And to add salt to the wound, you’ll see things like this floating around on the internet.

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Many of us know that our parents and grandparents may have a solid portion of their net worth tied into their home values. For some, it can make up the overwhelming majority of their net worth!

People constantly tell us that buying a home is a great “investment” but they usually leave out a lot of additional headwinds people face when owning versus renting. As one of the primary sources of wealth in America, it may seem like homeownership is the driver of wealth.

But I’d argue the opposite. I’d make the case that wealth is a driver of home ownership.

I recently came across this study from Aspen Institute and two pieces of data stuck out to me like a sore thumb.

1. On average, homeowners have a net worth that is 40x greater than renters.

2. If home equity is stripped from the net worth, homeowners still have a net worth 20x larger than renters.

So, with that, I’d argue that homeownership is a byproduct of building good habits around money, savings, and investments.

NOT that homeownership drives people to become wealthier. Although, of course it may play a part in the overall picture, I don’t think that wealth is a byproduct of homeownership.

I mean think about it, to make a downpayment and get approved for a mortgage, we have to have a very solid foundation around our personal finances.

A home itself doesn’t give us the wherewithal to save for a down payment, lower our debt to income ratios, and save more money. All of those things should come prior to buying a home.

While owning a home could assist in compounding our wealth as it is an asset, it usually doesn’t mean that it creates the financial foundation required to be a homeowner in the first place.

So, next time someone tells you that homeownership leads to wealth, you might want to ask if they’re putting the cart before the horse!

PS: Here’s a funny little comment someone left me when I posted about this on X.

“The average net worth of country club members is also higher than non-members.”

Was it the country club that led to that? I’d say no!

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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But some are willing to take more risks than others. I came across this story from Bloomberg last week.

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Essentially, this 33-year old saved up $6,500 to allocate to the IPO. From there, she even tried to borrow money from a friend and get a bank loan to invest even more.

As a financial planner, this is an exorbitant amount of risk. Personal loans and borrowing from friends to invest in an IPO brings a ton of potential headwinds. It can stress relationships and it can create a financial hole we have to dig ourselves out of in the event the IPO goes against us.

Usually, any amount of leverage is carefully considered. We help clients with this all the time. Whether it be a HELOC, SBLOC, business loan, or margin loan, these forms of leverage can quickly work against us in the event things go sideways. Leverage amplifies everything. It can begin to look more like gambling than investing when it is not carefully considered.

I can’t know what this 33 year old’s total financial picture looks like, but I can make some inferences. She looked to borrow $5,000 from a friend for this investment. She saved $6,500 for the IPO. In the grand scheme of things, if someone is looking to borrow just $5,000, I would assume that they may not have ample liquidity accessible.

This is where the risk becomes even greater. For argument’s sake, let’s just say that this $6,500 was all she had saved, she has now concentrated her entire net worth into one issue and the next thought was how to borrow to get more exposure to the stock.

To put it in other words, every alarm bell in my financial planner mind was going off as I read the article. To me, this looks much more like a gamble than a responsible investment.

So, how would I have played it?

First off, as a young professional myself, I encourage people to ensure their liquidity is intact. A cash reserve of 3-9 months’ worth of expenses allows us the privilege of taking risks in the market.

From there, I’d consider toning down the amount of exposure. Generally speaking, capping single issue stock at 20% of one’s investable net worth can be considered reasonable depending on their age. For someone that is 33, they have a lot of time. They could recover in the event the stock got crushed given their time horizon. But for an IPO, I’d consider even less of a percentage.

Finally, absolutely no leverage. We’re talking about a $6,500 investment and the consideration of borrowing another $5,000 to invest. If one needs to borrow $5,000 to make that investment, to me that’s all that needs to be said as to why they shouldn’t be making that investment.

Big IPOs can create a whirlwind of FOMO. Imagine getting in on IPO day for a company like Amazon, Apple, Google, Nvidia, or Tesla?! That worked out well for some who were able to endure the volatility and drawdowns.

I’m not against picking stocks. I’ve written about it here. But I am totally against irresponsible concentration that masks itself as a “smart” investment.

Be wary out there, folks! Most are expecting a few more mega IPOs before the year is out. Investing responsibly is key to our financial well-being. An investment in an IPO can go to zero but still be survivable if it were sized correctly. Risk isn’t inherently irresponsible, but without liquidity and careful attention to concentration it can quickly become irresponsible.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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In the best way possible, I think that most young people are being cornered into investing in the stock market. For many people that are my age, even into their early 30s, home prices are just ridiculous. Even still, many of us have a goal of home ownership.

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But when it comes to actually buying, rates are much less favorable than they were just a few years ago and prices seem extremely high. Saving cash for years on end to eventually make a downpayment can sandbag our retirement savings. While we cannot know what the future of the market holds for us, the past few years have been absolutely stellar.

A home purchase can quickly result in a 6-figure outflow. Between the down payment, closing costs, and any potential renovation, it can be a significant amount of money.

And for a lot of young professionals, a 6-figure down payment can seem like a pipe dream. Even if someone were able to save $2,000 per month, it could take them 4 full years to save this amount of cash.

To some extent, I think that Gen Z is more comfortable investing because they feel entirely stuck when it comes to the housing market. If someone has $20,000 saved, and is chipping away each month to save more, that $20,000 getting cut in half in the market isn’t really moving the meter when it comes to something like a home purchase.

The same way that $20,000 doubling isn’t really moving the meter for someone looking to purchase a home.

To me, it feels like swings in the market relative to most people’s savings amounts are dwarfed by even just the downpayment for a home.

And this seems like a bad thing. But Gen Z isn’t afraid of investing. We are actually pretty solid at it. Being unable to dump our cash into homes, we started contributing to retirement accounts and brokerage accounts.

The home purchase can be flexible. We can extend timelines, we can continue to rent.

For Gen Z folks who can save, they are buying productive assets, they just might not be buying homes yet. I think it is great. I even got to comment on this topic in Barron’s.

Our time for homes will come but our generation has done a pretty solid job of finding alternative ways to build the foundation for our financial futures.

The seemingly hopeless housing market has turned many of us to the stock market. I actually think that is a great thing.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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(If you’re at all interested in taxable wealth, you’re doing yourself a disservice by not following Tax Alpha Insider).

Having spent time at Basis Northwest, I was even more impressed with the Tax Planning Certified Professional® designation that I recently completed. While I wouldn’t deem myself an expert in all the fields we talked about, I will say that most terms and strategies were not foreign.

