How To Maximize Your 401(k) Strategy!

"I’m 31. My 401(k) lets me pick a percentage for Roth and a percentage for Pre-Tax contributions. I have $7k in a Roth IRA, and plan to max out 401(k) and Roth IRA next year! My 401(k) match is 8% Pre-Tax. How do I pick my Roth percentage?" We'll walk you through that question and more in today's Q&A episode! Jump start your journey with our FREE financial resources Reach your goals faster with our products Take the relationship to the next level: become a client Subscribe on YouTube for early access and go beyond the podcast Connect with us on social media for more content Bring confidence to your wealth building with simplified strategies from The Money Guy. Learn how to apply financial tactics that go beyond common sense and help you reach your money goals faster. Make your assets do the heavy lifting so you can quit worrying and start living a more fulfilled life. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:06Brian Preston?

  401ks, how to maximize your strategy?

• 0:10Speaker 01

  Brian, I am so excited about this because we get to tell people how they can make small decisions that can have huge impacts. We get to tell people, "Hey, I've got a question and I want to know the answer to this question." And we love that we get to do that for you guys. Every Tuesday at 10 a.m. Central time, we get to load you guys up. And today is no different. So right now, we have our team out in the wings collecting your questions because we believe there's a better way for you to do money. We also believe that you should subscribe right now to the channel if you have not yet subscribed. So with that, Senior Content Developer Megan, I'm going to throw it over to you.

• 0:49Speaker 02

  All right, and we are starting off with a 401k question from LP. It says, "I'm 31. My 401k lets me pick a percentage for Roth and a percentage for pre-tax contributions. I currently have 7,000 in a Roth IRA, and I plan to max out my 401k and my Roth IRA next year. My 401k matches 8% pre-tax. How do I pick my Roth percentage?"

• 1:13Speaker 01

  I love this. So a lot of people are faced with this question. "Hey, my 401k, when I do open enrollment, or when I go to the website, it says, 'Hey, I can either put money into the Roth side, or I can put money into the pre-tax side.'" Now, I do want to clear something up because we've got some questions around this. He mentioned in here, or he or she mentioned in here, that I get an 8% pre-tax, or I get a pre-tax match on 8% of my contributions. I want to be clear, that does not mean that you have to make pre-tax contributions in order for you to receive the match. Even if you choose to do Roth contributions, you would still get the match. It's just that match goes in your pre-tax bucket. Sometimes

• 1:56Speaker 01

  we just assume that people know these things, and they don't. So we've gotten questions on that. You can contribute to either one of those buckets, and you can still get your employer match. And we love each of those buckets because obviously, pre-tax You put money in today, you get a current year tax benefit. It grows tax deferred. And then when you go to pull the money out, you pay income taxes on it in retirement. Versus Roth, you don't get a current year tax deduction. You put the money in, it grows tax deferred. And assuming you meet certain qualifications, when you pull that money out in retirement, it is completely tax free. And so the question LP has is, well, how do I decide? Which one do I know? And for a 31 year old, who sounds like is doing, this is a pretty big decision because

• 2:41Speaker 01

  this decision can have some pretty long-term implications, right?

• 2:45Brian Preston?

  By the way, LP, congratulations. Just the thought that a 31 year old can max out not only their Roth IRA, but also their 401k at work. Massive, because every dollar, every dollar that comes into your command and control is, has the opportunity for a 31 year old of multiplying 20.39 times by the time you retire. So if you, by the way, if you want to know your own wealth multiplier, I'd encourage you to go to moneyguy.com/resources. You too can see exactly what every dollar of your saving, your investing, and even keeping you away from the spending side can do if you use that resource. But here's what LP, the first thing, and it is based upon the wealth multiplier, that compounding growth opportunity is huge.

• 3:30Brian Preston?

  And if we can have compounding growth married to tax-free growth, wowzer. I mean, that's, that's just magical. But there is something that's sticking to me, even though he's 31 and young, and you really, that tends to, for the youth that have decades of compounding growth, that lends itself to the Roth side of contributions. So it's easy to tell somebody in their twenties, even early thirties, do 100% Roth contributions.

