This week, I came across a post on X that really got me going. I see a lot of financial content on that platform. This one piece ended up circulating around and naturally, it was one of the options course “gurus” touting a put writing strategy.

They claimed that they are doubling the use of their funds and quietly bringing their annualized 10-11% returns to 25%.

Right away, I was irked. The strategy, a “portfolio-secured” put strategy, glossed right over the additional risk.

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So, let’s walk through the strategy real quick. Remember, anything with options can be slightly higher level. Options can create additional risk and complexity when it comes to a portfolio.

This particular strategy revolves around using a portfolio to secure a written put option. When we write put options, we tend to be paid a premium. This premium is the reward for the obligation to purchase someone else’s shares in the event the underlying security trades at or below that value.

For a quick example, assume we sell a put option on ZZZ security, which trades at $50. The strike price we chose to sell is $40 and we were paid $2 for selling this put.

In the event ZZZ goes to $40 or below ($30, $20, etc.) we are obligated to purchase 100 shares for every contract we sold in the event of assignment.

It is set in stone that throughout the duration of the contract, we are obligated to purchase the shares if the shares reach that $40 level or lower.

(Many people do enjoy writing cash-secured puts. This is different from the strategy outlined above. For some, they would love to own ZZZ at $40, but maybe it isn’t there yet and is still at $50. They would essentially say, “I’d love to own these shares at $40, and I can make some premium while I wait to see if I can buy the shares with cash in the event they come down to $40.”)

But this is where the scenario I saw begins to deviate. The gentleman expressed that his puts are “portfolio-secured” not cash secured. Calling the puts portfolio-secured doesn’t eliminate any of the risks. Rather, it means that his portfolio is supporting the potential obligation created by the puts which is adding a layer of risk. On top of that, the risk is actually correlated.

This means that in the event he were assigned to purchase the shares of the puts he sold, he may have to liquidate a certain amount of his existing portfolio or deposit additional cash to purchase those shares.

Might sound good on paper, right? And I won’t even say this is not a viable strategy, I will, however, say that the gentleman egregiously understated the risks involved.

So, basically, here’s how this goes wrong. The market sells off significantly. The existing portfolio loses a lot of value, and all of a sudden, you’re on the hook to buy shares above the value they are currently trading at.

Essentially, the risk is correlated. As share prices decrease, the odds of being assigned the put also increase. The value of the put also increases, meaning to close out the put before the risk of assignment, the put may be more expensive than we sold it for. This is how the strategy adds risk to a portfolio.

Lots of pieces to the pie that can quickly work against us. Imagine watching a portfolio lose 50% of its value and then being on the hook to buy shares at $40 (although this is more like $38 when accounting for the $2 premium received) even though the underlying stock is trading at $20.

Here’s exactly how I would explain a strategy like this:

Now, again, this isn’t to say the strategy isn’t viable. It is to say that we must understand the additional risks.

Premiums from selling options don’t come from thin air. In the event of the written put, it is quite literally selling someone else insurance on their portfolio. They have transferred risk from themselves to you!

Be diligent out there. There is a ton of financial education online. Combing through this information to ensure you are getting qualified education is so important, especially when it comes to portfolio management.

I’d bet that if someone were able to attain 25% annualized returns on a consistent basis, they sure would not be selling a course on options trading. They’d likely be running billions of dollars at an institutional scale because everyone and their mother would be signing up to achieve those returns.

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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Nonetheless, this is a major change for me. Specifically, in regard to the financials. My cost of living will rise pretty significantly.

I figured I could walk everyone through how I have gone about this move. It is not uncommon to see young professionals live dynamic lives. For better or worse, our finances can dictate some of these changes.

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Let’s get to it.

Cash Reserve: I just had the absolute pleasure of making my security deposit and paying the first month’s rent. My current lease doesn’t end until the end of August and my last rent payment was due this week as well.

That’s some serious outflow and exactly why I think a cash reserve is so important. My cash reserve padded me for these pretty significant expenses. One-time expenses like these are exactly the purpose of the reserve.

