05.13.25 Ask An Advisor With Wes Moss

Breaking Down ETFs/Index Funds/Mutual Funds and Retirement vs. Brokerage Accounts Confused about ETFs, index funds, and mutual funds? Fiduciary financial advisor Wes Moss breaks down these "cousins" of investing – including when to use them. Also, retirement accounts vs. brokerage accounts – what’s the difference and what’s the best option for you? Wes explains everything you need to know! Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the May 13, 2025, Ask an Advisor episode of the Clark Howard podcast. Submit your questions at clark.com/ask. We hope you enjoy our weekly Ask An Advisor episodes, in which Christa and Wes discuss investing and retirement savings in depth. Let us know what you think in the comments! Learn more about Wes: Wes Moss, CFP® Learn more about your ad choices: megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

• 0:00Speaker 00

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• 1:04Speaker 02

  Welcome to Ask an Advisor, where we here at Team Clark talk with fiduciary financial advisor Wes Moss. Thanks for being with us again, Wes.

• 1:13Speaker 03

  Always good to be here. Thank you.

• 1:15Speaker 02

  And I'm Krista DeBias.

• 1:16Speaker 03

  So much fun.

• 1:17Speaker 02

  We have a great time. And speaking of timing, just before we get into today's topics, which I think are really, really interesting, I just wanted to say how grateful I was, like, last week, just, I know the markets, you know, there's lots of tumult that's been going on, but you've been-

• 1:33Speaker 03

  It's been a rocky year.

• 1:34Speaker 02

  But listening to you and your, you know, you're steady the course, make sure you're invested in the right things. What happens when people get out and miss historical lows, miss historical highs, all those things? It really has resonated with me and I think, you know, a lot of people who just are staying the course and found that to be very beneficial, you know, at least recently.

• 1:56Speaker 03

  Well, thank you. I will say, it's rare that as you're kind of talking through economic history and market history, that it presents itself in the same day or right around when you're talking about it. Usually you're thinking, well, at some point, we have these really good days and if you're not- In the market, you can miss them. And we had a 3,000 point up day in the Dow in the month of April. And the reason it's so impossible to nail that, if you had already gotten out because of all the tumult in the other direction, is that particularly in this situation, we never know what announcement that could come in the middle of the night, in the early morning, after the market can move things so dramatically in equity markets that there's just really no way to predict that to the day. So this was a good example

• 2:41Speaker 03

  to stay the course and investors have been rewarded with a rebound. Again, it doesn't mean we won't go back down to where we were, but that patience is really paying off.

• 2:50Speaker 02

  Well, today, on today's show, you're going to be talking about a couple of really interesting topics. First, the difference between an ETF versus an index fund versus a mutual fund. So that's something that I think is really important for us to understand and know the difference there. And then you're going to help us also understand the difference between a retirement account and a brokerage account. When do you need what? When's it appropriate to go into each one?

• 3:14Speaker 03

  Okay, so let's start with the difference between ETF and an index fund and a mutual fund. And for those, if you've been investing, if you're one of our more seasoned viewers and listeners, and you've been investing for 20 or 30 years, you may be thinking, well, I already, I already know the difference between these. But there's something about kind of going back to the beginning and understanding the roots of what these vehicles really are and what they're made to do and kind of the evolution. I find fascinating the evolution of the financial industry that really didn't necessarily start with mutual funds, but that was the early adopter of really basketizing or putting investments all in baskets. And there's a bunch of different versions of that now, and they're all kind of cousins. But

• 4:00Speaker 03

  So if you've been investing for a long time, you may already, I already know what those are. But if you're in your twenties or you really haven't gotten started investing and you're in your thirties, I think that just going back to understand those fundamentals is really important. So I wanted to kind of go through the history of and why we would use and where we would use these different vehicles and what separates them because they're all kind of close. So I think of them, I was trying to think of a last name because they're all cousins. And I was thinking, well, what is basket a last name? And it kind of is a last name, but it doesn't really make sense. But think of them as cousins, all in the basket family. So we, if you go back, call it 75 years ago, Wall Street had an idea of, well, instead of just picking stocks,

