Strategy and execution, very different things.

Don’t forget the nuance.

Lately, for whatever reason, there are tons of people posting about personal finance online. In all honesty, it may just be engagement bait but today’s piece is going to highlight some of the most common things I see covered without giving the full picture.

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.