Money Talk with Carl Stuart

Carl Stuart takes caller and text questions on capital gains and tax implications.

The full transcript of this episode of Money Talk with Carl Stuart is available on the KUT & KUTX Studio website. The transcript is also available as subtitles or captions on some podcast apps.

KUT Announcer: Laurie Gallardo [00:00:01] This is Money Talk with Carl Stewart. Carl Stewart is an investment advisor representative of Stewart Investment Advisors. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl Stuart [00:00:20] Welcome to Money Talk, I’m Carl Stewart and you’re listening to KUT News 90.5 and the KUT App. Now and coming up on our 32nd anniversary, Money Talk is a broadcast slash podcast about the world of financial and investment planning where you always determine our agenda by calling or texting 512-921-5888. I take today’s calls first. And then today’s text and then other texts I haven’t had the opportunity to fully answer. It’s always a terrific idea to call or text early in the broadcast giving me ample time to do my best to answer your question. The last two weeks we’ve had a couple of fun broadcasts with Jimmy Moss and I. I hope you enjoy those and if you haven’t chance you can always go and listen to past shows at KUT.org slash money talk or wherever you get your podcasts. One more time, 512-921-5888. Okay, let’s just see here, text. Hi Carl, I’m debating where to park about $20,000 of emergency funds. My name, Brand Broker, offers a government money market fund, which you have recommended in the past, at 3.4%. And 13-week treasury bills currently 4.2. I need some liquidity if the HVAC or other things need immediate replacing in my rental house. What are your thoughts on a split between the two? Will the Fed raising rates impact this? This is from Jeff in Italy. Jeff, thank you for the question and thank you listening such long distance. I know you’ve told me you listen to the podcast. If you need daily liquidity for some… All of the money, then I would go with the government money market fund. The Treasury, while yielding more, you have to buy it and you have to sell it. Now it’s an extremely liquid market, but nevertheless you do have some very modest principal risk if rates were to rise sharply during the time after you purchased the bill and you needed to sell. Now if you thought you want to split it, then you want to put the money that you think you might need for the HVAC in the government money market fund, then you could buy a treasury bill with the balance. The other thing is answering your question, will the Fed raising rates impact this? And the answer is yes in the following ways. One, I just mentioned it could put some slight downward pressure on the market value of the bill. But over time, a money market find invests in short term debt security. So… Virtually every day they have securities maturing. And so they’re going to then turn around and take the sales proceeds and buy other securities. If it’s a government money market fund, they’ll be buying treasuries and agencies like Fannie Mae and Freddie Mac notes. And in a rising rate environment, not immediately, but over time, the yield on a money market funds should go up just like over time when and if rates fall, money market funding yields should fall as well. Thanks for listening and thanks for the question. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-921-5888. Here is a call. Daryl, you are on the air. How may I help?

Daryl [00:04:02] Hi Carl, so thanks for doing this and thanks for taking my call. I’m a new listener and I wish I had discovered your show 20 years ago. I think it’s my retribution that I didn’t listen to NPR and donate more often in the past.

Carl Stuart [00:04:17] I see there you’ve had it

Daryl [00:04:19] And there I’ve had it, yes. So here’s my story. I’m 68 years old. My wife is 61. We’re semi-retired, about to retire. And we’ve been self-managing. We don’t earn very much money, but we don’t spend much either. Consequently, we’re in the 12% income tax bracket. Our house is paid for. We have no debt. We have not kids. And we’ve managed to swirl away 1.4 million into a Vanguard portfolio. Yeah, so my question is about asset allocation and my holdings. May I go into a little more detail?

Carl Stuart [00:05:01] Yes, please do.

Daryl [00:05:03] Okay, so of the 1.4 million, I’ve got 500,000 in cash equivalents and that’s some CDs and money market. Very little bond. Of the 900,000 equity, I got 400,000 tax deferred, about two-thirds Roth and one-third traditional IRA, and the other 500 are just Vanguard equity funds, you know, small cap, big cap, large cap, prime cap, all that.

Carl Stuart [00:05:34] Darrell, excuse me. How are the Roth and IRA accounts invested? What do those portfolios look like?

Daryl [00:05:43] Similar. Equity. All equity.

Carl Stuart [00:05:44] Equity. Okay, all equity. Good. Okay. Please, please continue.

Daryl [00:05:48] Yeah, thank you for the question. So I have three questions. One is, what’s your opinion of my asset allocation? Second question is, talk to me about bonds because I just, when I look at there’s about 50 bond funds, none of them seem to return very well. And yet when I read the instruction manual on how to invest for people my age, it says you should be in bonds and I’m not. Mm-hmm.