• 4:45Speaker 03

  what if you had somebody really smart and really good at picking stocks and you put them all in a basket? And you just delivered a kind of a no work, easy to invest in vehicle that had a bunch of stocks in it. And a really supposedly smart research team would be picking those stocks for you. And it kind of made investing, it was the first real entree to kind of putting your investing on autopilot. Hence the mutual fund was born. So it's a fund of different individual stocks. Now it can be almost any security, bonds, real estate, anything publicly traded, very easy to put in a fund. And then it's managed by a team and that worked really well. And it's to this day, it still does work.

• 5:27Speaker 03

  The problem with it and why there was an evolution is that it got expensive. And you think about a mutual fund manager getting paid millions of dollars and then a 20 person research team, and they all want to make a million dollars a year and they're flying around at different companies and they're meeting with CEOs. Think about all that expense. Now, for many, many years, we loved that. Well, that's great. You're, you know, the company and the manager is at the plants and at the headquarters and they're doing research and they have real conviction in these companies. And that again, that worked and still works, but it got really expensive. There was a time, I think, when I first started the investment industry over 25 years ago, it wasn't uncommon to see a 2.5% a year cost to a mutual fund, 3%.

• 6:12Speaker 03

  And then when you got into more esoteric mutual funds that were doing research all over the globe, think of an emerging markets fund where a manager's flying to India and Brazil and Europe, it got really expensive. So there was an evolution. So we started with mutual funds. Then the next iteration of that, which I know that Clark has talked about for many, many years, is the index fund. So an index fund is a mutual fund. It's the same vehicle, but instead of having a giant research team and a bunch of analysts and portfolio managers, John Vogel, who's the founder of Vanguard, now a multi-trillion-dollar institution, almost got, by the way, he almost got run out of Wall Street because he said,

• 6:55Speaker 03

  well, what if because of these expenses primarily, only 10% or 20% of mutual funds at any given time would beat the index it was trying to beat? Let's look at the S and P 500. So Vogel said, well, if 80% of funds or 90% of funds don't even beat the index, then why don't we just invest in the index and be better than most mutual funds? And the key difference was cost. So instead of a 2% a year mutual fund, the original index funds were 90-plus percent cheaper than that, and they were 0.2%. Now, by the way, they've gone down to now 0.02%, so they've gotten even cheaper. But Wall Street said,

• 7:40Speaker 03

  wait a minute, A, you're going for average, B, you're trying to not charge anything. How are we going to make a living? Like, let's run this guy out of town. And he really did have a struggle in the early years until the, kind of that gospel spread and people started to realize, well, maybe I can, if I cut out, I can control one of... John Bogle's original principles was control what you can control. And one of those is expenses. So we can control our expenses and we're okay with getting whatever the index does, which again is in a lot of cases, not all cases, as good as or better than an expensive mutual fund, then let's just make it simple. And that is one of the guiding principles I've kind of lived by when it comes to investing,

• 8:24Speaker 03

  that I've learned from people like Bogle, learned from Warren Buffett, that the more complex we make investing, the more big mistakes can happen. So making it simple and keeping it simple as an investor really can pay off over the long run. I think that Bogle kind of embodies that. So you've got mutual fund, basket of companies, has a price as everything settles at the end of the day, four o'clock in the stock market, and that's the net asset value. Same thing with its cousin, the index fund, lower cost version. And then along came the next iteration, kind of the youngest cousin. Call it the last 25 years, these proliferated and really the last five to 10

• 9:05Speaker 03

  have really garnered an enormous amount of assets that have moved out of actively managed, more expensive mutual funds into passively managed ETFs or exchange traded funds. And these are just baskets as well, but here's the big difference. An ETF is able to be traded throughout the day, just like the stocks that it owns. Again, you can have a large cap, US, small cap, REIT, commodity, international, emerging markets. So we've got lots of different flavors of ETFs. The big difference is that you can trade them, buy them and sell them, these baskets, any second of the day, just like you would individual stocks. And the technology over the last 20 years has gotten to the point where that was possible.

