Money Talk with Carl Stuart

Carl Stuart answers caller and texter questions on inheriting real estate and its tax liability, the pros and cons of using a fee-only financial advisor, managing investments –and risk tolerance – on your own, plus Roth IRA rollovers and a whole lot more.

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 [00:00:20] Welcome to Money Talk. I’m Carl Stuart and you’re listening to KUT News 90.5 and the KUT app. Money Talk is a broadcast about the world of financial and investment planning. You determine our agenda by calling or texting 512-921-5888. It’s always a great idea to call or text at the beginning of the hour, giving me ample opportunity to do my best to answer your question. My rule of thumb is I take today’s calls first and then today’s texts and then previous texts. I hope you had a chance to listen last Saturday to the special broadcast that Jimmy Moss and I did. If you haven’t, I really recommend that you go and listen to it. And for that matter, you can listen to any of our broadcasts since the first Saturday of April simply by going to KUT.org slash Money Talk. One of the things I really like about Money Talk is that we have such… Thoughtful and informed listeners. I made a comment in a previous broadcast when someone had inherited a piece of residential real estate and was trying to understand what the tax liability was. And I said, first, the person who had owned it had passed away. And so they could use the value from the taxing district to determine the value at the time of the decedent’s passing. And I got a really good email. A CPA says, I’ve been in real estate investment with my clients and for myself for many years, including the horrible 80s. Boy, do I remember that. The appraisal district is usually low. Their appraising responsibility is just so massive that they don’t have the time or the manpower to dedicate to specific appraisals. And no one is going to contest the appraisial district if they think the value is too low. No kidding. But they will if you think it’s too high. I have fought the appraisal district countless times personally, and was almost always trying to get them to agree to a value below what I would sell it for. In a rare moment in, I think, 2023, amid the post-COVID irrational real estate market, TCAD, the Travis County Appraisal District, actually went too high in many cases. I had to request binding arbitration in two cases for that year to make them be reasonable. If you have a client who is inheriting real estate, I look at the importance of the valuation. If the real estate is complex or very valuable and the step up is large, they should get a professional appraisal. If it is someone inheriting a mom’s house, for example, I often suggest a broker’s opinion. You need something for the files with some comps and an opinion of value. Carl mentioned the beauty of a step up in basis, which I’ll get back to. With the excludable estate value, I’ll get back to that, so high, death offers a no-lose basis opportunity for most beneficiaries. Since most are not paying inheritance taxes, there’s no reason not to seek the highest valuation you can get. Whether it is a professional appraiser or a broker, I always mention which direction I would like to see it go. It can’t hurt. So there’s a couple of things there. So when a person dies… …And they have capital assets, stocks, bonds, mutual funds, real estate, and they own it outside of, say, an IRA, and you inherit it, whatever that person paid for it, that’s not your cost basis. It’s the value at the time of their demise. Obviously, that is easy to determine, let’s say, if all they owned were mutual funds. But when it’s an illiquid asset, real estates, then you don’t have the day-to-day value. And what this individual is saying is… …Everyone’s walking around with a lifetime exemption this year of $13.99 million, and next year goes to $15 million. And this CPA is saying most people are not going to have an estate greater than that. So if you inherit a house, let’s say, from your mother after she’s passed away, you’d like to have the higher valuation because you’re only going to pay taxes after you take $250,000 of gain above that, right? That’s not subject to tax. And then you pay tax over and above that. So that’s a great answer, and I really appreciate that. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. You will hear the text coming off right here on my phone. And you’re on the air. How may I help?

Caller [00:05:06] Hi. I have a question about my retirement funds. I used to teach at a private school here in town, and they gave us some TIAA retirement funds that I still have, and they’re still there. And is it okay if I mention commercial product names?

Carl [00:05:27] Of course it is. Please proceed, of course.

Caller [00:05:30] And I had a financial advisor recommend that I change that into a VOYA Select Advantage, and I had always heard through the grapevine that TIAA was really good and strong, so I’m not sure. I just wanted to get a neutral opinion on if I should switch.

Carl [00:05:48] So for everybody else, TIAA stands for Teachers Insurance Annuity Association, and CREF, C-R-E-F, stands for College Retirement Equity Fund. And VOYA is an insurance-based company. And the benefit of staying where you are is that your operating costs, which reduce your total investment return, are lower because there are thousands and thousands of educators who are in the TIAA system, so they spread the expenses around. If you were to make a change, the VOYA sounds to me like an annuity, and I would recommend against that. If you’re going to make the change, if you do it on yourself or look for an advisor, because you can do something called an IRA rollover, where you pick a custodian or your advisor selects a custodean, you get the money from TIAA, and it goes into your IRA. And it’s invested the way you choose, on your own or with your advisor, because you no longer work at the school. If you leave it there or you put it in an IRA, you will be subject to a required minimum distribution, which this year doesn’t occur until you’re 74 years of age. So I would either leave it based on my understanding of your situation, or I would go to a different investment product, because if I, in fact, and every time I’ve seen VOYA… It’s been a series of mutual funds or fixed funds inside an annuity, and you’re buying a life insurance product that you do not need, you’re better off to buy the mutual funds straight. So based on my experience, I would decline the opportunity to put it in a VOYA if I were in your shoes.