• 3:58Speaker 01

  But that's only part of the

• 4:00Brian Preston?

  But LP has given us some breadcrumbs here that there might be more to this story. And the fact that if you can save and max out not only your Roth IRA, but also your employer 401k.

• 4:11Speaker 01

  That's 7,000 plus 23,500.

• 4:13Brian Preston?

  It makes me think that somebody's got a pretty good income rolling through, meaning they've got a good shovel. And when you do have good income, you have to start paying attention to taxes. And we're very clear on this, for people, when you start trying to figure out if taxes have an impact on your saving strategies for the future, I saw somebody on social media post on one of our comments. They said, Brian, taxes don't really matter when you're talking about Roth or pre-tax. If you just save the tax savings when you do the pre-tax.

• 4:46Speaker 01

  Same in a vacuum, all else is equal.

• 4:47Brian Preston?

  And I'm like, yeah, but here's what people never pay attention to is that they're that would. The reality of the situation is there it's true. It's a math exercise as long as tax rates don't change. And also, you have to know that after-tax savings even have a drag on them as well. So here's what I would encourage you to do is you have to kind of really do the math. Don't skip homework. If you're young and your tax rate, meaning you add your marginal rate, both federally and statewide, and it's less than 25%, I think that you're 100% Roth. Because you want that that compounding and the tax-free growth is very powerful.

• 5:28Brian Preston?

  I do think if you're somebody who is higher income and your tax rate is beyond 30%, now maybe you're thinking about pre-tax. The why is because you're hoping on the arbitrage situation. As soon as you leave the workforce, say in your late 50s, early 60s, you don't have to take required minimum distributions until your mid 70s. And you're hoping that once your earned income falls off of your tax return, all of a sudden, your tax rates that you pay crater. Because you're now going to be able to take advantage of those much lower tax rates in retirement. You can do Roth conversions at that time. So if you're beyond 30% on the taxes you pay, that lends itself to the pre-tax contributions.

• 6:09Brian Preston?

  But I have a feeling that LP is probably in that gray zone. That 25 to 30%, but what are the things that when you fall into that gray zone, that donut hole of opportunity? How do you answer that question then?

• 6:23Speaker 01

  Yeah, that's where personal finance gets a little bit more personal. It depends on your unique account structure, your unique goals. When you think you're going to access these dollars, your unique risk tolerance, risk capacity, all is different variables. Now, I would say when you measure all of that and you look at all of it and you say, you know what? Odds are I'm going to be high income now and I'm likely going to be high income later. And I'm young and I'm. Really want to maximize the Roth, then you might lean towards more of a Roth contribution than a pre-tax. Or if you end up saying, you know what, I'm kind of in my highest earning years now and there's a really good chance that I'm going to take a different career. I'm going to switch later on, or maybe my income is going to drop and I don't think I'll always be high income. Then you might want to err towards the pre-tax.

• 7:05Speaker 01

  This is where you do need to get a little more nuanced and instead of just specific or instead of general guidance, you need specific guidance, specific to your unique situation. What I love though, whether you go either way, I love that you're talking about the savings rate and maxing out the 401k and maxing out the Roth IRA. What that tells me is Brian, can you hold up? Do you have a thing that you can hold up? It tells me that you are moving along at age 31 in the financial order of operations. You are, once you max out step six, you are max out your 401k, you're already through step six, moving into step seven. And to be able to do that at your early, in your early 30s is amazing. The future is bright.

• 7:45Brian Preston?

  To put an exclamation point on this, most people though, just typically you're 100% Roth or 100% traditional pre-tax. You don't see a lot of that. You go do 35% here, 65 here. You don't see that unless you do have unique things going on in your financial life. Like you, maybe you're between that 25 and 30, or you're using this for estate planning or so forth.

• 8:09Speaker 01

  Love it.

• 8:10Speaker 02

  Great. Well, LP, thank you so much for your question. Hopefully that gives you a lot to think about. Uh, this next one is interesting.

• 8:17Speaker 01

  Uh oh.

• 8:18Speaker 02

  Curious in your take. This is from.

• 8:19Speaker 01

  There's a comment just came in and said, hey man, I love Brian's members only jacket.

