Nate (00:13)
Hello, physician moms and dads. I'm Nate Rennekee, certified financial planner and primary advisor.
Kyle Hoelzle (00:19)
And I'm Kyle Hoelzle, certified financial planner and retirement investing specialist.
Nate (00:25)
Kyle, it's our once a month episode where we try to talk about investing. but before we do that, it is the we're right in the middle of summer. What does the summer look like at the Hoelzle household?
Kyle Hoelzle (00:38)
Not very many open weekends, I'll tell you that much. So
Nate (00:40)
Yeah.
Kyle Hoelzle (00:41)
yeah. let's see. Some some some big things going on. daughter's playing club soccer. We've traveled to three different tournaments. She's done really, really well. Her and her team took the gold cup last weekend and the the at home tournament too. The one at home. So
Nate (00:53)
Ooh. Nice.
Kyle Hoelzle (00:57)
yep, yep. So she's excited about that. And let's see 15 year wedding anniversary this summer.
Nate (01:04)
Wow. I just hit 10. 15's awesome.
Kyle Hoelzle (01:05)
Uh-huh. Yeah. Yeah. okay.
That's easy to remember. We're like five just five years.
Nate (01:11)
Yeah.
Kyle Hoelzle (01:11)
yeah, and then we're traveling to see family and we had well, we had a summer party with a bunch of friends from school and and had a big summer slip and slide and cookout. so yeah, it's been kind of done a little bit of everything and super busy in a good way. So how how about you?
Nate (01:28)
Gosh, kinda same. No no no open weekends. In fact, I was gonna ask you. I've been my my wife wants me to redo our fence. This is something I I maybe would have taken on seven or eight years ago, but now it just seems impossible. And I don't think, you know, it's like w the projects around the house with with kids
You think, this will take me a weekend and then it takes a month. But I know you live out on how many acres do you have?
Kyle Hoelzle (02:01)
Seven.
Nate (02:02)
Seven. Okay. So seven eight acres So you have projects galore. Are they are
Kyle Hoelzle (02:06)
Never ends.
Nate (02:07)
it never ends? Are are you is it the same for you though? Like impossible to get to them all?
Kyle Hoelzle (02:13)
Yeah, it is. One thing I did was I made a list and I s I I just did on paper, which is kind of embarrassing 'cause you think I should do it on spreadsheet. In hindsight
Nate (02:19)
Uh-huh.
Kyle Hoelzle (02:22)
should have, but what I did is I made a I I just wrote it down, just brain dumped on it, and then I put ones next to it with dollar signs that were gonna cost money, you know, and so that way I knew
Nate (02:29)
Mm-hmm.
Kyle Hoelzle (02:31)
those ones required like savings. And then I put ones next to that were I put a star next to the ones that were easy, you know,
Nate (02:37)
Mm-hmm.
Kyle Hoelzle (02:37)
the like take out this light fixture and put a new light fixture on or something I knew I could do in
like a weekend or a day or a sitting, you know, something that wasn't gonna be ongoing. I sorted my project that way. I started hitting all the stars first. And then I started looking at the money slash I put a big T for like lots of time. And I started looking
Nate (02:55)
Yeah.
Kyle Hoelzle (02:55)
at the the money, money, no T. And then I left the T's and the monies and that's the hard ones, right? So but
Nate (02:58)
Yeah. That's a good idea.
Kyle Hoelzle (03:02)
yeah, some things are just never ending like mowing and
Nate (03:05)
Yeah.
Kyle Hoelzle (03:06)
and weeds and everybody, anybody who's got a yard knows that. But when you're out in the country it's
Nate (03:09)
Yeah. I feel like
Kyle Hoelzle (03:10)
like a whole other battle.
Nate (03:12)
I I feel like we should add a new meeting to your calendar, which is just like talk about buying acreage because lots of people want to buy they think they want to, and maybe they do. I I there's some people where it's I've talked to them, they're like they grew up on it. They know how hard it's gonna be. but my grandparents and my dad, you know, have acreage, had acreage, and it was like in fact we just
My grandparents passed and we just their house just got sold and I'm just thinking, Man, the the next people are in for a treat 'cause they just fixed everything themselves. They're always like out digging holes in the yard to fix the like pipes and it was just it's just non stop. And you can't
Kyle Hoelzle (03:52)
Mm-hmm. Mm-hmm.