Caller [00:07:36] I think my TIAA is an after-tax annuity as well, if that matters.

Carl [00:07:44] If it’s an after-tax annuity, then what will happen is, again, if it’s just a straight annuity and you don’t have to annuitize it, you can leave it there to let it grow. And then when you want to annuatize it you can take it out. There’s a variety of options when it comes out. You can take a lifetime annuity. You can a lump sum. There are various things to do. But if you’re already in an annuity… I don’t see the benefit of going to another annuity.

Caller [00:08:15] Okay, thank you very much. I appreciate that.

Carl [00:08:17] 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. Here we go. Christopher, you’re on the air. How may I help?

Christopher [00:08:37] Hi, how are you? I love your program. I’m good. Thank you. Okay, so I’m 67 years old and my questions sound a lot like the previous person, so I’ll try to keep it simple.

Carl [00:08:48] Okay.

Christopher [00:08:48] I have a $130,000 IRA and it’s an insurance annuity.

Carl [00:08:54] Mm-hmm.

Christopher [00:08:56] I’ve had it for about three years. It’s been only performing at about 4% a year, and it peters in about two more years. Yeah. And so my social security is about $28,000 a year. Yeah. And so I’m sitting here thinking about, you know, tax brackets and 2028 when rates are going to go up, and should I be taking that 10% out now? Moving it to a Roth IRA or some other financial investment? Sure. And then I guess the last question is, it sounds like you don’t like it.

Carl [00:09:38] The answer is I just have a lot of caution. There are certain types of annuities for the right individual that are very appropriate, but there are a lot annuites that advertise the benefits, and they’re basically financial instruments inside a life insurance product. So you’re paying not only for the investments, but you’re also paying for the insurance, what’s called mortality expense. And that just adds an extra layer. So let’s just take a hypothetical. Let’s assume that I can own the mutual funds in, let’s say, my IRA, or I can only the mutual fund in an annuity. I’m going to have, over a 10-year period, a better return if I own the same fund in both of them, simply because I have lower expenses. So unless someone, unless there’s a feature of the annuity that is very attractive to a person… Then there’s not a real reason to do it, because you’re already in a retirement plan, so the tax-deferred nature of growth and annuity is not relevant when you’re inside a retirement. Now, if you don’t need the income, and you’re in TIA, where you can only take 10% a year, doing a Roth conversion is a reasonable thing for you to do. Obviously, you’ll pay income tax on the amount that you take out, but the tax brackets are quite wide. And let me just ask you, I’ve got here by my side the tax brackets. Are you a single taxpayer or married filing jointly? Single. Okay, and what is your taxable income currently?

Christopher [00:11:18] Okay, well, with my dividends and my Social Security, the total come last year, I filed at about $40,000, $41,000 or $45,000. I can’t remember.

Carl [00:11:28] Okay, your taxable income from $11,900 to $48,500 is taxed at 12%, and then above that, from $48000 to $103,000, it jumps to $22,000. That’s a big jump. So what I would start doing is taking enough over and above my other sources of income, after the standard deduction, I would take that, if you don’t need the income, and put it in the raw. Because you can still pay 12% tax on it, and you begin to build up another pillar of your savings. And the benefit is, the benefit is you don’t have to take a required minimum distribution from a Roth, whereas you do from an IRA. And secondly, if you want to, once it’s in there five years from the original investment, then you can take the money out income tax-free. So if you don’t need the income today, taking the money out while staying in the 12% bracket. And putting it into a Roth seems to me like a reasonable thing to do.

Christopher [00:12:30] Okay, okay, okay. I love that. Okay, so I’m pretty close to the 48 number then.

Carl [00:12:36] Well you are, that’s why you want to be careful. You’ve got time, and it’s not a big deal. Say you take $10,000 out, you’re only going to pay 22% on the amount over $48,000.

Christopher [00:12:49] Okay, okay.

Carl [00:12:50] Don’t let the, yeah, don’t let the tax tail wag the dogs, Mike.

Christopher [00:12:54] Okay, so I can take out the 10% without paying the IRA penalty, and then two years when it renews, I can just continue to take out 10%.