• 8:23Speaker 02

  I was wondering if you were going to see that.

• 8:24Speaker 01

  That just came, I thought you should know. No, no, that's all. I was just.

• 8:27Brian Preston?

  I don't mind. No, I like sharing with the family.

• 8:31Brian Preston?

  I had yesterday, now full disclosure, it might be too bright for the show.

• 8:37Speaker 01

  Nah.

• 8:37Brian Preston?

  We, we, we might have to try this later. I have an actual, I was wearing a similar outfit yesterday, but I had a red, actual members.

• 8:45Speaker 01

  It was a literal members only jacket.

• 8:47Brian Preston?

  The reason I have a members only jacket is because when I was a kid. Members only was like what the kids who had money had. I had like players' club. You know, so, you know, it looked like a members only, but it was, it was not a members only. Because my parents refused to pay. If you can believe it, back in the day, I think you could buy a players' club jackets for like less than $19. Like JCPenney's outlet or something like that. So that's, that's what I ended up with. But all my friends who came from, you know, a little more means, they had members only jackets in every color of the rainbow. And I remember as a kid being so jealous of that. So as soon as I found out as an adult, I could buy a members only jacket.

• 9:25Speaker 01

  Yeah, I'm doing that.

• 9:26Brian Preston?

  So I wore it yesterday, and I really did get probably four or five compliments on it, but.

• 9:30Speaker 01

  I was, at least three of them.

• 9:32Brian Preston?

  I got home and my wife goes, didn't you buy that jacket for an 80's night we went to? And I said, yeah. I was like, but it's kind of cool. So I've been wearing it. And then she's like, yeah, it makes you look like a Gen Xer, you know, so.

• 9:46Speaker 01

  That's on brand. You are in fact a Gen Xer.

• 9:48Brian Preston?

  Her point was, is that we're trying to youth ourselves down a little bit, and here I am putting myself forward. So I, I, so we, we were going out on a double date last night, and I, this is the jacket I put on. She goes, that's much better. So, you know, and we all want to impress that significant other. So it kind of put a, it put a rain cloud over the red members only jacket. So it's in the closet at the house right now.

• 10:09Speaker 02

  I will say confession, I didn't know what a members only jacket was before this morning.

• 10:14Brian Preston?

  Really?

• 10:15Speaker 02

  Yeah.

• 10:15Speaker 01

  And that's why you could have educated the world. You could have done the hard work of showing the world, all of our, uh, millennial Gen Z's out there, what a members only jacket is. But, you know, you missed that opportunity.

• 10:26Brian Preston?

  Well, maybe I still can. I mean, we'll, we'll have to, we'll have to find another content day that I'll wear the red. But we have to, I'll have to get with Nate and Caleb and make sure that it's not too bright, that it saturates out the, the cameras.

• 10:38Speaker 01

  I like, you, it sounds like you know your camera lighting, huh?

• 10:41Brian Preston?

  Somebody said it in content meeting this morning, so I just, you know, mimicked it like a parrot.

• 10:46Speaker 01

  I'm sorry, I guess you were trying to ask this question.

• 10:50Speaker 02

  Alright, y'all ready for the next question?

• 10:52Brian Preston?

  I guess.

• 10:54Speaker 02

  Alright, so this is from Fu Pa. He says, "Thoughts on if you should increase the principal amount, or sorry, include the principal amount of a mortgage payment in the 25% savings target? Should this be included since it's increasing the equity in your house? And would you also increase your net worth?"