Daryl [00:06:14] And the last thing is talk to me about it change traded fund because Sure. Uh… I’ve invested in mutual funds uh… And it just you know that’s how i started and that’s what how i went with it uh… Can i switch should i switch it into exchange traded by now can i go with you didn’t exchange traded part is it worth doing that and i’m in a twelve percent income tax bracket and as i understand it i don’t think i even paid long uh… Long-term capital gains

Carl Stuart [00:06:43] Mm-hmm, mm-hmm. Okay, so let’s tackle these that first with asset allocation You are heavy in cash Historically and frankly throughout my 48 year career when you take cash returns and you subtract taxes and Inflation you for most people you have a negative return or what we call a negative real return now granted your marginal bracket of 12 percent it may make the bet not quite so much, but with, currently, just take government, Vanguard Government Money Market Fund, probably yields around 3.6%, and if the consumer price index is 3.4%, so take that minus 12% tax, and you have a negative return. And so, I’m not a big fan. Of having a large cash position in the situation that you have just articulated. I understand your skepticism about bonds and the reason people at Vanguard, and that’s not just Vanguard, it’s Fidelity, all the other kind of standard perspectives is that you wanna have a balance of stocks and bonds and the older you are, the more you have in bonds. I learned a long time ago that That’s not necessarily the wise course of action. And the reason is you don’t know three things. You don’t how long you and your spouse are gonna live, but a 61-year-old female has a really long life expectancy. You don’t know what’s going to happen to the cost of living, which you’re probably gonna bet it’s not gonna go down or stay flat. It’s likely going to go up. And you don’t how long are you gonna live. You don’t know what’s gonna happen to the costs of living. And lastly, you don’t know what your prospective rate of return is. And so you have to approach this with a great deal of humility. But I think you have to be more into the stock market rather than cash and a modest amount in bonds simply because of your joint life expectancy is really, really long. You probably have access to healthcare. You’re probably not abusing tobacco. You’re not obese, the kind of factors that lead to life shortening events. And so. You want to invest it more like a pension fund or an endowment or a foundation. I like, there’s nothing wrong with the Vanguard funds. Vanguard didn’t get to be that big because they’re somehow not appropriate and not quality. So I’m perfectly happy with you saying that Vanguard, they’ve made the reputation primarily on their low expenses and secondarily on their passive or index funds. So I would consider putting some money in bonds. Now, I like a three bond fund approach to the allocation to bonds. And I’m gonna use what are called Morningstar categories because bond funds can name themselves lots of different things. Let me start by telling you what I would avoid in bond funds. There are bond funds that are high yield bond funds, that sounds like a terrific idea. It’s not, because what happens is in a period when the economy weakens and Stocks weaken and you want bonds to hold value or even go up high-yield bonds based on history go down They’re very highly correlated to start to the stock market The three categories I like are short or the first one is short or ultra short bond fund The next one is what’s called a core. That’s these are the best intermediate term And then the next category is called multi-sector the short-term bond fund. I’ll give you an example of how this works So as of yesterday, on a year-to-date basis, the intermediate or core funds down about 2.55%, the multi-sectors down about 1.9%, and the ultra-short is up 3.1 because short rates have stayed high and longer term rates have gone up and bond prices have gone down. Now. The yield on the core is over 4%. I’m using what’s called the trillion 12-month yield off of today’s Morningstar. The yield of the multi-sector is 5.77%. And the yield on ultra-short is 4.15%. So you’re getting that yield at today’s prices if those bonds hold value. If the rates go up, the bonds have got to go down efficiently so that that dividend yield is wiped out by the decline in the price. On the other hand, if rates stay stable, you’re going to have a decent return. So there’s some number out there, probably 20% to 25% in your case because of your youth and a balance of equity funds. I’m a big fan and have been for many years of having exposure to international equities. The data indicate that most Americans are underweighted, have none or a small portion of their money allocated outside the United States. I think this is a mistake. And so when you get an equity allocation, I would like you to have 25% international and 75% domestic. And if. It. Let’s move to ETFs and and then I can finish the description Exchange traded funds came along because mutual funds are only Priced at the end of the day you buy a Vanguard fund the price you pay is the value of the portfolio at the End of the Day you sell a Vanguard Fund the price should get is the Value of the Portfolio at the End of the day the Vanguard SMP 500 mutual fund that’s the way it works and it always has the Vanguard SMP 500 exchange-traded fund. Is traded throughout the day. Now for you and for me, that doesn’t matter, but for large institutions or people who want to trade rapidly, it does matter. But exchange traded funds have one of the things that mutual funds do not have. They seldom, if ever, distribute capital gains. Mutual funds are required every year to look at their portfolios to add up the stocks that they’ve, or it could be bonds, the stocks that they sold. And the bonds that they’ve sold, if they have a net gain, they have to distribute that to you and to me, the shareholder, even though we’re gonna reinvest and we don’t want the money, we still have the capital gain distribution. Exchange traded funds historically do not do that. And so in those IRAs and Roth IRAs where you have no tax consequences to transfer or shift from 40 act mutual funds to ETFs, that would be something that I would consider doing. In your own so-called brokerage or taxable account, if you’re moving from a Vanguard Mutual Fund to a Vanguard ETF and creating a capital gain, the difference in their expense ratios is very, very low. I’d be reluctant to do that. So I’d have 20 to 25% of fixed income. I’d had the balance split 75-25 domestic-foreign. Where I had the opportunity, I would use exchange-traded funds. You’re perfectly happy at Vanguard, then that’s where I would stay. And that’s how I would think about it if I were in your shoes, Daryl.

Daryl [00:14:08] Wow. Thank you so much.

Carl Stuart [00:14:12] Past performances don’t guarantee a future returns. Be clear about that. Oh, no.