Nate (03:54)
pay for it all at it when you have property 'cause it's so much. So the saying around here
Kyle Hoelzle (03:59)
yeah. Yeah, it is.
Nate (04:01)
is the well's always broken.
So
call Kyle if you want to buy seven acres, and he'll tell you if you really want to buy seven acres. Yeah. That's right.
Kyle Hoelzle (04:09)
Yeah, well country living conversation. The two two to ten acre range. Yeah, we'll talk about.
Nate (04:14)
Okay. So we're here to talk about investing today. We got four good questions. I'm gonna start us off with one from surgeon in Arizona. It says my portfolio has drifted way off from where I said it a few years ago because stocks ran up so much.
Do I actually need to rebalance? And if so, how do I do it without triggering a big tax bill?
We have a couple ways we love and a couple
Kyle Hoelzle (04:39)
Yeah. Mm-hmm.
Nate (04:41)
ways that are like more complicated. but what's your initial reaction, Kyle?
Kyle Hoelzle (04:47)
Well, I think we're all a lot of people are experiencing this. I think it's great question, right?
Nate (04:52)
Mm-hmm.
Kyle Hoelzle (04:54)
and there, yeah, like you said, there's a couple of approaches. You know, the most simplistic way would be to place a trade, sell some sell some stocks for gains, lock in those gains, realize
Nate (05:04)
Mm-hmm.
Kyle Hoelzle (05:04)
some capital gains, and rebalance back to your your target allocations, whatever that might be, whether that's buy some bonds, pick up some more international stock, maybe both, and rebalance back to target.
and and and you can take that experience and and go, well, you know, maybe in the future I won't let my account drift drift that far. Maybe I'll be looking for some some short term rebalancing opportunities, something a little smaller, and and and kind of identify this earlier and not let so much time go by without placing rebalancing trade. and that'd be a way to manage the tax bill moving forward, and not have so much do in in one in year five versus you know, what years one, two,
Nate (05:39)
Yeah.
Kyle Hoelzle (05:40)
three, four, and five.
There's of course, like you mentioned, some more complicated strategies, maybe for people who are more tax sensitive, but they're gonna add ongoing complexity in their portfolio for basically the rest of their days. And that would be to not sell the stocks in a taxable account and realize the gains. Instead, look for a qualified account that has a large enough balance that will support your rebalancing efforts there.
Nate (06:04)
Mm-hmm.
Kyle Hoelzle (06:05)
so let's say in this scenario, you're light on bonds, heavy on stocks, taxable accounts got too much stock.
You don't want to sell the stocks, realize the gains. You could increase your bond allocation in a 401k or 403B or
Nate (06:18)
Mm-hmm.
Kyle Hoelzle (06:19)
an IR a Roth IRA or something. No, I recommend a Roth IRA, sorry, but an attritional
Nate (06:24)
Yeah.
Kyle Hoelzle (06:24)
IRA or whatever your qualified account is. That's easy to have no taxes realized to change the allocation around and to throw the bonds in there. But moving forward, you constantly have to be rebalancing across accounts.
Nate (06:36)
Mm-hmm.
Kyle Hoelzle (06:37)
sometimes depending on the size of the taxable count and the size of the 401k when you first start this strategy with additions and starting balances and performances, because you you know, bonds in the 401k are gonna typically have less less growth than the stocks in the taxable. And at some point it could get to the point where the stocks get so large in the taxable account, like 401k doesn't grow fast enough. And now you don't have the ability to add more bonds when you need to, and the
Nate (07:01)
Mm-hmm.
Kyle Hoelzle (07:02)
strategy starts to fall apart, and then you're now you're facing
placing trades or carrying risk into the future. So you gotta be really careful with that strategy from in the long term. And so there's mm.
Nate (07:09)
Yeah. Yeah. So it takes a lot of massaging and sometimes
the you will like you s depending on what is in each account. Like just to get really simplistic here, you know, if you if you have all bonds in your four one K, there's no more runway left. So at some point, theoretically, depending on how much you save, right? Because you might have a smaller brokerage account compared to your four hundred K.