Savings Rate: I will have to adjust my current automated savings. It pains me to see it go down, but as I always encourage my young professional peers, putting yourself in the best place to grow your earnings may very well outweigh an additional few bucks saved each month.

Rent will increase by 67% (67, nice). This is obviously a major change but through careful planning, I know that adjusting my current savings rate will allow me to comfortably cover this on a monthly basis.

For the time being, I have turned off my automatic contributions to my brokerage account. (Don’t worry, retirement savings are intact!) This is purely temporary and will likely last 2-3 months.

This is going to allow me to tune into my cash flow and handle any other one-off expenses like buying furniture, moving costs, etc.

I know that most would say, “Pay yourself first, Cliff!” And they aren’t wrong. But these one-off expenses are likely to be significant over the next couple of months. I’d prefer to have the cash flow support me during the transitionary period.

Budgeting: While I’m personally not a fan of spreadsheet budgeting, I will be closely eyeing my total expenses.

The main purpose of this is to differentiate one-time expenses and recurring lifestyle expenses. Buying a new bed frame is a one-time deal. Getting a meal with my pals on a Friday is something I hope to do every week.

Being able to identify the one-offs will allow me to grasp what amount of money I need to feel comfortable on a monthly basis.

From there, I’ll be able to understand if I am living on less than my monthly income. I can then begin directing funds back to my brokerage.

Personal finance is of course, personal. There are ample ways to go about a big change. This is what works for me!

The planning before the move:

One of the biggest concerns with a move like this can be the overall affordability. I knew exactly my upper limits on what rent needed to be in order for me to maintain what I’d deem a comfortable savings rate and a comfortable personal expense figure.

This is super important because it lets me outline the changes that will occur prior to the actual move.

Essentially, I said to myself, “If rent is $X, how much does that leave me on a monthly basis for my own expenses? Does it leave me with any capacity for savings?”

From there, I used my net paycheck amount to fully grasp my spending power but there is always the unknown of moving to a new place. I’m aware that the first few months will be expensive, which is exactly why I am giving myself some grace when it comes to monthly investments.

Personal finance is largely about levers. In my own scenario, I built multiple levers that I can lean on during this time such as my cash reserve and temporarily adjusting my savings rate.

Next time a big change is coming your way, make sure to take a second to pause and think how this might play out financially. I can honestly tell you that I personally feel much more confident having outlined all my parameters and trying to understand the monthly adjustment beforehand.

This is where planning can be so useful. Life is constantly changing. In many cases, our finances dictate the extent of those changes. Having a plan before the event can reduce a lot of the financial stress associated with a big change!

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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Anyway, one of the younger guys approached me and asked what I did for work. I told him I was a financial advisor and that I was introduced to his director through mutual friends in the space.

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Then he just flat out asked me, “What’s the best advice you could give someone in my position? Contribute to a Roth IRA?”

While a Roth IRA is an amazing idea, my advice had nothing to do with where to invest, how to invest, or what to invest in.

I replied with the following: “If you truly want to become wealthy, I’d focus much more on your ability to increase your income than almost anything else at your age.”

I think this caught my new friend off guard. I assume they expected me to say something along the lines of saving a percentage of income, using tax-advantaged savings vehicles, or automating investments.

And all of these things are awesome. But in all honesty, the advice I wish I had when I was 20 is exactly what I told him.

I think this goes a long way for young professionals. Especially those who are willing to bet on themselves.

Obviously, I am not saying don’t save or don’t worry about expenses and go wild. I am saying that when it comes to things that really move the meter, income is largely the path of least resistance.

Trading a $5,000 portfolio into $10,000 could require tons of luck and risk. Whereas a $5,000 raise in salary could be much lower hanging fruit.

Personally, I wish that when I was in my early 20’s, I focused much more on my career capital than I did trying to be exceptionally frugal and save every last dime. From my own experience, this was a losing game. I lost out on experience, time, and sanity.

I think back on my mindset then and it was almost completely backwards. The ability to put another $50 away each month should’ve been outweighed ten-fold by the opportunity of building a network, finding new clients, and nurturing professional relationships.