Carl [00:13:07] Yeah, you’re going to, yeah, yeah. I don’t know about any IRA penalty, it’s just that you, well let me ask you, I should say that, how old a man are you, Christopher?

Christopher [00:13:17] I’m 67.

Carl [00:13:18] Yeah, there’s not a penalty. It’ll just come out as ordinary income. There’s no penalty.

Christopher [00:13:22] Well, I’m sorry, I take out more than 10%, I’m allowed to take out 10% without the IRA penalizing me.

Carl [00:13:31] Well, that’s a TIA feature that I don’t like, but that’s the fact, yeah, yeah. You bet.

Christopher [00:13:37] All right, thank you so much, I love your program.

Carl [00:13:40] Thanks a lot, 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. Let’s just see, it looks to me, I knew I heard some text coming in. Hi Carl, I keep hearing warnings that the AI bubble might burst at any time. Since the gains in the S&P 500 have largely been driven by the increasingly lofty valuations of AI stocks, would it be prudent to decrease positions in S&P 500 indexed ETFs? If so, any recommendations for where to move those funds in these very uncertain times? By the way, you’ve convinced me to move out of investing in individual stocks. Ha ha, good for me that I have been liquidating those assets. Thank you for that, you’re welcome. I should have learned my lesson when the .com bubble burst. Ah, you’re old like I am. Ha ha, and it was a long time before I got back into buying individual equities. But definitely don’t want to experience a repeat performance of the early 2000s and them changing my ways. Congratulations. Thanks again for a really great show, John. John, you are quite welcome. Yeah, I think what you want to do, you’ve had big gains, you want to look at your asset allocation, John. Because you want international equities. I’ve been owning international equites forever and they’ve been a drag on my performance in the equity sleeve of my portfolio because domestic has been doing great. This year, it is altogether different. And I think it’s totally appropriate to increase your international equity exposure. Every Saturday, I sit down and look at the ETFs. That represent the indexes. So I look at the Vanguard Total Stock Market, the Spyder VOO S&P 500, the Fidelity ONEQ, which is the NASDAQ, and I look the Vanguard XUS, which is all international, no U.S. The Vanguard Total stock market through yesterday is up 13.63, that’s great. The Spyder S&p 500 up 13 .98, that is terrific. The ONEQ NASDAQ up 16.75, but ready for this. The VXUS is up 25.34. Why is that? In my view, there are two reasons. One, on a valuation basis, international stocks are cheaper than U.S. Stocks, and particularly AI stocks. And secondly, the dollar has been weak. And when the dollar goes down, that’s good when you have international securities because they’re marked up when they’re translated into the dollar. So unless you already have a large weighting and international, if I were in your shoes, I would add to the international exposure whether or not you choose index funds, ETFs, actively managed is a whole other conversation. Thanks for the text. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. I’m gonna take a break. It’s a perfect time for you to call or text. 512-921-5888. I’ll be back.

