June 26, 2025 • 18 mins
Retirement accounts like 401(k)s and IRAs often get all the attention, but there’s another tool that can play a powerful role in your long-term strategy: the humble brokerage account.
Unlike retirement accounts with age restrictions and penalties, brokerage accounts offer flexibility. You can access funds at any time, for any purpose without early withdrawal penalties. That kind of control can be incredibly valuable, especially if your goals include retiring early, helping family, or funding big life moments along the way.
Having a mix of account types—pre-tax, Roth, and brokerage—can give you more control over your income and taxes in retirement. It also helps you avoid a common challenge: having most of your wealth tied up in accounts that are difficult (or costly) to access when you need them most.
A thoughtful strategy includes more than just maxing out retirement accounts. It’s about building flexibility, tax efficiency, and confidence into every stage of your financial life.
-
Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.
The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.
Create Your Custom Strategy ⬇️
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Now, james, there's something called a brokerage
account.
It's also called a taxableaccount.
It's also called a jointaccount and an individual
account.
There's so many different namesbecause the financial industry
just wants to keep you on yourtoes?
No, but in all reality, we callit the superhero account
because this is an account thatmany people are not aware of in
terms of how should you beinvested inside this account and
(00:23):
also just what are the benefitsof that.
So this is a superhero account.
I literally had someone call upVanguard and tell me they tried
to open a superhero account andthat they had no idea what they
were talking about because it'snot a real name.
We just call it the superheroaccount, which is, once again, a
brokerage account.
So today we're going to talkabout what are best practices
(00:43):
with this account.
Why is it we even call itsuperhero account?
Are there other names that willuse root reserves and otherwise
for what we do at root?
Yes, there are.
We're going to hop in.
First thing I want to do isread the comment, and this was
in our community, and Abe T saysso.
I've heard a lot about how coolthis account is, et cetera, et
(01:04):
cetera.
Sure, I understand what it isand why it's says so.
I've heard a lot about how coolthis account is, etc.
Etc.
Sure, I understand what it isand why it's good, blah, blah,
blah but I want to understand ifthere are actual cons of this
superhero account.
So why on earth, james, do weeven call it a superhero account
?
Speaker 2 (01:18):
Well, typically investing, kind of equals
retirement.
In most people's mind, I'mgoing to invest money because
one day I'm going to stopworking, and that's true.
But that's a very binary thing.
This money is either to bespent today or this money is to
be spent in retirement.
And retirement accounts arethings like 401ks, IRAs, Roth
IRAs, et cetera.
Wonderful accounts, lots ofgreat benefits to them, but a
(01:40):
brokerage account.
So if someone's wondering, justif it's not clear by now, if you
go to the IRS website and lookup, superhuman nothing's going
to pop up.
So let's be very clear this isnot the legal, technical IRS
given name.
It's just a name that impliesthe sense of if you have this
account, it gives you way moreflexibility.
It provides you way moreoptionality.
You can invest your money.
(02:01):
You could spend it on a carbefore retirement age a vacation
.
You could spend it on a carbefore retirement age a vacation
.
You could use it to retireearly.
There's just so much moreflexibility that comes with this
account that I think a lot ofpeople don't realize.
Retirement accounts arewonderful, but they do come with
some handcuffs in terms oftiming, of when you can use the
money, or potential penalties orthe long-term taxation of how
some of these accounts work.
(02:21):
The superhuman account, thebrokerage account, is just a
wonderful type of an account tohave.
That gives you tremendousoptionality in terms of when you
retire your withdrawal strategy, your tax strategy just a lot
of cool things you can do withthat to optimize your overall
financial picture.
Speaker 1 (02:38):
We'll go through the basics of it, so everyone's
aware.
But I think the number onething I hear when speaking to
all of you and reading thecomments is what do you mean?
I shouldn't max out my 401k ormax out my Roth?
I've always been a maxing outguy.
I want to max it out.
There's a reason they put a max.
I want to do as good as Ipossibly can.
Now you're saying maybe Ishouldn't possibly max this out
(02:59):
and this other superhero thingdoesn't even have a max.
Why is it so many people, james,come to us that are qualified
rich cash poor?
So many of you know house richcash poor.
But qualified rich cash poor iswhen so much of your money is
locked up that now you'rehypothetically 53, you want to
retire all your money's in a401k.
(03:21):
You might have four or fivemillion bucks, but you can't
retire because of the taxes andpenalties, which is crush you.
So this qualified rich cashpoor this is a lot of you, and
that is because you're maxingout year after year.
Why do people make this mistake?
Speaker 2 (03:37):
Yeah, and and I wouldn't go so far it can be a
mistake for sure, depending uponyour goals.
So we'll back up and look bigpicture.
But why?