So, having some time to reflect on the topics discussed, I wanted to write about 3 of the coolest things I got to hear about.

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351 ETF Exchanges

The 351 ETF exchange is a really interesting offering to defer taxes. A Section 351 ETF exchange may allow an investor to contribute appreciated securities to a newly created ETF in a tax-deferred exchange.

There are some rules around what can be contributed. The top holding for any investor is capped at 25% of their contribution. The top 5 holdings are capped at 50%.

But the tax angle is that the gains associated with these positions are deferred. While I view the 351 ETF as more of a consolidation tactic than a pure diversification tool, it does have the potential to offer diversification depending on the strategy of the ETF.

My mind immediately started thinking about how a 351 ETF exchange could be an amazing off-ramp for direct indexing strategies. Here’s a refresh on direct indexing if you need it!

When we think of long-only direct indexing and how markets generally appreciate, the portfolios can become ossified. This just means that there may be no more losses to harvest. Rather than holding hundreds of positions, the 351 ETF exchange may pose an opportunity for an investor to consolidate their holdings while deferring taxes!

Box Spreads

The box is back. I got to see the SyntheticFi squad while I was there. If you need to review box spreads, make sure to check out my old post that had the CIO of SynthetiFi walk us through the strategy.

I won’t even lie. Every time I think of box spreads, my mind is blown. They just seem like such an efficient way to borrow relative to SBLOCs.

Now, what is interesting about the box spreads is that they are pretty tax efficient. When structured with broad-based index options, box spreads are generally treated as Section 1256 contracts. This means that the “interest” which I like to think more of as a capital loss, is deductible against capital gains. The treatment for the “interest” on the box is typically 60% long-term capital loss and 40% short-term capital loss.

As most of you know from my posts about direct indexing, losses have economic value. And when we’re borrowing, those losses can reduce the effective borrowing rate.

Pre-tax Alpha

I believe I’ve mentioned that some hedge funds are now going tax-aware. Two weeks ago, I walked through a very high-level overview of the tax-aware leveraged long/short strategies. If you need to check that out, here it is.

Nonetheless, one of the GOATs, Joseph Liberman of AQR, was there to present on how pre-tax alpha in these strategies can lead to less ossification, more position creation, and an overall better outcome for the investor.

Now, I won’t get too into the weeds here, because honestly I am not qualified. But if anyone is interested, here is a link to Joseph’s research, which is awesome.

My biggest takeaway from Basis was that taxable wealth is becoming increasingly specialized. With massive IPOs slated for this year, many advisors are looking at any and all angles to assist with the tax bite of concentrated stock positions. Tax-aware implementation seems to be catching serious fire.

All in all, Basis Northwest was a huge hit! I had a great time and got to meet some incredibly bright people. Truly, there were some of the brightest people in tax at the event. I had a blast and hope that you all enjoyed this piece.

If you have any questions about some of the other topics or want to chat about the conference in general, you know where to find me!

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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To be clear, lifestyle creep can be a massive issue when spending is out of control, there are no forced savings, and no financial plan in place.

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Most of the time, people will tell you to avoid lifestyle creep at all costs. It directly impacts your ability to save and invest. Arguably, it can make it even harder to retire because we become accustomed to a more lavish lifestyle. Cutting back expenses can be really tough for most of us, especially when we have a newfound understanding of what “comfortable” is.

So, why is lifestyle creep not the worst thing ever? Because we’re all growing. Do you really think that your 40 year old self is going to spend less money than your 25 year old self?

That seems unreasonable and just straight up not feasible. Our lives gain complexity and that usually comes with added expenses.

Before I get to a few reasons lifestyle creep doesn’t phase me, I’d like to remind everyone that when savings are happening in the background, and we’re putting 15%-20+% of our income away automatically, expenses are usually of little worry to me for young professionals. I’m worried about how we’re going to get that next raise, find a new job with better compensation, or hit those bonus targets to bring our income to the next level.

Essentially, lifestyle creep is really only an issue when it occurs before the plan for savings. Once savings are in order, lifestyle creep becomes much more acceptable.

The first reason: Awareness

If we are aware that spending is increasing, or we are purposefully beginning to feel more comfortable spending more (when we are already hitting our savings goals), I am just not that phased by it.

I know super savers that need an okay to start spending more. A lot of us work incredibly hard. Squirreling money away and never spending any of it can sometimes lead us to leave memories on the table.

As Cody Garrett once said, some will “die with unrealized personal experiences (not just unrealized gains).” It is one of my favorite quotes.

Being aware of the increase in expenses while annual savings and investment targets are still being met is no issue to me!

The second reason: There’s nothing wrong with wanting more.

I think that lifestyle creep can actually be one of the biggest motivators, especially for younger people. Personally, I think about different things I’d like to afford nearly every week. Whether it be something like the ability to eat at any local restaurant without having to think twice about the bill all the way to affording my first home.

I want more. And I know that working harder will likely get me there. I’d love to be able to afford certain things and when I put myself in the position to do so and can maintain a strong savings rate, I won’t hesitate.

Now, the important part here is that the ‘wanting more’ part should come before increasing lifestyle expenses. We don’t want to increase lifestyle expenses before those increased earnings materialize. Then we run into issues.

The third reason: We work hard, enjoy some of it.

I love to know that young people are able to enjoy some of the fruits of their labor. I have friends and clients that work incredibly hard. Like seriously, their work ethic is actually enviable. They are nonstop.

These types of people deserve to live in the moment every now and then. They deserve to treat themselves to vacations or splurge on something that someone else might deem silly.

Don’t get me wrong, unintentional lifestyle creep can be absolutely detrimental to wealth accumulation. But purposefully increasing expenses when our savings rates are where they need to be? That’s optimizing for life right there.

At the end of the day, as earnings increase, so should savings and so can lifestyle expenses. Striking that balance of intentionally enjoying more while increasing our savings is key.

PS: Most financial advisors would never judge your spending rate. I get a gut feeling that some people avoid an advisor for fear of judgement. Not once have I ever judged someone by their expenses. Everyone has different definitions of comfort and we work to increase income to allow people the level of comfort they want as well as hit the savings goals they need to track for retirement.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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First off, I wanted to refresh everyone on direct indexing. I’ve shared about it previously here but let’s refresh:

Direct indexing is a way to invest in a specific index at an individual level. So, rather than buying an ETF that tracks something like the S&P 500, an investor could “direct index” and own the index through purchasing shares of each company individually.