• 9:48Speaker 03

  Imagine a fund, so now in an ETF wrapper, exchange traded mutual fund, but we shortened it for ETF. Imagine 500 different stocks that all have different prices at every given second, and then the basket itself has a price that reflects that. Takes a lot of compute. So it wasn't possible 50 years ago to really do that, but over the last 20 years. Has been. So we've gotten this next evolution of again, lower cost, more passively managed, meaning that the original ETFs were also essentially indexed ones. They said, let's track the S and P 500, the Russell 2000, the EFA, their international, international indices, et cetera.

• 10:27Speaker 03

  And now we're in a world where there's almost, it's a wide scope in the ETF world where still many are passive and just are super low cost, 0.02 of a percent in a lot of cases, and they just track an index. Or now there are actively managed ETFs, but if you think about why this has been beneficial to the investor class, us, they're not much lower cost. So now you can get actively managed funds in an ETF form, but instead of 2% a year, we're talking about a half a percent a year, or in some cases, lower even for active management. For the most part, we're going to

• 11:08Speaker 03

  use these, we're going to use mostly mutual funds and index funds within our 401ks, our retirement plans at work. I haven't seen a whole lot of ETFs make it into the retirement planning space, even though it's possible. Our 401k at my work, we have ETFs available, but most plans haven't gone to ETFs, but almost all plans, not all of them, but have low cost index fund options. So I would say index funds and mutual funds for your retirement accounts in general, and then ETFs for your brokerage accounts, where if you want to be able to trade, if you need to raise some cash or get some liquidity, you need to pay for something, easy, quick to do

• 11:49Speaker 03

  so with an ETF. You don't have to wait till the end of the day, the end of the trading day, like a mutual fund or an index fund. ETF allows you to do that at any time throughout the trading day. So not that you can't use all three cousins in either version of an account, but that's how I tend to see them used in different accounts, which we'll talk about in our next topic as well, the difference between retirement accounts and

• 12:14Speaker 02

  Brokerage accounts. Yeah, that's great. And we will go to questions before that. If you have a question you'd like to ask Wes or ask Clark, you can go to Clark.com/ask. All right. The first question for you, Wes, is from Kristen in Michigan, one of your favorite

• 12:28Speaker 03

  One of my favorite states, Kristen.

• 12:31Speaker 02

  Kristin says, can you explain the Lippor ratings to me? And more specifically, the tax efficiency rating? In my brokerage account, I'm trying to move out of mutual funds and into more tax-friendly ETFs. I know that they're better because they don't have capital gains. But why would an ETF that pays a dividend like SCHX, which yields 1.31%, get a five rating for tax efficiency? I love to do research. Do you have any favorite websites for evaluating ETFs? Thanks.

• 13:01Speaker 03

  Whoa. And you know, she brings up a good point that I forgot to talk about when I was describing ETFs and mutual funds. So here's the first one. There's a couple of different questions in there. Michelle from Michigan, it sounds like she's going from mutual funds into ETFs. And asked a question about tax efficiency and Lippor ratings. So here are Lippor ratings. Lippor is a research company that dives into almost most mutual funds that are available. And they give them scores on their rate of return, their return consistency. Their tax efficiency is one of them. They have five different categories and it's one to five. Five is the best. And it means that they're in quintiles. So a five is in the top 20%. A one would be in the bottom 20%.

• 13:46Speaker 03

  And that's how they rate all these different categories. The tax efficiency one, I would put a lot of stock in. The rate of return ones, a lot of stock in. That was almost

• 13:58Speaker 02

  You're very punny.

