Ask the Money Experts: Backdoor Roths, Bad Debt, & When to Fire Your Financial Advisor

Mindy:
Welcome to the BiggerPockets Money Podcast where we bring in Kyle Mast and Amanda Wolfe to answer your questions.

Amanda:
First, what you’re going to do is make sure that you have a traditional IRA open and a Roth IRA open. Then you’re going to contribute your money to the traditional IRA. You don’t invest it, which normally goes against everything that you would ever learn about investing, but you leave it there for a couple of days for the cash to settle. Sometimes it can be upwards of like a week or so if it’s your first time doing it. But then once it says you have settled cash, then you’ll have the option to actually roll it into the Roth IRA.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and I am here to make financial independence less scary, less just for somebody else, to introduce you to every money story because I truly believe financial freedom is attainable for everyone no matter when or where you are starting. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own business, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
Now, if you are a longtime listener, you will know that Scott Trench usually joins me today, but he’s on a break. So I am here with Kyle and Amanda and we are going to have an awesome time answering your questions. But if you are a longtime listener, you also know I have an attorney who makes me say the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor Amanda nor Kyle nor I nor BiggerPockets is engaged in the provision of legal, tax, or any other advice.
You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal, tax, and financial implications of any financial decision you contemplate. We have a new segment here called Money Moments where we share a money hack tip or trick to help you on your financial journey. Today’s money moment is, if you still carry cash, always pay with a bill versus exact change.
This may sound crazy, but a great tip to save. Break the bill and then put the extra change in a jar. Every month, take your change and put it into your savings account and you will have a nice nest egg in no time. If you have a money tip or trick to share with us, please email [email protected].
All right, before we start, let’s take a quick break. And we are back. Kyle Mast, Amanda Wolfe, welcome back to the BiggerPockets Money Podcast. Thank you for joining me today.

Amanda:
Happy to be back. Thanks for the invite.

Kyle:
Thanks for having me back. It’s always good to be here. Thanks for having me back.

Mindy:
We asked in our Facebook group what questions do you have for our money experts and you guys did not disappoint. So thank you so much for asking these questions in advance. If you have questions at any time, you can always go to facebook.com/groups/bpmoney and our amazing community will also help answer your questions. But we have experts here today, so we’re going to take advantage.
Up first, when you want to own your own business but you have bad debt, should you pay off those debts first before buying a cash flowing business with no money down? Kyle, I’m going to start with you. We could talk about this particular one all day long. I’m going to let you talk about this for a bit.

Kyle:
Owning your own business is something that I really think a lot of people should consider. It’s not for everyone, but it’s a very good thing. In this particular question, the bad debt issue is the thing that concerns me. I would want to ask a few more questions. What’s the current job that you have? Are you getting paid really well? How fast could you knock out this bad debt? Is it like $10,000 that you could knock out in three to six months if you lived really simply? Are we talking about $80,000 of credit card debt?
Then a follow-up to that would be what kind of business are you looking at? Is it a cash flowing business with no money down? The first thing that comes into my mind, and it probably shouldn’t, is a multi-level marketing. That’s the first thing that comes to my mind. No money down, we can get into this business, you can invite your friends to these parties. There’s different things that we need to look at here. But I’m a huge proponent… if you can get into owning your own business, especially with no money down, that’s a great way to go.
I’ll maybe share a little bit of experience being a CFP and then launching out to your own business from that avenue because it’s probably similar to a lot of different businesses you might do. You have some costs. For me, I had to get that certification. But I would say all ins launching the business probably $5,000, which is very lean for that type of business. But it can definitely be done. The second thing is that you can also… and you said a cash flowing business with no money down, so I’m going to assume it’s not a multi-level marketing business.
I’m going to assume it’s actually… say it’s a pressure washing business in the local community and the no money down is the current owner will allow you to pay them overtime out of the earnings that you make. That’s a very common thing and that’s a great way to go into business. It’s a very good way because if you create some agreement where the current owner is paid on the revenue that comes in, you’re incentivized to work harder so that you make more money for yourself and for your family and then they’re rewarded for essentially seller financing that by… they get maybe paid a percentage of what you’re bringing in.
I mean, that’s probably the way I would structure it. Depends on the business though. If there’s some assets in the business, they’re not going to want to do that. If it’s a clientele business, they might be more willing to do that. So there’s a lot of moving parts here. But I would say definitely look into it. The bad debt thing worries me and the no money down cash flowing business worries me because I don’t know what that is.
There’s a lot of things out there where people are really excited about, I’m just going to go do this and it’s just not the 11:00 PM… I should say 1:00 AM. 11:00 PM is the latest I stay up. Like 1:00 AM infomercial business that comes on where you can just go do it and you don’t have to put any work into it. Real entrepreneurs don’t work like that. It’s good work, but it’s hard work to get into something. Yeah. Amanda, any comments on that?