Daryl [00:14:18] That’s understood, that’s always understood. No, actually I’m living proof of the basic concept. I started investing badly and meagerly when I was 29 or 32. I’m very passive about it. Yeah, you know Look at that, you know, 40 years down the line and you know I’m doing okay.

Carl Stuart [00:14:39] I’m guessing you never thought, or you and your spouse never thought you would be millionaires.

Daryl [00:14:46] Yes, very true, very.

Carl Stuart [00:14:47] And here you are. Here you are, that’s it. Here we are.

Daryl [00:14:52] Big smile on my face from when I showed my wife the Vanguard tally because of course this has been a pretty good stock Of course sure yeah, yeah when we got the big seven digits. It’s like big smile on. My face look honey

Carl Stuart [00:15:04] That’s wonderful. All right. All right, good luck to you, Daryl. You bet. Thanks for calling. You’re listening to Money Talk on KUT News 90.5 and the KUT app. When you have a question, call or text 512-921-5888, okay. Let’s see here, it’s this text. Let’s go back and see if we can get this one. That was the one about the HVACs have already taken care of that. Okay, hi Carl, this alluded to a previous question. Hi Carl, with your previous caller, you mentioned finding a financial advisor with reasonable fees. How do we know what a reasonable fee might be? Good question. Let’s face it, the marketplace, I mean, this is an open marketplace and fees today are transparent and once you know the kind of a benchmark, you can pretty well rest assured that everybody similarly situated is going to charge a similar fee. So there are really two ways that financial advisors are compensated. One is by the transaction. This goes back you know, to the beginning when we were called stockbrokers. And those people can call themselves financial advisors. That’s a term of art, not a term law. Then they’re the people who charge you a fee based on the value of the assets. And that fee is called an advisory fee. It’s a percentage of the asset. Typically, at the end of a quarter, they add up the value all your accounts. Times the stated fee, times the number of days in the previous three months, and debit your account or accounts for the amount of the fee. These people are acting as investment advisors. They can own their own practice or they can work for a large company, which is the investment advisor, and they’re the investment adviser representatives. Typical is a, how shall I call this? It’s not, it’s tiered, that’s the word I’m looking for, it a tiered structure. So the more money you have with the advisor, the lower the incremental fee. So under $250,000, it could be between one and 1.75%. Above 250,000 it could around 1%. Above a million, it may drop to, say, 0.75%, and it goes on like that. And they should consolidate all of your accounts to get you the lowest melted fee. So that’s kind of a benchmark you can look to. I would just say this. If you’ve got two candidates and one charge is 1% and the other charge is one and a quarter percent, I would not let that drive my decision. I would be much more interested in understanding their strategy, understanding how they’re going to invest my money, understanding what a happy, healthy client relationship looks like in terms of conversation and content. Good luck. You’re listening to Money Talk on KUT News 90.5 and the KUTF. We have a call coming in from Randy, but it’s also a good time for me to take a break and a perfect time for you to call or text 512-921-5888. I’ll be back.

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KUT Announcer: Laurie Gallardo [00:18:56] This is Money Talk with Carl Stewart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl Stuart [00:19:10] Welcome back to Money Talk. I’m Carl Stewart and you’re listening to KUT News 90.5 and the KUT app. If you want to catch past shows, you can come to the website at kut.org. They have a list of podcasts and there we are. Or you can go wherever you get your podcasts and listen to MoneyTalk. Great to call or text. We have a quiet afternoon. Now, granted you listen to the podcast and it’s not afternoon, but here live it is. So we have lots of time and we have lots of opportunity for calls and texts at 512-921-5888, here we go. Randy, you are on the air, how may I help?

Randy [00:19:52] Greetings, Carl. I’ve been considering converting my IRA into the Roth account that I have that’s currently empty for quite a while. I’ve be dithering about it. But actually, all of a sudden, I got a wild hair and I said, man, I gotta get some of those cheap bonds out of my account over into my Roth, and thereby, since they’re supposedly or low-valued. Uh… Will countless of income well uh… All of a sudden my bonds are doing great and and the only target i had for transfer was a uh… Status domestic uh… Standard standard in course Mm-hmm.

Randy [00:20:40] And so, I called up my customer service people and talked to them and I got that and the other, the only other Standard& Poor I had transferred over to the Roth, which was the Standard& Poorer Euro, so that was doing pretty darn good. At any rate, I wondered if I use twenty-five tax tables to estimate… The tax on the increased value into my rock uh… Is that is that a pretty accurate thing to do or to change from year to year

Carl Stuart [00:21:20] So I use the 2026 tax rates because just because every year they slightly change the brackets, they change the bracket upward, which is a good thing when you’re doing a Roth conversion because it means you go into a higher bracket at a higher level. So I would just copy the 20 26 tax rates, look at what I understand is going to be my taxable income, add the amount of the conversion. And that will tell you what the extra tax is. That’s a perfectly, I’m not a CPA, but that’s a perfect reasonable thing to do. Frequently, what I do is if somebody’s right on the cusp of going from say the 24 to the 32, which is a big jump percent, we try to stay on the 24 and feed it over over a period of years. But if you go from the 22 to the 24% bracket, frankly, I don’t think that’s big deal. So yes, conceptually use, you can use last year’s, but just as easy to use this year’s is available and this is going to be a 2026 tax liability. So if I were in your shoes, I’d use the 2026 Tax Rate Schedules and Contribution Limits.