Technology plays a huge part of this. Imagine buying 500 stocks individually and weighting them accordingly?! Madness. But with today’s tech, it can be as easy as pressing a few buttons and the index is then broken out by individual holdings.

At face value, it seems nuts. Why would anyone want to add that level of complexity to their investments?

Sometimes the benefit is customization, but more often than not, the real driver is taxes.

Caveat: Yes, direct indexing can offer significant amounts of customization. It offers the ability to remove any single issue from the portfolio. This is huge for a lot of ESG investors and those who are paid in company stock.

On any given day, the performance for most indices is based on the weighted performance of the companies that make up the index. But, on any given day, some stocks are down.

Direct indexing allows investors to capture those losses on a frequent basis. Some company had a bad day? Well, the direct index investor can capture that loss. The ETF investor cannot.

As crazy as it may sound, capital losses have economic value. Realized losses are first used to offset realized gains. From there, up to $3,000 can be used to offset ordinary income. Anything remaining from there can be carried forward indefinitely (at the federal level).

This can be a pretty tax-savvy move for some investors. Short-term capital gains are taxed at the same rate as ordinary income. Long-term capital gains are taxed at 0%, 15%, or 20%.

Having a loss that an investor otherwise wouldn’t have had can be incredibly advantageous. But there are potential drawbacks.

One of those drawbacks is tracking error. The second something is sold in the direct index, it is no longer tracking exactly as the index would be. Usually, a direct index will wait 30-days before buying those shares back to avoid a wash-sale.

So, for 30-days, the direct index no longer holds those shares. This can lead to the direct index deviating from its underlying index’s performance.

One thing I will note: “tracking error” is just a deviation in performance between the index and the direct index.

Most understand this but believe it to be outright bad. I think that stems from the word “error”. However, tracking error can be negative or positive.

Imagine this scenario: A direct indexing software wants to sell a stock to realize a loss. The investor owned the shares at $100 and sold them at $80.

They captured a $20 loss. Then the shares fell further to $50. The direct index “saved” the investor from another decrease in share price!

While this is possible, with the market performing well, it is usually the other way around. Over extended periods of time, the amount of losses to realize may dissipate without the addition of fresh capital.

It makes sense, right? Markets generally appreciate, if we don’t add fresh capital (resetting our basis higher), the direct index will eventually lose steam and be unable to find losses to harvest.

Well, the WSJ article brought attention to a new way to exacerbate losses. I’ve been familiar with this strategy for a little while and the TPCP® coursework even covered this strategy as well!

Add some leverage. The next iteration of tax awareness brings leverage into the picture.

The WSJ article does an amazing job highlighting the mechanics, but I’ll quickly go through it here.

Imagine someone has a $1,000,000 portfolio. Through the use of leverage and short selling, the strategy can add $300,000 of short exposure and $300,000 of long exposure.

Essentially, they short $300,000 and add more to their longs with the other $300,000.

We now have a 130/30 long-short portfolio. 130% of the portfolio is long and 30% of the portfolio is short. The net market exposure remains close to 100% as the leveraged extensions cancel each other out, but this strategy is complex and can introduce additional risks.

The point of this is to constantly have losses to harvest. If stocks move up, the short will lose which can exacerbate the losses.

This strategy is very niche and there can be risks involved whenever leverage enters the picture. Nonetheless, I think it is a great example of how much value some high-net worth investors are placing in tax-awareness.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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They’re not wrong. This can actually make a difference in someone’s investments. Below is an overview highlighting the difference between a .03% expense ratio and a .09% expense ratio. (Each of these are very low). For the example, we’ll take a 7% return and reduce it by the expense ratio.

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That could be a solid $47,200 over the course of someone’s investment career. I’m not here to diminish this in any capacity. Optimizing for fees can be an important piece of the puzzle.

However, what I am here to do is show multiple examples of where tax-awareness has much more juice to squeeze than the race to 0% fees.

One issue on this front for some is that the difference in the fee structure above is for a fund that tracks the same exact index. It is much easier to have an “apples to apples” comparison in that regard.

However, there are always tradeoffs. If we do one thing, we don’t do another. So, for the purposes of today’s piece, I’d like to offer comparisons that I’ve come up with on my own. No, they won’t necessarily be apples to apples because there are a billion different things that someone can do with their money. But hey, it’s my newsletter, so I can do anything I want, right?

Tax Advantaged Accounts

You know them. I’ve covered them. Roth IRAs, 401(k)s, HSAs. They can offer significant tax efficiency relative to a standard brokerage account.

I can give you a super easy example of what I am talking about when it comes to tax-awareness having more juice to squeeze with a Roth IRA.

Roth IRAs suffer from no “tax-drag.” Historically, ~30% of the total return for an index such as the S&P 500 has come from dividends. As of recent, this has looked different.

The problem? Those dividends are taxable if held within a brokerage account. Assuming we were working with a high earner, we could estimate these dividends would be taxed at 20% for qualified dividends and tack on another 3.8% for NIIT.

So, let’s work that out now. Assume the Roth IRA and the brokerage are invested identically. 30% of the assumed 7% return is due to dividends.

Our brokerage investor takes a 23.8% haircut on 30% of that return annually. This results in an after-tax return of 6.5%.

See what I mean? That’s .50% annually. Not splitting hairs over a few basis points.

Here’s what the Roth would look like with those variables, assuming monthly contributions of $625.

The brokerage? Well, that returned 6.5% net of tax.

We’re talking a difference of nearly a quarter of a million dollars.

Tax-awareness is an ongoing planning item. Take a 401(k) for example.

If someone were in the 37% federal tax bracket, every dollar they get into the 401(k) plan is saving them $.37 on federal taxes.

And some might say, well, if they chose Roth, they’d never have to pay taxes again on it.

Sure, that isn’t wrong but the pre-tax saver could very well create tax arbitrage. Imagine contributing to avoid the 37% bracket for years and distributing the funds when the individual’s bracket dropped to the 22% federal bracket.

That is a 15% spread that the individual effectively captured by simply being aware. Being aware of how to arbitrage the brackets can allow for a much more holistic understanding of where to look to put the next dollar is important.

Which Accounts to Use:

On the same note, let’s consider an individual who contributes up to the match in their 401(k). They also have an HSA. Now, they are considering where to allocate the next dollar.

Well, the HSA, if a Section 125 Cafeteria Plan, allows for an individual to avoid FICA taxes. This is your standard 7.65% employees pay towards Social Security and Medicare.