Amanda:
Yeah, no, I think you bring up a really good point of first and foremost what type of a business it is and why is it no money down? Is somebody lending you the money to get going and then there’s going to be monthly costs that you’ll be incurring or annual costs that you’ll be incurring? If I look at my own journey in being an entrepreneur, my business did start with $0. And it was pretty much $0, maybe 20 bucks a month, for maybe the good first year and a half. Then it started becoming profitable.
Once it started becoming profitable, then I was able to put some tools in place to make it run a little more efficiently. But I think that one thing that striving entrepreneurs, I should say, should know is a lot of times your business does not make money in the beginning, so are there going to be costs that come along with it even if it’s no money down now that you’re going to have to cover until it does make money?
Are you sure that this is a thing that people want to buy? For example, the MLM piece of this, the multi-level marketing, are you going to be harassing your friends and family to buy your products? Is this something that people really want? So looking at it as, how much money will it cost you ongoing? If it’s truly zero and it’s just your time, for sure, I say go for it. But being an entrepreneur is really, really hard work, especially if you’re doing it alongside a 9:00 to 5:00 job, which I can say is me.
It is a lot of work and it’s not sustainable forever. So I would say if you’re just dipping your toe in, see what you’re signing up for long-term. And if it is going to cost you money monthly, annually, then I would personally get rid of that bad debt first before going all in and looking at a business that truly did cost zero.

Mindy:
I have a lot to unpack with this question. Let’s start at the very beginning. When you have bad debt, what does bad debt mean? I think we can all agree that a mortgage is traditionally not bad debt. It’s good debt because it’s a lower rate and it’s on your house, you’re leveraging a place to live. Credit card debt can be 15, 18, 27% interest, which is awful. It’s heartbreaking that they could even charge that much. But that’s typically what bad debt is.
Kyle, to your point, you said, what about your income? What about your job and what kind of debt? If you’re making $20,000 a year and you have $80,000 in credit card debt, you have no business buying a business. If you have $80,000 as your income and $20,000 in medical debt, that’s a less bad kind of debt. Then we can talk. If it’s a lower interest rate, we can talk. Bad debt has levels. When you want to own your own business, but you have bad debt, should you pay off those debts first before buying a cash flowing business with no money down?
Yeah, it depends. I think all of these questions are going to be… first answer is, well, it depends. It depends on all these different things that we’re bringing in. Amanda made a really good point about costs. Just because it costs you nothing to get into this business doesn’t mean it’s not going to cost you money on an ongoing basis. I can’t think of any business that has absolutely zero ongoing costs. Even though they’re low, they… every business has a cost. And the what kind of businesses, like a cash flowing business with no money down?
What business is cash flowing with no money down? I think even those MLMs cost money. We did an episode on multi-level marketing, and LuLaRoe specifically, episode 369, and I think at one point it was like $5,000 to start off. There are lots of ways to start a business. I mean, Amanda, you started with basically no upfront costs outside of website hosting and the cost to make good videos and make good-looking Instagram pictures and things like that. Do you do all of your own graphics or do you hire somebody out to do that?

Amanda:
There are ways to get around not having a full-on website if you have a social media page. I didn’t have one in the beginning and I was using free resources that allow you to make graphics. I was just using my iPhone for all videos. So you can start with zero for something like that. Then once I started seeing that, yes, there is an audience for my topic, people are interested, then I got to a thing where I was spending $20 a month on something to help my graphics come together a little more easily.
Then creating a thing so people could schedule calls with me. So the costs were then low, but it was after I made sure there was a demand for the services. And then ongoing, making sure you keep those costs low because that’s another thing, is it’s really easy… There’s so many efficiency tools out there and it’s really, really easy to let that get out of control and then you’re tens of thousands of dollars a month in hard costs that you have to pay and then that can get out of control.
That’s much further down your business owning journey. But I would say start with as little as possible, especially if you have debt. If this business that you’re going into is truly nothing down, see if you can keep it at zero for as long as possible. Make sure there is a demand and then go from there. That was a long-winded answer to that, but to answer your other question, Mindy, yes. So now that I’m in a position where my business is earning money, I’m still working a 9:00 to 5:00, I did have to get to a point where I was outsourcing some of that work. But I did it all by myself in the beginning. It doesn’t have to be perfect. Now I do have a team of some help.