It is because what I justmentioned is there's this sense
of oh, you're supposed to maxout your 401k, because you have
it and it's attached to payrolland you get a match and the IRS
tells you you can put a certainamount in.
So it's kind of fun.
You feel like you're gamifyingthe system a bit to say I'm
(03:59):
maxing this out every singleyear, whatever the number is.
There's almost that sense oflike the same feeling you get
when you check a box when youmax a 401k, like you've done
everything you can.
You've accomplished that task.
The problem comes down to savingmoney in a 401k isn't saving
you taxes, it's deferring taxes.
Now there's a difference there.
(04:21):
Deferring taxes doesn't meanyou don't pay them, it just
means you pay them at a laterdate.
So, hypothetically, if I'm in a22% tax bracket today and I put
money in my 401k and then Ipull it out and I'm still at 22%
tax bracket, it hasn't saved meanything.
Now I have deferred taxes theinterest, the growth along the
way.
There's not been any tax.
I haven't had the tax drag onwhat my returns have been, but
(04:43):
it's just kicking that can downthe road.
So where is that strategy best?
That strategy is best whenyou're saving your 401k in
really high income years andyou're pulling out in much lower
income years.
So can I save?
Can I put money in when I'm ina 32% tax bracket and save 32
cents on the dollar and pull itout, hypothetically, when I'm in
a 12% tax bracket?
That is a savings of 20%, thedelta between what I saved
(05:08):
putting it in versus what I paidpulling it out.
The example you're giving Ari,which is a very good one that
person who's got several milliondollars saved in their IRA and
they're 53 years old and theywanna retire.
Well, if they have that amountin their IRA, they're probably a
really high income earner theirwhole life.
So they're saving at a highrate.
But also, I'm guessing they'regoing to maintain some of that
lifestyle in retirement.
And if all their money is intheir IRA, well, guess what it's
(05:31):
coming out and you're probablygoing to pay at a pretty high
rate as well.
Not to mention, you might evenhave this early distribution
penalty because you can't pullthat money out at the age of 53,
with few exceptions, withoutpaying both taxes and a penalty.
So do you have this superhumanaccount the name that we'll use
to describe brokerage accountsto say now you have some
(05:52):
flexibility, some optionality.
You're not handcuffed to yourjob based upon the type of an
account you save to.
You have way more flexibilitybecause you'll use the right
types of accounts along the wayto buy yourself freedom to use
it whenever you want to use it.
Speaker 1 (06:08):
Love it.
I had a client who was verytransparent, said I know you
call it superhero and you wearthe silly cape and do all those
things, but can you just breakit down real simple.
Why would I actually considerthis?
Because I like the idea, whileI'm in a high tax bracket, to
defer money to a 401k.
I said, yeah, I'll give you anexample.
It's not perfect, but I toldthem why would you ever rent?
(06:28):
They said, well, I valueflexibility.
I said what if it was cheaperto buy, meaning renting would
cost you more.
You could go buy something.
They said, well, I just don'tknow where I'm going to live
next year.
I want to follow my childrenaround.
That's my main goal inretirement.
I'll say so.
There is a time where you mightbe able to buy something.
You actually want more andwould choose to rent.
And they say, yes, not aperfect analogy, but the idea
(06:52):
here with the superhero accountis you're intentionally saying I
don't want a tax deductiontoday In exchange for choosing
how I go invest this so you caninvest it safely.
You can invest it veryaggressively.
You could choose what you wantto do, just like a 401k.
The difference is there's noactual rule that says you have
(07:12):
to wait until a certain age topull the money out.
There are still taxes, there'scapital gains, there's things
you need to be aware of, but youare really prioritizing
flexibility.
A lot of people use this insteadof a 529 or in addition to a
529.
Or they'll actually say youknow what?
This brokerage account, thissuperhero account, this is going
(07:32):
to be where I go save money forthat future travel and the idea
of having to pull more moneyand pay more taxes in retirement
most of you listening you'vealready done a good job saving
and investing.
You might have a million or twomillion bucks in a pre-tax
account.
If you keep adding money tothat, you're just adding to a
larger tax burden.
So the idea of maybe pausingfor the first time in your life
(07:55):
and not maxing out your 401k,maybe just getting the full
match because James and I lovefree money, and putting the rest
into a superhero account orsomething else, it might make a
lot of sense.
You may just have neverconsidered it before.
Speaker 2 (08:08):
Yeah, and obviously this is where having a financial
plan, a financial advisor, canadd a lot of value.
Just to help and understand,sometimes what is best is that
401k.
That's just the reality, only401k.
A lot of times there's a caseto say that's not what the best
thing to do is and why I like itactually is for the reasons
you're talking about, ari.
There's so many financialbenefits, but there's also the
(08:29):
psychological benefit.
