Katie walks through what spurred her “financial awakening” and how sharing the same thought process could activate your own. She also touches on financial myths that the middle class commonly falls into, the great Roth vs. 401(k) debate, and why lifestyle creep isn’t such a bad thing. She’s proof that you can turn your entire financial situation around in only a few short years, and if she could do it, why can’t you?
Mindy:
Welcome to the BiggerPockets Money podcast where we interview Katie Gatti Tassin from the Money with Katie podcast and talk about financial awakening, questioning conventional money wisdom, and also, have a good old-fashioned pre-tax versus Roth debate.
Katie:
In either case, having all tax-deferred or all tax-free, both are pigeonholing you, in one case it’s pigeonholing you into now having to figure that out now; whereas, if you went all Roth but wouldn’t have needed to, then you’re being pigeonholed into, you’ve overpaid probably on your tax at the time if you were contributing to a Roth while you were paying a 37% marginal tax rate. That’s cutting out a third of that contribution. I would say having all of either is probably not going to give you the most flexible outcome.
Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my money-loving co-host, Scott Trench.
Scott:
Great to be here with my 401 okay co-host, Mindy Jensen.
Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.
Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big- time investments and assets like real estate, start your own business or just have a financial awakening, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.
Mindy:
Scott, today is a super fun episode. We talk to Katie from Money with Katie the podcast, Money with Katie the blog, Money with Katie the Everything. This is a super, super, super fun episode. I really enjoy talking to her. I enjoy our lively debate at the end, Roth versus traditional 401(k)s. I enjoy her story of her financial awakening where she discovered that you don’t actually have to spend every dime that comes into your pocket. Who would have thought?
Scott:
Yeah, I think Katie is just, she’s brilliant. She has immersed herself in this world of personal finance, built a philosophy of money that I think is really strong, and she’s done it from the ground up. There’s a lot of familiar concepts in there and there’s a lot of brand new and controversial things or challenges to the things that we take for granted in the world of financial independence and early retirement. I think she’s worth listening to, really enjoyed the conversation and loved the debates that we had.
Mindy:
Today, we welcome Katie Getti Tassin to the podcast. Katie is the host of Money with Katie, which you probably have heard of as it is screaming up the money charts. Her podcast focuses on building wealth, questioning conventional wisdom, and creating a great life. Katie, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.
Katie:
You so much, Mindy, and Scott, I am honored to be here.
Mindy:
This is going to be so much fun. Let’s learn all about Katie. Katie, where does your journey with money begin?
Katie:
Well, I should caveat everything that I’m about to say by saying the honest, real beginning of my journey with money, and how I think about it is the fact that I was born into a middle-class family with two working college-educated parents who consistently lived beneath their means and clipped coupons and tracked their spending and drove used cars that were 15-years-old. I think it’s impossible to extricate me and my perspectives and my outcomes from that environment in which I was raised. I don’t really think it’s all that surprising that I grew up to be an adult that tracks everything I do in a spreadsheet because those are the two humans that I learned how to be a human from. I also think that the fact that I was never concerned about where my next meal was going to come from or how we were going to pay for my school supplies, that definitely influenced my fundamental sense of security and confidence around finances.
That said, I basically had no inclination to save money whatsoever as an adolescent or young adult. Any money that came my way, whether it was from birthday or Christmas gifts or from part-time work, it really didn’t matter. It basically just got spent it immediately. I had no concept of opportunity cost. When I was graduating from college, I didn’t have any student debt, which was a huge leg up, I now realize in retrospect. At the time I didn’t realize it was that big of a deal, but now I see how impactful that was, but I also had no money. I had less than probably $500 to my name when I walked across the graduation stage. I wasn’t really concerned about it until I started living on my own post-grad and was kicked off that family payroll of, “All right, you have a college degree now and an internship, so here’s the bill for the car insurance.” God speed.
So about six to 12 months into working full-time, I realized, “Oh, my God, I’m just treading water. I don’t really have a plan,” and that didn’t really sit well with me. I think simultaneously around that time I realized that this idea of working in a cubicle for the next 40 years sounded like moderately terrible to me. So that combination of my own insecurity around my ability to manage money, the fact that my paychecks were coming in and then suddenly gone and, “Okay, cool, well, when’s the next one going to get here, because I’m going to use that one to pay off this bill?” That whole sentiment didn’t feel great, combined with my fear of never being able to retire. That was mostly what kicked me into gear and got me interested in personal finance, and knowledge is power, so it all really built from there. But that was probably age 23, I would say, there about.
Scott:
What year is this?
Katie:
This would’ve been mid-2018 probably.
Scott:
Okay. So you graduate college in 2017?
Katie:
Yes.