As my income has grown and as I became more confident in my own professional abilities, I now know that the biggest tailwind to my financial life is likely my ability to earn more.

I truly believe that all young professionals should consider their income trajectory. It will likely be the biggest driver in their ability to attain wealth. From there, consistent increases in savings goes a long way. But the income has to be there before we can make further savings.

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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Hardika is an economic strategist at Fundstrat, and her insights are always something I value. Her research is absolutely next level and is usually my first read of the day.

If you don’t know Hardika, her credentials and experience speak for themselves. She previously wrote for Bloomberg and was a markets reporter at WSJ. She is actively studying for her CFA level II exam, as well.

Before we dive into the details of our mid-year review, I highly recommend keeping tabs on Hardika’s work. You can find her insights on X and follow her professional updates on LinkedIn.

To follow our conversation, I have italicized all of Hardika’s commentary and my questions are in bold:

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Cliff: I’d love to hear your thoughts about rotation. The Mag 7 trade looks dried up right now.

Hardika: I wrote about the Mag 7 recently, yes, they have been stocks that have just underperformed so massively that it is just astounding at this point. They’ve underperformed even though they’ve spent so much money. And yes, they are cheap right now, but that’s not the only factor that makes them interesting at this moment. Fundstrat head of research, Tom Lee, has rated Magnificent Seven as one of his top picks for the year.

So, I have kept a close eye on them. And the biggest factor that supports the view that Mag 7 may be in a transitional period right now is the fact that AI isn’t in their core thesis. AI is feeding into their core thesis, but it is not the only thing that they’re running on. If you look at the performance of memory stocks in the past month, I think investors are starting to realize that memory and storage names are very volatile.

If seeing a 20% drop in a month makes you nervous, I think you should probably think about diversifying. The Mag 7 could be seen as a “safety trade” given their maturity. Another thing that I’ve kind of noticed is: How cheap they look right now on a forward earnings gap basis. The gap between the Mag 7 and the S&P 500 is the narrowest since early 2023. So at some point, it’s kind of worth asking: Have the prices become cheap enough for you to start buying them?

I don’t particularly see that the Magnificent Seven could go down so much more from here, especially if memory continues to be volatile. But I do think that there needs to be a catalyst for them to do well.

Cliff: Right, that makes sense. And I think that a lot of investors, especially younger investors, may be unaware of what’s going on under the hood of the S&P 500. I think that thus far, year to date, we had a great first half of the year for the S&P 500, yet the Mag 7 lagged throughout and was about flat. What does that mean to you when you see this more broad participation amongst the market, is that a good sign? Is that a sign of a healthy market or is that something that you’re keeping an eye on?

Hardika: It’s a very healthy sign. You never want to have just a handful of stocks leading the market to all-time highs. That is not a sustainable sign. But recently we have seen a greater number of stocks participating from all kinds of things, financials, industrials, and healthcare.

I haven’t been able to figure out an exact reason for why these stocks are doing so well right now other than the fact that this is just a rotation. And again, it goes back to show that investors were in tech for such a long time they sort of forgot about all these other sectors. They were very unloved and then memory started coming down hard, and it sort of forced investors to reckon with the fact that they had built so much exposure to tech, and it wasn’t healthy.

They realized they need to cut down a little bit and rotate into some of the other areas. So, it’s always a good to see that.

What I am concerned about is that these top names are so heavy, you still do need them to rally in order for the S&P 500 to keep pushing through. It’s great that financials and healthcare are doing well and hitting all-time highs, but is it going to push the S&P 500 to 8,000 points? No, they’re a very small weight of the index.

So, I do want to see some of the Mag 7 here start to lead the market again, and the semiconductor names, as well. I think that’s a possibility we’re going to have because if we look at historical data, whenever we’ve seen some such volatile sell offs in semiconductor shares in the next one-month, three-month and six-month periods, they’ve come back with huge gains. This is just historical data. So, I think if you look at that as a sort of a reference, it bodes well for the future.