We talk a lot about thechallenges of people go 35 years
, 40 years, 45 years, puttingmoney into their portfolio and
then all of a sudden, now it'stime to start pulling money out
of your portfolio.
You're retired, it's time tostart spending and that's a very
difficult transition for a lotof people.
They're used to seeing thedollar value grow in their
(08:50):
account, both from market growth, hopefully, and contributions.
Psychologically, flipping thatswitch and pulling money out is
very difficult to do and it ismade more difficult when you
know that every single dollaryou pull out is going to be
taxed at ordinary income rates.
Ordinary income rates are thehigher rates that you pay on
money that comes out of an IRAor your salary.
(09:12):
Those are taxed the sameordinary income rates, whereas
brokerage accounts they havemuch more tax preferred
treatment.
If you hold your investments forover a year, you get taxed at
capital gain rates, long-termcapital gains rates, which can
be either 0% or 15% or 20% atthe federal level.
That's a lot easier to justifythan rates that go from 10% to
(09:38):
37%, plus potential state taxes,if you're pulling out of an IRA
.
So not only is it thedifficulty of spending, but it's
a difficulty of just that senseof every dollar I pull out is
going to be one extra dollar oftaxable income.
And how often are we to seepeople not do things that they
very well could afford to do,that we encourage them to do,
(10:00):
but they can't get over thespending hurdle.
And then they can't get overthe tax hurdle of what it's
going to mean and it ends upmeaning they do less than they
otherwise could have, because ofeven the psychological side of
spending in retirement.
Speaker 1 (10:13):
The answer is too often, and we will see people
who are on track for retirementthat we will tell not to retire
and people you probably justheard that going well, that
doesn't make any sense at all.
Here's what we mean.
If all of your money is in a401k and you retire and you go,
it's time I've been saving forthis day.
We're buying the RV.
It's going to be $150,000.
(10:33):
We've got kids in college,we're also taking trips, we have
healthcare and we're doing ahome remodel.
The tax liability on that isgoing to be significant.
That's ordinary income taxes,as James just explained.
If you have a superhero account, you might go.
You know what?
What if we actually we don'tneed that RV.
This year We've got healthcare,but next year we're going to be
(10:55):
65.
Medicare is coming on.
We're actually going to thendecide we're going to take a
bigger trip or we're going tostart to space out some expenses
.
You can actually massage yourincome with something like a
superhero account as opposed toa 401k.
So, no matter the balance, itwill often cause people to not
do things that they're in aperfectly fine financial
(11:15):
position to do because it justfeels not so fun.
Yeah, yes.
Speaker 2 (11:22):
So tremendous financial benefits, tremendous
psychological benefits.
The reality is a well-designedfinancial plan.
You probably have some mix ofpre-tax money, some Roth money
and some brokerage money, or inother words, superhuman money.
That's the best of everythingwhen you have the optionality to
say here's my accounts.
I have some in Roth, some inIRA, some in brokerage, some in
(11:43):
an HSA, someone in brokerage,someone in HSA.
The power there is you get tocreate your own, not tax bracket
, but your own taxable income.
You can pull income to say howdo I pull the right amounts from
the right places?
How do I design the rightamount to have in dividends and
interest and capital gains andIRA withdrawals and Roth
(12:04):
withdrawals and HSA withdrawalsto coordinate with social
security, with pension, withother things?
It can get pretty complex, butthe power with that is the
ability to manufacture thetaxable income that is right for
you, which often means how dowe minimize what that tax
liability is going to be overthe course of your retirement,
which helps actual save, realdollars.
But it also helps with thatpsychological sense of freeing
(12:25):
you up to go spend your money,because the only reason we save
is for future consumption andwhat we don't like seeing is
when we save, save, save, butthat consumption never happens
because psychologically we can'tbring ourselves to do it.
This is a wonderful way to sayconsume now and in the future.
And it doesn't just have to benow and then, once you're over
59 and a half, it's at any pointalong the way.
(12:45):
That brokerage account, thatsuperhuman account, can be used
for a rainy day, can be used forkids college, can be used to
buy a new car, can be used tofund a vacation, can be used to
fund retirement, can be used forany number of things, and it's
just a really powerful tool whenused right.
Speaker 1 (13:00):
Beautiful, the big con that I just want to talk
about.
To address Abe's question.
Here he goes what are theactual cons of this account?
Well, the first con is, to yourpoint, james, if people
over-optimize and they go, youknow what?
I'm just not going to do the401k yeah, I.
You know what I'm just notgoing to do the 401k yeah, I
know I'm in a high tax bracket.
I'm just going to do thebrokerage account.
Well, the con is you actuallywould have saved a ton in taxes
(13:21):
and it really didn't actuallyhelp your plan.
