwork. What should I invest in with that?” Well, I’ve mentioned this before on the podcast, if you listened in the past, so excuse me if I’m repeating myself. But I think an asset like real estate is actually a relatively speaking, poor place to invest money within a 401(k).
Why do I think that? Because real estate is already tax advantaged, right? You’re already getting depreciation. You can defer taxes with a 1031 exchange, you can cash out refi. Real estate investing is a great thing to do, in my opinion, with money that is not in your retirement account, with money that I just save up outside of that, after-tax dollars. Within the retirement account, I like the idea of investing in assets that produce more taxable income. What might that be? Maybe like note investing would be an interesting thing to do with a self-directed retirement account. Because that note is going to produce a private note, or a hard money loan, or something like that, might incur a 10% interest rate. That’s all ordinary income. If you’re lending that out of your after-tax savings, it’s going to be taxed at a very high rate if you’re doing that.
But inside your retirement account, you can earn that very high return, and you get a much better tax advantage from that. Just think about as you’re framing this out, and whether you want to do with your retirement accounts, if you’ve got a large number of assets in retirement accounts, and you’re interested in some of those things, just formulate an approach and maybe talk to your CPA or something like that, or your CFP and understand where the biggest advantage for investing in different asset classes might come relative to the tax consequences of investing in your 401(k) and outside of it.

Mindy:
Oh, good idea. Scott, what do you think about syndications? I have done private loans and syndications in my self-directed solo 401(k), as well as a mobile home park.

Scott:
Great, so syndications, let’s do this, I invest in a syndication. Okay? I invest in multiple syndications. Syndications are often available only to accredited investors in a traditional sense. Okay? An accredited investor earns over $200,000 a year as an individual, $300,000 a year as a married couple, or has over a million dollars in assets. There’s also been a recent release from the SEC that says that they’re going to … I don’t know if this is out yet or whether we have it yet. It was unclear, but there’s going to be some sort of certification that folks who do not meet those two criteria, or the other less common criteria for the definition of accredited investors, to basically take a certification or class of some sort, so that they can get the accredited investor certification. I’m thrilled that that’s going to be an option, although I think the details are still very vague on that. That was big news a few weeks ago.
Okay, so with that, if you’re an accredited investor, you can invest in a syndication. Syndications can be a wide variety of things, right? The syndications that I’ve invested in so far are generally large real estate, basically, apartment buildings. We buy an apartment building. Not me, the operator of the syndication buys an apartment building. They finance the acquisition just like you would a rental property with a equity piece, a down payment, and then a loan, right, which is often a bridge loan. They then go in and rehab the property, right? The equity piece is what they’re raising from an investor like Mindy or myself. Right? Then they’ll go in and fix up the property, raise rents, reduce expenses, whatever, and then stabilize and sit on the asset, the apartment complex for a few years, and then either refinance it, use that refinance proceeds to pay off investors, or sell the asset, right?
Okay, I’m getting really complex here, but what else happens when this happens is the investor, me, I put money in, and there’s a big loss in the first year. Why is there a big loss? Because we have to pay fees to purchase the asset. There’s a brokerage fee, there’s a financing fee, there’s when all the rehab and expenses go into fixing up the property. It’s a big loss, often, the first year or two of the hold. That can be great for you because it can help offset other income from other investments that are similar, right? Then in later years, that’s when you begin realizing the gains. There can be a lot of really good tax advantages just from syndication investing. I invest in syndications with after-tax dollars, or at least syndications of that sort that I just described. I may invest in syndications that have completely different financial profiles through my 401(k) in the future, because they’re likely to realize large amounts of income right away in ways that I cannot apply tax advantages to. But for that basic framework, that’s why I like to invest in syndication with after-tax dollars at this point.
Another type of syndication … Sorry, I’ll get going for 60 more seconds, then I’ll move on. All right, but another type of syndication might give you what’s called a preferred return. In this syndication I just described, I’m a common equity investor. I get a big loss at first, and then over the years, I’ll be getting increasing amounts of income, ultimately, a large payday when they sell the asset. But with a preferred return, what happens is you invest money into an asset, and they’re going to pay you what’s called maybe an eight to 10% pref, preferred return. That’s basically income to you. Let’s say you loan $100,000 to this person or invest $100,000, you get an eight to 10%, pref, right? That’s an eight to $10,000 interest payment per year on that money that you invest in.
That is going to be very highly taxed. It’s going to be very consistent high taxed income. That would be a good thing to invest with your 401(k). Right? I’m getting really complex here, but hopefully, that framework is helpful to those of you who are thinking about the future and what to do with the money in your 401(k) versus the money that you had saved up outside of that, maybe in your just bank account or after-tax brokerage account. Sermon over.