Randy [00:22:33] I had no idea it was a failed one.

Carl Stuart [00:22:35] Yep. I’m looking at it. I’ve got a hard copy in front of me right now, Randy. Yes, sir. All right. OK.

Randy [00:22:39] I’ll take your word for that Carl. One more little thing. So I was talking to some people in my customer service department and I’ve talked to several people outside that but I haven’t been able to talk to an official financial advisor and I get differing opinions on whether or not this transfer from my IRA account into the Roth. Is going to indicate a higher income. And a lot of people said, oh, no, you’ve had these accounts for years, and when they go across, you’ll see no net income increase, et cetera. I don’t know. But Jim and I disagree.

Carl Stuart [00:23:32] So yeah My experience is, whatever the value is at the transfer, that amount, because it’s coming out of a pre-tax, tax-deferred environment, in other words, the money in your IRA, if you put that money in and it was tax-deductible when you put it in, and it grew without any current taxes, whatever amount you transfer is called a conversion, whatever out you convert from that pre-tax IRA to your. Roth IRA, that amount is treated as taxable income, not capital gain, doesn’t matter what you paid for it, it’s the value that gets converted and when you do that, then that amount is added to your taxable incomes.

Randy [00:24:20] Okay. Anyway, yeah, I believe you and Jim and I. Okay. Thank you, Carl.

Carl Stuart [00:24:26] You bet, thanks for calling. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. You can hear that text. Call or text 512-921-5888. Okay, let’s see here. Hello. I know I’m probably not the deepest into the weeds on this kind of thing. However, I was just reaching out because I’m a young man interested in building a portfolio the right way and have been attempting. I have around $2,000 in VUG and about $1,200 in VEG, but I doubt this is how I should split my portfolio. But how should I go about building my portfolio into my older ages. As wisely as possible. How does the yen carry work? Whoa, my name is Antonio, and I’m listening diligently. I’m also 19, and that’s probably important. Well, first of all, congratulations to you, Antonio. If everybody was 19 and was thinking about these things, we wouldn’t have to be worried of this debate about whether social security is solvent or not, because starting at 19 and being prudent, you’ll be independently wealthy and it won’t matter. Okay. You’re using Vanguard exchange traded funds. Exchange traded funds are very tax efficient. They don’t throw off realized capital gains if they’re passively managed, which I believe yours are. So that’s a good thing. The biggest thing to know about investing in the financial market is that Asset allocation is the single biggest determinant of risk and return. Asset Allocation is just a fancy way of saying you’re a mix of different strategies. Since you’re 19 and you’re going to be continued to invest, regardless whether the stock market goes up or down in the near term, you want to invest in human ingenuity, which is the stock markets. And you want invest in the global stock market. I don’t know what those symbols stand for. But if you’re going to use Vanguard, and I always want to say this, I’m not recommending here, my lawyers would take me off the air if they thought I were, but Vanguard and Fidelity and Schwab all have a total U.S. Stock market exchange traded fund, and they also have a total international stock market, exchange traded funds. That’s where I would invest because the academic data indicate that the majority of more, shall we say, focused, whether it’s small cap, mid cap, growth, or value, over time are likely to underperform the broad market because what will occur is periods of time when small cap stocks are in favor and you’ll look great and then it’ll switch to large cap stocks. There’ll be a period of time when technology and fast growth companies will dominate and that will be followed by periods of time when slower growing value companies will. And you don’t know when that’s gonna happen. Right? And so what you have to do is you want to capture the entire market. So I would have 75% in the total stock market ETF and I’d have 25% in the domestic. I beg your pardon, international. The other thing is you don’t have all the money you’re ever going to have to invest. And so getting into what we call a dollar cost averaging program where you can take money every month or every six weeks or whatever you’re in charge, you can even set it up. To have it automatically withdrawn from your checking or savings account, and you can always change that. You can stop it. You can increase it, whatever you want. But the stock market is a volatile asset class. Real estate has much longer cycles. Goes up for a long time, goes down for a longer time. Stock market goes up, goes, down, goes up goes down, and you take advantage of that volatility by regularly investing. And so in those moments when it’s down, your dollars are buying more shares. Moments when it’s up your dollars are buying fewer shares and over time That’s a really wise thing to do because none of us knows what’s going to happen and we can’t time the market So that’s what I would do if I were in your shoes. Thanks so much for the text and good luck That’s exciting that you decided to do this at age 19 You’re listening to Money Talk on KUT news 90.5 and the KUT app. Call or text 512-921- 5888, okay, I hear some other text, let’s see this. Hello Carl, regarding bonds, we understand that you don’t make recommendation on your program, thank you, my Lord, I’ll be glad you know that. How comfortable would you be with the following in a bond allocation? One, tips near the top of their historical rate returns, real return of 2.8%. Two, treasury exchange traded funds with three to seven years, that’s the duration. And three, an active manager PIMCO bond fund has a stellar 25-year track record. Separately from bonds, your thoughts on real estate investment trusts, which have been hammered recently. Thank you. I like your bond allocation. I’ve become a little less enamored of TIPS. When things went to heck in the hand basket in 2022, TIPS went down with everybody else. And so. They don’t have the defensive characteristics that we think of bonds having, bonds do have, but obviously 22.2 doesn’t always happen. And I like the idea of having an ultra-short bond fund. As I was saying earlier in the broadcast, the one that I followed on a year-to-date basis, the price is up 3.10%, and the trailing 12-month dividend yields 4.15%. And the egg, which is you can’t buy the egg but you can buy an exchange traded fund, is down 2.38%. So I liked having, I like your three to seven year. I like you PIMCO actively managed. I got a sneaking suspicion, I know who that is. And if it is, I’ve spent some time with him in a larger meeting. And I like the idea of the ETF as well. So I like, that’s the one comment I would have on that. Real estate investment trust. I’ve learned the hard way real estate investment trusts How do you decide which ones to own? I guess you can own a mutual fund that owns real estate investment trusts. But as I’ve said before, the stock market is a bet on human innovation. Real estate is a bit on rising rents. And that’s a determined, that’s determined by two macro factors, actually one macro and one micro. The macro is a growth in the economy and the micro is location. So here we are in central Texas. Uh, and we’ve had a great real estate market, but we had a terrible real estate market for six or seven years in the late eighties and early nineties. My little hometown on the banks of the Mississippi had 16,000 people. When I graduated from high school, it has 9,000. People now, I don’t think you could have made any real estate investment when I graduated. From high school that wouldn’t have been profitable. If you held it all this time, because demand collapsed. So, uh, I’m, I am skeptical. They pay out a very nice yield. They are sensitive to interest rates, so that may be why they’re going down since rates have been going up. And you have to diversify by types, but various types of income producing. So I’m just not a fan of them. When we had the collapse of the global financial crisis, they were, as a group, from peak to trough, down 55%, so. I would not own the REITs if I were in your shoes, thanks. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-921-5888 and we have a call. Anthony, you are on the air, how may I help?