Mindy:
Kyle, you said it costs about $5,000?

Kyle:
Yeah, that’s about right. And that’s probably on the low end. Everything is different. Amanda and Mindy are making really good points here about… we’re not hitting on it directly, but I want to point it out, part-time. Starting it part-time on the side is a very good way about starting your own business, buying a business, owning a business. It’s very low risk. In this question, we don’t know what your current job is. Hopefully you have a job and hopefully it’s a decent paying job.
If it is, my goal would be to increase your flexibility so that you can try this other business, or if you’re ready to start a business, create flexibility in your current job so that you can do that on the side before you jump. Amanda’s talking about as her business grew and as she had a little bit more income, you can do more things. Another good point she made in there, the expenses. Even from the beginning, as you add these little monthly expenses, recurring revenue is the lifeblood of a business.
Recurring expenses will kill a business really fast. Well, I shouldn’t say really fast. It actually will bleed you pretty slowly and then all of a sudden it’ll die. But that’s a good way to look at it. Even when I started the CFP and I started my own business, I think I made $13,000 the first year. But my family raises Christmas trees and I went to Arizona for two months and sold Christmas trees on Christmas tree lots to people in the desert. I’m from Oregon. But that’s what I had to do to make ends meet and pay off student loans.
Then about three years in, for a lot of businesses where you hit the sweet spot, people start to… especially in a service business, people start to know who you are, what you do, referring starts to happen. But if you can do the part-time thing in the meantime to really cushion that. And the bad debts… if I had to answer this question directly, so we’re doing this depends thing all around… we’re dancing around what your situation is.
If you pinned me down and said, “Should I pay the bad debts off before buying the business?” I would say yes. That would be my default answer because it just makes everything else easier down the road. Do whatever you can to just hammer those out and then you can do a lot more. But again, it does depend.

Mindy:
Yeah, I’m glad you said that Kyle. I absolutely agree. If you want to own your own business, you want to start just like real estate. You want to start investing from a position of strength, a position of financial strength. That means you are financially secure, you are in a good financial position. You don’t have a bunch of bad debt, you have a good income, you can easily cover the expenses that this new investment will generate, if any.
So if it’s a small business, it’s going to generate expenses. You personally need to be able to cover those expenses. Assume the business makes zero. Just because it says it’s cash flowing doesn’t mean it actually is. Okay, I think we have covered this. I think that those were some pretty good answers and some great tips from Amanda and Kyle. Let’s move to bonds. I’m not a big bond fan, so I am relying heavily on Amanda and Kyle for this one.
Should we take old bonds, I bonds, government bonds, war bonds from 2000 to 2010 and cash them out and put them in the stock market? I would say yes because I don’t like bonds. But that just comes from a position of uneducation. I am uneducated about bonds. Kyle, what do you think about bonds?

Kyle:
Well, here’s where I’ll put my little disclaimer in. I am a certified financial planner, but I am not giving specific advice to this person or anyone on this podcast for their specific situation. I’ll just give you some ideas of what I’ve seen and my personal opinions too. From this standpoint, there’s a few other things I would need to know, like how much are you going to get hit from a tax standpoint on these bonds? What was the price you bought at? What are you selling them at?
There’s a couple different types of bonds you’re talking about here and we won’t go into the details on them. But in general, I am with Mindy, I don’t like bonds for the long-term. If you’re someone who has a substantial amount of wealth or you have enough, maybe I’ll just say enough, and you like to sleep good at night and you don’t like the stock market going up and down, that doesn’t help you sleep good at night, then bonds can be a fine thing. You just need to remember that you’re not going to beat inflation with bonds.
You might beat it a year or two here or there, but in the long run, it’s going to be… Basically, when you’re owning debt, a lot of times you’re just keeping up with inflation. If you’re owning good debt, if you’re taking risk and owning a little bit more riskier debt, then you can maybe beat inflation, but you’re also taking on more risk to do that.
My personal opinion is, well, right now the stock market… I think it’s probably a decent time for the long run to be… If you have some and you have the risk appetite for it and you don’t need the funds in the long… or in the short-term, five to 10 years, I would say if you need them in less than five years, you need to really think through putting them in a full equity stock portfolio.
I like real estate and stocks for the long run. They just perform better in the long run. And if you have a cushion of cash to weather the short-term issues, that’s where investments should be if you’re serious about building wealth in the long run. Nothing wrong with bonds though. I’ve worked with clients in the past that live well within their means, whether they’re wealthy or even maybe just your normal, average American household, but they live well within their means and they have good money habits and they don’t like the risk of the stock market.
They don’t need to shoot for the fences, they don’t want to. They’d rather just see the dividends coming in from their bonds, and then when the bond comes due, they’ll re-cash it in and get another one. And that’s fine. It’s not what I would do, but I’m not them and it helps them sleep good at night. I have gotten those calls before from clients that are not comfortable with being in the stock market and it goes down and they are in a hysteria.
You don’t want to be there. You don’t want to make a bad decision. So in general, if you’re looking for the best return and the best builder of wealth in the long run, bonds are not the way to go. But it’s a personal preference thing.