But theoretically, if you're a a super saver, you can't always like tap into this. And at some point, you probably are gonna have to realize a tax bill or stay out of balance. And to me, the the big picture here is that, you know, the goal the number one goal of a portfolio is not to pay no taxes. That's not I mean, that's part of it. And you want to manage your tax bill, but
A really good way to do this, and you do this every year with people with brokerage accounts, is just to set a tax budget that's really manageable, even if it's smaller. but yeah, so you're saying, you know, you could take new money, buy bonds, you could buy different assets and different accounts that have b a more favorable tax result, you know, they don't create a tax bill. or just
Pay the taxes. Stay in balance. Am I getting that right?
Kyle Hoelzle (08:36)
Yeah, exactly. And
Nate (08:37)
Yeah.
Kyle Hoelzle (08:38)
all this is gonna be like individually specific to your situation. It has so much to do with what the holdings are, which accounts you have, what balances are in those accounts, what additions you're making. There's a lot of factors to to consider before you decide which route to take. But all
Nate (08:55)
Mm-hmm.
Kyle Hoelzle (08:57)
three of those routes, if if it works for your situation, will get you the result you want. So
Nate (09:04)
Right.
Okay. Good. So my encouragement to everybody is not necessarily sprint to more complexity, although that, you know, tax location is is an option. but also it's just to get kind of recalibrate your expectations for taxes. If you have a lot of money in a brokerage account, you're gonna pay taxes at some point unless you have so much that your children inherit it, meaning
You avoid the tax bill by dying. So, but at some point you're, unless you're that person, you'll pay some taxes. Okay, next question is from a hospitalist in Texas. I've got a 401k, a Roth IRA and HSA, and a taxable brokerage account. I have no idea what's supposed to go where. Does it matter which investments live in which account, or can I just buy the same thing in all of them?
Kyle Hoelzle (09:56)
Yeah. So this is a good question.
touched a little bit on these this concept before but let's start the taxable brokerage account that's kind of the unique duck out of on in the pond of accounts there
Nate (10:09)
Uh-huh.
Kyle Hoelzle (10:11)
so that account you just want to be really careful with the bonds you put in there you want to stay as efficient as possible tax efficient as possible with your bonds because you pay income tax on the income generated in the year that it accrues in that taxable account municipal bonds are
Great because they avoid federal taxation and that's
Nate (10:31)
Mm-hmm.
Kyle Hoelzle (10:32)
your highest income tax burden typically. So just be careful with the bonds you put in there. That's a mistake I see commonly it when physicians bring their portfolios over, or we look at a portfolio that that they're managing elsewhere. I s we'll see like a balanced fund, which will be like a blended stock bond fund, or I'll see a target date fund, which again blended stocks and bonds.
And the problem with that is that those the bond exposure in those accounts are your rent-of-the-mill corporate bonds and federal
Nate (11:02)
Mm-hmm.
Kyle Hoelzle (11:02)
treasury bonds, and those are going to be taxed inefficiently in that taxable account. So you just want to avoid those types of bonds. And otherwise a taxable account, you can put, you know, your your stock market funds in there and your and your municipal bonds.
The other accounts, the qualified accounts, the 401k, the Roth IRA, the HSA, those are all qualified. So any of the income that's accrued or dividends paid in that account, you know, it's not you're not subject to taxes on it in the year it accrues, it's all deferred until
Nate (11:35)
Mm-hmm.
Kyle Hoelzle (11:35)
till the withdrawal. so you know, you can you can put those other funds that I talked about in there. You can put the target date fund, you can put the balanced fund. The bonds aren't an issue for you, the corporate bonds. in fact
I I love the diversification you get when you put the municipal bonds on the taxable and you get the and you put the other bonds, the corporate and treasury bonds in your four one Ks and your and your HSA. So and and the other thing, of course, we all know this, most of the time, unless we're self man you know, self employed, we have a solo four one K or something like that. Our four one K and HSA plans typically have a limited investment lineup pick that we have to pick through. So,
Nate (12:10)
Mm-hmm.
Kyle Hoelzle (12:11)
you know, you just
Find what fits your situation best on that list, you know, what what matches your target allocation and and and pick pick the one that that you feel is the best. So 'cause
Nate (12:22)
Yeah.
