Money Talk with Carl Stuart

Carl Stuart takes caller and text questions on the benefits of money market funds, the pros and cons of different down payment amounts when buying a house, and the rules around inheriting Roth IRAs. He also provides advice on the topic of paying off credit card debt, building college funds for nieces and nephews, and considerations when estimating retirement savings.

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 Stuart. Carl Stuart is an investment advisor representative of Stuart 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 Stuart and you’re listening to KUT News in 90.5 and on the KUT app. Money Talk now in our 32nd year after just celebrating our 31st anniversary last broadcast, Money Talk is a broadcast about the world of financial and investment planning where you always determine our agenda by calling or texting 512-921-5888. It’s a terrific idea to call or text. At the beginning of the hour because I take things in this order, today’s calls first and then today’s texts and then any text that I have not had the time to answer in the past. So let me give you that number one more time before I go to some of those previous texts. 512-921-5888. Give me a call or send me a text. Here’s a text from last week. Carl. What do you think of a money market mutual fund as a safe haven? One I have is currently returning around 4.5%. So I think a money-market mutual fund is a good place for a safe-haven. Money-market-mutual fund invests in high-grade securities of very short maturities, a year or less, and the sponsor keeps the share price at $1 per share. There are three types of money market funds called prime, government, and treasury. The prime funds invest in high grade securities, taxable securities, although you can get tax exempt money market fund. The government money market invest in both treasuries, US treasurys, and government agencies, primarily Fannie Mae and Freddie Mac, perhaps, and Jenny Mae, and then the treasury. Invest strictly in Treasuries. As you would expect, with each successive one the yields are slightly lower, I would say the Government Money Market Fund is a great place to be. Having said that, it will not pay 4.5% all the time. It will pay whatever the portfolio yield is. So in a period of rising interest rates, over time you will see your return rise and in a period of falling interest rates, over time you will see rates, your yield decline. But in terms of safety, I should always say it’s not an FDIC type thing like you would get at a money market account at your bank credit union or savings and loan. But with the one exception during the global financial crisis where a money market fund that had no sponsor, it was a standalone company, owned some Lehman Brothers paper and they broke the buck and went less than a dollar per share. But if you’re with a money market fund with a large firm like Merrill Lynch or UBS or Morgan Stanley or Vanguard or Schwab or Fidelity, they have millions upon millions of their clients’ money in there and they are not going to break the buck. That is my opinion. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888 and you heard a text coming in. Hi Carl, my husband and I went to buy our first house and we’re not sure what percentage to put down. What are the pros and cons of putting down 20% versus putting down a smaller percentage of the price as a down payment? It’s interesting, because I was having lunch with a good friend of mine, Larry, yesterday and we were reminiscing back in the day when you were required to put 20% down and also back in day the lender knew you probably your family and your reputation and understood your job and your character, but that’s not the way the mortgage market works. You will get a mortgage and your lender will then turn around and sell that mortgage probably to Fannie Mae or Freddie Mac, not necessarily. Take the money that they get from say Fannie May to turn around and lend to somebody else. That’s why we have such great liquidity in the mortgage market. So there’s two ways in my view to look at this. The more money you put down, the less you’re going to pay over the life of that mortgage in interest because you’re gonna pay a ton of interest on a 30-year mortgage, for that matter, a 15-year mortgag. And so if you have smaller mortgage payments, right, or you pay the mortgage for a shorter period of time, then you’re, that’s gonna be a good thing. On the other hand, there’s always the concept of opportunity cost, which is what if I was able to get a 10% down payment and take that extra 10% that I would have put in the 20% down and saved and invested that because while I’ll build up equity by just paying down the mortgage on my home, is if you’re a regular listener, I don’t consider a personal residence an investment because while yes, over time, residential real estate goes up, but you gotta sell it and live someplace. So it’s not as if you can sell it and plan on retiring and living out of your car. So I’m a homeowner, I’m not opposed to home ownership. I just don’t want people to think that that’s somehow better than saving for their own financial independence. You don’t wanna be house poor and have such a big mortgage that you can’t save for your future. So that’s how I would look at that. I would say if we had a 10%, what would we do with the money? If we had 20% down, will we still have enough cash flow? To participate in our employer-sponsored retirement plan, to participate an IRA or Roth IRA or whatever the case is for that. That’s the way I would look about it if I were you. Thanks for the question. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Also, I checked today and yes, you can catch past shows. At kut.org slash money talk. Let’s see here another question from last week. Carl, are indexed rate a good long-term investment for retirement? I’m going to have to assume that you mean an index rate annuity. And there are different kinds of these, but there are some kinds that I’m not fond of at all. They tend to say that you will get some portion of the stock market gain when it goes up. But you will get very little or none of the risk when the stock market goes down. These are highly complex investments using usually options to be able to do this. And I have two criticisms. One is when you look back at the history of the stock markets, let’s just use the US stock market, good returns are obtained by long-term investors. Great returns and terrible returns and big losses are what short-term investors get. And the stock market doesn’t go up nice and neatly, 5% or 8% or 12% a year. It goes up in spurts and it goes down in spurths. And when you have this type of structure where the stock markets up 18% or 17% like last year, and you get 10% of it, then it goes down 10% and you don’t get any of the down. Over time, your rate of return will be… Subpar, inferior. The other thing is a lot of these have very high costs and very high sales charges. And my colleague, Lindsey and I, worked with a person who had put in an indexed annuity and she had two years of returns. And the last two years in the stock market have been way above average. And yet, if she were to liquidate it two years, she would have a loss. She’d get less money than she put in. And not get any of the gain of those two years. These are very expensive, and because of the high cost, both to the insurance agent and to the company doing this, if they’re gonna make money, they’ve gotta give you lots of reasons to stay there, and the way in which they do that is by having very high surrender charges. So if this is an index rate annuity that I’ve just described, I’d be very careful about doing that. Thanks for the text. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Here is a call. Dave, you’re on the air. How may I help?