Now, maybe it provided peace ofmind, which you would argue is
worth it.
If you wanted to possiblyswitch careers, you might find
there's more value in addingmore rainy day funds, but on
paper it might be financiallynot optimal.
That's not the biggest mistake.
The biggest mistake that Ipersonally see is people who do
really well with a singleposition, a concentrated stock,
(13:44):
and I'll use my dad all the time.
My dad crushed it.
He bought Monster Energy, whichis literally one of the best
performing stocks of the lastfew decades.
If my dad, if I, were to tellhim, dad, I need you to go sell
monster stock, he'd shoothimself in the foot and he'd
probably cry because he'd justwonder what if it goes up.
And I said, dad, I don't blameyou, but do you want one company
(14:05):
to dictate how many surf tripsyou take in retirement?
He said no way.
So the point here is it doesn'tmean he needs to go diversify
entirely.
I'll hear people listen to ourcontent, james, and go.
I heard you guys say it'simportant to diversify, but I
bought all Apple.
Should I just go do that?
Generally, it can make sense todo so over time, but what
happens is people get attachedto a single position.
(14:26):
That could be literally amonster energy type investment
or a Tesla or Nvidia.
Sometimes it's an ETF whereyou've held VTI for a very long
time and you don't want to sellit because of tax implications.
So the con that I see is peopleare not going and actually
using these proceeds to dosomething because of the tax
(14:47):
liability which, once again toyour point, james, doesn't make
sense.
The point you saved or investedwell is to use it, but it
doesn't always mean it's easy.
Yeah.
Speaker 2 (14:56):
A few other cons.
The same way, there's apsychological benefit to having
this account.
The psychological downside is,with a 401k just automated, you
tell your 401k provider I wantto say 5%, 10%, 15%, whatever it
is.
It just happens and that moneyis out of sight, out of mind,
the brokerage account, that'smoney that's hitting your
checking account or it's hittingsome account that you have.
You typically now you canautomate this, hopefully, but
(15:19):
you could spend that.
Sometimes people say, oh, the401k that's out of sight, out of
mind, I would never think tospend it.
But everything else that comesin we spend that on our
lifestyle.
So it can be a bit moredifficult in terms of just you
don't have the true automationalmost like barrier between you
and your money like you do witha 401k.
That's one.
The other is taxes.
(15:39):
If you don't manage it well, ifyou're constantly kind of
buying and selling stocks andyou're triggering short-term
capital gains, it's going to behorribly tax inefficient and
you're going to be paying thehighest tax rates for doing that
.
That's not going to be good.
So I think there's somepsychological downsides plus
(16:00):
real downsides if you don'tmanage it well.
But if you can automate it, ifyou can control how much you're
saving or something like that.
This is where asset locationcomes in.
We talked about the importanceof having the right types of
stocks and bonds and cash andreal estate etc.
To hold in your portfolio.
You don't necessarily wantevery single holding that you
know you should own in everysingle account.
Your brokerage account, forexample, maybe holds more
(16:22):
tax-efficient assets.
The assets are going to betaxed at long-term capital gains
rates, whereas thetax-inefficient investments
maybe you're going to prioritizehaving those held more in your
IRAs or your Roth IRAs.
So there's more that goes alongwith it.
But overall, if managedcorrectly, it can really
compliment a really good planand give you what we talked
(16:44):
about that flexibility, thatoptionality in your non-working
years, or even in your workingyears, if you choose to use it.
Then yeah.
Speaker 1 (16:52):
So if you go call up Vanguard or Fidelity or Schwab
and say, hey, I heard these guyson this podcast.
They talked about the superhero, go set it up for me.
They'll be very confusedbecause it's, once again, not a
real account.
But this is something that is atool Doesn't mean you need to
use it.
It's just another tool and it'ssomething we strongly consider
you to look at and go.
Would it help my individualsituation I know many of you
(17:15):
have shared.
Hey, it's something I justdidn't even consider and now I'm
going to start looking into it.
Others of you have said I'vehad it a long time.
This whole episode justvalidated how brilliant I was to
get it Awesome.
We want to give you as helpfulas information as possible.
Once again, nothing should betaken as financial advice today.
This is what we help clientswith.
So if you want to get anindividual plan to understand
(17:36):
how you can optimize and reallywithdraw income in the most
efficient manner to minimize notjust a single year of tax
liability but over the course ofyour lifetime, that is really
where we love to help clients sothat you can go.
Yep, I have multiple accounts.
I know I'm doing as best as Ican, so I can take that extra
trip, or I can help that kidwith a down payment, or I can
(17:56):
retire a few years earlier.
So, once again, you can reachout to us at our website,
rootfinancialcom.