• 13:59Speaker 03

  Just missed that one. The rate of return ones, I don't put a huge amount of emphasis on because there are also studies that show what are five star funds? Very often turn into one star funds. Now, how is that possible? Well, they're investing. And if we're looking at short bursts of time, a year is pretty short term. You're going to have a manager that has been really lucky to some extent and in the right area and has a tailwind in the market and it's a five star fund and did really well. And then the tides turn. And sometimes those really good five star funds can turn into one and two star funds. So I don't put a lot of stock in the Lippor ratings when it comes to rate of return.

• 14:41Speaker 03

  But tax efficiency is something that is more consistently measurable. And this is the big thing that I should have mentioned in the very beginning, but thank goodness for your question, Michelle, because I'm going to mention it now. A mutual fund in brokerage accounts, this doesn't matter all that much in a retirement account because we're sheltered in retirement accounts, but in a regular after-tax account, anything that happens in that actively managed fund, even an index fund, because there's some activity in an index fund, and ETFs gets passed on to you, meaning that if they buy a stock for $10 and they have this great run and two years later they sell it at $100, great, great rate of return, but who pays those taxes?

• 15:24Speaker 03

  Well, everyone that owns the fund, that's why we call it a mutual fund, because it's mutual ownership. So if you have a million-dollar capital gain inside the fund and there's a million shareholders, that everyone's going to end up with a $1 capital gain, one times a million, all of the gains get distributed out to the shareholders. So this is, I think, one of the big frustrations with the original mutual fund is that you can sit there in a year, Michelle, and your mutual fund goes from, say, $100,000 in a fund and it goes all the way up to $150,000. It's been a great year. Well, you get a tax bill because you had gains distributed out to you. And that is what you have to watch for, and that goes back to your question about tax efficiency.

• 16:09Speaker 03

  If an ETF has a high tax efficiency, it means there's not a whole lot that gets distributed out to you. Where you would see a one-star is a fund that has a ton of taxes coming and hitting investors in any given year. And this goes back to churn. Churn is the enemy here. Churn, meaning there's lots of trading, they're taking all these, their gains and losses and gains and losses, and you end up with a big taxable gain in the fund, it gets distributed out to investors, and that would be a fund, if that happens a bunch, lots of churn, would probably get a lower rating on tax efficiency. So this particular ETF... It sounds like there's probably very little that gets distributed out in any given year, and that's why it is quote, "tax efficient, lower churn."

• 16:52Speaker 03

  Speaking of, just be careful or be mindful when you're making the switch to a fund because you want more tax efficiency and less churn. Make sure that transition doesn't create your own churn and you end up with a bunch of taxes in order to get into a new investment product like an ETF. So just be careful and mindful of that.

• 17:12Speaker 02

  Okay. Yoel wrote in with this one. For Wes, I have my investments in Schwab. I have two questions. One, can it all be in the S and P 500 index fund or do I need to diversify? And if I should diversify, what other market index funds and what is the ideal split? And two, what are currency hedged index funds and when would you use them or not use them?

• 17:33Speaker 03

  Yoel, this is my take on this is yes, I think the S and P 500 is a great base. It's a great core, but there's a couple of caveats to that. It is 100% in stocks. It's got great volatility. You have to be able to handle and manage that, number one. Number two, if you're younger, that might make sense, but as you get closer to retirement, I personally like the thought of adding some other areas to the S and P 500. Here's one main reason why. It's a cap weighted index. That means the biggest stocks have the biggest influence on the index itself. And the world we live in today, those giant companies are primarily tech. Heard of the Magnificent Seven?

• 18:14Speaker 03

  Those are seven multi-hundred billion and multi-trillion dollar companies and they absolutely are the driving force of what these indexes do. If you look under the hood, the S and P 500, it says it's 35% in tech, but a couple of the other bigger sectors are also tech names within those other sectors. The S and P 500 is very reliant on tech, 40, 45, almost half of it. You can make the case that it's tech driven. What is not represented in the S and P 500 all that much? Materials companies, 2%, real estate, 2% to 3%. Energy, energy is a massive business in the United States. It's 3% to 4% of the S and P 500.