Amanda:
I think I’ll also add the same disclaimer, not a CFP and everything that I’m sharing here on the podcast is all just my opinion. But I think as far as bonds go, I don’t think there’s anything wrong with having some bonds. For this person, I don’t know how old they are or what they would be using it for, but I would say, are you in the wealth preservation stage of your life or the wealth accumulation stage? Are you 25 or are you 65?
So I think it just really depends on where you are in your life and how many bonds you might already have in your portfolio. Are you starting to get a little over-leveraged on them? If that’s the case, then I would probably cash them out and buy stocks because of all of Kyle’s points that he just made around the stock market. We know in theory goes up over time, so as long as you’re planning to put them in there and leave them alone for a while, then theoretically they should be going up over time.
If you’re going to need those funds in the short-term though, then you probably want to stick them somewhere like a high yield savings account or somewhere where the funds are going to be more accessible and you can access them without penalty. Bonds are also not my favorite, but again, at my age I think having a smaller allocation of bonds is better. But again, all the Kyle’s points, really just depends on your risk tolerance and the stage of life you’re in.

Kyle:
I want to maybe point out too that the bonds are not always… they’re supposedly less risk, as kind of how our industry will advertise them. But as you can see, in an increasing interest rate environment, which we’ve had recently, which was hard for us to think about 40 years because we were in a decreasing interest rate environment for so long, but in an increasing environment, bonds values go the opposite direction of the interest rates as they increase.
A lot of people make the mistake of thinking, “I want to be very conservative, so I’ll move everything to bonds.” That’s actually less conservative if you were to go 50% bonds, 50% stocks. You just have to wrap your head around that. But it’d be like putting all your eggs in a bond basket. So just make sure you’re not doing one thing. If you want to sleep good at night, don’t put them all in bonds because that’ll hurt at some point. You can put a lot of it in bonds, but just don’t put quite all of it there. There’s no complete safe haven.

Amanda:
Low risk, not no risk.

Kyle:
Yes, exactly. Yep.

Mindy:
What are your thoughts on direct indexing? Kyle, can you give us a definition of direct indexing?

Kyle:
Yeah. It can mean a few different things sometimes, but essentially, the simple answer is usually you’re picking the stocks that would be in an index fund. So if it’s a S&P 500 index fund, you’re just mirroring those 500 stocks. But instead of buying a mutual fund that owns them or an ETF that owns them, you’re buying them individually yourself. You might not buy all 500, but you might buy a spread that’s close to that. You know might buy 50 that represent the 500 roughly. But that’s the general idea behind it.

Mindy:
So my thoughts on direct indexing is it sounds like a whole lot of work to save pennies or to make extra pennies. Not a fan.

Amanda:
No, I’m with you, Mindy. Your initial thoughts, I’m on the same page. I think that they take a long time to set up, they can be expensive to set up too. I mean, depending what you’re doing, sometimes you can implement some additional tax saving strategies for yourself. But I don’t know, I feel like nobody got time for that to sit around and pick and choose what is going to be inside this basket. Let’s just pick the tried and trues and move on. That’s my opinion on that.

Kyle:
Totally. That’s where I land. For really wealthy individuals, sometimes it makes sense because you can get some of these huge tax breaks if you want to harvest specific stocks. However, Amanda made a good point, who’s got time for that? If someone’s really wealthy, they want to be spending their time doing something else, and sometimes they’ll maybe have money managers do that for them. But the fees you pay the money manager, you might lose that tax savings, so just keep it simple. I mean, don’t try to do something that’s being done really well by a good indexing company.