Anthony [00:32:55] Hey Carl, how are you?

Carl Stuart [00:32:56] Doing today. Good, fine, thank you.

Anthony [00:32:59] I’m concerned about the volatility of the S&P 500, especially in relation to these midterm elections. I’m really concerned about this guy, Taylor Rico, running in Texas. This guy’s kind of kooky, and I’m real concerned that that’s going to hurt the overall chances of the economy of the United States. We really got to get Paxson in that office, because he’s the only hope here in Texas.”

Carl Stuart [00:33:24] So Anthony, I guess I don’t cover politics. I will just tell you that politics have very, there’s no relationship that I can see established between politics and the stock market. That’s just my 48 year experience. If I had told you that we were gonna have 9% inflation followed by record high tariffs that haven’t been this high since before the Great Depression, that we we’re gonna have a major war in Europe. And that we were going to have a war in the Middle East without any evidence of how we’re going to get out of it. And oh, by the way, the stock market hits new highs. You would have said, Carl, that will never happen. And Anthony, I have just told you what’s happened over the last four years. So if you’re concerned about the election, I understand that. Midterm election years are the weakest for the Standard and Power 500. Of all four years. There’s no question about that. But when you go back and look at the standard and poor return when the Republican administrations and Democratic administrations, there is no correlation. You cannot say one is better than the other. So you’re welcome to be concerned, but you should not allow that to affect your investment strategy, Anthony. Big mistake.

Anthony [00:34:44] Okay, well, well these guys are this guy’s a socialist and

Carl Stuart [00:34:48] You know what, Anthony, thanks for your call. That’s the first time we’ve had one of those. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Ha, ha, ha. Call or text 512-921-5888. If you thought this was pre-taped, you now know it’s live radio. Here’s the text. Carl. I’m 70, my wife is 62. We have $300,000 in home sale proceeds in short-term cash equivalents. We want to use half of this in about six months. Where should we put the remainder? ETS or something else? So here’s my rule of thumb. Money has three characteristics by its anticipated use. There’s the day in, day out money to pay the rent, buy the groceries. Whatever the living expenses are. And there, as Will Rogers once said, I’m not concerned about the return on my money, I’m concerned about return of my money. So that’s where you have the money in your bank or wherever you keep your checking account. That’s perfectly fine. The second kind is what we would call intermediate, where we have an anticipated expenditure that is anywhere from one to two, maybe three years. There, we can take a little risk the further closer we get to three years with something like a short or ultra short bond fund. And then there’s money for our financial future, and that’s where we want to take the risk to get the best return. If you’re going to use half of this in six months, I would use it in a money market fund. That’s different than a money-market account. A money market account is at your bank or savings and loan, which is just fine. You get the FDIC insurance. But mutual funds have been around for a very long time, and money market funds are technically and legally mutual funds, but they do not invest in the stock market. They invest in very short-term debt securities. There are three kinds, prime government, and prime government and, I’ll get it out here, treasury. And I would go with the government. They invest and U.S. Government securities, and you have daily liquidity. And when you’re ready to get that money out in six months, there you have it. For the other half of it, think about what I said, and your anticipated holding period. You’re 70 and your wife is 62. A 62-year-old female has a very long life expectancy, and leaving the money in CDs or money market funds will not do her any good, because after taxes and after inflation, and she lives to be 90, then… She’s got a problem, so you need to think about what kind of risk portfolio you want with the other half. Thanks for the text. You’re listening to Money Talk, it’s about time for me to take a break. A perfect time for you to call or text 512-921-5888. I’ll be back.