• 18:59Speaker 03

  So when you own the S and P 500, you're not getting the representation of the full 11 different industry sectors. So I think that it's a good starting place, but I would look to potentially add some of these less represented areas, energy companies, utilities as examples, real estate or REITs, and/or look at some of the ETF options around more equally weighted indexes. For example, the S and P 500, as opposed to having so much in tech, they limit the amount of every individual company to a certain percentage. So you're more spread out and not just so concentrated in a handful of tech names.

• 19:40Speaker 03

  So I would be adding over time to some of the other areas that the S and P doesn't get to.

• 19:45Speaker 02

  All right. Ben in Iowa says, my relatives recently asked me about a new investment opportunity. It's a small to medium sized media company that my family watches and supports, which is going public on the stock market. They're offering new IPO shares to invest in and share price will start at $10 with a minimum investment of $500. What are your thoughts on participating in an IPO? What are the risks versus purchasing an already established stock? Thanks for your time and insight. Lee, enjoy and value your addition to the podcast.

• 20:18Speaker 03

  Ben, I appreciate you writing in. Couple of things, I'm not opposed to IPOs. One, initial public offerings, new stocks on the market. They're not new companies necessarily. They're new, newly public for you to buy on the equity markets. One, two, I also love participating in companies you know, believe in and already use. And that is goes back to Peter Lynch, who was a famous mutual fund manager back at Fidelity. He managed the Fidelity Magellan Fund. And he and Warren Buffett has said something similar that if you invest in what you know. There are a lot worse ways to be invested. Let's put it that way. So if you're using 10 big companies all the time and you're constantly paying the same 10 companies, it's a pretty good sign they have your wallet share. There might be something to it.

• 21:03Speaker 03

  And there's been a lot of successful investors in investing in what people already know, brands and companies we already use. That being said, a new media company, it has to go with your exposure. I think the answer really goes back to how much are you going to do in this individual company?

• 21:22Speaker 03

  I think IPO is fine. I think investing in a company you love is fine, but don't bet the farm on it because it is the equity market. And if you look back over the course of history and look at IPOs, and I've done some work around this, it's kind of a winner take all scenario where 10% of IPOs do really, really well, even if you look three years out. So one out of 10 do really well. They're up like something like 300% above the market. Decile 2 does pretty well. Decile 3, just a little better than the market. And then seven out of 10 do the same as the overall market and way worse.

• 22:03Speaker 03

  So really you've got 70% of IPOs three years out are pretty bad and they're way worse than the equity markets. Once in a while, one out of 10 is kind of a home run. And that's how I would treat this. It's speculative. You never know what's going to happen with a new company. They're not necessarily time tested with various economic cycles. So who knows what happens? It could be great, could be terrible. So just don't bet the farm, Ben. But I like how you're thinking.

• 22:29Speaker 02

  All right. We're going to take a quick break and we come back talking the difference between retirement accounts and brokerage accounts.

• 22:36Speaker 03

  Let's do it.

• 22:38Speaker 00

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• 23:38Speaker 03

  Welcome back to Ask an Advisor. I'm Wes Moss along with Krista DBS here on the Clark Howard Show. Krista, what do we got?

• 23:46Speaker 02

  Retirement accounts versus brokerage accounts.

• 23:48Speaker 03

  And then we're going back to questions.

• 23:50Speaker 02

  Yes, I've got tons of questions for you.