Dave [00:09:17] Yeah, I’ve got a question. You were just talking about mortgages. And interesting thing. I’m just curious. My mortgage lender sent me some stuff about instead of paying once a month to pay twice a month, once on the 1st and once on the 15th, to split that up. And apparently it’s gonna save a lot of money, which sounds like a great deal and probably will do it. But I’m also curious about how that actually, how that saves money or how that works. In the sense of really reducing that.

Carl Stuart [00:09:51] Unfortunately, you and I are not mathematicians. I’ve heard about this before, and your mortgage company couldn’t tell you anything that was mistaken or misleading. It has to do with the compounding over time. And it is true, and it’s pure math. I believe it. I think it’s a good idea. If you’re making, do you think they’re suggesting you make, let me give you a hypothetical. Let’s say your mortgage payments $1,500 a month. Are they saying break it into two pieces and put 750 in twice a month? Is that what they’re suggesting, Dave?

Dave [00:10:27] Yeah, basically. And the only, only additional thing is when the first month I do it, I got to pay a full month and then I pay, like on the first, if it was 15, I’d pay 1500 plus 750 and then 750 that month. And then after that 750, you know, first and 15.

Carl Stuart [00:10:46] Yeah, I don’t see any downside to that at all, because you were going to pay the $1,500 in our hypothesis, you were gonna pay the 1,500 anyway. And so, if you can save some money doing that, heck yes, I’d go ahead and do it if I were in your shoes, Dave.

Dave [00:11:01] Yes, okay. Thank you very much. Appreciate it.

Carl Stuart [00:11:04] You bet, thanks for calling. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Bippin, Bippen, you’re on the air, how may I help?

Bibin [00:11:26] Yeah. You know, you just were talking about the home ownership and things like that. And I know Americans have generally considered home ownership a great investment. But my question pertains to people, you know, like my age group 80 and things who are, as I myself in the God’s waiting room. The reason why I’m saying it is when something does happen to you, your family has to sell the house, which may take five, six months, a lot of work, a lot of lawyers, etc. So would you think it is a good idea to move into either a, quote unquote, some kind of an apartment or something when something does happen, your family just pays the last rent and you are done. Plus, because of what just has happened to this ladies, you know, the woman whose mother was, I’m forgetting her name right now, Aswana Kadri’s mother. What I’m trying to say is, you know, your home is a place where somebody can knock on the door. If you are living in a community of an apartment where there is a secure entry, some kind of a foe or something, Wouldn’t that be a better idea for people my age?