Directing additional funds to the 401(k) won’t save the employee anything on FICA. Yet, it can be an automatic boost if they directed funds to their HSA relative to the 401(k) plan.

That’s a significant boost too! Talking about over 7%, just for being aware!

Using Opportunities to Get More

If you’ve been reading my newsletter for a little while, you know that tax-loss harvesting can be something worthwhile. This income shifting tactic can allow for an individual to capture losses and use their economic value today.

This strategy is largely valuable. Don’t believe me? Check out what the hedge funds are up to. Their pivot to tax-awareness should be studied (don’t worry, I am actively studying this).

Losses can move the needle so much that many people are looking to direct indexing, or even, tax-aware leveraged long/short strategies that exacerbate the losses even further.

Achieving additional tax-alpha through loss harvesting can be something that moves the needle. Arguably more so than the difference between paying .03% and .09% for an expense ratio. In many cases, ultra-high net worth clientele are paying wayyyy beyond that in management and operational fees associated with the leveraged long/short strategy.

Before this turns into a book, I’ll stop myself here. If there is one thing the Tax Planning Certified Professional® coursework taught me, it’s that almost everything can be optimized for taxes. There are angles I was previously blind to that I am implementing in every plan I deliver lately.

Of course, fee sensitivity is important, but tax-awareness likely has much more juice to squeeze. The toughest part of tax-awareness is that it is incredibly subjective. It is not as simple as finding similar funds and choosing the cheaper one. It is about a holistic approach to mitigate taxes throughout one’s entire life.

The vast majority of people have one expense that tops them all. It’s not a home, it’s not a car, it’s taxes.

Next time something comes up in your financial life, I encourage you to dig a little deeper on the tax front. You might be surprised with the outcome and what you learn.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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In all honesty, this is not necessarily a bad thing at all! But what’s important is to recognize that the landscape has completely changed.

Trying to emulate a path that doesn’t exist can be really tough. For previous generations, their idea of financial independence and their path to achieving it may look wildly different from what may work today.

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At the end of the day, living within your means, saving, and investing hold true. This is always sound advice. Every now and then, I’ll meet someone whose parents are heavily against something like investing or 401(k)s or anything outside of CDs and cash under the mattress.

This is where things can get dicey. The way your family handles money is likely ingrained in you to some extent. Of course, we want to be respectful of their opinions. They usually just want the best for us. However, we must be aware of the environment we are operating in.

Here are a few examples of what I mean when I say the landscape is different:

Health Savings Accounts (HSAs) weren’t even around until 2003.

The very first ETF in the US didn’t make its debut until 1993.

If we look back just 15 years, you might have been paying $7 to $10 for every single trade you made.

Online high-yield savings accounts (HYSAs) didn’t really become a prominent part of the landscape until 2021.

Roth IRAs were not available until 1998.

Deferring Roth dollars to a 401(k) plan was not an option until 2006.

Some of the most impactful personal finance tools did not even exist as our parents and grandparents navigated their careers. They may be unaware that some of these vehicles even exist.

I’ll never forget my dad telling me the brokerage fees he used to pay to place a trade. Imagine paying $10 every single time you wanted to place a trade? On a $100 trade, that’s a 10% haircut!

Nonetheless, I’m not telling anyone to discount their family’s advice. Rather, be aware of the options that are currently available to you. While the principles may hold true, the tools have changed.

Advice from family can mean well, but it can neglect the differences in the environment we find ourselves in.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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Number 1: Roth conversions

Whenever a low income year comes about, many begin to think about the potential for a Roth conversion.

In its simplest form, this is a tax-arbitrage opportunity. If someone were in the deferring to their 401(k) in the 37% tax bracket and were laid off, they may have a significantly lower income year.

The idea of converting some pre-tax funds in the 10%, 12%, 22%, or 24% bracket might begin to look attractive.

Here’s the nuance that is left out. Conversions are taxable and most platforms offer the ability to withhold for taxes via the pre-tax dollars themselves.

BUT if the individual is below the age of 59.5, this withholding is not seen as a conversion. It is seen as a pre-mature distribution.

Thus, it can be subject to the 10% early withdrawal penalty. Imagine converting $80,000, withholding $20,000 for taxes and getting slapped with a $2,000 early distribution penalty.

That’d be no fun. This is just the first example in which execution may look different than a conceptual overview of a topic.

Number 2: 72(t) distributions

I know I literally just covered these. I won’t even get too into the weeds here because I wrote an entire newsletter on this topic.

This is still somewhat of a hot topic in which I think a lot of context is left out. At face value, it seems awesome, and honestly, it actually can be for someone in a pinch.

But the mechanics are not nearly as simple as some make it seem. This is a high-touch and intricate distribution plan. IMO, the internet oversells the strategy.

Number 3: HSAs

HSAs are very interesting. They are arguably the most tax-efficient account around.

Yet, one must be on a high-deductible health plan in order to be eligible to contribute to one. This alone makes the account nuanced. If you want more, please check out my friend Ryan’s coverage on this topic. He does an incredible job of outlining it here.

High and recurring medical expenses may automatically rule out the HDHP, thus ruling out the HSA.

In practice, it is not uncommon to see younger professionals opt for the HDHP and as they build their families swap to a more comprehensive insurance plan. I have 3 brothers… One of us was either sick, hurt, or doing some type of physical therapy every other day.

Nonetheless, here’s another interesting nuance to the HSA. When the HSA is structured as a Section 125 Cafeteria plan, such as most are when it is offered through an employer, contributions via payroll can avoid FICA taxes.

Personally, my HSA allows me to contribute outside of payroll via my checking account. If I were to do that, I would not avoid FICA and the contributions would simply avoid federal and state taxes.

These are just 3 instances in which I’ve seen online information fail to cover the actual execution and implementation of a strategy.

I’m sure you all see stuff like this as well. Don’t make any knee jerk decisions based on something online. Not even this newsletter.

There is so much more to some of these strategies than social media leads on.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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I built this little visual to help everyone understand the nature of capital gains. For some, the “stacking” nature of these taxable events.

Essentially, capital gains are taxed at either 0%, 15%, or 20% federally. However, they are taxed at these rates according to taxable income, which capital gains are a part of.

Although they are taxed differently than ordinary earned income, they still count towards taxable income.

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So check this out:

For a single filer who had taxable income of $45,000 before their capital gains and they realized $25,000 in capital gains, they now have taxable income of $70,000 for this year.