• 23:52Speaker 03

  Okay, again, if you've been investing, if you're in your 60s or in retirement, you probably know the answer to this, right? And you maybe even take it for granted, but one's an IRA, one's a retirement account, one's a brokerage account. But if you're younger, I think it's good to understand just the fundamentals here. So let's think about, we've got, there's really only two main places you can own assets, if you really were to boil it down. And that would be in your name in a brokerage account or in a retirement account. Yes, there's a Roth. I would put that still in the same retirement account bucket. So think of you get two main categories where you can own assets that should appreciate long-term for the future. The retirement account, if I were to give this an analogy, think of it as a, if you're

• 24:37Speaker 03

  a cook and you've been in the kitchen, or even if you haven't, it's a crock pot. The retirement account is a crock pot. The reason for that is that I think about the one we have at my house and we don't use it enough. When we do, I always say, why don't we, why don't we use the crock pot more? Because it's always so good. And the reality is you put a bunch of ingredients in it and you usually have a little glass top. It has a little bit of a hold, lets some of the steam out, right? But that's a retirement account. You put a bunch of ingredients in and you don't use it right away. It simmers over time. And eventually you get to the point where you're allowed to take the top off as long as you've cooked it long enough, slow and slow, Krista.

• 25:19Speaker 03

  That it's amazing. And if the longer typically you put a bunch of ingredients in a crock pot, the better it is. And it's a lot like a retirement account.

• 25:27Speaker 02

  And you can keep it on and you can eat little bits of it and keep it simmering because then it can still get better and better.

• 25:33Speaker 03

  You don't ever just take the crock pot and dump it out.

• 25:36Speaker 02

  No.

• 25:37Speaker 03

  That's usually what that would be is A, a disaster and B, a huge tax bill. So there's a bunch of rules around the crock pot, just like in the kitchen. You put in things slowly, you let them cook for a while, you usually scoop things out over time. That's really how a retirement account works. You use it over the course of your entire life. There are a bunch of rules around retirement accounts. We'll get to them. And then versus the crock pot, a taxable account or a brokerage account, it's like a skillet. You can put whatever you want in it, but you're exposed to it. So if you put whatever you put in and it simmers up, it pops out, it doesn't stay in the pot, right? And that to me is the difference between these two. The crock pot, retirement account,

• 26:21Speaker 03

  cook a long time, eventually you use it. Brokerage account, a lot like a skillet, whatever you put in there, you're exposed to it in any given year. And then let's start with that. Anytime you get a dividend in the skillet or the brokerage account, you owe taxes on it that year. Anytime you have a taxable gain or a loss, that gain or loss shows up that year. You're exposed to it in any given year. It's kind of an ongoing process. Whereas, think about your crock pot or the retirement account, that thing can bubble up all day long. You can get dividends and interest, capital gains, and it still all just stays in the pot. And you don't have to worry about any sort of capital gains in any given year. I think that's the, that is the big difference with the retirement account. It's sheltered,

• 27:02Speaker 03

  it's covered. And you don't have to worry about reporting until you take money out. Now here's some restrictions. No restrictions on the skillet. You can take money out of a brokerage account whenever you want. You can put as much in as you want, take as much out as you want. You're exposed in any given year. And the retirement account, There are limits. So we know that we have limits on our 401k. We can only put, we can max out at 23,500 in the year 2025. That's the most you can put in. If you're 50, it's 31,000. That's the most you can put in. Now, you can get an employer match for that, and that all stays in the crock pot, but you can't tap it or open up the lid and use it until you're 59 and a half.

• 27:45Speaker 03

  And then it becomes free and clear. You can use it as much as you want. But whatever you pull out is tax that ordinary income. So we want to typically be measured with this. We cook it for a long period of time, and then we're going to use it over a long period of time as well. That's the way I would look at this. And the answer is, well, which one to use? It's not an either or, it's a both. The way I typically see this work is that when you're younger, it's hard to save a bunch of money after tax. And it's a little easier to get started in a retirement account, particularly when you get a free employer match. So if you put in a thousand dollars and they're going to match up to that, that is literally free money just for you because you saved. And that's an incentive that we want to take part in.

• 28:30Speaker 03

  So I would get started with a retirement account, particularly putting in enough that gets you the full free match. And then save in an emergency fund, so that a brokerage account. And then you go back to really maxing out your retirement account. So whatever that number is for you, depending on your age, 23,500, getting up to that point, if you can still save beyond that, then everything beyond that goes into a brokerage account. So lots of flexibility on brokerage, immediate kind of, you're exposed to whatever happens in that in any given tax year. Retirement account, more limited, a lot more rules. You can only put so much in at one time. Can only take money out starting at 59 and a half. Now, there's the 55 rule.