KUT Announcer Jimmy Maas [00:16:57] Money Talk airs every Saturday at 5 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 [00:17:32] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl [00:17:46] Welcome back. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. When you have a financial or investment plan in question, call or text 512-921-5888. And, by the way, you can catch past shows at kut.org slash Money Talk. And if you didn’t hear last week’s broadcast, it was a lot of fun. I recommend you go do that. Here comes a text. Hello, Carl. What factors should I consider when trying to decide whether to hire an investment advisor to manage my retirement accounts versus doing it myself? My main concern is having the proper asset allocation. Currently, I have about 80% stock in a 401K that is a mix of large, mid, and small cap index funds and a small percentage of international. That’s a great question. So I’m going to… And it’s important… All of our listeners who are interested in saving for their future. Because of the way things have changed over my 47-year career, you can do it yourself if you want to. When I got started in this profession, that was not the case. But there’s been a collapse in fees and also, importantly, a collapse in barriers to entry. So you can this yourself or you can hire someone. It really, I’ve come to learn, is not about the expense. It’s about your personality. And I use as an analogy owning rental properties. And long-time listeners know this story and they could tell it for me. Two buddies and I bought a rent property within walking distance of UT Austin because it was the late 80s and you couldn’t lose money in real estate and everybody we knew was getting rich in real state. And the rents went from $1,600 a month to $800 a month, but the operating expenses and mortgage, the property taxes, et cetera, didn’t go down. And I realized that I was like the old joke about a boat owner where her two favorite days are the day she bought the boat and the day that she sold the boat. So what I’ve learned is that in bull markets for stocks, being a do-it-yourself investor is a lot of fun. And in bear markets for stock, doing it yourself during a bear market is no fun at all. So you really have to know yourself. There’s a whole area of finance. In fact, two people, Dan Kahneman and Richard Thaler, got a Nobel Prize for this called behavioral finance. And one of their key conclusions is that when we experience a 10% gain, when we have a 10%, we experience it as a 10 percent gain, but when we a 10-percent loss, we experience as a 20-per cent loss. We are risk-averse animals. That’s probably the reason we’re still here on the planet. So you have to have the right kind of personality. As Warren Buffett said, when the stock market goes down, it’s a little bit like when the tide goes out, you discover who’s swimming with and without a swimsuit. So first and foremost, you have to determine who you are from that standpoint. Now let’s suppose that you’ve decided either because it’s turned out to be so much money or because you have concerns and you’re worried, as you say, you’re concerned about asset allocation, then you should engage an advisor. But if you engage an adviser, and look constantly over her shoulder, and say, gee, why did you do this? I read about this in the Wall Street Journal. How come you did that? That’s the wrong thing. You shouldn’t have an advisor. So let’s suppose that’s not your personality. Okay, there are two ways that advisors can be compensated. They can be can be compensated by the transaction. Just like a real estate agent, when you buy a house, you pay a commission. Or they can be compensated based on the value of the assets. When I first started 47 years ago, everybody was what we called stock brokers, and we were commission based. I will tell you that there’s plenty of high quality, high integrity people who work that way. It’s not my favorite. I like the idea of paying an advisor an advisory fee, and they receive no transaction based compensation. They operate under the Securities and Exchange Commission, or the Texas Securities Commission, depending on the amount of assets they have under management. And they charge what’s called an advisory fee based on the value of the assets, typically on a quarterly basis, either in advance or in arrears. So let me take the in arresars, whatever the heck that means. They take the value of all your accounts, add them up at let’s say the end of September, take that amount times the fee, times the number of days in July, August, and September. And they debit the account. They have what’s called a fiduciary responsibility, which means they must act in your interest, they receive no transaction based compensation, and they have what’s call a duty of care. Typically these people have a wide wide range of assets that they can buy from individual stocks and bonds to mutual funds and exchange traded funds. I really like that. So they can buy a fund from Fidelity, a fund form Vanguard, a fund from Capital Group, a Fund from T. Rowe Price. They can buy what they think is the best funds in whatever asset based on their understanding of your goals and objectives. So then you ask what factors should you consider? Well, there’s plenty of them in Austin, Texas, and plenty of around the United States. You ought to have, if you can have, a face-to-face and with Zoom and Microsoft Teams and Google Meets, it’s a lot easier these days. Have a face-to-face, preferably in their office if you can, and they ought to be able to articulate three things. But first, they ought to ask you about your situation, because it is a diagnostic process. If they immediately start talking about their rates of return without understanding you and your situation and your goals and objectives, I would keep looking. Once they have an understanding of your situation then you should be sure that number one, they can explain their investment strategy. You may think, well, that’s interesting, but I disagree with that. If they can’t explain it, that’s probably a red plague. The second thing is they ought to be able to explain, if you become their client, what does a happy and healthy client relationship look like? There’s a lot of data that indicate when people hire a, not a financial advisor, a servant, a professional servant, an accountant, an architect, a lawyer, an investment advisor. Many times when they’re unhappy, it’s because there’s been a misunderstanding or a mismatch of expectations. So you want to know, if you engage this person, what does a happy, healthy client relationship look like? That’s the third or second. And the third, how are they compensated and what are their fees? If you get those things down and you have this sense of connection, then you’ve found the right person. 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’s the text. Carl, I have a traditional IRA, a Roth IRA, and a 457B plan, all with approximately $50,000. I plan to have these supplement my monthly pension from Travis County after I retire in two years. I will be 61 at that time. My Q is my question. I see what that means. My question is, which IRA should I collect from first? Or should I collected from the 457 deferred comp first? So the 457B is deferred comp as opposed to 457. Okay. I, since the money out of the IRA will be, presumably you put that money in pre-tax, that will be subject to income tax. The Roth IRA, if you’ve held it for longer than five years from your initial investment, that will come out because you’re over $59.50 tax free. And then the 457B, presumably that was pre-tax when you put it in and that’ll come out taxable as well. I like the idea of taking the money last from the Roth IRA. The reason is that it’s not going to be subject to income tax. Let’s hope you outlive your money and I’ll bet you do. And if you do that, the good news is that your heirs or your beneficiary will get that money. They’ll have 10 years to take it out. It’ll be tax free for them. And as long as you don’t throw yourself into a significantly higher tax bracket, you’re going to have to take the money out anyway on those other two when you hit 74 probably by the time you get there 75 or even older. I would think if I were in your shoes. I would take it from the 457 if it’s tax deferred, which I presume that it is, and or the IRA because the tax consequences are the same. I’m ignoring, of course, how they’re invested. I can only assume that they’re invested in the same fashion. So it’s not that one has greater growth potential than the other. It’s strictly a financial planning question about in what order should you take the money. 