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Is Your DIY Investing Strategy Holding You Back?

Melissa and her partner are preparing for the best earning years of their lives. Could they benefit from automated tax-loss harvesting and transition from DIY investing to a robo-advisor? An anonymous caller just learned something surprising about their Roth 401k and feels squeamish about making future contributions to this account. What’s Paula and Joe’s advice? Hampton is following up on a question from Episode 524 to spark an intriguing discussion on the generational tax advantages of a Roth IRA. Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! _______ Melissa asks (at 02:10 minutes): An upcoming job change is launching my partner and me into our highest earning years over the next decade. Given our higher tax bracket, what do you think about robo-investing with features like tax-loss harvesting? We’re in our early fifties with a paid-off mortgage, $1.6 million in retirement accounts, and $400,000 in a taxable brokerage account. We’re DIY investors with mostly total market index funds. Our last kid is finishing college with those costs already set aside. Since our expenses will be much lower, we’ll have more cash to invest after maxing out tax-advantaged accounts. We’ll need some of that money to bridge us from retirement in 10 to 12 years to age 70. Does it make sense to look at something like the Schwab Intelligent Portfolio? My partner prefers an aggressive portfolio, but I’d like to mitigate the volatility since we’ll need that money earlier than the typical 30 to 40-year investing timeline. How do we think through this? Hampton asks (at 21:50 minutes): I usually try to predict what your answers are going to be, but I was way off on episode 524 when Mark asked about how to use a $300,000 inheritance from a Roth IRA. When you interviewed Ed Slott in episode 307, he discussed inherited versus traditional IRAs and the tax implications. He mentioned that the Secure Act changed the inherited IRA rules to require a withdrawal of the full balance within 10 years. Given the tax rules on a Roth IRA, I think the wisest thing for Mark to do is to leave the inheritance alone for 10 years until he’s forced to withdraw the money. The $300,000 would become $600,000 at 7.2 percent interest. He could use his other savings for a down payment to buy the house and let the inheritance grow. At the end of the 10 years, he could easily pay off the house with beautiful tax-free money. What do you think? Anonymous asks (at 32:19 minutes): I recently rolled over a Roth 401k from a previous employer into a Roth IRA. After rolling it over, I learned that I’ll have to pay taxes on the part of the rollover that is earnings, as opposed to contributions. Is this true? If so, I’m turned off from contributing to a Roth 401k. I know you’re big proponents of Roth accounts but I’m worried that this degrades the benefits of this account. Is there something I’m missing? Should I continue contributing to a Roth 401k in the future? Resources Mentioned: Interview with Nick Maggiulli: https://affordanything.com/375-the-2x... Interview with Paul Merriman: https://affordanything.com/300-the-tw... merriman/ Interview with Dr. Wade Pfau: https://affordanything.com/119-spend-... IRS Page Discussed in Anonymous’ Question: https://www.irs.gov/retirement-plans/... _______________ Subscribe via Apple Podcasts: https://affordanything.com/applepodcasts Full show notes for the episode: https://affordanything.com/episode535 Get our show notes in your inbox: https://affordanything.com/shownotes Follow us! IG:   / paulapant   Twitter:   / affordanything   FB:   / affordanything   Community: https://affordanything.com/community