The first $45,000 of taxable income will be taxed as ordinary income. The capital gains then play by the long-term capital gains rates.

One of the biggest misconceptions is that the 0% bracket for LTCG applies only to capital gains no matter taxable income. This is untrue. The 0% bracket applies to capital gains that fall within that bracket after taxable income is considered.

You’ll notice that similarly to more traditional income tax brackets, capital gains rates are progressive.

The scenario above does a solid job of showing how $4,450 attains the 0% bracket, while the remainder is pushed into the 15% LTCG bracket.

I won’t even lie to you all, just a few years ago this stuff still tripped me up. But it is incredibly important.

To throw a wrench into all of this, when income exceeds a certain threshold, an additional net investment income tax can apply. This additional tax complicates things slightly, but we’ll cover that another time! It is definitely something to be aware of!

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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Tons of people came right back with, “You must not understand Rule 72(t).” While this rebuttal is not wrong, they leave out major context. To me, it seems like they are saying that 72(t) distributions allow for the entire account to be “unlocked” and not subject to early withdrawal penalties. This isn’t the case.

So, I figured we would cover Section 72(t) or Substantially Equal Periodic Payments (SEPP) this week.

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72(t), at its core, is a way to access funds within an IRA or 401(k) (if separated from their employer) for individuals below the age of 59.5 without being subject to the 10% early distribution rules.

At face value, this seems like a great way for an early retiree to begin withdrawing from their retirement account in the event they needed to. Honestly, it can be a great way to access these funds! But first we have to discuss some of the mechanics of this election.

When 72(t) is elected, the owner of the account MUST take distributions annually for the longer of 5 years or until age 59.5. For someone who is 45, this can be a significant amount of time to be required to distribute funds.

There are 3 different methods in calculating the amount to be distributed. These calculations can be a tad in-depth. I will give a brief overview of each and leave a handy calculator below!

The amortization method*: This results in a fixed annual payment and is derived using a reasonable interest rate** and a life expectancy table.

*This method generally allows for the largest annual payment out of the three methods.

**The reasonable interest rate is either the greater of 5% or 120% of the AFR (applicable federal mid-term rate)

The annuitization method: This method also results in a fixed annual payment and is derived through a mortality table offered by the IRS and the interest rate explained above.

The RMD method: This results in a variable annual payment using the life expectancy factors associated with RMDs. This method can result in the most work as the amount needs to be recalculated annually.

Now, I’d like to present the calculator that helps us really visualize how much 72(t) can offer. Bankrate has an awesome one.

For our example, we’ll assume someone is 45, has $1,000,000 in their IRA, chooses the fixed amortization method, and uses an interest rate of 5%. Please note this is just an example and the calculator shouldn’t be solely relied upon if looking to elect into 72(t) distributions, working with qualified professionals is important.

This is where my gripe with the “You must not understand 72(t)” argument comes to the light. Someone who chooses the highest calculation method for 72(t) with a one million dollar balance can access less than 6% of the account’s value without penalty on an annual basis.

And they must do so for over 14 years. Could this be helpful to the right person? Definitely. Does this unlock a significant amount of funds relative to the total balance? Not really.

I’ll also add this, which most online seem to ignore: If any distributions are taken as a lesser amount than calculated or more is taken than the calculated amount, the 72(t) schedule is broken.

This can result in a retroactive 10% penalty on ALL previous distributions. Interest can apply as well.

I am not sure why this potential pitfall is not made more clear when people tout 72(t). Imagine at year 10 in our scenario, after ~$600,000 has been distributed, if the schedule was broken. This could result in the retroactive penalty amounting to ~$60,000 plus potential interest.

Oh… by the way, rolling funds into the account or making an annual contribution can potentially trigger this penalty as well… might be something people would want to know.

Now there are legitimate planning strategies around 72(t) distributions. Unlike for Roth conversions, there is no pro-rata rule and not all IRAs are subject to the rule. 72(t) can be elected for just one IRA of many.

One planning strategy revolves around looking to achieve the highest withdrawal amount from the lowest balance.

This can maintain liquidity outside of the account that is electing into 72(t). So, if a distribution was needed, it can be taken from a separate IRA and the penalty would only apply to that amount, rather than potentially breaking the 72(t) schedule from the initial account.

All of this to say, please double check your sources. Some of these planning topics that are discussed online are more in-depth than they’re made out to be.

While it may seem like I covered a decent bit on Section 72(t) today, there are even more factors that can impact a decision like this.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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Rather, I’d like to make the argument that life is like a loan.

It is something that is borrowed. From day one, we start crossing off days until suddenly, we don’t anymore.

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Throughout that time, we focus so much on money. It quietly drives many decisions we make throughout life.

Which car to drive, apartment to rent, restaurant to eat at. It goes on and on. Money is a constant throughout our borrowed time.

Yet we slowly lose track of life itself. We live for a weekend, book vacations to look forward to, and continue crossing off days.

So, if life is like a loan, that’d mean we might be able to pay it off early.

I came across a TikTok one day in which someone offered another person $10,000,000. Of course, it was hypothetical.

They followed the offer with one caveat. You’d receive $10,000,000 today, but there would be no tomorrow.

Almost everyone, and I’d bet 100% of my younger readers, wouldn’t put a present value on their future life experiences. There’s just no sum of money that’d be reasonable for someone to cut it short. I’d argue that $10,000,000 is a wildly significant amount of money to about 99.9999% of the globe, but who would take this deal?!

What resonated with me is that if our last day was worth more than $10,000,000, but we have no idea when that last day might be, shouldn’t every day be valued that way?

People have argued that the odds of you being born as you are 1 in 400 trillion. When it’s phrased like that, it becomes pretty obvious that we may be richer than we’d ever fathomed.

It’s something to think about, especially for younger professionals. I’m not here to discourage anyone from achieving their goals or fear-monger people into thinking they need to quit their jobs.

But I will definitely encourage people to find balance in their lives. Find things you enjoy and work you truly like if possible (I know this isn’t always the case.) Take time to enjoy life itself. Work is not life. Although, if you can find something you truly enjoy, work can feel a lot less like work.

It is so important to find balance financially, personally, and professionally.

Money can serve us, but at a certain point, if we aren’t purposeful in our financial lives, we become servants to our money.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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I have been quoting the joke someone made a lot as of late: “You can make someone $100,000 in the market and they’ll never love you as much as the person who saved them $10,000 in taxes.”