Mindy:
Love it. All right, this is a question we get a lot. For folks with several investment account opportunities but not enough money to fill all the buckets, how would they prioritize Roth IRA, 403(b), 401(k), that sort of thing, 457? For this purpose, I would equate 403(b) and 401(k) as the same thing. They’re just the same but different depending on where you work. So how would you prioritize Roth IRA, 401(k)/403(b), 457, and taxable brokerage? There are obviously differences for each, but I’d love to hear their advice about prioritization and use of Roth versus non-Roth for the average middle class investor who probably can’t max everything out?

Amanda:
Yeah. I would personally lump together the 401(k), 403(b), 457. Those are all employer-sponsored plans. My favorite order of operations is first to make sure that you get that employer match if you’re offered one. We like to say that’s free money, but also it’s part of your comp. When they configured your comp, they were expecting you to take advantage of that match. So first and foremost, get that match. If it’s 3%, put in 3%. My second favorite after that is to max out the HSA if you’re eligible for one.
I know that one was not listed, but a lot of people don’t realize that the HSA is also an investment account as well, and it is this triple tax advantaged unicorn account that… No other account gets triple tax advantages. So that is my second favorite one. The limit on that for an individual for 2023 is, I believe, 3,850. So that would be my second account. Then I would be hitting the Roth IRA, which is 6,500 a year. Then after that I would look to see how much money am I left over with.
So we’ve done the 6,500, we’ve done the 3,850, and then the match, how much money do we have left? Can we put some more into our 401(k), 403(b), 457 but then still have a little leftover for a brokerage? That is, I feel, maybe where my opinion might differ because I don’t want to put every extra dollar into a retirement account. I like having a small amount at least to put into a brokerage account. I think that the brokerage account can be used for some of those five to seven to 10 to 15 years goals, like a supersized savings account if you will.
But you’re investing it for those long-term goals, goals that you might not even know that you have today. So I like leaving a little bit of money for the brokerage, but in summary, that’s my order. So the employer match, the HSA if you’re eligible for one, the Roth IRA, go back to the 401(k)/brokerage.

Kyle:
Yeah, I love it. That’s a great order. The only maybe thing I would add is the 457 account. When you get to that point, if you have that as a possibility, you might want to look at that and your current employer rules on that one because that is actually an account that you can oftentimes take from earlier at an earlier age. So if you’re planning your retirement sometimes and sometimes you can dump a whole lot more into it than the normal maximum. Some nuances around those tax codes, but just pay attention to that. But that’s later down the line there. But yeah, I like Amanda’s order. I Wouldn’t change anything.

Mindy:
Tagging off of that HSA conversation, here’s a new question. I have children that we have also been saving our receipts for to file against the HSA. Can I still file for reimbursement of their procedure that happened this year in 20 years when they are no longer my dependents as they will be well into their 30s by then?

Kyle:
That’s a good one. Here’s where I would land on that one. I would say probably yes. But don’t sue me. I think the way the rule is written is that if the child needs to be your dependent and on the high deductible healthcare plan to be able to use HSA money, I think it would be easy to make a case that the kid is 12 years old, they break their leg, you’re reimbursing for that 20 years later.
There’s no limit on reimbursements for HSA accounts. They were dependent on your tax return for 2023 when they were 12 when they broke their leg. I think so. I don’t know that I would push that limit. If you want to be safe, I would reimburse yourself while they’re still dependent of yours, all the reimbursements that you need for your kids. That would be a safe way to play it. But you could play it the less safe way of reimbursing later on. You’re probably going to be okay. You might have to defend it, who knows?
And there might be at that point a tax court case that tells you one way or not, one way or the other what you can do. But you could always save the medical expenses for yourself and your spouse and reimburse those. That’s an easy one. But yeah, this is a good question. I don’t know if that makes me want to do some research and figure out if they’ve lined that out somewhere. I don’t know. Do you know, Amanda?

Amanda:
My gut tells me yes, because to your point, as long as they were qualified dependents during the year that the incident happened and that the receipt that you’re looking for a reimbursement occurred, I am pretty sure yes. This is a trick question. This is a tough one. But yeah, I think so. And I think that is one of the most powerful things about the HSA though in my opinion, is that if you have the funds to cover those medical expenses now, you get to invest that money, let it grow all those years, and then pay yourself back and you got to earn money on your money all those years.
So that to me is why the HSA is so awesome. So my gut tells me yes. It sounds like you’re already doing some future planning, which I love. But my gut tells me yes, but to Kyle’s point, don’t sue.