Kyle Hoelzle (12:23)
yeah, it's not open brokerage typically. So
Nate (12:25)
You you reminded me of another issue with tax location. Tax location can be, you know, a good tool to use, but also you may, depending on your situation, lose that diversification. 'Cause if you if you're not buying if you're buying all corporate bonds in your four one K, you don't get the municipal bonds. So, everybody's a little bit different here. We have run into people who that part doesn't really matter a whole lot.
And then we run into situations where especially, you know, like you'll see a physician with a cash balance plan and it's like this one plan that is really heavy on on bonds. And so getting perfectly in target has a lot to do with which investment goes in each account. But let's say it's more straightforward. Like this one seems pretty straightforward. 401k, Roth IRA, HSA. it's pretty typical lineup and a brokerage account.
I think the big ticket items here are to avoid because a lot of people love target date funds and we like target date funds too. but avoiding target date funds in a brokerage account and getting municipal bonds in there. So anything else? Did we miss anything?
Kyle Hoelzle (13:30)
Yeah, 'cause sometimes
No, I don't think so. I mean
Nate (13:35)
Pretty good. Okay.
Kyle Hoelzle (13:35)
Pretty well covers it. Yeah.
Nate (13:38)
All
right, question number three Gastro Dock in Michigan. Every time the market drops, I get the urge to sell and wait until things calm down. Is there ever a good reason for a long term investor to move to cash? Or is that always a mistake?
I'm gonna try
Kyle Hoelzle (13:55)
Mm.
Nate (13:55)
it. I'm gonna try it this one real quick and then I wanna hear your your thoughts. like hindsight is 2020. I mean, like if you knew when the market was going to go down and the market was gonna go up, it it's almost an impossible question because you're always looking backwards and you're saying, Well, of course, if we could predict when the market was gonna go up and down, it wouldn't always be a mistake. And if you tried this 10 or 12 times, you'd probably get it right once or twice. So
tw two times it wasn't a mistake. I think the mistake is the a believing somehow that you're gonna get this right and not only get it right once, but get it right twice. You have to know when the market's gonna go down, pull your money out right before. And you have to know when the market's gonna go back up and put your money in right before that. So to play this game in general, I think it goes against our beliefs and how you a a a quality investment strategy. But
Always a mistake. We don't like that word, right? I mean, if you need this money, like in the short term, then you sh I mean, I guess actually no, it says long-term investor. So if you have a couple of decades, I think it's just a losing strategy to try to time the market. and what does things calm down even mean? I mean, things haven't been calm for
y almost a decade. You know, it just doesn't it's not a r it's not a real premise. Right. So to me, you don't know when things are calm. Yeah, I mean, like calm before the storm is what I think of. Who knows? It could be calm and that's when the market goes down because things have been pretty chaotic and the market has really just gone up. with little with little
starts and stops in between, but I I believe this doesn't mean that this is right for everyone, but we believe here that this is a mistake for a long term investor. What do you think?
Kyle Hoelzle (15:53)
Yeah. I don't like the word always, of course, like you said, but typically, statistically, yeah, it's it's gonna create an error, if you will.
Nate (16:01)
Mm-hmm.
Kyle Hoelzle (16:03)
I the the easiest way for me to visualize this is the Punnett Square, right? The four squares, right? And you have the different outcomes on each side of the square, right?
Nate (16:12)
Mm-hmm.
Kyle Hoelzle (16:12)
So you have I I sold out of the market at the right time, I sold out of the market on the wrong time, I bought in at the right time, I bought in at the wrong time. And when you look
cross those squares, there's only one square out of the four squares that is I sold the right time and I bought the right time. So
Nate (16:29)
Mm-hmm.
Kyle Hoelzle (16:29)
right away, you have to get to get that part perfect. You have to be
Nate (16:33)
Mm-hmm.
Kyle Hoelzle (16:33)
in that one quadrant, right? And that's really, really, really, really hard to do.
Nate (16:37)
Mm-hmm.
Kyle Hoelzle (16:38)
And I've a friend of mine, financial advisor 20 years, tried this with his own money. He he thought, I'll I can time the market, I'm gonna time the market on this. And then
calculated the results and had lost profits.
Nate (16:53)
Mm-hmm.
Kyle Hoelzle (16:53)
So someone who knew who knew the industry really well, who worked in the industry, they tried this and they failed.