• 11:13Speaker 01

  It is awesome that when you pay down your home, because it's an amortizing loan, part of your payment goes to interest every month and part of your payment goes to principal. And that principal is reducing the debt balance on your home. And as you reduce the debt balance on your home, the equity goes up. So this is a great thing. So paying off debt is a good thing, especially when it is debt on an asset that retains value and does not depreciate through time. So we love the idea of you paying off debt. And we love the idea of you making those principal payments. We love the idea of seeing your net worth increase. While all of those things are wonderful and while all of those things are amazing,

• 11:56Speaker 01

  we do not believe that you can include your principal portion of your mortgage in your 25% savings rate. Our assumption would be that when you get to a 25% savings rate in step seven of the Financial Order of Operations, it is above and beyond what you are paying on your mortgage. Now, here's the good news. Once you hit 25%, much to Brian's delight, you get to pick and choose what you do with your dollars after that. So if you decide, "Hey, I have additional capital that I want to deploy in some meaningful way in my financial life, and you desire to take that additional savings you have and apply that to your mortgage to drive that debt balance down quicker and increase that equity faster",

• 12:42Speaker 01

  then you can absolutely do that, but it is not a replacement for the 25% savings rate. It is in addition to the 25% savings rate. Because in our view, house is a used asset. It's something that you live in. It's something that you are presently consuming. The dollars that you are building and saving for the future are for your future self, not for your today self.

• 13:05Brian Preston?

  Bo went all over the place to say, "I'm just gonna say no." Because

• 13:09Speaker 01

  Next question.

• 13:10Brian Preston?

  Um, look, don't be like everyone else. I mean, this is something I always tell people, you gotta peacock out. You gotta be different than everybody else. Uh, a few, what was it? Two years ago, the Fred came out with data on net worth of Americans and the initial headlines were net worth for Americans is up 35%. And you're like, huh, that's great.

• 13:29Speaker 01

  They're doing so much better.

• 13:30Brian Preston?

  Everybody is doing so good, um, building up their net worth statements. And then you read into the fine print, because that's how nerdy we are. And you find out the only thing that went up on this Federal Reserve analysis was people's ownership of their equity in their homes, meaning that inflation had caused houses to go up. They had, their, their net worth had gone up because the market value of their real estate. And that just, that troubled me because it showed me that the typical American was not, does not understand the difference between, as Bo described, use assets. This is something that provides you shelter. You raise your family. And the only way you turn a use asset into an investment asset is you either take on more debt. That sounds less than ideal when you're trying to reach financial independence, or you go sell

• 14:14Brian Preston?

  it. Well, if you try to sell assets like right now, you'd have to, if you were trying to move to a bigger home, or the only way that works is if you're downsizing and you move to a lower cost of living area, which that's a lot of assumptions when you're trying to make a decision of how do you build financial independence outside of your back, your brain, your hands? And that's with investment assets. So that's why I don't think, Fupa, I don't want you counting that 25% towards the investable assets, because I'm trying to get you to build, be like, unlike the typical American, and actually build financial independence and assets, your army of dollar bills that are working just as hard for you as those other elements. The other thing is, I always worry about, is I see this all the time, people become debt crusaders.

• 14:59Brian Preston?

  It feels so good when you pay off your credit card debt, and it's, and you should pay off your credit card debt. There's a reason in the financial order of operations, that's step three, is because you're never gonna get ahead if you're paying the credit card company 25% while you're hoping to make eight to 10% on your investments. So go be a debt crusader on credit cards. But a lot of times, people get so excited about paying off the high interest debt, they put their eyes on the low interest debt, like your, your mortgages. And I always remind people, there's a difference between the Make wealth behaviors, the maintain wealth behaviors, and then the multiply wealth behaviors. And if you're already doing the maintain wealth behaviors before you've even made your first million dollars, two million dollars, what are you doing? And that's why we're very, very serious about the fact that paying down low interest debt,

• 15:44Brian Preston?

  because it breaks my heart when I hear people paying off mortgages that are less than 4.5% when they're in their twenties and thirties, and they don't even have their first seven figures in their investment accounts yet. I'm like, what are you doing? You've got to get to the make wealth phase first before you start de-risking into these maintain. And that's why it's a balance. And look, I'm all about paying off the mortgage, paying off the debt, being as debt-free as possible. But there's a time and a place. And if you know any value of what the wealth multiplier, and with all my stacks, I don't have that. If you go to moneyguy.com/resources.

• 16:17Speaker 01

  In the binding.

• 16:18Brian Preston?