Mindy:
No, I think that’s very helpful. That can be confusing if you’re not ready to invest at that level, but there are people who are investing at that level or ready to invest in that level, explaining that’s really helpful. Thank you, Scott.

Scott:
Great.

Mindy:
Okay. Anthony sent in a really great question. Frankly, I want your opinion on this as well, Scott. Anthony says, “What do you think about investing into a 401(k) up to the time that the estimated future value of that account will be funded to 25 times the estimated standard deduction at the time of withdrawal with a goal of minimizing future taxes. Any retirement contributions above and beyond this 401(k) strategy would be in Roth IRAs or real estate investments with their own tax benefits.” Then Anthony ruined it by saying, “I love this show, but I love the jokes more.”

Scott:
Love it. Awesome. Thank you. Thank you, Anthony. I appreciate that. Those jokes will never retire. All right, now we are going to talk about-

Mindy:
Oh, God.

Scott:
I think the way the question is worded may be confusing to some listeners, so let me reword the question. When I pay my taxes every year, I get what’s called a standard deduction. I may also get deductions for if I’m married, I’ll get deductions if I have dependents, those types of things, right? There’s a standard deduction. The standard deduction, if we all remember, just changed when the Trump administration changed the tax code a few years ago. Okay? What Anthony’s asking here is, “Should I just create a 401(k) contribution, such that my income that I withdraw when I get to the time of a traditional retirement age is around that deduction threshold or close enough to it where I’m not incurring a hefty tax burden, and then shift my approach to a Roth IRA, or some other savings approach so that I can maximize tax benefits?”
Anthony, I’d say that’s a really smart concept. I think you’re really thinking through this critically and have something there. But I would just challenge you with a fatal flaw in your assumption or planning in this that would make me not want to address that, is the fact that those standard deductions could change. Who knows what that tax code is going to be in 20, 30, whatever years it is toward retirement age. If you’re just a few years from retirement age, maybe that’s a potential thing to plan on. But you’re still going to be, hopefully, if you’re retiring is 65 even, hopefully, you’re still going to live another 30 years, and over that 30 years, the tax code could change multiple times.
I think that planning around a specific event like that far into the future is likely to backfire, and in a way we can’t predict. What I would do instead is I would think generally through, “Am I in a high income tax bracket now? Am I in a low income tax bracket now? Will I be in a high income tax bracket at retirement age? Will I be in a low income tax bracket at retirement age? What is the best set of approaches there?” Right? I’m sitting here, I’m an overconfident, now, I guess 30 something year old, and I think I’m in a high income tax bracket now. I love my job, I love my career. I think I’m going to be in a high income tax bracket at retirement age, therefore, instead of investing, and I think tax rates are going to go up, right, so that’s why I’m investing in a Roth 401(k) with the vast majority of my retirement account used, and not in a 401(k) because I believe that tax rates will go up over time, and I’ll be in the same or higher tax bracket at retirement age, right? I think that that would be a better framework to approach your retirement planning from then the standard deduction as it currently exists, and a mathematical computation against that.

Mindy:
I-

Scott:
Getting going.

Mindy:
Well, Scott, do you like talking about this?

Scott:
Mm-hmm (affirmative). Yeah.

Mindy:
Okay. No, I have nothing to add. I think that’s great. Scott and I are in different places in our life. We are different ages. I am still contributing to a traditional 401(k), and I am maxing out my Roth IRA, because the Roth will tide me over until we get to the traditional, or 59 and a half where I could start pulling out from the traditional 401(k). I also have after-tax investments that generate income such as the coworking space in my local hometown. It doesn’t generate a ton of income right now, but I don’t have to have it generating a ton of income right now. But even still, it’s probably 50% of my monthly spending just in that one investment. There will be other things that we invested. But we’re also, we have an eye to the future. Where am I going to retire at? Once I do, I’ve got plans in place, so I’m not going to starve, and so hopefully, I don’t have to pull a lot out of my 401(k) until retirement age. If you’re young, right now is the best time to be thinking about this. What are different ways that I can fund the gap?

Scott:
Yeah. I think there’s no one right approach. I just think it’s all about the framework that we have and what position in life you’re in, and what position you want to be in at the retirement age. I just would specifically recommend Anthony not to specifically plan around the standard deduction for what’s right now, just because look, I don’t know what’s going to happen in 2020 with the election, I don’t know what’s going to happen in 2024, 2028, whatever. But I just would feel reluctant to plan around what seems like a changing and moving target around the tax code and the standard deductions.