In the upper right you'll see abutton that says see if you're
a fit.
You can click on that and welook forward to hearing from you
.
Thanks James, thanks everyone.
Speaker 2 (18:10):
See you soon, see ya you.
Now, james, there's something called a brokerage
account.
It's also called a taxableaccount.
It's also called a jointaccount and an individual
account.
There's so many different namesbecause the financial industry
just wants to keep you on yourtoes?
No, but in all reality, we callit the superhero account
because this is an account thatmany people are not aware of in
terms of how should you beinvested inside this account and
(00:23):
also just what are the benefitsof that.
So this is a superhero account.
I literally had someone call upVanguard and tell me they tried
to open a superhero account andthat they had no idea what they
were talking about because it'snot a real name.
We just call it the superheroaccount, which is, once again, a
brokerage account.
So today we're going to talkabout what are best practices
(00:43):
with this account.
Why is it we even call itsuperhero account?
Are there other names that willuse root reserves and otherwise
for what we do at root?
Yes, there are.
We're going to hop in.
First thing I want to do isread the comment, and this was
in our community, and Abe T saysso.
I've heard a lot about how coolthis account is, et cetera, et
(01:04):
cetera.
Sure, I understand what it isand why it's says so.
I've heard a lot about how coolthis account is, etc.
Etc.
Sure, I understand what it isand why it's good, blah, blah,
blah but I want to understand ifthere are actual cons of this
superhero account.
So why on earth, james, do weeven call it a superhero account
?
Speaker 2 (01:18):
Well, typically investing, kind of equals
retirement.
In most people's mind, I'mgoing to invest money because
one day I'm going to stopworking, and that's true.
But that's a very binary thing.
This money is either to bespent today or this money is to
be spent in retirement.
And retirement accounts arethings like 401ks, IRAs, Roth
IRAs, et cetera.
Wonderful accounts, lots ofgreat benefits to them, but a
(01:40):
brokerage account.
So if someone's wondering, justif it's not clear by now, if you
go to the IRS website and lookup, superhuman nothing's going
to pop up.
So let's be very clear this isnot the legal, technical IRS
given name.
It's just a name that impliesthe sense of if you have this
account, it gives you way moreflexibility.
It provides you way moreoptionality.
You can invest your money.
(02:01):
You could spend it on a carbefore retirement age a vacation
.
You could spend it on a carbefore retirement age a vacation
.
You could use it to retireearly.
There's just so much moreflexibility that comes with this
account that I think a lot ofpeople don't realize.
Retirement accounts arewonderful, but they do come with
some handcuffs in terms oftiming, of when you can use the
money, or potential penalties orthe long-term taxation of how
some of these accounts work.
(02:21):
The superhuman account, thebrokerage account, is just a
wonderful type of an account tohave.
That gives you tremendousoptionality in terms of when you
retire your withdrawal strategy, your tax strategy just a lot
of cool things you can do withthat to optimize your overall
financial picture.
Speaker 1 (02:38):
We'll go through the basics of it, so everyone's
aware.
But I think the number onething I hear when speaking to
all of you and reading thecomments is what do you mean?
I shouldn't max out my 401k ormax out my Roth?
I've always been a maxing outguy.
I want to max it out.
There's a reason they put a max.
I want to do as good as Ipossibly can.
Now you're saying maybe Ishouldn't possibly max this out
(02:59):
and this other superhero thingdoesn't even have a max.
Why is it so many people, james,come to us that are qualified
rich cash poor?
So many of you know house richcash poor.
But qualified rich cash poor iswhen so much of your money is
locked up that now you'rehypothetically 53, you want to
retire all your money's in a401k.
(03:21):
You might have four or fivemillion bucks, but you can't
retire because of the taxes andpenalties, which is crush you.
So this qualified rich cashpoor this is a lot of you, and
that is because you're maxingout year after year.
Why do people make this mistake?
Speaker 2 (03:37):
Yeah, and and I wouldn't go so far it can be a
mistake for sure, depending uponyour goals.
So we'll back up and look bigpicture.
But why?
It is because what I justmentioned is there's this sense
of oh, you're supposed to maxout your 401k, because you have
it and it's attached to payrolland you get a match and the IRS
tells you you can put a certainamount in.
So it's kind of fun.
You feel like you're gamifyingthe system a bit to say I'm
(03:59):
maxing this out every singleyear, whatever the number is.
There's almost that sense oflike the same feeling you get
when you check a box when youmax a 401k, like you've done
everything you can.
You've accomplished that task.
The problem comes down to savingmoney in a 401k isn't saving
you taxes, it's deferring taxes.
Now there's a difference there.
(04:21):
Deferring taxes doesn't meanyou don't pay them, it just
means you pay them at a laterdate.