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 and you can catch past shows at kut.org slash Money Talk. Here’s a new text. Hi Carl I’m listening while I mow the lawn. Well, good for you. You’re doing two things at once. That’s very nice. I’m listening while I mow my lawn so I can’t call in. My wife and I own a couple of rental homes and other investments including IRAs and Roth IRAs. With the decline in interest rates that have happened and seem likely to go lower, I’m considering buying another rental property. What do you think is a good proportion of investments to have in real estate? At near five percent interest, I have had funds in high real savings. How low do I let that interest rate drop before I put those funds in real estate? Okay, well I noticed that you are willing to take the risk in real estate, which is an illiquid asset, but you’re unwilling to take that risk in equities, which is a liquid asset. So you’ve left that out. You are in cash, high yield savings, and you’re in real estate. I would suggest that that is a lopsided stool. Rather than buying another piece of real estate, I think you ought to take that money largely out of savings, not all at once, because stocks are high, and begin to put money into the equity market. You obviously are a do-it-yourself person because you have rental properties, but you don’t have diversification. I’m guessing your rental properties are not in New Jersey and Florida and Washington and Los Angeles and Central Texas. And you know what happened, I hope you do. In the late 80s and the early 90s, is people who had Central Texas real estate and Southwest real estate lost their real estate or at least lost a lot of money, and people who have their money in real estate in 2008 in Florida and California lost a lot of the money and even the properties. So you have a concentrated illiquid asset allocation. You should have a higher return because there’s something called the liquidity premium. You’re also either paying a property manager or you’re spending the effort yourself, which as you grow older, based on my experience, gets increasingly tedious. I think you probably should stay out of cash, because unless you need it to live on, cash has a negative return, historically, after taxes and after inflation, and yes, because you’re in short-term rates, the Federal Reserve will determine that, whether or not the Federal Reserve can’t determine the 10-year treasury. Which affects mortgage rates, credit cards, and auto loans, but it looks like it’s likely, who knows, that short rates could go lower. So I think you’ve got two legs of the stool, income-producing rental property and cash. I think that’s a misallocation. I would reduce the cash and over time, over the next six months, I would begin to put money into the equity market, probably 75% domestic and 25% foreign if I were in your shoes. 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. Okay, let’s just see. Oh, this was about the IRA, the Roth IRA and the 457. The person said, thanks, Carl. That was exactly what I had thought based on internet research, but I feel better hearing it from you. I’m glad that I agree with the internet. Now, I’m going to go back to previous text. Let me give you that number again. I’ll interrupt myself and take your text or your call at 512-921-5888. Alright, here we go. Let’s just see. Bear with me. Okay, here we go, is it better to pay off credit card debt from investment accounts or keep the investment accounts gaining interest and paying the credit card down monthly over the minimum monthly amount? Well, that’s a really difficult one and the first question I would ask about my credit card is how did I get in this situation? Because if I pay it down and ultimately off my credit card the question is will I end up 6 months or 12 or 18 months from now with the credit card debt again? Because that tells me that I’m living beyond my means. Credit cards are charging about 20% interest. There is no investment that you can make that year in and year out will deliver 20%. If you paid it off from your investment accounts, you have an imputed return to 20% and that’s a good thing. But if you turn around and build up credit card debt again now you don’t have the investment account. So this is a conundrum which means that’s hard to understand what to do. So look at your expenditures, ask yourself the difficult question, how did I get in this situation in the first place? If I were to take my investment money and pay down the credit card and actually pay off the credit if I can would I then be able to build back up my investment account because now I’m not paying the credit card debt and I have cash flow to invest. If the answer to that is yes, then I would go ahead and pay the credit debt if I were in your shoes. Good question and you’ve got to be not the only person listening who’s wondering the same thing. You’re listening to Money Talk on KUT News at 90.5 and on the KUT app. Call or text 512-921-5888 Here’s a text. Oh, just to answer your question. Okay. Greetings. Would you please help me understand what structured notes are? Our advisor is suggesting a two-year note to hedge protect gains. So this has become very popular. A structured note usually like this. They will take an index. Let’s just say the standard and poor 500 index. And it’s a complicated situation. The issuer of the note will then buy options, maybe put options and call options. And what they will say to you is, I’m making this up obviously, if the stock market goes down 20 percent, you have no If it goes down 25 percent, everything over down 20 percent is your risk. Now if the stock market goes up 20 percent, you only get the first 10 percent of it. So it’s the idea is you reduce your downside risk and you eliminate large gains. They’re very popular. I don’t like them. Because when you look at history and you look the return in the stock market, it comes from violent moves both down and up. And when you cut off those tails, you don’t get the returns of the equity market. I don’t get it. I know they’re popular and they’re particularly popular right now because the stock market, the U.S. Equity market, is hitting new highs. I get that. But if you’re a regular listener, you know that I like international equities and there are all kinds of other strategies that will either hold value or increase in value if and when the stock market declines. So I would ask my advisor, what are other non-correlating equities, non- correlating strategies to the stock market? The other thing I would consider is, what’s my proper mix? We call it asset allocation. It’s the single biggest determinant of what your future return and what your risk is going to be. And if you’ve had big gains in the stock market and you started off with, say, 60% in equities and now you have 74% in equites, you need to reduce it back unless your goals and objectives have changed. You’re older if it’s gone up that much. You are older than when you put the money in anyway. Then in my view, you ought to rebalance your portfolio. To reduce your risk and put it in other non-correlating assets. So they’re not evil. I’m just not particularly fond of them. You’re listening to Money Talk on KUT News 90.5 and the KUT app. It’s time for me to take a break. A perfect time for you to call or text 512-921-5888. I’ll return.