Mindy:
Everything I have read says that if your child is eligible and covered today, you can pay the bill in cash today and then take reimbursement later. But I have never seen an end date on that reimbursement. So you can allow it to grow and collect later, but there’s no specific guidance on that. Now I’m going to reach out to all of my financial geek friends and ask them the same question. I will have an answer for you in the Facebook groups when I get definitive answers.
All right, moving on. I’m retired with about $1 million invested. Paying my advisor 1% would cost me $10,000 a year. No, thanks. I’d rather pay someone hourly for help a couple of times a year. Is this reasonable? Yes, it is reasonable. It’s called a CFP, a fee-only financial advisor. Hey, Kyle, have you ever heard of this before? Do you know where we could find a fee-only financial advisor?

Kyle:
Yes, I’m glad you asked. Mindy is spot on, this is who you want to talk to. Find someone who charges hourly or… A lot of fee-only financial advisors, certified financial planners, CFPs, will do retainer. If you’re someone that you want to meet with someone two or three times a year, and if that’s an ongoing thing, you probably want someone that is going to… you’re probably going to pay them on a retainer fee of some sort.
I’m going to push back on this question a little bit because in the financial independence community, there’s a real push against this percentage charged against… that financial advisors charge. It’s very understandable and most of the time it’s charged on investment accounts to try to get more performance and that’s a terrible… that’s a waste of money.
However, to this person who is asking this question, if you want to talk to a really good fee-only CFP about your million dollar portfolio in the context of your overall financial plan, a really good one with 10 to 15 years of experience, it’s probably not going to take you hourly. He or she’s probably not going to meet with you once or twice a year. It’s not worth their time. I hate to say that, but they want to work with someone who values that time so much that they’ll probably offer you a retainer.
And guess what their retainer would cost a year. Probably five to $10,000 for someone who has maybe a moderately to a little more complicated financial planning life. If you have a family, if you have a job, your spouse has a job, you own a house, you maybe have one rental property, you have a million dollar portfolio, and if you want advice on all of that from someone with a good amount of experience, the price tag is not going to be real cheap, but it’s going to be worth it.
I can guarantee you, if you speak with a really qualified fee-only CFP, in about 15 minutes of looking at documents, if you haven’t spoken to one for a while, they’ll probably save you the $10,000 right there. That might not happen every year. It might be 50,000 that they save you some years because of a life transition or something. But there’s some real value in paying well for good advice. I know the person asking this question, that 1% fee is a big deal.
I really don’t like it in our industry where there’s a lot of this 1% that we charge and we build this portfolio and it’s supposed to do better and it’s a bunch of hogwash and we don’t provide any other value. There should be social security planning, there should be insurance planning, disability insurance planning. There should be retirement planning, real estate. They should be looking at everything. But if that’s what you want, it’s going to cost money to do that. But yeah, that’s my semi-strong opinion, I guess.

Mindy:
And you can hear more tips from Kyle on episode 41 of the BiggerPockets Money Podcast. That one is called How to Find the Best Possible CFP for Your Needs with Kyle Mast. He goes through just in really great detail what a CFP could do for you. I think you shared several things that I was not even aware of that if I had hired you to do my financial planning, I would’ve been like, “Oh! That would’ve been way better. That would’ve been way better. That would’ve been way better.”
I don’t have a 529 plan for my children. The reason I don’t is because 100 years ago, either they changed the plan or I was wrong and misunderstood, I thought that if you put money into a 529 plan and then it didn’t come, you didn’t use it for school, you only got what you put in. Let’s say I put in 10,000 but it grew to 100,000, I would lose the 90,000. I don’t know why I thought this, maybe there was some sort of thing on the state that I was in where their specific state college plan was like that, but if I had spoken with a CFP, then my kids’ college would be paid for tax deferred or whatever the 529 plan is.

Kyle:
Yeah, there are some really good CFPs that will do hourly and they’ll charge you… It’s going to be anywhere from 150 to probably up to $350 an hour, but it will be worth it. They’ll probably ask you for all of your documents ahead of time to do some prep. If I were doing it… I’m done, I sold my firm, FI. But if I were doing it, I’d send you a list of documents to send to me; insurance statements, tax return. Look over everything and then I’d have an hour-long… hour and a half long meeting with you and just plow through things. And then probably a little bit of a follow-up.
There are advisors that do something like that. I used to charge about a $1000 for something like that because of the hours before, the hour and a half to do it, and then the follow-up. The problem is that if someone’s good, even that starts to not make as much sense for them. Because the downside is, we as financial planners, we really love to see people succeed and I have no follow-up with you in the future to make sure you took action on the items, you didn’t mistakenly do something a little bit different. Whereas if someone’s meeting with you regularly every six months or every year, then you can see where we need to make an adjustment along the way.