Of course, this is a joke. We’d all prefer the $100,000. Yet, it taps right into the psychology of paying taxes. Most people do not enjoy paying taxes and if there are any avenues to reducing a tax bill, they are usually interested in hearing it.

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Today’s topic may not seem too applicable to young professionals at face value, but with the anticipated wealth transfer from Boomer’s it is something to note.

The step-up in basis is such a powerful wealth transfer tailwind that some even refer to it as “The Angel of Death.”

Essentially, when taxable assets (real estate, brokerage accounts, most assets that are not held in a tax-advantaged account) are passed onto heirs after someone passes, the basis is stepped up to the fair market value on the date of their death.

There is no way in which my writing could express how significant this is.

Let’s review some of the basics before I show an example. Basis is the price an investor pays for their assets. Think of basis like an anchor. It dictates whether there is a capital gain or loss associated with an asset.

Now, let’s dive into an example of how this step-up in basis can be so powerful.

Assume that Person A bought shares of a company back in the day. They bought $100,000 of this company.

Fast-forward, and we’ll assume that this investment did incredibly well. It is now worth $1,000,000.

If they are to sell the position entirely, the gain of $900,000 could be subject to taxes. This could be a significant drag and quickly erase a great amount of the gain!

For a quick, back of the napkin tax assumption, if the gains were taxed at 20% along with NIIT of 3.8%, this could result in over $200,000 in taxes being owed.

However, if Person A passed this holding to their child, Person B, the basis is entirely reset.

Assuming Person A died and the fair market value was $1,000,000, Person B’s new basis is $1,000,000.

Meaning they can literally turn around and sell the position for $1,000,000 and be subject to no tax.

The step-up in basis is literally one of the most powerful tailwinds in generational transfers of wealth.

While it may not seem like it is applicable today, lots of financial planners are working with older clients to ensure this step-up is used to the fullest extent for the next generation.

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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As if they believe they are deserving of a bear market… almost guilty for having been able to participate in a bull market.

As you all know, I cannot time markets. Nor do I try. But there has been no shortage of doomer takes as we entered 2026.

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Here, look for yourself. All you have to do is type in “dot com market” into Google and you’ll be met with a few of these search results.

Call me naive, but from what I have learned, the Dot-Com bubble was fueled by severe speculation. Companies that didn’t even really do anything could go parabolic at any point in time just by adding “.com” to their name.

Does that seem like today? To me, it does not.

I don’t think that any chart better explains my feelings than the one Phil Rosen posted to X. Phil is the co-founder of Opening Bell Daily. His work is impressive; I read it each morning and highly encourage those who are market-focused to check it out.

Phil’s chart shows the difference in valuation of key companies during the Dot-Com Era and the AI Era.

For reference, a P/E ratio, or price to earnings ratio, is generally used to value a company. While many factors go into analyzing a company, the P/E ratio is a quick way to understand the price of a company’s stock divided by its earnings per share.

At a very high level, the lower the P/E ratio, the more value an investor is getting per dollar paid for the stock. Please take this with a grain of salt. Security analysis goes much further than just one ratio.

But what the chart shows are absolute blowout trailing P/E ratios during the Dot-Com bubble. Microsoft was trading at 80x earnings! Said differently, for every $1 of earnings the company posted, investors were willing to pay $80.

Even the hyper-scalers of today, such as Nvidia, are only trading at 30x earnings.

One quick note: The figures shown for the Dot-Com Era are a trailing P/E ratio, meaning those earnings did materialize. For the current day ratios, a forward P/E ratio is used, meaning these are projected earnings and could be subject to change.

I’m not telling anyone which stocks I believe are undervalued or overvalued. All I’m saying is that Phil’s chart adds a ton of context to what a bubble might entail.

To me, it seems that there are fundamental drivers of this market, such as earnings expansion.

After reviewing it, it is hard for me to believe we are currently experiencing a Dot-Com era bubble. But that’s just me…

Do you think differently? Do you have evidence that contradicts my piece today? If so, please send it my way. I love to hear different opinions from readers.

One of my New Year’s Resolutions was to constantly challenge my existing beliefs! Help me make good on that resolution!

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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While the course focuses on taxes at the federal level, there have been some items that come up with nuanced state level differences. While the course doesn’t cover too much for specific states, it does highlight that it is possible, which usually leads me down a rabbit hole of finding new items to focus on.

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Some of these state level differences are actually really interesting and could potentially impact a decent amount of people!

Today, I wanted to outline just a few. Trust me, there are more than the 4 I am going to outline.

HSAs

You’ve probably seen someone say that HSAs are triple-tax advantaged. In most cases, they are! But certain states may play by different rules.

New Jersey and California do not conform to the federal guidance. In each of these states, the contributions are taxable at the state level.

To throw a massive administrative burden on HSA owners in these states, interest and dividends can be subject to state tax as well on an annual basis. While it is still federally tax-advantaged, the state level taxation can be tough to keep track of.

529 -> Roth Rollover

The Secure Act 2.0 gave 529 savers an amazing way to distribute funds to their beneficiary in the event they overfunded the education savings plan. 529 Plans are eligible to rollover up to $35,000 (lifetime limit, but subject to Roth contribution limit annually) to beneficiaries assuming the beneficiary has been named for over 15 years and has earned income.

This is an awesome generational planning tool. However, there are a slew of states that do not conform to the federal guidance here as well.

The rollover is permitted, but there may be a state tax recapture to the extent contributions were deducted.

Remember, some states offer a deduction for contributing to the 529 Plan. When the 529 to Roth rollover occurs, some states are looking to recapture that deduction.

My California friends… CA is arguably the least favorable state for a 529 to Roth rollover to occur. They recognize tax on the earnings and the rollover can even be subject the rollover to an additional 2.5% penalty for a non-qualified distribution.

Capital Losses

Generally speaking, capital losses can be carried forward indefinitely. Meaning that if someone does not take full advantage of them in the year they are recognized, they can be used the year after.

However, for our NJ and PA friends, that is not the case. These states do not recognize carry forward losses at the state level.

A huge planning item for people in these states! Especially for NJ as NJ state tax can range up to 10.75%!

As I continue my journey in this profession, it has become more clear to me that simply understanding these nuances and quirks can allow for so much opportunity. We don’t necessarily need to know which stock to pick or which sector is going to perform well, but understanding how to keep more of our hard earned dollars by way of tax knowledge can take a lot of guesswork out of the equation.

The takeaway here is to be aware of the potential differences at the state level. For some, these differences can make a significant difference in their financial lives!