Carl Stuart [00:12:50] Here’s what I’ve observed. It’s not just about the difficulty of selling the house upon your death. There’s just, it’s a psychological thing. So here’s what, I was just, frankly, I was this morning at a memorial service for a friend and we were talking to some other friends and they’d sold their home and they moved into a retirement place. And they said they missed having their home for about five seconds and they were really, really happy. They had all the services, they liked the food, they liked people, there was a sense of community. Also, this was a place that if they ever needed longer term care, say they had dementia, they had that. They thought it was terrific. But on the other hand, to your earlier point, we have a narrative in the United States about the benefits of home ownership. And some people just say this means so much to me psychologically that I’m simply not going to move out. I’m going to stay here and then when I die my family can do whatever they want with the house. So I would say I don’t disagree with you. I would just say that I’ve observed over my 47-year career it’s a very emotional psychological thing. And if a person doesn’t have that deep emotional Desire to stay in their homestead and they welcome and they’re ready to go to an apartment or a retirement place Yes, I think that’s a terrific idea But they have to be happy about it or they have be forced to do it because of their health So that’s my experience Biffin. Okay Okay, thank you very much. You’re very welcome. Thank you for calling You’re listening to money talk on KUT news 90.5 and on the KUT app. Call or text 512-9000. 921-5888, here’s the text. The listener with the home down payment needs to remember they will pay home insurance. Let me read this again. The listener, with the Home Down Payment, needs to Remember they will Pay Mortgage Insurance if they don’t pay 20% down. Okay, thank you. That’s not my area of expertise, so I really appreciate that. Yes, and then I got it from somebody else. Carl, please remember the 20% down also avoids PMI on the mortgage. Thank you, love your show, you’re welcome. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Here’s another one. Carl, my wife and I are planning on selling our house this year. What do we do with the profits short term? So I’m gonna define short term as 12 to 18 months or less. So there’s basically three things you can do. First, you can put it in a high yield money market savings account with your financial institution and you know that the money is safe. Secondly, you could put it in a certificate deposit that would come due at the end of the time. If you’re unsure about how long the short term is… And you choose to do CDs, if it’s a lot of money, several hundreds of thousands of dollars, you can do what is called a Certificate of Deposit Ladder, L-A-D-D E-R, by going to your financial institution, I’m making this up, you take the money and divide it into thirds, and put a third in a six month CD, a third 12 month, and a third 18 month, and as interest rates change, if you don’t need the money, you’ll probably have a better return and just keeping it in the savings account. And if it turns out six months from now, you don’t need the money, and now that 18 month CD is a 12 month one, you can go out and buy another 18 month one. The third is what we talked about at the beginning of today’s broadcast, a money market mutual fund, a government money market, mutual fund. You’ll have daily liquidity unlike the CD. It, based on history, will yield more than the high yield savings account. And you can do that at many different places. Securities firms, whether you do it yourself with Fidelity, Vanguard, or Schwab, or you do it with your financial advisor, those tend to yield more over time than CDs. Now, you’re not going to have any appreciation. You’ll earn whatever interest that instrument will give you, and you will have either daily liquidity or liquidity when the CDs mature. Good luck. You’re listening to Money Talk on KUT News 90.5 and the KUT App. Coming up on time for us to take a break, a perfect time for you to call or text 512-921-5888. Stick around, I’ll be back.

Jimmy Mass [00:18:03] 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 [00:18:33] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl Stuart [00:18:47] Welcome back to Money Talk, I’m Carl Stuart and you’re listening to KUT News 90.5 and the KUT app. When you have a question, call or text 512-921-588. Amy, Amy, you’re on the air, how may I help?

Amy [00:19:06] Hi, um, I have, I’m sixty-six, soon to be sixty-seven.

Carl Stuart [00:19:12] Mm-hmm.

Amy [00:19:12] And I am wondering about long-term care insurance. It really was fabulous when my mother had it. She passed away six years ago, but for the three years she needed it, it was fabulous and I think within five or six months she’s pretty much paid for her investment because it’s so expensive. So obviously it’s way more expensive now and I was told you know I spend like 50 a month and then if I needed long-term care it would pay out only three thousand a month but that would certainly defray some of the cost because it’s outrageously expensive right and you know I know a lot of people just say well sell my house just like the previous gentleman but right in today’s market can’t always count on that

Carl Stuart [00:20:04] That’s right.

Amy [00:20:06] So I just wanted to see what you thought about that versus putting it in another, putting that 250 a month into something else.

Carl Stuart [00:20:14] I struggle with this, Amy. I remember when long-term care insurance first started being offered to us. And it turned out that a bunch of insurance companies made big mistakes because if you think about it, life insurance companies have all kinds of data and they know how many people are gonna die and they them by gender. They just don’t know them by name. And so when they price… Say a regular so-called whole life insurance policy, or even a term policy, they have lots of actuarial data, and those premiums are priced very efficiently. But when long-term care started, the insurers did not know, one, how many people were gonna actually use it, two, how long were they gonna live, and three, what was it gonna cost? And it turned out that they underpriced the premium so dramatically. That big insurance companies just threw up their hands and got out of the business. I remember Genworth, which was a general electric insurance company, got out, Connecticut General got out it. And so what’s happened now is just what you talked about. Two things have occurred. They have limited the benefit, so it’s not as generous as it was when your mom purchased it, and they’ve raised the prices. And so it’s not as good a decision, and that’s a mistake. It’s not easy a decision as it was 20, 30 years ago. I would say to you that taking the 250 a month and putting it aside or even investing it in an index mutual fund, which will probably over time grow at a rate equal to or faster than the rise in the cost of care is a perfectly reasonable thing to do. If you end up buying it, it’s almost more of a comfort decision because obviously if everybody who had long-term care insurance was going to use it, you couldn’t buy it. It’d be so expensive. There’d have to be a whole bunch of people who’d never use it because otherwise they wouldn’t even, the insurance companies wouldn’t make any money. And so it’s a tough decision. It’s emotional. If it’s the kind of thing where it’s going to interfere with the later years of your life if you don’t have it, well then go ahead and buy the darn thing. But I got to tell you, I’m skeptical and if you are a healthy, soon to be 67 year old female, you have a really long life expectancy. If you have access to good health care, I mean, I’ve got friends who are dying in their 90s recently, one for 102, they happen to be female by the way. So, if I had to decide, I’d probably not do it.