Mindy:
Absolutely. No, I think that’s great. And I think that you don’t have to go total lone wolf or total super managed fund. The CFP, the fee-only CFP, could be a great alternative. But you do need to recognize that they do have a value and that value costs money and you’re paying them for their expertise and their expertise isn’t just one hour of $100 worth of work. A good CFP is going to, like you said, review your current situation and your goals. If they don’t do that, what’s the point of having a conversation with them?

Amanda:
Can I also just add in that whichever route you decide to go, having some financial literacy under your own belt is going to be really helpful to make sure that, one, if you’re meeting with the hourly person, that you’re getting them the right information, that you are asking them the right types of questions, that you can answer them the right way.
If you’re meeting with somebody who charges a percent, making sure you don’t get taken advantage of because there are people out there… I feel like we hear about the scary people who take advantage of people, especially when they’re taking percentage of our portfolio. But just at least having a baseline level of financial literacy so you can have a seat at the table with whoever you decide to sit and meet with.

Mindy:
And does anybody know where we can find a fee-only financial advisor?

Amanda:
Where, Mindy?

Mindy:
The xyplanningnetwork.com, sponsored by our… or created by our friend Michael Kitces?

Kyle:
Yeah, the XY Planning Network is a phenomenal place to go to find a fee-only CFP. It’s a network that I was a member of while I was practicing. To give you an idea of what it feels like… Some listeners have been to the Bigger Pockets Podcast or Bigger Pockets Conference. I’ve gone to different industry conferences and most of them focus on how to improve the revenue of your firm or how to increase your business, get more clients, bring in more money, is basically how the advising industry, investment industry focuses.
The XY Planning Network Conference is just completely different and so client-focused. These people are family people, they are very real people that are super smart, and they are so focused on getting to know a person personally, their goals, and creating a financial plan without any… What’s the word I’m looking for?

Mindy:
Outside influence by way of commissions that pay you way too much money to recommend stupid investments.

Kyle:
That’s exactly the word I was looking for. Yes. Yes. They have no dog in the hunt other than the fee that you’re paying them. They’re not getting paid some other way. It’s a very good group started by some very, very smart and very good people that I recommend to people all the time.

Mindy:
All right, our last question. Let’s wrap this up with the good one, the big one. Can Kyle and Amanda walk us through the process, step-by-step, of how to contribute to a Roth IRA via the backdoor process? Amanda, I’m going to start with you on this one.

Amanda:
Sure. So maybe just to add context in case people don’t know, in order to contribute to a Roth IRA, you have to make under a certain income. In 2023, I believe it’s under 153,000 if you’re single and 228,000 if you’re married. But if you make over that as your modified adjusted gross income, then you can still get around that through something called a backdoor Roth IRA, which is a sketchy name, but a perfectly legal way to still be able to contribute to the Roth IRA.
First, what you’re going to do is make sure that you have a traditional IRA open and a Roth IRA open. Then you’re going to contribute your money to the traditional IRA. You don’t invest it, which normally goes against everything that you would ever learn about investing, but you leave it there for a couple of days for the cash to settle. Sometimes it can be upwards of like a week or so if it’s your first time doing it. But then once it says you have settled cash, then you’ll have the option to actually roll it into the Roth IRA.
So depending what firm you’re at, sometimes it says convert to Roth or transfer to Roth. At that point, you’re going to move that cash over. And you want to make sure you don’t wait too long, you don’t want it to start accruing interest, you’ll run into other problems. But you’ll transfer that cash over to the Roth IRA and now you can invest it. I feel like a lot of people when I walk them through it, they’re like, “That seems unnecessary. Why am I putting it into one account to transfer over?”
I didn’t make the rule up. None of us made the rule up. But that’s how you have to do it to be able to get around the income limit for the Roth IRA if you still want some of that tax-free growth goodness. But you got to contribute to the traditional first, you don’t invest it, you roll it over. I’ll also add that you can do this multiple times a year. In 2023, the Roth IRA limit for an individual is $6,500. You don’t have to do 6,500 at once. You can do some every month as you would any of your other normal investments.
I just want to call that out. Then want to call out one really big watch-out as well. There’s a lot of caveats. It’s a really easy thing to actually execute, but there are some watch-outs. Like I said, roll it over quickly, then get it invested. The other thing is if you have any other traditional IRAs out there, like if you did a 401(k) rollover at one point in your life and now it’s sitting in a traditional IRA, then there’s something called a pro-rata rule, which would mean in summary that you’re not going to get that same tax-free goodness because the government lumps your IRAs together at that point.
But that was probably a long-winded answer. That’s how you actually execute it. But I just want to make sure that nobody gets in trouble by doing the backdoor Roth IRA and then getting… Can I say screwed over? Can I say that? Getting screwed over later with this pro-rata rule. I just wanted to call that out.