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KUT announcer Laurie Gallardo [00:36:57] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl [00:37:11] Welcome back to Money Talk. I’m Carl Stuart and you’re listening to KUT News 90.5 and on the KUT app. When you have a financial planning or investment planning question text or call 512-921-5888. Here is a text we got in. You just answered a question about retiring and doing yourself or hiring an advisor. You missed another approach. I had mostly handled it myself until I retired. But retirement was a new situation. So I went and found an advisor. But I picked a fee only advisor. I managed everything. She looked over my shoulder and suggested problems or other approaches. Some of which I did, some I didn’t. For example, she taught me about Medicare supplemental plans and suggested Plan G. All new info for me, it was $1,000 a year for a yearly meeting to review things. After four or five years she said she was calling it quits. She felt she wasn’t contributing anything for the money. Now I’m back to doing it myself. Thanks for that. You’re right, I didn’t do that because I was thinking of someone who wanted investment advice. What you got, sounds to me like, was a terrific amount of value for a very, very low cost. And I think that’s terrific. An investment advisor is going to charge you more because you’re going to do more. Because people who are fee only are not going to be your investment advisor, take on the financial, I beg your pardon, the fiduciary responsibility because they can’t make a living at that low fee. So I think that’s a great idea. Thanks. We have all of our lines available and no new texts, call or text 521-921- 512, I beg your pardon. 921-5888. Let’s just see here if I can find if there’s anything else. Hi Carl. I’m recently widowed and in the process of transferring our property into my name. Long story there for another time. My question is, in regards to asset protection for my adult sons. I have a number of investment accounts as well as substantial savings. I want to set up a trust, but have been advised that all but my IRA could be included in a trust. Is this accurate? This is my largest investment account and it just seems odd that it would not be allowed to be included in a revocable trust. Thank you. First of all, let me just say I’m not an attorney. I didn’t play one on television. I will tell you that IRAs cannot be taken from you in some form of lawsuit. I remember back in the day when the economy was really, really weak. People were concerned about this and to the extent they could they put their money in their home, which couldn’t be taken away, as long as they paid the property taxes. And they also kept in their retirement account, which was not subject to being taken either. So that’s why you can’t put it in a revocable trust. I would step back and make sure that you really need a revokable trust if you are in some if your situation is such that you have a lot of risk in your life. I get that. If you are pretty much a normal person, just be sure that you really have the need for that. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. And, of course, be sure if you’d like to hear past shows, including last Saturday’s special show, you go to kut.org slash Money Talk. Let’s just see here. Here they come. Let’s try this one. Hi, Carl. Rollover and conversion questions seem popular recently. Yes, they do. Here’s another one. I’m changing jobs and will roll over my 401k into my traditional IRA with Vanguard. If I then want to convert it to my Roth, can I do it slowly, like a 10-year to minimize the upfront tax hit? How long do I have to convert my traditional IRA? I turn 50 this year. Thanks. My understanding is there’s no limit to how long you have to convert your traditional IRA to a Roth. However, because you’re only 50, when you take money out of the IRA before you’re 59 and a half, you’re subject to a 10% additional tax in addition to the income tax. So you want to postpone that probably until you’re 59 and half. And you can do it slowly. What you do is you look at the tax code. And you say, OK, I’m married finally jointly, filing jointly. This is our taxable income. And generally, the rates are from 15 to 22. Sure, that’s a big one. But from 22 to only 24, not such a big deal. And I wouldn’t worry if I went from 22 to 24%, marginal bracket. But, from 24, they go to 32, as I recall. Big jump again. So when you reach the age where you don’t have a penalty, then if I were in your shoes. That’s what I would do. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Here comes some calls. Judy, you’re on the air. How may I help?