Again, these are just a few examples of how state level taxation may differ from the federal rules. There are many more and some that carry significant weight, such as estate taxes!

This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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In fairness, we didn’t have assets then. We didn’t even really grasp the extent to which people were being financially burdened back then.

But this idea that our generation has yet to experience a meaningful drawdown in the market is absolute garbage.

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Please note that I do take it personally when older generations belittle our market experience. (Usually, it is because they are telling me personally that I haven’t experienced these things with an undertone of young advisors being unfit to do their job... First things first, if someone thinks our job is to focus only on markets, they don’t understand what we do).

So, let me make the argument that our generation has experienced significant market drawdowns.

First off, COVID. The COVID crash occurred when I was a junior in college. I worked throughout my entire college career. I had been investing since my freshman year. I remember this vividly. I remember exchanging texts with my dad about how quickly the market was moving.

The COVID sell-off was scary. Mainly because of how violent the sell-off was.

We hit 4 circuit breakers during the COVID sell-off in March of 2020. A circuit breaker kicks in when the S&P 500 falls 7% in one day. The market essentially shuts off for 15-minutes.

Do you know how many circuit breakers occurred during the GFC market crash? Try 0.

But hey, we don’t know anything about volatile markets and scary drawdowns… right? We only experienced one of the quickest 33% losses for the market in history.

We also experienced 2022. By definition this was a bear market and it was one of the worst years in the history of the bond market.

Throw in some flash sell-offs like the yen carry trade unwind of 2024, the DeepSeek event in early 2025, the Tariff Tantrum of April ‘25, and I’d make the argument that we’ve seen more than most give us credit for.

I’m sorry but I just don’t bite down on the idea that Gen Z hasn’t experienced a bear market. Have we not experienced a Dot-Com bubble bursting or a 2008 financial crisis, sure.

But those are exceptional events. They are not considered the norm.

One more idea. Gen Z invests heavily in cryptocurrency. They have been exposed to this asset class and seem to be adopters of the assets.

Crypto has experienced multiple 50% drawdowns over the last 8 years with 2022’s bear market bringing Bitcoin down over 70% from the high.

Gen Z lived this. They watched it. It was a very real drawdown.

While we might not have had the amount of assets at risk as older generations had during ‘08, we still experienced these drawdowns.

I hope there is never another 2008 event. But if there is, I’m confident in Gen Z’s ability to handle the drawdown.

We know more about investing than any other generation did at our ages and tons of information is at our disposal. We’re no strangers to market drawdowns and volatility and we have more market experience than most credit us.

This is for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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Some might even have this preconceived notion that I think picking stocks isn’t worth it or that I’d look down upon someone trying their luck and skill at stock picking. In all honesty, I have no issue with people picking individual stocks.

Investing can be fun, and people can build up some serious conviction in some of their favorite companies. Who am I to deprive them or steer them clear of that?

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Enter the opportunity portfolio.

The opportunity portfolio is what we label most portfolios that deviate from the standard portfolio. This could be a portfolio that is actively traded, options (usually not recommended), individual companies, or even cryptocurrency.

But here’s the catch. The opportunity portfolio is not one-size-fits-all. Usually, there are strict individual parameters around the opportunity portfolio, and we generally try to avoid them until lots of the fundamentals are taken care of.

If someone is:

• Contributing to a 401(k)

• Contributing to a Roth IRA

• Tracking well for retirement

• Building their “boring” asset base

They might just be a candidate for an opportunity portfolio! The opportunity portfolio is usually scratching an itch. People love to find conviction in stocks or even give some speculative trading a try.

Once an opportunity portfolio is brought up, we like to define the parameters. The most important parameter revolves around concentration. While it is always subjective, a general rule of thumb would be no more than 5% of investable assets.

At 5%, even if the account were blown to $0, we want to have a general feeling that this wouldn’t derail someone’s financial well-being. Remember, this will differ significantly between different situations.

So, as an example, if a younger professional with $200,000 in investable assets wanted to give stock picking a try with $10,000, that would likely not build too much risk into their financial life, yet it may allow them to scratch the itch of buying individual stocks.

Now, this is subjective. For someone with $10,000, would I consider a $500 trading account? Ehh, probably best to stick with the fundamentals at that point.

As investable asset bases grow, some are afforded the opportunity to add a bit of risk. The account is then monitored and can be tailored accordingly.

At the end of the day, it’s not uncommon to see people interested in alternative assets, trading, or picking some individual stocks. Rather than depriving someone of that, we like to outline the risks, contain the risks, and allow them to have the experience.

As with almost everything in personal finance, it is all about balance. Stock picking sounds pretty cool, but concentrating one’s retirement in just a few companies can increase their risk exposure significantly.

Encouraging people to learn more about investing while managing the risks associated can allow them to scratch that trading itch, learn, and further identify with their investments.

That’s something I’d never want someone to shy away from… as long as the risks are contained and properly managed.

While the initiative to pick individual stocks may seem like it’s about alpha, the opportunity portfolio is much more about behavioral containment.

This is for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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Some engage in short-term trading. I’m sure a lot of you who have been following this newsletter know this, but we’ll review for anyone new!

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Short-term capital gains are taxed according to ordinary income brackets. Very similar to how our wages are taxed.

Long-term capital gains are taxed under a more favorable structure: 0%, 15%, and 20%.

State and local taxes can apply to any income and capital gains can be taxed at these levels as well.

One last item: The Net Investment Income Tax. An additional tax of 3.8% that is applicable to single filers who have MAGI (modified adjusted gross incomes) over $200,000 can apply to investment income (interest, capital gains, etc).

Wow! That’s a lot of tax!

For our example, we will be using the 2025 brackets. While outdated, many are still in the process of filing and these brackets will still do the trick in driving home the point.

So, let’s assume our young high earner has taxable income of $300,000 before any capital gains. They did some trading and absolutely crushed it. They realized $100,000 in short-term capital gains. This brings their total taxable income to $400,000.

Here’s how that short-term capital gain would be taxed for our single filer:

Federal: 35%

Income between $256,526 - $626,350 is taxed at 35% at the federal level, meaning all of the capital gain would fall within this bracket.

State: 6.85%

Income between $215,401 - $1,077,550 is taxed at 6.85% in New York state.

Local: 3.876%

Taxable income above $50,001 is taxed at 3.876% in NYC

NIIT: 3.8%

Given MAGI will exceed $200,000 in our scenario, the short-term capital gain will be subject to another 3.8% net investment income tax.