Amy [00:23:07] Okay. Well, thank you very much. I appreciate your advice on that.

Carl Stuart [00:23:11] Okay, you bet. Thanks for calling. I’m reminded of the old joke one fellow says to the other, are you ambivalent? He says, well, yes and no, I’m ambivalant. There’s no question about that. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-921-5888. Carl, my understanding about inheriting Roth IRAs was that your heirs get it tax-free as long as they put it into a new Roth IRA of their own. But I’ve heard you mention some 10-year period. Can you explain what are the Roth IRA inheritance rules? Yes, those were the good old days when you could take it out over your lifetime. It was called a stretch IRA or a stretch Roth IRA. That is no longer the case as a result of the IRS Secure Act 2.0. When you inherit a Roth IRA, that’s called a beneficiary IRA. Now, I’m assuming that you’re not the spouse. If you inherit Roth IRA because it’s your spouse’s and she or he predeceases you, you have your, it can be commingled with your Roth IRA and you have the no required minimum distribution thing, you can keep it as long as you want and then when you pass away, your beneficiary, your child or your grandchild gets it, then she has what’s called a beneficiary IRA and she must withdraw it within 10 years. If you inherit a beneficially Roth IRA from someone who was already taking required minimum distributions, which seems to me doesn’t matter to a Roth IRA, that’s only a beneficiar IRA, I think about this out loud. So yes, you do not, open a Roth IRA, a new kind of Roth, you open a beneficiary IRA, the securities or the money you transferred, and then you have 10 years to take it out. So that is the way it is. Thanks for the text. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-921-5888. Hi Carl, I sent this last week and you liked the question but it ran out of time. Thank you for doing this again. I’m resubmitting to get your advice. Carl, I have a three-year-old granddaughter for whom I want to create a college fund. I have retirement assets sufficient to create an UGMA or UTMA. We stop and say that’s a uniform gift to Miners Act or a uniform transfer to Miner’s Act rather than a 529 plan. Which route is best? I want to maximize her ability. To pay for tuition and perhaps a European trip upon graduation. Well, first of all, congratulations on your generosity. Here’s the pros and cons. An UTMA account, it’s actually, when you put the money in, you’re the custodian, but your granddaughter’s, it’s her property. It is an outright gift to her property, and when she hits 21, it is her property and your name disappears. Now… Because you’re the grandparent, you will have a problem. You will identify a successor custodian. So if you die before this money is used, there’ll be another custodial, but still at 21 or at 18, I’d recommend 21, it’s their money. I like the idea of just setting up an account, not a 529, and call it a special account or an education account. It’s yours in your name. She never owns it. You have complete control. You can even set it up with a transfer on debt. So if you predecease the money being spent, you’ve identified who will take over the account. Yes, it’s your tax liability, just like with the UPMA account. But if you invest it in tax-efficient mutual funds and exchange-traded funds, there’ll be very little income liability to you during the time. And when you sell these funds at your rate, you’ll be at the lower long-term capital gains rate, and you retain total control. Whether it’s to buy an automobile, or it’s take a trip, and when the child is young, three years old, we don’t know what her life is gonna look like. She may want tutoring, you may think she needs tutoring, or, and I don’t mean disrespectfully, she may choose to take a few years of sex, drugs, rock and roll, in which case, if she owns the money, there it goes, And if you have the money… You have control over it. So I like just setting up another account. You can style it any way you want, invest in tax-efficient mutual funds and exchange-traded funds and retain complete control. That’s what I think I would do. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. You can catch pass shows or tell your friends and relatives they can catch past shows at kut.org slash money talk. Let’s see. Okay, this is another one. Hi Carl, I texted you about a month ago but I don’t believe I saw the answer. Well you probably didn’t because I didn’t get to it and then I got a new text. So thanks for your persistence. I have a 529 account for my niece. And I am the only FAMBER member contributing to it. My kids’ 529s are in really good shape, so I want to start putting money in hers. How much do you recommend putting in a 529 account each month if a child is nine and a half years old and you wanna save $50,000 by the time the child is entering college at age 18 or 19? Well, if you think I can do the math in my head like that, you have a much higher regard for me than I deserve. There are places to go. You should go, just Google college savings accounts and they will give you features like how much money do you want to have by what time, how old is the child, and they will answer your question. Because you have to make some suppositions about your rate of return. I would just tell you 6% money doubles in 12 years, 7% money double in 10 years, but I just don’t have the ability in my head to talk about that. You just need to pick a compounding amount. Based on the type of investment you’re going to make and then do it that way. I’m sorry, I couldn’t be more helpful. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Will, you’re on the air. How may I help? Hi Carl, thanks for taking my call. You bet.