Nate (16:59)
You know, you
point you you said something really important. Lost profits. I get prospects all the time that have some very strange investment strategies that they've been implementing on their own. And the words I hear is I've done pretty well. We've all done pretty well the last five years. I mean, not all, but like if you're buying index funds, just your typical index fund, we've all done pretty well. The question is how well?
You know, and and y normally, unless you're a very astute investor like this financial advisor who also didn't outperform, normally you wouldn't be able to or wouldn't even try to go back and compare returns. But what you you know, statistically, what you're saying is you won't outperform just leaving your money alone. You know, we got we got like idle hands.
Here where people watch these quote unquote boring portfolios and they want to do something. They want to take control. And physicians
Kyle Hoelzle (18:05)
Mm-hmm.
Nate (18:06)
oftentimes are in control, you know, at work. And so they want to take control of their portfolio. And this is just something that, at least from our perspective, we don't have a ton of control over when the mark goes up, when the mark goes down. What you do have control over is continuously saving, trying to control your tax bill the best you can, and being patient.
Kyle Hoelzle (18:26)
Yeah, 'cause it he poses all these other questions too, which I find interesting. It's like, okay, so you sell out, right? And and you you go to all cash or bonds or something. Well, what do you do with your new contributions? So like let's say you have
Nate (18:36)
Yeah.
Kyle Hoelzle (18:37)
to sell the market for a while because you're sitting there watching. So say months and months roll on. You're making contributions to your four one K, you're you just put it all into bonds or cash, or do you want to buy new stocks while stocks are say there's volatility, you know, it's marked going down, so you buy out. Let's assume that, right? Don't you want to keep buying stocks while stocks are going down? Or do you not want to put new money in the market too during this period of time?
Nate (18:54)
Mm-hmm.
Kyle Hoelzle (18:55)
But you're missing opportunities, you're not putting new money into the markets. In my opinion, while the markets are going down, you should be picking up shares as they're getting cheaper, as they're getting cheaper. and not be sitting there waiting for that bottom because you might be too late by the time you hear the noise in the market that the that the bottom's been reached and you go to put in the bottom's already you've already missed the bottom. You're already probably on the upswing at that point. So then how
Nate (19:12)
Mm-hmm.
Kyle Hoelzle (19:14)
long what if you are on vacation and you miss the upswing by a week and it really just goes bananas for a week and you come back? It's just like this it's just it's it it's just rife with like
so many like other issues that kind of spill out of that, you know, and you gotta you gotta be careful of the wash cell and other things with that. And then here's the other thing that I that I just want to point out that I think clients would appreciate. If you're if you're if you're send if there's some volatility in the markets, you the market's going down, you hear this in the news, or you pick up on it, bring up a long running stock fund, like you know, something with a 15 year trailing performance, like a total US stock fund or even SP five hundred or something.
And just look at the trading returns and and look at the one month and the and the one week and the one year even and see that volatility in the short term. But then go all the way out to the 15 year and see what return you're getting on average per year. And you start to see that the further out you go, and this has to do with their their this being a long term strategy,
Nate (20:10)
Mm-hmm.
Kyle Hoelzle (20:11)
is when you go further, further out in the trading returns, you see that this this sharp volatility in the short term really doesn't impact that 15 year number as much as you would think.
And you s and
Nate (20:20)
Yeah.
Kyle Hoelzle (20:21)
you look at and I look at those returns sometimes. I'm doing my my re when I look at the returns at least once a month. Once once a month I'm looking at the trading returns. And I when I see that volatility short term, I look at the fifteen year, I'm like, that's still an acceptable return for me every year for the last fifteen years, despite
Nate (20:35)
Mm-hmm.
Kyle Hoelzle (20:36)
the short term noise. And if you make a long term decision off of that short term noise, then it has rippling percussions
Nate (20:42)
Yeah.
Kyle Hoelzle (20:43)
through you know, through your portfolio if you don't get this timing exactly right. So
Nate (20:48)
Yeah. I think it's also
important to note, because we have seen people who have actually done this,
Kyle Hoelzle (20:54)
Mm-hmm.
Nate (20:54)
the feeling behind this. So like s you've just basically ground down to a pulp that it it kind of doesn't work strategically. It just doesn't work. People don't get it right. But oftentimes when I'm s when I hear people ask this question, it comes from a feeling of being nervous. They're nervous about the market. So they think by going to cash that they will no longer be nervous.