Jimmy Maas [00:38:00] Money Talk airs every Saturday at five o’clock on KUT News 90.5 FM on the KUT app and at KUT.org. This podcast is produced by KUT and KUTX Studios as part of KUT Public Media, home of Austin’s NPR station and the Austin Music Experience. We are a nonprofit media organization. If you feel like this is something worth supporting, set an amount that’s right for you and make a donation at supportthispodcast.org

KUT Announcer: Laurie Gallardo [00:38:31] This is Money Talk with Karl Stewart. Call or text him with your questions at 512-921-5888. Now, here’s Karl.

Carl Stuart [00:38:45] Welcome back to Money Talk, I’m Carl Stewart, and you’re listening to KUT News 90.5 and the KUT app. And if you’re like our listener in Italy, you can also listen to our podcast anytime and regardless of what time zone you’re in by going to kut.org slash Money Talk and then going to the or go to kutt.org and go to the podcast section or wherever you get your podcasts. Five, one, two, nine, two one. 5888 here we have a call David you’re on the air how may I help

David [00:39:19] hi carl uh… Sixty four years old uh… Not sure when i might be able to retire the way things are going but i have a hundred and twenty thousand dollars in an ira right now and wonder if it’s best invested with cd that my bank or pressure put in the four one k at the company i’m currently at

Carl Stuart [00:39:42] Okay, so the amount that you can put into the 401k is, there’s a limit to that. So you’re going to, before you decide where to put it, find out with your employer, the amount, that you could put in, that’s critical because I don’t think you can, put in 120 at all one time. The, let’s talk about the pros and cons. If you put money in a 401k and you, you’re taking money. That you already paid taxes on, and you’re putting it in a tax-deferred environment. And I don’t think that that makes a lot of sense for you, because then when you take the money out, it will be complicated as to how much of it’s taxable. And I would say that being, if you have 120 in an IRA now, okay, I’m reading your. I’m reading the text. I’m misinformed. Let’s start over. 120 is in the IRA. Fine. Okay, it’s already in there. If you go to the 401k, I’m not sure. I’ve had people take money from a 401k to an IRA. Very common. Taking money from an IRA to a 401K, I’ve never seen that occur. David, I am not even sure that’s even plausible. Usually the money that goes into a 401k comes out of your paycheck or it’s transferred from another 401k from another employer. I don’t know that you can take money from an IRA and put it in a 401K. I doubt that, but you have to check that. Now, I would tell you that staying in a CD when you’re 64 years old is probably too conservative. You’re going to keep working based on your earlier commentary. You need to put some of that money in the stock market and accept the risk of it, because what happens is someday you’re gonna retire and the cost of living is gonna keep going up and the rate of return you’re going to get on that CD based on history is not gonna keep up with the cost living. And so you need start investing in something that while it will go up and down over time, you need have money in in the in the stock market both domestic and foreign. You don’t have to do it all at once. You can say, okay, I’m nervous about this. I’ve got 120 in the IRA, but I wanna start putting money into the stock market using something called exchange traded funds. Then a little over time, over the next year, if the stock markets goes down in good heavens, that’s entirely plausible. You’ll keep buying more shares at lower prices. If you have a 401k and your employer makes any kind of what’s called a matching contribution. Where you put money in and they put money beside you, you sure as heck wanna do that because that’s free money from them. It’s your money and when you retire, you can get your hands on that money and put it in your IRA. So that’s how I would think about that, David, if I were you.

David [00:42:42] Okay, thank you very much, Carl. That’s great advice. I appreciate it.

Carl Stuart [00:42:45] You’re very welcome. Thanks for calling. You’re listening to Money Talk on KUT News 90.5 and the KUT app. When you have a question, call or text 512-921-5888. Here is a caller. Mike, you are on the air. How may I help?

Mike  [00:43:07] Hi, yes. I’m 68. My wife is 70 and our son is 30. We have about a million and a half in fungible assets. I have $800,000 in a deferred retirement option plan that I have to take out by the end of next year. Mmm. And my wife has i don’t know she might have more than she has around uh… I don’t know half a million to a million we own two properties two homes with no mortgage there together with about nine hundred thousand Mm-hmm. So we’re starting, and she’s 72. So we are starting to push having to get this money out and establish a method to transfer this to our son. So do you have any advice about that?