Kyle:
Yeah, that’s a really good overview. This is a really cool tool for people that are bumping over that income limit. Like Amanda said, there’s some rules that you need to watch out for. That pro-rata rule is a really big one. People don’t realize. Basically, the IRS looks in… in terms of this type of conversion, they look at all of your IRA accounts as one piece.
If you have non-deductible contributions, which is what we’re talking about here, that you put into an IRA and then you convert that into the Roth IRA, but you also have deductible contributions that you deducted and then you convert, some of that gets taxed, some of that is non-taxable, and you got to do this calculation. It gets messy. The easiest way is if you don’t have any other IRAs and you’re just doing these back doors.
But yeah, the other thing that I would say… This is an interesting rule. Kitces, Michael Kitces, of course, he has an article on this. I would encourage anyone who is diving into this to read that article, or at least the summary of it. Gives a really good overview of what to watch out for and how to do this. There’s some gray areas as far as the timing of how fast you should do it.
There’s this… I forget what it’s called. Basically the step transaction rule of one transaction. Are you doing it so fast that it’s two transactions become one transaction or are you doing it in a manner where there’s a couple separate transactions. From the IRS standpoint, there’s a couple IRS court cases that are not real clear. But basically, there’s two different forms of thought on it. Some of them, it’s like, “Do it right away, get it done.” Well, I should say three.
And there’s a lot of people that say, “Wait one statement cycle to do the conversion.” Then there’s some people that say you should wait a year. Nobody’s right or wrong at this point. There is not a definitive answer. Amanda is talking about doing it the nice and clean and simple, easy way of not investing it so that you get it converted and you don’t have to worry about a little bit of growth in there, which then you have to file taxes on and pay tax as a conversion. There’s no penalty, but you’d pay tax on it.
But that’s something if you left it in there for a year, you would probably want to invest it during that year and maybe your 6,000 grows to 6,200 or something and then there’s 200 in there that you got to pay tax on as growth when you convert it over too. So there’s a few things to watch out for. We’re kind of going long on this one, but it’s really good.
I just want to make sure people don’t get in trouble with it too, because if you do it wrong, the look back, there’s a pretty decent penalty for having it wrong for a few years that you have to pay to undo it. But yeah, it’s a really cool tool for people in any income to be able to get into the Roth, which is really nice.

Mindy:
If you’ve got the income to allow you to do this, then you have the income to get guidance from somebody who knows what they’re doing, who can help you out, even if it’s just training you how to do it the first time so that you can do it in the future. Do not be afraid to pay qualified individuals for their expertise and their service to help you learn how to do something so you’re not stuck with these weird tax bills. The IRS doesn’t care that you didn’t know how to do it. They’re going to tax you and fine you and all of that because that’s how they roll.
All right, Amanda and Kyle, thank you so much for joining me today. I really appreciate your time, and more importantly, your expertise. Amanda, where can people find out more about you?

Amanda:
You can find me on my socials, She Wolfe of Wall Street. She Wolfe, W-O-L-F-E of Wall Street. And my website, shewolfeofwallstreet.com. Have lots of free fun goodies out there for you to keep you on your financial literacy journey.

Mindy:
Awesome. We will include links to that in our show notes. Kyle, where can people find out more about you?

Kyle:
Yeah. I have a website, kylemast.com, where I write some different financial writings a little bit. I write some letters to my son that have financial leanings towards him. Then I’m also on Twitter, @financialkyle. I don’t do a ton. I’m on a road trip right now with my family. I’m spending a lot of time with my young family right now, so don’t expect to get all kinds of goodies from me like you would from Amanda on the website.

Amanda:
I’m a dog mom. I have more time. That’s it.

Mindy:
Yeah. Kyle has… two what? Small twins. So that’ll take up so much time. All right, that wraps up this episode of the BiggerPockets Money Podcast. She is the She Wolfe of Wall Street, Amanda Wolfe, and he is Kyle Mast. I am Mindy Jensen saying catch you on the flip side.

Speaker 4:
If you enjoyed today’s episode, please give us a five-star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Caitlin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.