• 29:14Speaker 03

  There is the 401k age of 55 rule. So it may be 55 if you've left an employer and left your plan or 401k plan. Post age 55, then you can tap that. But those are the ways that I would look at this is retirement plan first, get the match, and then If you've already been able to save as much as you're allowed to save in a retirement account, then everything else goes into a brokerage account. And the vehicles you can use are the same. You can use, we talked earlier about mutual funds, ETFs, index funds, individual companies, individual bonds. You can hold any of those assets in either account.

• 29:55Speaker 03

  So there's very few restrictions within either account, and I think that's the way I would look at this. But really, the answer is to use both. They're very different vehicles in the kitchen, but they're both super useful over time.

• 30:07Speaker 02

  All right, let's go to some questions for you. Wes, Michelle in Wisconsin sent this one in. I've been considering a Roth conversion, and I would like to know when it is not advised. I would like to start doing small conversions. However, our income puts us into the 24% bracket, and we are subject to additional Medicare tax and net investment tax. My husband and I are both 54 years old and plan to drop to part-time hours at age 59 to slowly transition into retirement. Should we wait until that time to start converting?

• 30:37Speaker 03

  You know, Michelle in Wisconsin, you're thinking about this the right way because really remember Roth conversion 101 is that whatever you're taking from a regular IRA and getting it into a Roth, you're going to owe ordinary income taxes on that. And it is about taxes today, your rate today versus what your rate will be way out into the future when you are going to use your retirement account or a Roth. So that's the simple way to look at it. The next step in thinking that through is all the other ramifications that happen when you convert a certain amount and what it does to your overall income bracket.

• 31:18Speaker 03

  And does it trigger things like the additional net investment income tax, which is 3.8%? The additional Medicare tax, which is point almost 1%? And remember, why all those things matter is that at certain income levels, you don't have to worry about those new extra taxes that kick in, but at higher income levels you do. And adding anything you convert from a traditional to an IRA adds to your income. So you're literally, it's like you're getting a raise at work is according to the IRS, and that could have ramifications. The other thing, you're already in the 24 bracket. That's a pretty high federal tax bracket.

• 32:00Speaker 03

  So if you were to do a Roth conversion, you'd want to do the math to say, if we're keeping this really simple and we're not worrying about the Medicare tax and the net investment and income tax, how do you stay in the 24 bracket? So if you look at your bracket, and I don't have the brackets in front of me, but let's say you have room, the next 50,000, you could get a $50,000 raise at work and you're still in the 24 bracket. That's probably the most I would consider doing a Roth conversion amount in any given year. Now, in five years, it sounds like you're going to be working more part-time and your income is going to go down. That may be a smarter time to do larger, more significant Roth conversions, is that

• 32:43Speaker 03

  when your income drops, now you've got more room to take money from IRA to Roth, increase your income and still stay in the bracket which you want to stay in. And I think this goes back to some extent, it's our own pain tolerance. Some people will say, ah, gosh, I'm in the 12 bracket and I want to do a Roth conversion, but I don't want to go up past the 22. So you just calculate the amount of ordinary income, the space you have to get you only to that, the top of that next bracket and you stop there. But it may make some sense that you do some of these smaller conversions in the next couple of years that don't move you into the next bracket. And then you could pick it up even more, but when you're 59 and you're working part-time.

• 33:27Speaker 03

  So that's how I would approach this. Michelle in Wisconsin.

• 33:31Speaker 02

  This came in from Rob in Oregon. I have a question about my eligibility to contribute to Roth IRA. I'm retired after a career in public safety and receive a pension. At the end of the year, I receive a 1099R. My living expenses are less than the amount of my pension and I would like to continue to contribute to the Roth IRA that I established long before I retired, but now my only income is from my pension. Does this income count as the required earned income to enable me to make a contribution? I feel like it should since it's part of my AGI, but then again, I can see why it may really work out that way.