So, hypothetically, if I'm in a22% tax bracket today and I put
money in my 401k and then Ipull it out and I'm still at 22%
tax bracket, it hasn't saved meanything.
Now I have deferred taxes theinterest, the growth along the
way.
There's not been any tax.
I haven't had the tax drag onwhat my returns have been, but
(04:43):
it's just kicking that can downthe road.
So where is that strategy best?
That strategy is best whenyou're saving your 401k in
really high income years andyou're pulling out in much lower
income years.
So can I save?
Can I put money in when I'm ina 32% tax bracket and save 32
cents on the dollar and pull itout, hypothetically, when I'm in
a 12% tax bracket?
That is a savings of 20%, thedelta between what I saved
(05:08):
putting it in versus what I paidpulling it out.
The example you're giving Ari,which is a very good one that
person who's got several milliondollars saved in their IRA and
they're 53 years old and theywanna retire.
Well, if they have that amountin their IRA, they're probably a
really high income earner theirwhole life.
So they're saving at a highrate.
But also, I'm guessing they'regoing to maintain some of that
lifestyle in retirement.
And if all their money is intheir IRA, well, guess what it's
(05:31):
coming out and you're probablygoing to pay at a pretty high
rate as well.
Not to mention, you might evenhave this early distribution
penalty because you can't pullthat money out at the age of 53,
with few exceptions, withoutpaying both taxes and a penalty.
So do you have this superhumanaccount the name that we'll use
to describe brokerage accountsto say now you have some
(05:52):
flexibility, some optionality.
You're not handcuffed to yourjob based upon the type of an
account you save to.
You have way more flexibilitybecause you'll use the right
types of accounts along the wayto buy yourself freedom to use
it whenever you want to use it.
Speaker 1 (06:08):
Love it.
I had a client who was verytransparent, said I know you
call it superhero and you wearthe silly cape and do all those
things, but can you just breakit down real simple.
Why would I actually considerthis?
Because I like the idea, whileI'm in a high tax bracket, to
defer money to a 401k.
I said, yeah, I'll give you anexample.
It's not perfect, but I toldthem why would you ever rent?
(06:28):
They said, well, I valueflexibility.
I said what if it was cheaperto buy, meaning renting would
cost you more.
You could go buy something.
They said, well, I just don'tknow where I'm going to live
next year.
I want to follow my childrenaround.
That's my main goal inretirement.
I'll say so.
There is a time where you mightbe able to buy something.
You actually want more andwould choose to rent.
And they say, yes, not aperfect analogy, but the idea
(06:52):
here with the superhero accountis you're intentionally saying I
don't want a tax deductiontoday In exchange for choosing
how I go invest this so you caninvest it safely.
You can invest it veryaggressively.
You could choose what you wantto do, just like a 401k.
The difference is there's noactual rule that says you have
(07:12):
to wait until a certain age topull the money out.
There are still taxes, there'scapital gains, there's things
you need to be aware of, but youare really prioritizing
flexibility.
A lot of people use this insteadof a 529 or in addition to a
529.
Or they'll actually say youknow what?
This brokerage account, thissuperhero account, this is going
(07:32):
to be where I go save money forthat future travel and the idea
of having to pull more moneyand pay more taxes in retirement
most of you listening you'vealready done a good job saving
and investing.
You might have a million or twomillion bucks in a pre-tax
account.
If you keep adding money tothat, you're just adding to a
larger tax burden.
So the idea of maybe pausingfor the first time in your life
(07:55):
and not maxing out your 401k,maybe just getting the full
match because James and I lovefree money, and putting the rest
into a superhero account orsomething else, it might make a
lot of sense.
You may just have neverconsidered it before.
Speaker 2 (08:08):
Yeah, and obviously this is where having a financial
plan, a financial advisor, canadd a lot of value.
Just to help and understand,sometimes what is best is that
401k.
That's just the reality, only401k.
A lot of times there's a caseto say that's not what the best
thing to do is and why I like itactually is for the reasons
you're talking about, ari.
There's so many financialbenefits, but there's also the
(08:29):
psychological benefit.
We talk a lot about thechallenges of people go 35 years
, 40 years, 45 years, puttingmoney into their portfolio and
then all of a sudden, now it'stime to start pulling money out
of your portfolio.
You're retired, it's time tostart spending and that's a very
difficult transition for a lotof people.
They're used to seeing thedollar value grow in their
(08:50):
account, both from market growth, hopefully, and contributions.
Psychologically, flipping thatswitch and pulling money out is
very difficult to do and it ismade more difficult when you
know that every single dollaryou pull out is going to be
taxed at ordinary income rates.
Ordinary income rates are thehigher rates that you pay on
money that comes out of an IRAor your salary.