But that's not my experience. When people are in cash, they're still hyper aware of what's going on. In fact, they are more nervous. They call me like this cash just keeps piling up. When am I going to get back in? And so it doesn't have the effect that, or at least from what I've heard, it doesn't have the effect that people are looking for, which is to bring
Kyle Hoelzle (21:42)
Yeah, yeah.
Nate (21:43)
them less worry.
Kyle Hoelzle (21:45)
Right. Right.
Nate (21:45)
because they
still have to get it right again. And when they get it right, they're hoping, my gosh, I wonder if I got it right. And then you gotta wait five or ten years to know if you got it right. So not only
Kyle Hoelzle (21:56)
Mm-hmm. Mm-hmm.
Nate (21:57)
does it generally not work out, it also doesn't bring you calm. What can bring you calm is if you're really nervous about this, is just to take less risk. You know, if you are just if you are so nervous about the market.
You should have less money in stocks because the thing that that we get paid for by being in stocks is taking risk. So it's just a risky thing and and it has worked out historically. But the there's this new idea. I hear this all the time as well, which is people are are they yawn at a 10% return in stocks, almost like it's a given. It's not a given. You're taking risk. And if you can't take the risk,
And you think this is a given. I mean, you just you just don't understand or haven't looked at the stock market over the last hundred years rather than the last five. so yeah, we we're pretty die hard long-term buy and hold people. and you still will have opportunities as the market goes down if you own any bonds to rebalance and to buy stocks as they're going down. And if you're an accumulator, you're buying every month. It's just it's all relative. You you feel like
I'm not taking advantage of this because I'm not buying more than I did last month. But you are taking advantage of it. So yeah, it's a good question. We we don't get it a lot from as much from current clients because they have experienced these great returns and they have, you know, they've been trained, but from new clients or from prospects or new listeners, this seems this has worked very well over many, many, many years, which is just buying and holding.
you know, well diversified index funds. And we won't even get into the fact that the well-diversified part. Like what what does market noise mean? Which market? There's about a thousand of them. So if you if you got a piece of all of it, you should feel at least some more comfort than just looking at what happened to the Mag 7 in the last week.
Kyle Hoelzle (24:01)
Yeah, and that that feeling of comfort, like I always say if I could wave a magic wand over all my clients, they would all feel that feeling, you know?
Nate (24:08)
Mm-hmm.
Kyle Hoelzle (24:09)
That's like my hope. Because when you look at the study, like the psychology of investing, investors generally feel greed or fear and
Nate (24:17)
Mm-hmm.
Kyle Hoelzle (24:18)
rarely, rarely ever is satisfaction measured. And so
Nate (24:20)
Mm-hmm.
Kyle Hoelzle (24:21)
this is these decisions we make when we hear the market's doing something and we want to make this drastic decision, we're either leaning into that greed or that fear feeling, whether we want to acknowledge it or not.
Nate (24:30)
Mm-hmm.
Kyle Hoelzle (24:30)
And
when you're talking about putting money in the cash and that doesn't make people f feel easier, they feel like less unsure, that's because what happens is you go from it it's still fear. It's like fear of missing out, which is that like that green response. Like when it's all
Nate (24:41)
Great. Mm-hmm.
Kyle Hoelzle (24:42)
in cash and they're like, the market didn't keep going down, it's going up. You know, it's like so you're never satisfied no matter which choice you make. So having that well diversified portfolio, having your risk identified, what your risk tolerance is, and setting a target stock and bond that matches that, and following your discipline investing principles.
it should should t make it so that you don't have to feel greed or fear. You should kind of live right in the middle knowing that, hey, no
Nate (25:07)
Yeah. Yeah.
Kyle Hoelzle (25:08)
matter what happens, I'm gonna be I'm g I'm just gonna ride it out, I'm gonna be good to go.