Total: 49.526%

Again, this figure is for illustrative purposes. There are instances in which this figure could be reduced but for simplicity, this figure would be an approximation of the total tax on the short-term capital gain.

A whopping, almost ½, of the gain is forfeited via taxes. This is an astronomical amount of tax to pay for an amazing trade.

If the stock market dropped by 50%, we’d all be feeling it. We have not seen anything of the sort since 2008.

Well, our friend here just realized a 2008 event by way of taxes alone.

Pushing back on all of this, taxes are likely to be the biggest expenses of our entire lives. Purposefully planning and being aware of how these taxes can impact our situation is so incredibly important.

This is for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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I’ve seen and heard it many times, I’m sure you have as well. Someone saying, “Always max out this account” or “never do that with your money.”

The world of never and always creates a very tough mold to break out of. In some cases, people are over-optimizing and too much optimization can become a barrier to flexibility.

My absolute favorite part of personal finance is the idea of flexibility. It almost never has to be all or nothing.

So many aspects of personal finance are not binary and ensuring that you have reviewed all the options is so important.

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Here’s a few examples of what I mean:

Split funding goals:

I love split funding. It feels like we’re accomplishing two things at once. One of the most common split funding scenarios we see is putting a cash reserve in place and increasing retirement contributions.

Depending on the household, they may want to hold 9-months’ expenses as cash. But when they hit 3-months’ worth, they may also want to be saving for retirement.

In this scenario, once the 3-month reserve is met, it may make sense to begin adding some retirement savings to the stack.

Some Roth, some pre-tax:

Tons of people get tied up with how to contribute to their 401(k) plan. Generally speaking, in the higher tax brackets, individuals tend to favor the pre-tax and when in lower brackets, they tend to favor Roth.

For those who are in the middle-ground in the tax bracket hierarchy, a split decision may take the cake. It allows for a diversified pool of retirement funds, which is usually not a bad thing!

And for those who are doing Roth contributions, it is very likely that any employer match is ending up on the pre-tax side! Great diversification right off the bat!

Funding multiple accounts:

Some get really caught up in this. There is no rule that says a Roth IRA needs to be maxed out before a brokerage account is opened. There is no rule that says a 401(k) must be maxed out before a Roth IRA is opened up.

In a perfect world, I think more often than not, young professionals gain so much from having the full stack.

Of course, it may be tougher in the beginning to hit the maximum to a 401(k) and Roth IRA while still having funds to invest in a brokerage account.

But getting diversified tax-location can be so huge. Young professionals have some major purchases coming up! That brokerage account can add significant flexibility to their asset base with absolutely no age restrictions on withdrawals.

Selling a portion of a position

It happens! People can get very attached to their holdings. This is so prevalent when equity compensation is in the picture.

But here’s the thing… it is never all or nothing with this. There is always the ability to take some off the table. Could be 10% of the position, could be 90% of the position.

We have options and these options can allow us to feel more confident in the choices we make.

I know many would hate to sell a position only to watch it gain some serious momentum and at the same time, this one position may be making up a significant portion of their net worth. Concentration like that can become a real risk.

Finding a happy medium can help to mitigate that FOMO feeling as well as the potential concentration risk.

Alright, there are 4 very common scenarios in which I believe we need to be wary of absolutes. It seems silly to write out, but remembering that optionality exists is key. Work through different scenarios: Does it really have to be all or nothing? Am I diversified across tax locations?

Most people have more than one goal in life. Personal finance works the same way.

This is for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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Before we begin, let’s define a deduction. A deduction is something that lowers income subject to taxes.

For a quick, high-level example, if someone is in the 22% marginal bracket and they take a deduction of $1,000, they could expect tax savings of ~$220.

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At face value, the auto loan interest deduction does seem great. This could potentially help more people afford their car payments, right?

Well… about that. Like I said, at face value, it seems a little better than it really is.

There are some stringent requirements to qualify for this loan and there are even income phaseouts to take into consideration.

This deduction can be up to $10,000 annually but here are the requirements:

1. The vehicle MUST be new

2. The vehicle MUST have been finally assembled in the United States

3. MAGI (modified adjusted gross income) must be below $100,000 for single filers to take the full deduction and below $200,000 for MFJ. The deduction is fully phased out when single filers breach MAGI of $150,000 and $250,000 for MFJ.

So, up to $10,000 as a deduction sounds solid. But… we can’t forget that we’d have to have paid a full $10,000 in interest alone to get this full deduction!

Without really taking a second look, which is what makes me very apprehensive about this deduction, it can be hard to fully grasp what would need to be borrowed to pay $10,000 in interest in the first year of a car loan’s life.

To emphasize the amount of the loan, let’s reverse engineer and solve for the present value of a loan that would result in $10,000 of interest being paid in the first year.

We will assume the term is 60-months with a rate of 7%.

~$155,000

Yes, one-hundred and fifty five thousand United States Dollars would need to be borrowed to deduct the maximum amount of interest in year one.

Check out the following from bankrate if you are skeptical.

So, while a deduction might be nice, now we can kind of see the extent to which someone who is earning ~$100,000 must borrow in order to take the full deduction in year one.

They’d need to borrow roughly 1.5x their annual income for an asset that depreciates the second it is driven off the lot.

Sorry, if I sound like a pessimist, but to me this is a wolf in sheep’s clothing. We know what predatory lending is, but has anyone coined predatory deductions yet?

To bring this back to earth, here’s a slightly more realistic example.

Let’s assume a new car costs $50,000. We’ll put down 20% and finance the remainder at 7% over 60-months.

This would result in ~$2,580 in total interest being paid over the course of year one. Remember, it is not the entire payment that is deductible, it is solely the interest paid.

We will also assume our borrower is in the 22% Federal tax bracket. This deduction results in tax savings of ~$567 in year one.

So, our borrower took on a $40,000 liability resulting in a monthly expense of ~$792 and they will save themselves about $567 in the first year.

Not horrible… IF they were in need of a brand new car and wanted to finance it. However, for someone who is earning less than $100,000, I am hard pressed to believe that financing a brand new vehicle is in their best interest.

Again, at face value, this deduction seems to be a great thing. However, without fully understanding the implications of taking on the debt and monthly payments, I’d venture to say that some will allow for this deduction to drive their decision in financing a brand new car.

Take a look under the hood of the deduction before allowing it to drive a decision… no pun intended.

While this deduction is set to help people, I am not fully convinced it will do more good than harm.

This is for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.

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