Will [00:30:14] I we have been advised by or recommended by our mortgage company to leverage some of the equity that we have in our home to pay for some credit card debt that we have and I have heard some bad things about things like key locks and stuff like that and so I just wanted to get your take on that

Carl Stuart [00:30:37] So let me ask a question. This credit card debt, more or less how much is it?

Will [00:30:43] $20,000.

Carl Stuart [00:30:46] And again, I’m gonna be respectful, but this is always comes up when people have credit card debt. Is that credit card death there simply because you spent more than you made, or is it because you had a medical emergency or some unexpected expense?

Will [00:31:02] No, I think it’s really because we spent more than we made.

Carl Stuart [00:31:05] So if you paid off the credit card debt, why wouldn’t you start creating more credit card debt then?

Will [00:31:11] It’s a great question. Both me and my wife do make a little bit more money than when we first, you know, sort of began acquiring this and then of course interest payments kind of kind of stacked up. But we would try to be more conscientious of our budget. But it’s a good question.

Carl Stuart [00:31:27] Yeah, because here’s what I would do. I’m going to answer your question, but I’m gonna do this and pontificate here for a bit. This is about our behavior, because if you think about it, a credit card loan is an unsecured loan. They’re going to charge you 20 plus percent. You don’t have to put up any collateral, and you buy stuff that’s consumption, and it disappears, right? It’s entertainment, it’s experiences, it whatever. And so, this is the American dilemma, is that we have access to ample credit. And we get in this bind. And so wanting to reduce that to zero is absolutely important. The question I would sit down with my spouse and say, let’s first, before we do anything, most people don’t have a real, based on my experience, don’t a clear, deep understanding of how much money they spend. Their view is, if we get to the end of the month and we’re current on all of our bills, we’re okay. But the fact of the matter is when you decide to quit working, or you’d like to quit work, your bills don’t go to zero. And so the best thing you can do is before you start this thing with a HELOC, is start taking receipts of every expenditure and sit down, both of you, and once a week, or once every two weeks, and categorize all of those expenditures. Here’s my experience. It may or may not be what’ll happen with you. Well, people tell me when they start to do that, the light bulb goes on. Oh my gosh. I didn’t realize we spent that much going out for dinner. I didn’t realize I spent that much at Starbucks or whatever the case is. And what you’re looking for is minor modest ways to change your behavior to generate more cash flow. Because if you have a sincere desire to change you behavior, lose weight, start smoking, drink more alcohol, I wouldn’t suggest the latter two, that you need to measure your current behavior. If you do that, come to the conclusion that there is no way that no matter how much we alter our spending behavior, we’re not gonna get out of this hole, then the interest rate on the equity loan from your home is going to be substantially less than the interest on your credit card debt. It’s just plain mathematics. Then getting a lower rate note to pay off a higher rate debt. Is a reasonable thing to do. But if you and I have this conversation three years from now, or five years from know, and the credit card debt is zero, but you’ve got more debt on your balance sheet because of the home loan, that’s not a good thing. Because we think of ourselves, to use accounting terms, we think ourselves as an income statement. This is how much we bring in, this is how we spend. But we have to think about ourselves. As a balance sheet. These are my assets and these are my liabilities. If I have a home and I’ve got $200,000 of equity in the home but I’ve $40,000 credit card debt I got $160,000 net worth, not $200. Because I gotta pay off the liability. And if I ever hope to retire and I still have these liabilities, I can’t retire. So I would just say to you first and foremost get a deep understanding of what you’re spending. Look for ways in which you believe you can bend that curve. And if it appears that even bending the curve is gonna take you forever, then go do the loan. But then you need to have the cash flow to pay down that extra loan because it’s gonna be at a higher rate, it just is. So that’s how I would think about it well if I were in your shoes.

Will [00:35:21] I appreciate your thoughts and your wisdom, Carl.

Carl Stuart [00:35:24] Okay, thanks for calling. Ah, well, just remember, I’ve managed to lose money in every possible asset class. And my two best teachers have been trial and error. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-921-5888. Mary, you’re on the air. How may I help?

Mary [00:35:52] Well, I’m in a relative- I’m sorry?

Carl Stuart [00:35:56] Go ahead, I couldn’t hear you at first. Please go ahead, yes, go ahead.