  We can show you what every one dollar you have is worth. And that's why when you're 20 years old, it's 88 times over, meaning every dollar can become $88. When you're 30, it's 23. When you're 40, it's 70. Do you see how this can go downhill very quickly? That's why we tell you, pay off the mortgage when you're beyond 45, because you're just not giving up much on the compounding growth. And that keeps you financially squarely on the financial mutant path versus just being this debt crusader that is doing things that might feel good, but then your 50-year-old self goes, "What was I doing paying off that 3.5% mortgage? When I wasn't even maxing out my employer 401K or my Roth.

• 17:01Brian Preston?

  I think I might have put that step out of order just because it felt good at the time."

• 17:08Speaker 02

  Great advice. All right, Foo Pod, thank you so much for your question.

• 17:11Speaker 01

  You know, I think it's funny. You made fun of me for going all over the place and taking a long time to say no, and then you took twice as long to say no as I took.

• 17:18Brian Preston?

  Well, no, but I mean, I'm a good teacher. You know, teachers, you're direct so that they remember. Just kind of like when you touch that hot stove, you want that initial reaction to kind of shock and open you up to being able to now absorb. And then you say the why.

• 17:33Speaker 01

  You are the third-degree burn of the education.

• 17:36Brian Preston?

  Want to give the why afterwards, you know, because I don't like the, as a Gen X kid, since I've already made fun of my age once. One of the things my dad used to do, and I love my dad and I respect my dad, and I was scared of my dad in a good way. But it was said in my household all the time, because I told you so. And that was the why. And as a curious individual, I don't like because I told you so. I want to know the why. So I try to just, I give you the pop, but then I want to give you the why.

• 18:03Speaker 01

  That's very Gen X of you. I need to know the why.

• 18:06Brian Preston?

  I should be wearing a red members only, I think.

• 18:10Speaker 02

  All right, next question we've got from Emily and John.

• 18:15Brian Preston?

  Emily and John, are they watching as a couple? That makes me happy.

• 18:18Speaker 02

  It sounds like it.

• 18:19Brian Preston?

  That's cool.

• 18:20Speaker 02

  They said, hey, money guy, we just finished, sorry, we just finished Millionaire Mission. And in it, Brian recommended Fidelity Charitable for a donor advised fund. Does Brian have any tips and tricks for making the most of Fidelity Charitable? I know we don't talk about charity a whole lot, but I know that's one of your favorite topics.

• 18:37Brian Preston?

  I don't know if I recommend, I use Fidelity Charitable. You know, there's Schwab has them, there's others.

• 18:45Brian Preston?

  I just like when you have the intersection of your charitable desires and then a good tax planning opportunity. Because it really is a win. If you've had success and you've started saving and investing for the future, and you're even beyond the make wealth phase, and you're now in that maintain, and you have appreciated holdings. Like, it's not uncommon, even with mutual fund investments, that you're going to have appreciated securities that are close to 100%. And wouldn't it be great if you could fulfill your charitable goals where your charity gets 100% of what you donate to them, but you never pay the income tax on that appreciation, but you get a charitable deduction for the full fair market value?

• 19:25Brian Preston?

  That is a win-win. And in the book, in Millionaire Mission, I go way beyond the common sense component. And the fact that I talk about how I've done this with my charitable strategies that I do annually, where I'm also reinvesting into those same investments that I'm giving away every year, because that over time pushes up the basis. So if I ever needed to have access to. These funds for like an investment like real estate or some other big purchase. Um, over time, I'm actually making the, these assets even more accessible to me as well.

• 19:55Speaker 01

  Yeah, specifically when you ask about fidelity, one of the benefits of if you use a, if you use the charitable giving uh, account at the brokerage at which you hold your assets. It just makes the linking and the donating of the securities really, really convenient. Like I know a lot of people um, like to use a service like Daffy, or if you're like, if you're a Schwab client, you might use the Schwab donor advisor fund. If you can use the same custodian and the same giving account, the transfer of securities becomes super, super easy. So fidelity specifically is an amazingly easy platform that you log into fidelity charitable and you can order all of your uh, holdings by most appreciated. You can even do it by specific tax lots.