Cliff: So, this is much different than 2023 in which the S&P 500 was essentially flat outside of being carried by the Mag 7. This is almost the inverse of that. But it’s providing you more comfort in that there’s more participation amongst sectors, smaller companies, and this idea of growth in the S&P 500 is not being driven by just such a small subset.

Hardika: Yes. I think it’s weird because at that time we were all saying, oh my gosh, I wish there were some other stocks leading the market higher. And now it’s, it’s completely flipped right where it’s like can you outperform again? So yeah, they were, they were such big leaders for such a long time, and I think at some point, the trade just got ahead of itself. That’s why we’re seeing a diversified rally now, which is great, but we need larger stocks to participate, as well.

Cliff: Walk me through the economy. I’d love to hear some K-shape inputs so my readers can understand what that is. Because to me, I say to people a lot of times that with this idea of inflation, if you own assets or if you’re earning income that is at least in line or outpacing inflation, inflation can be seen as an inconvenience.

For earners and asset owners, they have a privilege in that they can call inflation an inconvenience versus somebody who has not seen any wage growth. This is almost devastating. Over the last five years, if your wages haven’t kept pace with inflation, you’re feeling that on a monthly basis.

That’s what I think of when I think of the K-shape where it’s almost a tailwind to asset owners, yet it can be devastating to those that aren’t either accumulating assets or keeping their income on pace with inflation. So, for my audience, that’s my indicator as to why it is so important to become asset owners. We want to be participating in markets to any extent we can.

Hardika: 100%. I think time and time again everyone has said stocks are your best bet against inflation, not gold, even though I know young people are fawning over gold at the moment. But it’s not gold, not bonds, it’s only stocks, purely stocks.

And dollar cost averaging obviously is the best way to do it for most of the people who are looking to set it and forget it.

But I think this is one of the most fragile K-shaped economies because the stock market has done so well and that has made the K-shaped economy that much wider and led to this divergence.

If you think about it, the K-shaped economy is basically this divide between higher income and lower income. Let’s start with higher income. The reason why they’re higher income is because stocks have done so well, and they’re feeling emboldened by their stock holdings.

If my company stock goes up 100%, yeah, I’ll get guac with my Chipotle order. Why not? You know. Yeah, I’ll make that a large vanilla latte. I don’t care. I feel emboldened. Emboldened to spend more. But that is not good for the lower income because they are not asset owners, like you said.

So if you look at the data: The top 1% hold 50% of stocks versus the bottom 50% own 1% of stocks. That is a huge divide. That is a very uneven divide. And I think that’s what’s causing lower income to get crushed even more. And as terrible as it to say this, this analysis shows that it doesn’t matter what happens to their spending because as long as stocks can keep going up, the upper part of the K can continue to be strong because it’s masking the weakness at the bottom.

So, it doesn’t matter what happens to the lower income as much as it does to what happens to the top. And there are signs that the stock market can continue to be strong. This still remains a secular bull run. So, I don’t really foresee the upper part of the K falling down anytime soon. That’s the most interesting thing to me. But yes, own stocks. This is the best way to beat inflation. There’s nothing else.

Cliff: That is a great insight to the economy. I could definitely see how this is being propped up by high earners and asset owners. To finish this off, I want to hear what you think the most overhyped financial topic of 2026 has been thus far.

Hardika: I’m going to come out with a hot take and say that the SpaceX hype ain’t it.

I think everybody hyped it up so much and everybody was saying it’s oversubscribed. I think you have to be very careful about what you’re paying for a company. Because what could make SpaceX’s price go up in the near term? It’s not going to be profitable for a very long time. They’ve said this in their S1. They don’t know if they’ll ever become profitable. If a company is boldly proclaiming they’ll never be profitable, as an investor, why would I buy it? I don’t understand.

Yeah, it’s basic investing 101. You should buy companies that are profitable or hoping to become profitable, but SpaceX proudly proclaims they’re not going to be profitable. That’s very worrisome to me.