Mindy:
Yeah, I think that’s a fair bit of advice. Okay, our last question comes from Connor. I think this is a really great question, very timely. “Should I continue paying student loans while they are in forbearance?” I want to jump in here and say, if you have the money to make payments while they’re in forbearance, I would say do that. You want to get your student loans away as soon as possible. What does forbearance mean in the context of student loans? Because I don’t have any, I didn’t really pay much attention to that part of the … Was that the CARES Act? Where all federal student loans are incurring no interest for this set amount of time. Is that correct, Scott?

Scott:
I think it’s something like that. I need to go and double check the specifics of that. But again, I think this for me comes down to frameworks and having an approach in mind about how you want to do things and run your money. Right? Look, when I think about paying off debts, forget student loan debts, in general, look, I use a framework of there’s a … Don’t pay it off early. You’d be better off investing your money or figuring out a way to at least get some sort of spread between your debt and investing. Maybe we call debts with zero to 3% interest in that category. Right? That maybe there’s a definitely pay off that debt, it’s really high interest rate. Maybe that’s anything above seven or 8% interest rate at this point in time, right? It’s going to be very hard to invest for a risk-free return, which is what you’re getting if you’re paying off seven or 8% interest debt early, to get that anywhere else in the investing world at this point in time. Right?
Then you have this gray zone in the middle of let’s call it four to 6%, right, four to six, four to seven, whatever. Those zones are going to change for the individual investor, depending on how confident they are as an investor and how much they hate debt. If you hate debt, a 1% interest rate debt is going to be in the no go zone, right? But what the student loan forbearance situation has created, in my opinion, is it has taken student loans, and it has effectively reduced their interest rates temporarily. Right? Perhaps if they were in that definitely pay zone, they’re now in a gray zone. If they’re in that gray zone for you, where you’re not sure whether to pay them off or whatever, you have a hard decision about, is it five and a half percent? Do I pay it off? Or do I invest or close? I don’t know.
Maybe they’re now at 0% temporarily. That makes the decision easy for you to invest elsewhere or whatever. But maybe they’re going to go back to five and a half percent soon, and so all that’s really happened is it’s gone from five and a half percent interest rate to a 5% interest rate long-term, because you’re getting a temporary reprieve from that interest rate. Does that make sense? I’m getting going on this. But I guess the answer I would have is, understand if it’s really changing the math for you, or setting them into a new bucket where it really does change your approach, or it’s having a very modest impact, and it doesn’t really change what you’re doing. If you’re going to pay them off early, you continue paying them off early. If you’re not going to pay them off early, you are going to invest anyways. This just confirms that even more.

Mindy:
I’m coming from a point of in a typical loan payment, a portion of it goes to the principal and a portion goes to interest. Right now, none of your payment is going to interest, so the entire amount would pay your principal. I guess tag teaming with you, if you were planning on paying them off early, now you can get just an even bigger jump. I guess-

Scott:
Yeah. It’s only a benefit, no matter which way you look at it, right, if it’s not, in fact, accruing any interest, which I believe is the case. But I have to double check. But if it’s not accruing any interest, then it’s just a benefit no matter what, right? It’s just going to help you accelerate pay down faster if that’s what your goal was. It may change the long term interest rate profile of the debt in a minor fashion because you have a 5% interest rate long-term debt that is temporarily for a few months at zero that may move it to whatever it is that reduces the long term interest rate effectively on that loan. But it probably is not changing the ballpark of what you’re trying to do in a meaningful way. It may just shift it slightly from one category to the next if you buy in my framework.

Mindy:
Perfect. Well, Scott, this was a lot of fun. We should do this again. If you are listening and you have a question for us, please call and leave a message at 877 BPM show. That’s BP Money show, or 877-276-7469. Or if you would rather remain anonymous, email [email protected]. Or to reach either of us directly, he is [email protected], and I am [email protected].

Scott:
Anybody who posted a question today, or sent us a question, or called in, feel free to email me or Mindy directly if you have any follow up questions about what we described in the show here. Also, you can go on to the BiggerPockets Facebook group, right, Mindy?

Mindy:
Yes.

Scott:
And post questions there.

Mindy:
Yes, that is facebook.com/groups/BPMoney. We had a lot of links and additional information that we referenced in this episode today. The links can be found at www.biggerpockets.com/moneyshow142. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 142 of the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen, and we got to scoot, little newt.