Carl Stuart [00:43:59] Yeah, so first of all Most people I’m going to talk about giving it to your son or transferring most people are aware that you can You and your wife each can give him. It’s a certain amount every year and right now. It is $19,000 so that’s 38,000 But the fact is most people don’t think about the fact that each of us is walking around with what’s called a lifetime exemption And right now, you and your wife would have to have assets in excess of $26 million before you would have worry about an estate tax. So if you want to transfer to him, which is a gift, if you wanna give him more than 19,000, you can do that. What it will do, my understanding is you probably file a return, a gift tax return, not a CPA, so you have to look into that. But there’ll be no tax consequences of that. It will reduce your lifetime exemption by the amount of the gift. So you can give him whatever amount you choose. If it’s cash, it’s cache. If it appreciated securities, then he inherits your cost basis. So technically, that’s the case. Now, if you’re in deferred comp and you have a…

Mike [00:45:15] It’s not deferred comp, it’s deferred retirement. It’s gaining 5% right now. And it’s as if I worked 32 years and I retired with only a 25-year pension and they paid me cash for the difference. That goes into a savings account at 5%, or an annuity at 5% and I have to take it out by the time I’m 70 and a half.

Carl Stuart [00:45:37] That’s interesting. So is there a way to take that and put it into an IRA in your name and avoid the taxation on it? That’s the question.

Mike [00:45:46] I believe it can be rolled over, yes, I don’t think I have to just take it out and pay taxes on it.

Carl Stuart [00:45:51] Yeah, I’d roll it over. I’d establish an individual retirement account. Then I would work with the current entity that holds the annuity or whatever it is to set up the paperwork to do what’s called a trustee to trustee transfer because there’s no tax on that when you go from a pre-tax tax deferred account to another pre-tax tax defered account properly handled. They can even do it electronically and if they don’t, they can send you the check, but it’s not got your name on it. It’s to your IRA, so you do not have constructive receipt of it. And then you can invest that money in your own IRA and you’re not subject to a required minimum distribution until you’re 73 or 74 or whatever the case is, and it’s a modest portion of that total. So you can keep from having to pay a tax on a big lump sum, and that would be what I would do. You can start making gifts to your son. Of any amount that you want and then you’re left with the decision as to how to invest the money.

Mike [00:46:57] So we can do that, but getting the money out past the taxable income point and maybe into a Roth or whatever he wants. That’ll.

Carl Stuart [00:47:07] Well, that’s yeah, so yeah, you that you can do that. Any of the money you take out will be added to your taxable income for the year. He cannot put new money. He can’t put money in a Roth that exceeds his annual income. Oh, OK.

Mike [00:47:23] But I can have it in my name, can I have it in my and his name?

Carl Stuart [00:47:27] No, but you have him as your beneficiary.

Mike [00:47:30] Oh, okay.

Carl Stuart [00:47:31] You have the IRA, Roth IRA, or IRA. You could have an IRA for this money that’s coming due and then based on your tax liability, you can convert a certain amount, the whole thing or a portion of it to keep you out of a sharp increase in taxes and you can put that into a Roth IRA. It’s in his, he’s yours, he is the beneficiary. Upon your death, he gets it. He has 10 years to take it out, and it’s all tax-free to him. So that’s a way to…

Mike [00:48:06] Gift him up to $38,000 a year tax-free.

Carl Stuart [00:48:09] Well, you can gift them up to $13 million a year, tax-free.

Mike [00:48:14] Oh wow.

Carl Stuart [00:48:15] Yeah, the tax consequences are, is there a gift tax? And the answer is if you use your lifetime exemptions, there’s not a gift text. The only way there’s tax is if you give him appreciated securities and he sells them, then there’s a tax liability. If you’re giving him cash, you can give him whatever the heck you want. Over and above the 19,000 times two, 38,000, you just have to record that, and then that reduces your lifetime exemption by the amount of that you’ve You’ve taken it out before you died.

Mike [00:48:48] Well i’d that’s a great ideas great advice and i think that what i’m gonna have to do is go to a financial advisor that has that knowledge and get it all set up because that you know i think

Carl Stuart [00:48:57] Yeah, I think so too. Let me ask you a question. Do you do your own income taxes or do you have an accountant?

Mike [00:49:04] Uh… Most of the time my wife doesn’t she’s been pretty good at it but we have gone to an account

Carl Stuart [00:49:09] I think I go to an accountant first and just get clear about this because there’s two different situations. There’s the financial planning and tax part, which an advisor will do. And then there’s the investment part, an advisor may be able to confirm everything I’ve told you here on the air because I’m not a CPA. Make sure that you’re clear about the lifetime exemption and then you can come up with a plan with an advisor if you choose.

Mike [00:49:36] Excellent. That’s what I’ll do then. Thank you very much.

Carl Stuart [00:49:39] You bet, Mike. Thanks for calling. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-921-5888. Here is a call. Jordan, you are on the air. How may I help?

Jordan [00:49:58] Hey Carl, hope you’re well.

Carl Stuart [00:50:00] Good

Jordan [00:50:01] I had a question regarding my daughter’s 529 plan and allocating those funds. She’s seven years old, so she’s pretty young. I currently have around $50,000 in the 529 plan. It’s with Vanguard. Right now, the breakdown is about 70% is in the total stock market index portfolio. 20% is in a total international stock index portfolio. And…

Jordan [00:50:35] 10% is in the short-term bond index portfolio. Just wanted to kind of get a pulse on those percentages. Steve, I know you can’t give investing advice, but.