Mary [00:35:59] I’m in a relatively infield position. I’ve been retired for almost 15 years and I’ve, you know, paid into accounts. My problem now is that this was such a good investment year. I’ve got a lot of capital gains and obviously pay taxes on them. Is there a way to shuffle investment so that they go into ETSU? Nation before you know out of that without without playing the taxes that we are going to have to tell us that they didn’t

Carl Stuart [00:36:38] Yeah. Great question. So these assets, which generated these capital gains, were they individual stocks or were they mutual funds?

Mary [00:36:48] Nothing you can’t find.

Carl Stuart [00:36:50] Okay. So this, I think…

Mary [00:36:51] That I paid for a long time

Carl Stuart [00:36:53] Exactly. What’s happened? I struggle with this all the time. If you bought, I was looking at a portfolio where decades ago someone bought $200,000 worth and now it’s $2 million. Well, guess what? The capital gains because the funds are so large are huge. But the pain to get out of those into an exchange-traded fund is there’s no way. The sad and short answer to Your question is no.

Mary [00:37:21] I’ll say it is. It’s by Texas. Okay.

Carl Stuart [00:37:23] That’s exactly right and I guess the attitude you ought to take or we ought to take or I ought to take is thank goodness I have such gains and I’ll just pay the darn taxes and if I have to sell some funds to pay the taxes I will. I’m going to answer this for you and for other listeners. I did some homework on this. Some companies, I went and I looked at Fidelity, Dimensional Funds, and Vanguard. Some of these fund companies don’t have actively managed stock funds, which is what you and I are talking about. Funds like American funds, I’ll just use a huge one. They are required by law when they get capital gains. Every year, if they have net capital gains, they have to offer to pay to you and me the shareholder. We reinvest and then go on down the road. Here’s one thing I would do, and this is something my colleague Lindsay came up with. Stop reinvesting your dividends and capital gains because all you’re doing is compounding by having future larger gains. So stop reinvesting dividends and capital gains. Take the dividends and the capital gains because you don’t need to live on them and buy very tax efficient. If it’s a stock fund, an all U.S. Total stock market exchange traded fund, you can buy them. They cost like 0.03%, they’re virtually free, and all international exchange traded funds. 65% domestic, 35% foreign, and stop reinvesting dividends and capital gains on your actively managed funds and just be glad that you have those gains and know that upon your demise, your beneficiaries are going to get a step up in basis and then they can sell them at no taxes to them. That’s just the ugly truth.

Mary [00:39:12] That’s great advice. I like that. Thank you.

Carl Stuart [00:39:14] Thank you very much. Okay. Thanks for calling. Oops. It’s time for me to take a break. It’s a perfect time for you to call or text 512-921-5888. I’ll be back.

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KUT Announcer: Laurie Gallardo [00:40:11] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl Stuart [00:40:24] Welcome back to Money Talk and Happy Valentine’s. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. When you have a question, call or text 512-921-5888 and you can catch past shows at kut.org slash Money Talk. Here is a text. I am 34 with approximately $120,000 of government student loans on an income-based repayment. The current payment is zero dollars a month and not gaining interest because I have not had to re-certify income in a couple of years. My salary in the last few years has gone from $40,000 to soon to $160,000 a year. Wow! Congratulations! With this new income, I’m trying to figure out if it is better to aggressively pay off the loans above the income-based payment to pay it off in approximately five years with minimal investing, or do I go with a more gradual payoff of the loans and put money towards investing? Crunching numbers, net wealth after five years without aggressive paying seems higher, but I will carry more debt. Boy, this is an interesting question because Well, you’d have to think about the two things is what is the cost of the debt? And what is a prospective return on your investments? I would start paying because you have such a good income. And what I’m hopeful is when you go from making $40,000 a year and quadruple that, what happens to most people is that they increase their cost of living because they increase our lifestyle. That’s after all what we do in the United States. But if you could keep your living costs at a moderate level, I would frankly do both. I mean, I think I’d be aggressive in paying down it because whatever interest rate is, that’s your rate of return on that. And if the interest rate is anywhere above 5%, if it’s 7% or 8%, you know, the long-term return in stocks might be eight to 10, but you’re gonna have some down years as well. I think what I would do… Is I would figure out how much could I put away no matter where it is, okay? And then I split it 50-50. I’d open an account where I would do a dollar cost averaging with, if you’re a do-it-yourself person, vanguard, Schwab, Fidelity, whoever, you set up what’s called an ACH and they draft your checking account for a monthly amount, and you take the same amount and pay down on your note. And if your income continues to improve, Just do the same thing and keep doing it 50-50. And take the money, if you’re gonna do it yourself, put it in a very inexpensive, very tax-efficient, because if you are a single taxpayer making $160,000 a year, you’re going to pay some serious income taxes. So put it into tax-sufficient, exchange traded funds, total start with total stock market, make your young say 60% total or 65% total U.S. And the balance international. And then pay down the debt that way. I think that’s what I would do if I were in your shoes. Thanks for the text and congratulations. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Do we got a call? Bill, you’re on the air. How may I help?