Judy [00:42:41] OK. My husband and I have run a small business successfully. And we had an account that was just holding money for us. And small businesses need to do this. Sometimes they need to have a lot of money available just for something that might come up. So we have about $100,000 in there. It’s not any kind of special IRA or anything like that. But we want to know we’re getting Social Security about a little more than $4,000 a month. And then we’re also we also make a certain amount of money every year. And what I want to know is can we take that money that’s sitting in the savings account? And put it in a Roth? Or does our income have to reflect that we earned that $100,000 in a year?

Carl [00:43:48] You have to have enough taxable income to equal the contribution limit of the Roth. So this year you and your husband each can put $7,000 into a Roth provided you had income from your business, taxable income from you business. Social Security doesn’t count. Dividends don’t count and interest doesn’t count. But if you have $14,000 or more of taxable income. You could take $14,000 out of your savings and put it into two Roth IRAs if you want to.

Judy [00:44:23] Okay, so we easily have that but we can’t take the entire amount out of savings.

Carl [00:44:30] You can take the money from wherever you want, but you’re limited to putting in $14,000 for two people. Okay, thank you. You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Jim, you’re on the air. How may I help?

Jim [00:45:00] Thanks for taking my call. So my wife and her four siblings inherited in a state, unfortunately my mother-in-law passed. That’s all being handled very, very well. They’re doing a great job and there are these disbursements. And it’s going to take a while for it all to shake out. It probably won’t be finished for quite a while. But my question is there is some cash just sitting there in the checking account. Would my son’s 529 plan be a good place to put some of that away?

Carl [00:45:39] Only if the 529 plan was a good thing in the first place. Because for everybody else, 529 plans came about when our elected officials recognized that college is expensive and most people, that’s not fair, a lot of people didn’t have sufficient savings and we had a big ballooning in student debt. So a 529 is generally a state sponsored plan where you put the money in and when you take it out provided for a long list of educational expenses. It’s not subject to income tax. So from that standpoint, if that’s part of your financial plan, yes, that makes sense. Obviously, you don’t need liquidity with that. You’re going to get more money or more assets from the inheritance. I have mixed feelings about 529 plans, Jim, just because of the rigidity of the plans. And if you’re happy with the 529 plan, I would do that. I will just say. Frequently, I like to see people just set up a separate account. You can call it an education account. But what I like about it is that it’s fully liquid. You can use it for whatever expenses you want even if they don’t qualify. And if you invest in tax exempt, that’s not true, tax efficient funds like index exchange traded funds, then if it ends up you don’t need the money for college because the child gets a scholarship or doesn’t go to college. It’s all your money. But if you’re fond of the 529 and you’re willing to lose that liquidity for that future educational savings, yes, if I were in your shoes based on what you told me, that is something I would do. Yes.

Jim [00:47:21] That’s very helpful. We’re generally pleased with the 529. The only problem with it for the older child, we realized we did not fund it sufficiently. But now with the younger child, my only thought would have been I wish I put more into it. So that’s where I think it might be a good place.

Carl [00:47:42] Yeah, I think it is. I think savings for future education is terrific. And if you’re going to save it and you know you’re gonna spend it, then the benefits of the tax free is great. And I don’t have any problem with that. It all seems to me based on what you’ve told me and the good experience you’ve had, it seems to be like that’s a good idea.

Jim [00:48:02] Okay, I really appreciate it. Thank you.

Carl [00:48:03] You bet. You’re very welcome. Thanks for calling. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-921-5888. Monica, you’re on the air. How may I help?

Monica [00:48:23] Hi, I’m a therapist and I was curious if I get paid as a contractor, is there any benefit to me setting up my own LLC and getting paid there? Or should I just keep having it be direct deposit to my account?

Carl [00:48:37] I think I would have a direct deposit to your account. I don’t see the benefit of a limited liability corporation, no. I would go ahead as an independent contractor. Now I’m gonna ask you a question that you didn’t bring up. Are you saving do you have a retirement savings account?

Monica [00:48:54] We’re getting there.

Carl [00:48:56] Good, congratulations. Have you ever heard of something called an SEP IRA?

Monica [00:49:04] No, I haven’t.