Nate (25:12)
Yep. Agreed. All right. Last question of the day is from a psychiatrist in New York. I'm considering saving money for my child's future above and beyond the five twenty nine accounts we are contributing for are contributing to for college. Should I use a custodial brokerage account, a five thirty A account, or something else? So this is come up a lot and the five thirty A accounts are
the Trump accounts. With there it's 529, 530. That's how you can remember that. It's the next the next number up. But they basically minor accounts and the the this question goes beyond kind of questions we've asked in the past, which is like 529 versus 530 accounts. And 530 accounts have a very specific I mean you can use them, but only in a very like very small scope I have seen people actually
It'd be a fit for their goals. But 529's accounts that tend to be kind of the king of all for college, tax-free growth, usually a state income tax break. They're just the best thing since sliced bread for college. So that's that. But this person's saying I want to save above and beyond that. And there are consequences and benefits to each one of these accounts. So a custodial brokerage account is.
You open it it is for your child. It will become their account when they come of age. So when they become an adult, it's their money. it is taxed slightly more favorably than just your own brokerage account, which I'll get to in a second. But the the amount that you'll be contributing to it, it sometimes it spits off some income and under a very small dollar amount, basically there's no taxes.
Okay, so custodial brokerage accounts are reasonable if you want to gift your give your child money when they become an adult. The reason you would use a custodial brokerage account is if or or I guess if you use one, you just need to be aware that the money is going to be theirs. It's their money. And if you're comfortable with that, giving your child money at eighteen or twenty one or whatever the age is in your state, then that's fine.
It can just be theirs. But I personally have heard from physicians and I myself don't feel comfortable giving my child enough money to put, let's say, down on a house, which could be a hundred grand these days, at age 18. I just for me, I don't that's not something I would want to do. so if it's for a house and they're gonna need it in their twenties or
maybe early 30s, you can go custodial brokerage and do a whole lot of parenting about what that money is for and cross your fingers that they do the right thing with it. If you don't want to take that risk, you can just put it in a brokerage account for yourself. It's in your name and make a decision on your own later on when you think they should get the money. And then when you give them the money, you can gift appreciated securities. So this is these stocks that have
ran up with the market and you don't want to pay the taxes on them. So rather than giving them cash to buy their house, you just gift them securities and they cash them out at their own tax rate, which if done correctly, you can do this maybe last year of college or junior year of college before they make any real money. And the tax rate will be really low. And then again, you have some coaching to do about hey, you know, I just gave you a hundred grand, but you're gonna have to pay taxes on it. So it's really 90, whatever it is.
So I think custodial brokerage account or gifting appreciated securities is reasonable for what we call like a it's a new thing that we're hearing, which is a launch fund. Okay. Launch fund could be start a business, which is also interesting. I keep hearing this too. I don't know if I'm ready to give a hundred thousand dollars to my one of my children to start a business at like 19 years old. But if you want to do that, you could do that with a custodial brokerage or
gifting them securities. As far as the 530A account, this has a very, very specific scope here. I've looked at this with probably six or seven clients at this point, and one has has elected to move forward with it. This is like if you want your child, if you want to save retirement money for your child, that's what this is for.
And the way you would do it is you would fund it every year. You don't get a tax break for funding it, even though it's an quote unquote acts like an IRA, you don't get a tax break for putting money in it. So you fund it with after tax dollars. And then when your child has you know becomes of age, they can convert it to a Roth. Okay. So that's a good idea because their income will theoretically be so low.
That the conversion will be really cheap. But you would have to once again inform them that they need to convert it because that's good for them. So for my astute investors out there, you this is a this is a parenting and a coaching thing where there's more steps to be done to accomplish the goal that you're looking for once your child this is actually your child's money. Now for the for the
family that chose to do this, we did some math on how much money might get into these Roths by the time they actually retire. And it's unbelievable. You know, if you put five thousand dollars a year into this account for like 10 years and then they convert it and then they wait 40 more years for to re to spend it in retirement. It's an unbelievable amount of money. I mean, it would be fantastic. But it's it does not replace
needing to help them buy a house or paying for college. They're just totally different things. So next time you're thinking about this question, because we're getting it all the time now, first identify what the money's for. That's just good old fashioned financial planning. What's the money for? College, house, business, retirement. And once you determine what's what the money's for, it's becomes pretty obvious which account to choose. And then you just have a choice about
When do I want this money to actually be theirs to either make a good decision or a bad decision with? And if you want more control about that, you should choose gifting appreciated securities over a custodial brokerage.
That's that. I think I covered that one pretty good.
Kyle Hoelzle (31:52)
Yeah.
Nate (31:54)
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