• 20:37Speaker 01

  You can make the donation. And then one of the other things you can do is if you have a really good charitable platform, rather than having like every week or every month or whatever your giving cadence is, you can set up automatic distributions, automatic grants from your giving account. So it's kind of a set it and forget it. If you're someone who gives on a very consistent basis. So it's one of those things before you choose which account to use, figure out how you are, what type of giver you are. Am I a consistent monthly giver? Do I give once a year? And then you choose the best provider. Some of them have lower fees, some of them have higher fees. Some of them have transaction requirements. So you just want to understand what is the ultimate goal I'm trying to accomplish through my charitable giving? And then which platform is going to set me up to do that in the most efficient manner?

• 21:22Brian Preston?

  I'll give one more financial mutant tip. A lot of people have a hard time now itemizing.

• 21:26Speaker 01

  Oh, it's a great one.

• 21:27Brian Preston?

  Because the, the, the standard deduction for married couples has gotten so large. It's, you know, mid to high twenties, depending upon your age. And you know, a lot of people just don't itemize anymore. But if you could use a charitable gift fund to stack your charitable contributions, meaning that you give more in every other year to qualify to itemize for that year, but then you use the charitable gift fund to, to basically spread out and smooth your giving to your, to your favorite charities. That way they're actually, even though you're now grouping the contribution for tax deduction purposes, you're still giving your contribution or making the distributions from that charitable fund over time. So it doesn't look like, hey, Because their name was...

• 22:09Speaker 01

  This was Emily and John.

• 22:10Brian Preston?

  Emily and John, you know, if you want to be able to fund this every month, you can do that with a charitable gift fund, even though you might be grouping those funds to every other year.

• 22:19Speaker 01

  It's great.

• 22:20Speaker 02

  Wonderful. Well, thank you Emily and John for your question. I love that you're thinking about this advanced strategy.

• 22:25Brian Preston?

  This is the problem when you flip pages. You know, I went to a new page because I'd already used... I write way too big.

• 22:30Speaker 01

  So you wrote their name at the bottom, there's no margin for error.

• 22:34Brian Preston?

  I didn't have any note... This is called a note-taking error.

• 22:38Speaker 01

  Do you know about the pinch function? You can pinch and squeeze to shrink it. Did you know that? So like, if you just do like that, now you give yourself a bunch more room to write.

• 22:47Brian Preston?

  You can write there, okay. No, see, that's not writable space, is it?

• 22:52Speaker 01

  I think. It's marking up, isn't it, bro? I mean, y'all can't say this, this is more for us. But yeah, that's how the Remarkable works. Pretty cool, huh? I'm a bit... Whenever I'm in meetings, I'm a big... You know what, this doesn't matter. I don't know... I don't know why we went here. Hey, next question.

• 23:07Speaker 02

  Little Remarkable infomercial for you.

• 23:11Brian Preston?

  We're so good at doing those and we have no affiliate list to anything. We are the world's worst.

• 23:15Speaker 01

  We're not sponsored by Remarkable either.

• 23:16Speaker 02

  You know, we always get asked that in the chat, though. Like, every couple of weeks, someone will be like, "What are they using?"

• 23:20Speaker 01

  What are they using? What's that thing? It's Remarkable. Awesome.

• 23:23Brian Preston?

  If only somebody was thinking a little bit more about doing things.

• 23:27Speaker 01

  We're not very good at business.

• 23:29Speaker 02

  All right, you ready for the next one?

• 23:31Speaker 01

  Yes, ma'am.

• 23:32Speaker 02

  All right, this is from JB. They say, "I've heard you talk about tax allocation. I recently switched all of my index funds in my taxable brokerage to ETFs. Is this truly more tax-efficient or am I just counting pennies at this point? So how do you know when something like that is worth it?"

• 23:49Speaker 01

  Well, okay, let me answer your question slightly different. Not your specific question, but is there a positive impact to thinking through the tax considerations of my investments? Absolutely, there is. You mentioned tax location as an example. You know, different types of accounts. You have your pre-tax accounts, you have your after-tax accounts, and you have your tax-free accounts. Well, because they're all taxed differently, when you move from like a generalized... ...structure like a target retirement fund to a more specific asset allocation. You not only want to think about how you're allocating or spreading out your assets. You want to think about what types of accounts you're holding in those. Like you want your high growth assets inside of your Roth.