And also, it’s concerning that we’ve seen such a terrible performance from SpaceX when the lockups haven’t even expired. We have another year to go until the lockups fully expire. So, what happens then? I think this is just a stock that is facing the path most IPOs do in the first year where they have very volatile, poor performance. SpaceX is no different. And I think that means that investors should be careful.

You shouldn’t treat it as a special stock. You shouldn’t apply a special premium to it—the Elon premium— because it’s literally trading like a regular stock.

Cliff: Given the SpaceX IPO and a lot of other mega IPOs slated for 2026, 2027, how would you tell a young investor to navigate the waters of an OpenAI, an Anthropic, any of these other big IPOs that are very, very hyped up and they seem to be a little bit Frothy after watching SpaceX very recently, what would you tell a young investor about these mega IPOs?

Hardika: These are great companies at the end of the day, and that extends to SpaceX, as well. I do think that they are trying to do something that’s never been achieved before. OpenAI is literally a leader in the AI space. We wouldn’t have anything if it wasn’t for them and Anthropic.

But I think these are companies that you have had to get in very, very early on. And most of the people who are buying publicly are buying when most of the value of this company has been made already or a good chunk of it anyway.

I think that if you were an employee at Anthropic and you got stock there and then it goes to market, you are probably having a great time. But I think if you’re buying it publicly on the secondary market, you have to be ready for some volatility and that is a trade you should think about twice before making because we literally haven’t seen any IPO do well in the past year and a half.

Cliff: Interesting. So, you would say to a young investor: “look, if you’re a long term investor, make sure you size it properly, be ready to hold for the long-term and be ready for volatility.” Otherwise, if you’re a little apprehensive or you’re unsure, maybe let these companies mature a little bit as far as being public companies. Maybe get to an earnings call, maybe get to a full year’s worth of earnings calls and see how things look before making a decision. I love that.

Hardika: Yeah, I completely agree. I think people need to be a little bit more prudent here.

Cliff: I think you’re totally right in saying that people should be more prudent and understanding that some of these companies can look more speculative than investment-like.

Huge shoutout to Hardika for sitting with me to go through some of the things she’s keeping her eye on as an economic strategist. Make sure to follow her on LinkedIn for more of her content!

*Hardika Singh is employed by Fundstrat Global Advisors, LLC and her views are solely her opinion. This newsletter does not constitute an endorsement of Fundstrat by Bone Fide Wealth.

Disclosures: https://fsinsight.com/disclosures/hardika-singh/

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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Today, I wanted to outline a few different ways in which I see W-2 employees find tax advantages.

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401(k)s, 403(b)s, 457(b)s:

The slew of employer sponsored retirement plans. If you’ve been following me, you know the advantages of these accounts. Many allow both pre-tax and Roth contributions and they can be very useful when looking to build up retirement savings. Just note that 457(b) plans can vary depending on whether the plan is governmental or non-governmental.

HSAs:

Health savings accounts are available to those that are enrolled in a qualifying high-deductible health plan. HSAs are arguably the most tax advantaged account out there at the federal level. When they are established as a Section 125 Cafeteria plan, they can even avoid FICA. Contributions are made on a pre-tax basis, the funds grow tax-deferred, and they can be distributed tax-free for qualified medical expenses.

For more information on HSAs check out this old post here!

NQDC (Non-qualified deferred compensation) plans:

These types of plans are usually offered to highly compensated employees at certain companies. An NQDC works similarly to a 401(k), yet it does not have contribution limits. The drawback to these accounts is that they are bound by the same ERISA requirement a 401(k) plan would be and they can be subject to creditors’ claims in the event the company goes belly up. For some highly compensated employees at stable and established companies, the risk of forfeiture is worth the potential reward of deferring taxes!

Tax-loss harvesting and direct indexing:

I’ve written numerous times on the potential tax benefits of tax-loss harvesting as well as how direct indexing can aid in this process.

Losses have economic value! They are asymmetrical as well! Short-term capital gains can be offset by long-term capital losses!

For more TLH and direct indexing coverage, be sure to check out this old post: The evolution of investing.