Bill [00:44:10] Well, actually, I just kind of want to toot my horn and tell you about something I did with my teenage boys years ago.

Carl Stuart [00:44:17] Okay

Bill [00:44:18] and inadvertently stimulated an interest in finance and I just accidentally tumbled into it. Years ago when they were teenagers and started getting their own afterschool and summer jobs, I told them, let’s open a Roth account for each of you. You put all of your earnings in it and I will give you the matching amount so you’re not out of anything.

Carl Stuart [00:44:47] And it worked. So I got to tell you. It worked. Over the years. Yes.

Bill [00:44:51] I would say over the years they built up a little bit of money but what was unexpected now that they had this little asset they started to get interested in what we are going to do with this

Carl Stuart [00:45:03] That’s great. So I will tell you, when our kids started working, and I, much to, that’s not fair to them. I say much to their chagrin, that not true. When they started working and making money, they were 14, whatever it was, years old, I told them, you’re gonna be responsible for your entertainment expenses when you get to college, but you give me your, you put, you give my your earnings and I’ll write you a check. For half of it and put the other half in an IRA. Well, I didn’t, I put the whole thing in the IRA and wrote him a check. And then when Roth IRAs came around, I put it back in Roth IRA’s and they’re now worth, they’re worth over $253,000, really. Yeah.

Carl Stuart [00:45:48] Yes, exactly.

Carl Stuart [00:45:49] And because they’re under age 59 and a half, they know they can’t touch the money, and it’s just been magical. You and I know the old concept, the magic of compound interest. So this is a terrific idea, and I’m really glad that they not only saw it grow, but they became interested. They’ll be terrific responsible investors as adults. So that’s a great story, Bill.

Bill [00:46:13] Yes, yes. And I’ve offered that to lots of people as, hey, this is a real simple way. You don’t even have to match it, you know, just a few hundred dollars.

Carl Stuart [00:46:22] Exactly. Well, thanks for thanks for thinking of that and doing that and congratulations and thanks for your call. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Let’s see. Carl, thank you for your answer to my question. We have another question for you. When building models for estimating retirement savings and incomes, What considerations should we make when building those models to avoid common pitfalls and incorrect estimates? This is really interesting. The answer is going to depend a little bit on your personality. If you are a do-it-yourself person, you can go online and you can find free calculators, and they’ll be basic, but they’ll fine, and you plug in when you wanna retire, how much income you wanna have. And you plug in your ages, your gender and ages, they’ll plug in estimated length of your life. You plug in what you think you’re going to make on your return. I would use something quite conservative, like 6%, 6.5% on a balanced portfolio. Don’t say 10, because if it doesn’t work, you’re up the creek. Those are what we call income-based plans. There are some others. My colleague, Lindsay, works with something called gold-based planning, where, well, we want to pay for our granddaughter’s wedding, or we want to take a trip around the world, or we wanna buy a car in three years, or whatever, and you plug in those unusual expenses as well, and then the good ones will run what’s called a Monte Carlo simulation, where they’ll say, okay, what’s your asset allocation? How much do you have in US stocks, foreign stocks, bonds, cash, CDs? And it’ll run 1,000 simulations based on history, and it will spit out what your odds of success are based on your life expectancy and all of these inputs. So that’s where I would start, and I actually have a friend, he’s an engineer, and he wanted to do this himself, and he found one online and did it, and then we compared and contrasted with the one that we had, very interesting. There’s a lot of that out there, and if you have that interest, that’s were I suggest you go. Thanks for the text. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-921-5888. Gary you’re on the air, how may I help?

Gary [00:49:09] Hi, Carl. I just wanted to comment regarding the long-term care insurance, and there’s a gentleman that I used to listen to. I think he’s since retired, but he was an advisor in both the CPA and a tax attorney. And one of the things he was recommending was, I guess it’s a whole life or universal or something policy that has a long- term care rider on it. Expensive, I’m sure I didn’t do it, but I thought it was kind of interesting because so many people pay for the long-term care insurance, never need it, and then my stepfather did. He paid for years and years and never used it and passed. Yeah, and this way at least you have the insurance value. Yeah, you never use it