• 24:31Speaker 01

  You want your ordinary income type assets inside of your pre-tax accounts. And then you want your assets that either have capital appreciation component or qualified dividends or distributions inside of your after-tax account. So that it's subject to favorable capital gains rate. So you want to think about what types of investments am I holding in which types of accounts? And even you want to think through, okay, am I using mutual funds? And am I using an active mutual fund where there is literally a trader on the other side of the fund? Who's buying and selling and trying to outperform his specific index? And generating a bunch of taxable transactions that ultimately get passed through to the end shareholder? Or do I want to use something more efficient?

• 25:15Speaker 01

  Now, it's interesting in JB's question, Brian. He said, hey, I sold all of my index mutual funds and I bought ETFs. And while there may be some tax efficiency garnered there, I think of those as almost synonymous. Because really good passive index funds should be tax efficient in and of themselves already, without having to go to an ETF structure.

• 25:37Brian Preston?

  Yeah, all index funds, whether we're talking about mutual funds or ETFs, are pretty tax efficient for exactly the reason Bo said. They don't have a lot of turnover. Because think about indexes, they don't drop, they drop like three or four stocks a year. And then they add three or four. So it's just not a lot of turnover, meaning trades aren't being placed. That's why they're so efficient. The income, primary income source is just those few trades, as well as any dividends that are paid on the portfolio. Now ETFs versus mutual funds is more of a timing tool. Meaning that if I was buying in the, you know, late third, early fourth quarter, I'm probably buying the ETF because you won't have a capital gain distribution from the earlier trades in the year that have built up within the mutual fund.

• 26:21Brian Preston?

  So it's more of a timing of when you're buying your investment. So JB, you asked, am I? Kind of splitting hairs here. I think for like a dollar cost averaging strategy, like if I was doing a monthly investment, I use the mutual funds because they just are easier. Now, I know you can set up ETFs for that too, but most trading platforms and the big brokerages is easier to set up automatic investments with the mutual funds. So that's what I've, I've always kind of stuck with. You are confusing tax efficiency versus tax location though. And that's what, I do want to make sure we spend a little time because tax location,

• 26:56Brian Preston?

  when you use the word tax, even though they're connected, they're, they are separate planning elements because tax location is exactly what Bo was talking about is that you're going to want the tax policy to tie into the location of the investments. And when you start out, your savings rate is so much more important than even the investment. That's why we recommend like index target retirement funds where you only choose how much you can save and when you need it. But, once your assets start reaching multiple six figures, you're going to really want to start paying attention to where these assets are located. Because, as Bo said, the growth stuff, put in Roth. We want to stick it to the man legally as

• 27:37Brian Preston?

  much as possible to get that tax-free growth and that compounding working, working for you. Your pre-tax assets, you want to there, you know, everything in that category, you kind of want to, if it's treated as ordinary income, that's what you put in there. So it's a lot, it's usually a lot of your conservative holdings, your bonds, some of your alternative strategies, those type of things will go in that category. When you look over at your after-tax, now we're looking at our dividends, things that can have capital gains, even some real estate holdings and other things. You want to put those in your after-tax because they just have some lower tax rates with the long-term capital gains or the, you know, qualified dividends, that you just want to maximize the tax efficiency of those things.

• 28:19Brian Preston?

  So that's why tax location creates more tax efficiency, but tax efficiency of how index funds operate different than mutual funds is kind of a, a different thing altogether. But hopefully that gives JB some, some, some details there. And I would, I often caution financial meetings, don't fall into the hassle factor trap of, you know, you're splitting hairs, doing things. Make sure the actions you're doing is not getting busy doing nothing. Is it, just because you're creating activity, doesn't necessarily mean it's fruitful.

• 28:50Speaker 01

  That's great.

• 28:51Speaker 03

  The Money Guy Show is hosted by Brian Preston. Abound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities laws and regulations. Abound Wealth Management does not render or offer to render personalized investment or tax advice through The Money Guy Show. The information provided is for informational purposes only and does not constitute financial, tax, investment, or legal advice.