Carl [00:49:06] Yeah, so it’s specifically designed for self-employed individuals. And the great thing about them is they’re not like a 401k, which is very expensive for most people to set up because of the government reporting stuff. So you set this SEP up and you have larger contribution limits. So if a tax deductible IRA is great for you because you know that you’re not gonna put in more than $7,000, do an IRA. But if you have the ability to put more in or you have a really great year and you set up an SEP IRA, it’s still yours. IRA stands for individual retirement account. But you can put up to 25% of your taxable income up to a high limit into the SEP. Depending on how you invest it, it grows in value. And you have same rules as you do with an IRA, which is first of all, you don’t take the money out so it grows without taxation, right? And then also when it comes out, if you’re over $59.5, it’s paid as taxable income. So an SEP IRA would be something to consider as a self-employed person once you know that you could put in more than the IRA. Otherwise, I’d start a tax deductible IRA at your earliest convenience. And I would leave it alone. I see no reason to do the LLC.

Monica [00:50:29] Do I have to be primarily self-employed or can I be supplementally self- employed and still do that?

Carl [00:50:35] You can be supplementally self-employed and still do that is my understanding.

Monica [00:50:39] Awesome. Thank you so much.

Carl [00:50:40] You bet. Thanks for calling. You’re listening to Money Talk on KUT News 90.5 and the KUT app. Call or text 512-921-5888. I heard a bunch of texts coming in. Let’s just see. Hi, Carl. My financial advisor recommends that I convert my term life insurance to whole life policy. The yearly premium will increase by 10 times. But I’m advised to do so because I just turned 65 and was treated for ovarian cancer two and a half years ago. The advisor thinks this is a better bet from my heirs. The increased premiums will come out of my investments and should be invisible to me. What are your thoughts? I think that I learned this from insurance professional years ago, three reasons to have whole life insurance. The first is estate preservation. That’s because you’ve got a $30 million estate. Everything over $14 million you die this year is subject to estate tax, which rapidly goes to 40%. So you buy life insurance to pay the estate tax. Life insurance is held in something called irrevocable life insurance trust. You don’t technically own it. You pass away. Your heirs get the life insurance to pay off the estate tax liability and get the assets. The second is a key person, a key-person life insurance person. You and I have a business. We own it 50-50. It’s my largest asset in years. You take a life insurance policy. I’m the insurer. You’re the owner. I die. The policy shows up. You get the death benefit and pay my heirs and now you own the business. Not your situation. The third is income protection. You’re a young parent. You have two kids. You have a mortgage. And if you died… There’d be real problems for your beneficiaries. You buy that insurance to take care of that. But in the well planned financial life that need goes away. Because the kids grow up, can’t stop that, and off they go. So that’s term. Whole life is quite expensive particularly when you’re your age. And so what this person is saying is you buy more insurance to buy more benefit for your heirs. If you want to do that, then I’m fine with that. I generally don’t see that that’s a need that you have because you have these other investments. So I would just say to you, think long and hard about that. Generally whole life is expensive. There’s also the potential conflict or at least the appearance of conflict of interest because they have big sales charges or commissions. So get absolute clarity from. Your advisor, what she or he is getting paid. Make sure that you’re comfortable with that before you proceed. Thanks for the text. Here’s one, I’m Carl. I’m a long term listener. Long time listener and always appreciate your advice. Thank you. I just took a credit line loan from my bank to build a home. The interest is six and a quarter percent. I also have with the same bank an investment account under which my trust fund under my trust fund with monthly fees of one percent. And finally I have a royalty account under management at six percent, which I don’t know what that means. I feel like paying too much in fees and wonder how I can get better control of the fees I’m paying. Please advise me how to approach my trust advisor about perhaps bundling these fees. Well I would say if you’re paying one percent for your investment account, that’s competitive. That’s where the market is. And your interest rate is frankly on a credit line. Is I think pretty darn attractive. The royalty account management at six percent sounds to me like illiquid private investment. And I suspect that there’s no negotiation with that. And I certainly hope you feel like that’s a terrific benefit because you’re paying a really high fee there. I don’t see that you get, if this person’s getting the six percent, well yeah, then I think you should negotiate for a lower fee on the investment account. You’re not, in my view, going to get a lower fee on the credit line. So if you really like the royalty account and you’re willing to pay that because you’re getting a lot of money because it’s an illiquid investment, then yes, I think you can ask, and it’s all run by the same people and they’re all collecting those fees, then yes I think that you have the opportunity and I would negotiate a lower fee. We’re at the end of the broadcast. I want to thank CWA for being a terrific producer this afternoon. I’m going to thank you for listening. And I remind you as always next Saturday. At five o’clock be sure and tune in to Money Talk.

KUT announcer Laurie Gallardo [00:55:40] 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.