Carl Stuart [00:49:55] heirs get the, uh, death benefit. You get the death benefit, yeah. Yeah, you get death benefit and as you know, cause you’re a long-term listener, I’m not an expert in that area. So I’m glad you called and people should look into that. Gary, thanks so much for calling. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Let’s just see. Hey Carl, similar question to one before I’m 29 years old. Just became completely debt-free. Congratulations, un-American, congratulations. And I’m now focusing on building wealth for myself and my family. Currently I don’t have children, but all three of my siblings have children. Four in total. I wanted to start cleaving, I bet you meant saving. Saving for their future now, so it has more time in the market. Would you suggest creating four different brokerage accounts for each one? Currently I just buy $40 a month of one. ETF so it’s if it’s ten dollars each month for them, but I’m not sure how to split that up or give it to them when They come of age. What would you suggest I would open one account Because the ETF might be $300 share I’d open one to count put the money in just like you’re doing You can do it on your own or you can set up as I said earlier in today’s broadcast an ACH With your bank and they’ll automatically your ETF firm will automatically draft it, you still retain control so that if you want to increase it or decrease it, you can. You’re building it up on a tax-efficient basis. You are building up a long-term capital gain so when you use the money, it will come out at a much lower tax rate than income tax. And because these children are young, you don’t know. They may need the money for some non-educational purpose or you may decide that they’re not going to spend the money in a reasonable, mature way and you don’t t give it to them. So that’s, I think, what I would do. Thanks for the text. You’re listening to Money Talk on KUT News 90.5 and the KUT app. If you’re thinking of calling or starting to run out of time, but you can call or text 512-921-5888. Let’s see here. Is there a basis in the IRA? Form 8606 is filed to determine the taxable amount. In my TurboTax PDF, there’s no form certifying requirement of medrushion has been taken. I think you just report that, but I’m gonna keep going because you know a lot more about this than I do. IRS Form 5498 reports a penalty if not all RMD has been taking. There was a bug in the TurboTex last year for 2024 taxes that. Depending on how data was entered on its dialog interface, required minimum distribution and payments could be improperly allocated in its thoughts you had underpaid. It was a big topic in the user comments, basically how to enter the data in a way to bypass the bug. Advice, know in advance whether you have withdrawn the required minimum of distribution. Google confirms the taxpayer keeps his own records as to total IRA value. And required minimum distribution. Nothing extra is reported to the IRS except for underpayment penalty, if any, and basis reduction, if anything, which affects taxable amount. The IRS gets info from financial institutions so it knows your IRA values and distribution so you cannot cheat. Thank you so much. That’s what we call an expert. We have expert listeners here on KUT Money Talk. 512-921-5888, and I’ll say it for the last time today. You can catch pass shows or tell your friends, colleagues, and family members. They can go to kut.org slash money talk and tune in and to listen to all previous broadcasts. Let me see here. Okay, I don’t see that one. I thought that’s one. Let’s see here. I’m looking for this. It says, did I miss something and then I Don’t get it. I apologize or something here. It didn’t come through. Let me try this I’m working at a home equity line of credit, HELOC, with a 7% interest in financing $75,000. Some of the interest is at 29.99% oh, that’s your outstanding debt. That sounds good to me. What should I be aware of? Well, it is good And I’m stuck. I’m just shocked at what the interest is 30%. I would just say to you what I said to Will, which is that’s fine, and I think that’s a reasonable thing to do, but if you’re in credit card debt at that rate, I think you have to look seriously in the mirror yourself and say if I paid this off, I’ve still got the liability. I’ve just got it at a lower rate. Am I going to have the ability with my current lifestyle? To get out of that debt. Yes, you should go ahead and do it. You’re not missing anything. But the goal is not to just roll it from high cost debt to low cost debt. The goal is to ride from high-cost debt to low-cost to no debt. Because if you wanna be financially independent, meaning when you get up in the morning, you do whatever you wanna do and not because you have to, you gotta be debt-free, and that’s the objective. Thanks for the text. Here’s another one, because we’re almost out of time. How do you distinguish between if the estate holds all the money when it sells a property, or does it get divided amongst the heirs? Also, does the estate or the heires pay the capital gains tax? When you inherit assets from a decedent, and it has a profit in it, real estate, stocks, bonds, et cetera, the profit disappears because your cost basis is the value at the time of the person’s demise. You can hold the securities, or real estate, or you can sell it, and you’ll only have a gain if you sell it above the date of death. You could sell it and the real estate could have declined or the stock market could have decline. You’d actually have a loss. So how do you distinguish between the estate holds all the money and when it sells the property is get it divided. If the estate goes into the estate and then the executor sends the assets or the proceeds from the sale of the assets. The people that are listed in the will. That’s my understanding. I’m not a CPA, I’m an attorney, and I don’t play any on TV. I wanna thank Mark for doing a great job this afternoon, a lot of fun today, and I’m gonna thank you for listening, and as always, remind you that next Saturday at five o’clock, tune in to Money Talk.

KUT Announcer: Laurie Gallardo [00:56:54] You’ve been listening to Money Talk with Carl Stuart. Carl Stuart is an investment advisor representative of Stuart 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.