Asset Location:

Asset location is another avenue to tax-efficiency. Essentially, this is using different types of accounts to hold different assets. For a high level example, a tax-deferred account such as a Traditional IRA or 401(k) may hold assets that have annually taxable components to them (think dividends, interest, etc.). Whereas a Roth IRA, which will hopefully never be subject to tax may be skewed more towards assets that are believed to grow more rapidly given the funds can be distributed entirely free of tax after age 59.5.

Some believe asset location to have too many assumptions around the performance of asset classes. And this is not an invalid argument. But there are nuanced instances in which I have seen asset location move the meter significantly in practice.

These 5 different avenues to tax efficiency can be very helpful to W-2 employees. But it does not stop there. Here’s an additional list for those that are curious:

• Mega Backdoor Roth

• Strategic Roth conversions

• Charitable donations and strategic bunching

• Equity compensation planning and holding period advantages

• 529 Plans that allow for state tax deductions

• Employer sponsored commuter benefit plans

While W-2 employees may not have all the potential tax advantages that business owners have, there is still a lot of opportunity to optimize for taxes.

Knowing which solutions are out there is a start. From there, it is all about tailoring the avenues for tax efficiency according to what works for you!

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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However, there are certain things that some may be unaware of when it comes to contributing to the Roth IRA. There are workarounds as well, but those workarounds can come with a bunch more hurdles.

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First off, there are income limitations that dictate one’s eligibility for outright contributions to a Roth IRA.

For 2026, Modified Adjusted Gross Income must be below $153,000 to make a full contribution as a single filer. For married couples, MAGI must be below $242,000.

Now, one nuance is that there is a phaseout range. When MAGI exceeds $168,000 for single filers or $252,000 for married couples, they are entirely phased out from making contributions to the Roth IRA.

This is by far the most common mistake I see. People are unaware of the income limitations or the phaseout entirely but they make a Roth contribution anyways.

Then we get into the headache.

There are generally two different ways to undo the Roth contribution and each has their own consequences.

1. The timely correction: done within the tax-filing deadline

2. Untimely corrections: done after the tax filing deadline

Timely corrections can allow for the excess contribution to be distributed. The distribution generally includes the excess contributions as well as the earnings (or net income attributable to the contribution) on the funds. The earnings can be subject to tax, although they can avoid the 10% early withdrawal penalty.

Untimely corrections can result in a 6% annual excise tax on the overcontributed amount until it is removed. This can become a serious drag and should be tended to as quickly as possible.

Now, one more pitfall when it comes to the Roth IRA revolves around the Backdoor Roth.

The Backdoor Roth is like the gateway drug to personal finance. It is a relatively simple maneuver, yet there are a few nuances that I feel are glossed over too often.

The Backdoor Roth entails an after-tax contribution to a Traditional IRA and then having the funds converted to a Roth IRA. For those that exceed the MAGI limitations, this is usually how funding a Roth IRA on an annual basis can occur.

This works well when there are no pre-tax dollars in any existing IRAs, but when there are existing pre-tax balances in any type of IRA, the pro-rata rule comes into play and can make the conversion taxable.

Here’s the most common mistake I see when it comes to Roth conversions that leads to a taxable event.

An individual facilitates a Roth conversion early in the year. They had no pre-tax balances in any IRAs at the time. Looks like a clean conversion, right?

Well, mid-year, they change jobs and roll their pre-tax 401(k) to a Traditional IRA and maintain that pre-tax balance as of 12/31 of that year.

December 31st is the date the IRS uses to dictate whether someone had a pre-tax balance in their IRA. Not the date of conversion.

This results in the conversion that was executed earlier in the year becoming taxable on a pro-rated basis. A great idea and enough awareness to execute on the strategy results in exactly what one was looking to avoid due to an executional nuance.

When it comes to personal finance, understanding a strategy conceptually can look much different than the nuance associated with execution and it is so important to be aware of these nuances.

Be diligent when looking to execute on some of these concepts. There may be more than meets the eye!

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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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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