(09:12):
Those are taxed the sameordinary income rates, whereas
brokerage accounts they havemuch more tax preferred
treatment.
If you hold your investments forover a year, you get taxed at
capital gain rates, long-termcapital gains rates, which can
be either 0% or 15% or 20% atthe federal level.
That's a lot easier to justifythan rates that go from 10% to
(09:38):
37%, plus potential state taxes,if you're pulling out of an IRA
.
So not only is it thedifficulty of spending, but it's
a difficulty of just that senseof every dollar I pull out is
going to be one extra dollar oftaxable income.
And how often are we to seepeople not do things that they
very well could afford to do,that we encourage them to do,
(10:00):
but they can't get over thespending hurdle.
And then they can't get overthe tax hurdle of what it's
going to mean and it ends upmeaning they do less than they
otherwise could have, because ofeven the psychological side of
spending in retirement.
Speaker 1 (10:13):
The answer is too often, and we will see people
who are on track for retirementthat we will tell not to retire
and people you probably justheard that going well, that
doesn't make any sense at all.
Here's what we mean.
If all of your money is in a401k and you retire and you go,
it's time I've been saving forthis day.
We're buying the RV.
It's going to be $150,000.
(10:33):
We've got kids in college,we're also taking trips, we have
healthcare and we're doing ahome remodel.
The tax liability on that isgoing to be significant.
That's ordinary income taxes,as James just explained.
If you have a superhero account, you might go.
You know what?
What if we actually we don'tneed that RV.
This year We've got healthcare,but next year we're going to be
(10:55):
65.
Medicare is coming on.
We're actually going to thendecide we're going to take a
bigger trip or we're going tostart to space out some expenses
.
You can actually massage yourincome with something like a
superhero account as opposed toa 401k.
So, no matter the balance, itwill often cause people to not
do things that they're in aperfectly fine financial
(11:15):
position to do because it justfeels not so fun.
Yeah, yes.
Speaker 2 (11:22):
So tremendous financial benefits, tremendous
psychological benefits.
The reality is a well-designedfinancial plan.
You probably have some mix ofpre-tax money, some Roth money
and some brokerage money, or inother words, superhuman money.
That's the best of everythingwhen you have the optionality to
say here's my accounts.
I have some in Roth, some inIRA, some in brokerage, some in
(11:43):
an HSA, someone in brokerage,someone in HSA.
The power there is you get tocreate your own, not tax bracket
, but your own taxable income.
You can pull income to say howdo I pull the right amounts from
the right places?
How do I design the rightamount to have in dividends and
interest and capital gains andIRA withdrawals and Roth
(12:04):
withdrawals and HSA withdrawalsto coordinate with social
security, with pension, withother things?
It can get pretty complex, butthe power with that is the
ability to manufacture thetaxable income that is right for
you, which often means how dowe minimize what that tax
liability is going to be overthe course of your retirement,
which helps actual save, realdollars.
But it also helps with thatpsychological sense of freeing
(12:25):
you up to go spend your money,because the only reason we save
is for future consumption andwhat we don't like seeing is
when we save, save, save, butthat consumption never happens
because psychologically we can'tbring ourselves to do it.
This is a wonderful way to sayconsume now and in the future.
And it doesn't just have to benow and then, once you're over
59 and a half, it's at any pointalong the way.
(12:45):
That brokerage account, thatsuperhuman account, can be used
for a rainy day, can be used forkids college, can be used to
buy a new car, can be used tofund a vacation, can be used to
fund retirement, can be used forany number of things, and it's
just a really powerful tool whenused right.
Speaker 1 (13:00):
Beautiful, the big con that I just want to talk
about.
To address Abe's question.
Here he goes what are theactual cons of this account?
Well, the first con is, to yourpoint, james, if people
over-optimize and they go, youknow what?
I'm just not going to do the401k yeah, I.
You know what I'm just notgoing to do the 401k yeah, I
know I'm in a high tax bracket.
I'm just going to do thebrokerage account.
Well, the con is you actuallywould have saved a ton in taxes
(13:21):
and it really didn't actuallyhelp your plan.
Now, maybe it provided peace ofmind, which you would argue is
worth it.
If you wanted to possiblyswitch careers, you might find
there's more value in addingmore rainy day funds, but on
paper it might be financiallynot optimal.
That's not the biggest mistake.
The biggest mistake that Ipersonally see is people who do
really well with a singleposition, a concentrated stock,
(13:44):
and I'll use my dad all the time.
My dad crushed it.
He bought Monster Energy, whichis literally one of the best
performing stocks of the lastfew decades.
If my dad, if I, were to tellhim, dad, I need you to go sell
monster stock, he'd shoothimself in the foot and he'd
probably cry because he'd justwonder what if it goes up.