• 34:08Speaker 03

  Rob, you find the tax code confusing? Can you believe that?

• 34:14Speaker 02

  Don't say.

• 34:14Speaker 03

  You may be the only one, Rob, that's not confused by the 3,000 pages of the tax code. And yeah, you get a pension, you worked to get the pension, now you're getting the pension. But guess what? Even though it's part of your AGI, it's still not earned income. The IRS has these very different delineation. You've got wage income, so you're working and receiving a paycheck. But rent doesn't count as earned income. Investment income or interest doesn't count. Dividends don't count. And pension doesn't count. So you can be getting five grand a month in a pension. But the IRS says that's not wage income. It's not earned income.

• 34:56Speaker 03

  So you can't now qualify to be able to put money into a retirement account or Roth. Now, what's another way to make this work? If you have any wage income, if you were part, part, part time and made $5,000, that's enough earned income to be able to make some contributions. Or if your spouse is working part time or has some earned income, that will count towards it. But if your only income is pension and interest and dividends, then that's not going to count as earned income. So you wouldn't be able to qualify to make a contribution.

• 35:28Speaker 02

  JJ in others, so we don't know what state, says, "I recently hired a fiduciary financial planner for holistic financial health checkup. He uses MoneyGuide Pro for his clients and in general, I like the software. I filled out a lengthy form and sent the financial planner copies of financial statements to populate that information in the software. MoneyGuide Pro offers to link my financial accounts using Yodlee. I've never done anything like that and feel uncomfortable giving third party access to my accounts, but it sure would be convenient to have that data updated automatically. What are your thoughts on the safety and wisdom of adding Yodlee access to my financial accounts?"

• 36:07Speaker 03

  JJ, a couple of things. Look, first of all, Money Guide Pro is a really good software tool to get a great retirement plan. There are a lot of good tools out there. E-Money's another one, Money Guide Pro. You can even build these within AI now and do retirement plans. So, 99% of the power of the plan is not in the software, it's the inputs that you're giving. That's what really matters in any good plan. It's your inputs on how much you have and how much you think you're going to save. And then you and your advisor figuring out rates of return, assumed inflation, because you're just guessing towards the future, educated guess towards the future. So, the softwares are, all the different packages are really good, but your plan is only as good as the inputs you put in. Which

• 36:52Speaker 03

  gets to your second question, which is, hey, do I, do I link this up with something like Yodlee, so it's always updated? And I would say, no. Because, first of all, we live in the most invasively scary world when it comes to our information. And we, that's why we have dual authentication, and we are very protective of our data and our financial information, and really, all of our information. And to have something be automatically populated, you've just got another tunnel that's exposed, is the way I look at it, and it's overkill. You don't need to have your financial plan updated daily for account balances, or weekly,

• 37:37Speaker 03

  or even monthly. It gives you no incremental gain in the world. Zero, it's diminishing marginal returns. It's good to update your financial plan and your balances once a year. It's really no better to do it every six months, and it's certainly not better to do it every three months or every day. So, I think you get almost, you get zero benefit from doing an active link if you're worried about security than you do upside. Now, it would be convenient. It'd be nice to just have things automatically updated. And in some situations, that's, that's probably okay. But I would not be linking to a third party just so that you can now have real-time data in your financial plan. If you're updating

• 38:21Speaker 03

  it once a year, you're better than 95% of the world anyway, and it's still ultra-useful. If it were me, if you have any question and you're worried about it, skip it.

• 38:32Speaker 02

  All right. Well, thank you so much, Wes. That does it for Ask an Advisor for this week. We'll be back next week with another episode. Tomorrow, Clark will be back with a brand new episode of The Clark Howard Show. So, thank you, everyone, for tuning in and hope you have a great rest of your day.