Carl Stuart [00:50:48] Right. Yeah, I, it’s pretty good, but if it were my seven year old daughter, I’d have nothing in short term bonds. Um, because. She’ll start needing if she starts needing money when she’s 18, but she doesn’t use all at once then she’s got 18 19 2021 she’s a long-term investor. I just don’t see the benefit of a short-term bond fund Because it doesn’t matter if the stock market goes down because the stock mark it goes up I I think that’s gonna be a drag on your overall performance over the next 11 12 years Jordan. I like I like the Vanguard Total stock market, Vanguard Total International. I think it’s a great idea. My favorite allocation, as regular listeners know, is $75.25. Nothing magic about that. I wouldn’t do less than 25% international. If you want to put your finger on the scales, you look at performance over the last decade and domestic has done far better than international, that might make you look as saying, gee, Maybe it’s time for international, because historically… These things last for a long time. Maybe you want to put your finger on the scale and do 30 international instead of 25. Nevertheless, I would get out of this short-term bonfire if it were my daughter.

Jordan [00:52:02] Is there a particular age at which you would switch over to short-term bonds?

Carl Stuart [00:52:09] Yeah, yeah. Yeah, you know, that’s purely purely your your risk decision. Um, you could say, I mean, if you want to be conservative, you can say when she’s a junior in high school, she’s got two years before she goes to college. Let’s let’s pull out and assume we’ve got enough money for four years. Let’s pull up the first year. And then the next year, let’s pull out the second year. So by the time she enters college, she has got two Pearson. Short-term bond and then you spend the first year and you just stair step out the balance of it. That’s a reasonable way to think about it.

Jordan [00:52:44] Okay, and I have one more question if that’s okay. Sure, you bet. What do you think of those, I’ve read mixed reviews on the Target funds, like you know, Target, whatever. Sure.

Carl Stuart [00:53:03] So, I think they’re a lot better for people who don’t have the time or the interest than sitting in cash. They really came out because people were sitting, they were daunted by the menu of choices. And then Enron blew up and there were stories about people having all their money in company stock and went to zero. And so these target date funds allow Vanguard or Russell or Fidelity or Schwab or JP Morgan chase or whoever. To balance the portfolio based on some model that they have. That’s a lot better than nothing. I just think that I’d like it better to have for me to get to choose what it is. So sometimes I think they get too conservative, too quickly for retired people. I mean, today, if you look at longevity versus life expectancy, people with money to invest will live much longer than the overall life expectancy of the country. And that you just don’t want to be 84 years old and knowing that you’re going to run out of money in 12 months. And so I’m a big fan for keeping a good equity allocation. And so, I’m not a fan of those for people who believe what I believe, but for people who say, look, I just don’t want to think about it, then the Target Day funds are a heck of a lot better than doing nothing. There’s no question about that.

Jordan [00:54:23] OK, awesome. Thank you so much.

Carl Stuart [00:54:25] You bet, thanks for calling. You’re listening to Money Talk on KUT News 90.5 and the KUT app. We’ve just got about three or four minutes left in today’s broadcast, and so I’m not gonna ask you to call. Let me just see if I can get us some, if I could get us here, some texts, okay. Okay, Carl, uh-oh, I took your advice, ooh. I sold the rent house. And I paid off the mortgage on my main house. I’m happy and debt free. Good for you. And looking forward to retiring soon. Gonna have to pay capital gains. Is it just as simple as subtracting what I bought the house for from what I got? Are there other things that I can deduct before I have to the capital gains tax? For example, I put a new roof on the house. I’ve always done my own taxes. Is this the year I should hire a CPA since I had this capital gains issue? Well, as you know, I’m not a CPA. My understanding is that when you do those kinds of significant improvements to a rental property, that that increases your cost basis and decreases your capital gain. So my understanding is you can do that. There’s probably, this is why you wanna go to a CPA, there’s probably some either list of things that add to your cost bases. Or things that are just normal course of events. You get a new refrigerator, that doesn’t do it, but you do a major remodel, that counts. You put in a new roof, you add a garage or whatever the case. I think that lowers your tax liability by increasing your cost basis. And do I think this is, it’s that simple. What you sold it for, minus your cost, but I think you and I are talking about something called adjusted cost. And this is not the year to do your own taxes, so good luck. Let’s see if I have time for the next one. Hello, Carl. I manage the finances of a parent with dementia. She inherited my father’s thrift savings, which is approximately $890,000, making 6.7% return. 100% of the balance can be withdrawn at any time. She also has her own retirement account at TIA, approximately 1.1 million. That is making it slightly better than 6.7. I’m wondering if I should catch, you know, this is really an important and involved question and I really hope, Julia, that you can listen next week because I wanna take the time and to answer this thoughtfully. Been a lot of fun this afternoon. As always, I wanna thank Alyssa for doing her terrific job and thank you for listening and remind you that next Saturday at five, tune in to Money Talk.

KUT Announcer: Laurie Gallardo [00:57:38] You’ve been listening to Money Talk with Carl Stewart. Carl Stewart is an investment advisor representative of Stewart Investment Advisors. And this is KUT and KUT HD1 Austin.

This transcript was transcribed by AI, and lightly edited by a human. Accuracy may vary. This text may be revised in the future.