And I said, dad, I don't blameyou, but do you want one company
(14:05):
to dictate how many surf tripsyou take in retirement?
He said no way.
So the point here is it doesn'tmean he needs to go diversify
entirely.
I'll hear people listen to ourcontent, james, and go.
I heard you guys say it'simportant to diversify, but I
bought all Apple.
Should I just go do that?
Generally, it can make sense todo so over time, but what
happens is people get attachedto a single position.
(14:26):
That could be literally amonster energy type investment
or a Tesla or Nvidia.
Sometimes it's an ETF whereyou've held VTI for a very long
time and you don't want to sellit because of tax implications.
So the con that I see is peopleare not going and actually
using these proceeds to dosomething because of the tax
(14:47):
liability which, once again toyour point, james, doesn't make
sense.
The point you saved or investedwell is to use it, but it
doesn't always mean it's easy.
Yeah.
Speaker 2 (14:56):
A few other cons.
The same way, there's apsychological benefit to having
this account.
The psychological downside is,with a 401k just automated, you
tell your 401k provider I wantto say 5%, 10%, 15%, whatever it
is.
It just happens and that moneyis out of sight, out of mind,
the brokerage account, that'smoney that's hitting your
checking account or it's hittingsome account that you have.
You typically now you canautomate this, hopefully, but
(15:19):
you could spend that.
Sometimes people say, oh, the401k that's out of sight, out of
mind, I would never think tospend it.
But everything else that comesin we spend that on our
lifestyle.
So it can be a bit moredifficult in terms of just you
don't have the true automationalmost like barrier between you
and your money like you do witha 401k.
That's one.
The other is taxes.
(15:39):
If you don't manage it well, ifyou're constantly kind of
buying and selling stocks andyou're triggering short-term
capital gains, it's going to behorribly tax inefficient and
you're going to be paying thehighest tax rates for doing that
.
That's not going to be good.
So I think there's somepsychological downsides plus
(16:00):
real downsides if you don'tmanage it well.
But if you can automate it, ifyou can control how much you're
saving or something like that.
This is where asset locationcomes in.
We talked about the importanceof having the right types of
stocks and bonds and cash andreal estate etc.
To hold in your portfolio.
You don't necessarily wantevery single holding that you
know you should own in everysingle account.
Your brokerage account, forexample, maybe holds more
(16:22):
tax-efficient assets.
The assets are going to betaxed at long-term capital gains
rates, whereas thetax-inefficient investments
maybe you're going to prioritizehaving those held more in your
IRAs or your Roth IRAs.
So there's more that goes alongwith it.
But overall, if managedcorrectly, it can really
compliment a really good planand give you what we talked
(16:44):
about that flexibility, thatoptionality in your non-working
years, or even in your workingyears, if you choose to use it.
Then yeah.
Speaker 1 (16:52):
So if you go call up Vanguard or Fidelity or Schwab
and say, hey, I heard these guyson this podcast.
They talked about the superhero, go set it up for me.
They'll be very confusedbecause it's, once again, not a
real account.
But this is something that is atool Doesn't mean you need to
use it.
It's just another tool and it'ssomething we strongly consider
you to look at and go.
Would it help my individualsituation I know many of you
(17:15):
have shared.
Hey, it's something I justdidn't even consider and now I'm
going to start looking into it.
Others of you have said I'vehad it a long time.
This whole episode justvalidated how brilliant I was to
get it Awesome.
We want to give you as helpfulas information as possible.
Once again, nothing should betaken as financial advice today.
This is what we help clientswith.
So if you want to get anindividual plan to understand
(17:36):
how you can optimize and reallywithdraw income in the most
efficient manner to minimize notjust a single year of tax
liability but over the course ofyour lifetime, that is really
where we love to help clients sothat you can go.
Yep, I have multiple accounts.
I know I'm doing as best as Ican, so I can take that extra
trip, or I can help that kidwith a down payment, or I can
(17:56):
retire a few years earlier.
So, once again, you can reachout to us at our website,
rootfinancialcom.
In the upper right you'll see abutton that says see if you're
a fit.
You can click on that and welook forward to hearing from you
.
Thanks James, thanks everyone.
Speaker 2 (18:10):
See you soon, see ya you.
Popular Podcasts
Fudd Around And Find Out
UConn basketball star Azzi Fudd brings her championship swag to iHeart Women’s Sports with Fudd Around and Find Out, a weekly podcast that takes fans along for the ride as Azzi spends her final year of college trying to reclaim the National Championship and prepare to be a first round WNBA draft pick. Ever wonder what it’s like to be a world-class athlete in the public spotlight while still managing schoolwork, friendships and family time? It’s time to Fudd Around and Find Out!
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy, Jess Hilarious, And Charlamagne Tha God!