Scott:
A year later, in 2018 at age 23 you’re like, “I’m out. This is not going to work from a cubicle job for the next 40 years. I’m going to learn about personal finance.”
Katie:
Yeah, I didn’t last very long, did I?
Scott:
Yeah. What was your job?
Katie:
I worked in marketing at an airline. It’s funny because I had a great job, realistically. I worked for one of those employers that’s always on the list for being a great employer. I had a solid income, my starting salary was $52,000, so it wasn’t like I wasn’t making enough money or that I was working some horrible job with toxic people. It was a great gig. I think it was just in general that realization of, “Oh,” I remember down to the moment when this all hit me a ton of bricks, because I was walking into the building one morning, it was 8:00 AM, my heels on, and I got the lunch bag in one hand and the purse and the other.
I’m teetering along and it was just this jarring moment of, “Oh, my God, is this my life for the next 40 years? Is this it?” That was really rattling because I don’t know, I think you go through life and you go through school and there’s always something else on the horizon. There’s another semester or another class with the syllabus that tells you exactly how things are going to unfold and there’s very clear benchmarks. I think that endless expanse of a traditional career was a little bit unnerving to me because I was definitely ambitious and motivated, but I didn’t necessarily feel like I was directing that ambition toward the right thing at the time.
Scott:
Yeah. This is your story, so I’ll only chime in about myself for a moment here, but rewind five years, this was exactly … This is in almost eerie detail the same. I didn’t have the heels in the lunch and the purse piece, but I had the same thing, except I was working at a Fortune 500 company. I was a financial analyst and my company was consistently ranked in the top of the worst companies to work for in America, things there. I guess it took me three months. That was the difference of three months there instead of six months into the job for that. But I remember I had a similar type of moment and discovered in the weeks following concepts like financial independence and Mr. Money Mustache and changed my outlook on how I want to pursue my career.
Katie:
Yeah, I think everyone has a financial awakening. I think it just depends on how, I don’t want to use the word self-aware, but I’m tempted to, how in tune you are with your own happiness and fulfillment and how, I guess, willing you are to question it and to really honestly examine it. I think there’s a good Gary V. quote about this, not that I want to be the one that goes around quoting Gary V. all the time, but something to the effect of, “If you are living for the weekends, your life is broken,” and it’s really harsh.
But what it’s getting at is this same concept that if you are just putting your head down and grinning and bearing it through 75% of your week, 80% of your week, it’s going to be a long 40 years, and there’s probably a better way through. I think that that’s why the Mr. Money Mustache and mad scientist and that old guard of why their messaging is so impactful and like red pill situation because it’s, “Oh, my God, there is another way.” I thought I was trapped, but turns out there is this whole subculture that has figured out a more optimal path.
Scott:
Awesome. What changes once you have your financial awakening, which I think is a great term that I’m going to steal.
Katie:
Yes. My financial awakening, my baptism, and then I turned around and evangelized to everybody I knew. But what changed really was I think the idea that I had before that, “Well what difference does it make if I spend a dollar now or a dollar five years from now, it’s a dollar either way?” That misalignment corrected, because I understood opportunity cost and that, “Oh no, actually a dollar I have today is far more valuable than a dollar I have in five years from now, because I can invest a dollar that I have today.” that shift in how I viewed the money coming in was certainly powerful psychologically, but I think what I really started to notice once I began listening a lot to shows like BiggerPockets and to Choose FI and some of those … I consider them the OG personal finance content, I think I became far more critical of my own unquestioning of just the way things are.
The fact that almost every day my co-workers would go out to lunch and I’d be like, “Sure, I’ll join you,” because you don’t think about it unless someone points at that and says, “That’s probably not what you should be doing. You’re going out and spending 15 or $20 a day on lunch and then maybe going home and picking up food on the way home.” Those little choices that I never really thought much of before are just considered normal because it’s what was modeled to me as normal. That’s what I started to question. Same with I would say some of the more traditional “beauty” or “feminine expenses” of always having to have your hair done and your nails done, and to have trendy clothes and nice things and things like that, again, that I hadn’t really questioned.
I just thought, “Yeah, you have to get your highlights and your gel manicures and you have to have nice makeup on your face every day.” Those are also things that I started to look at through a different lens and say, “Well actually how much am I spending on these things? What percentage?” It turned out it was like 10% of my take home pay was going toward what I now call the hot girl expenses. Sure, now that I’m earning more, I’ve introduced some of them again. I get my hair done again, but at the time it was like, “Oh, my God, that is inexcusable that I would spend 10% of my take home pay just on the way that I look.” But unless someone really shines a flashlight on it for you and points out, “This is the trajectory that you’re putting yourself on with these choices,” it’s very hard to notice or question those things on your own. I think it was just that attitude that shifted.
Mindy:
Yes, and this is why I think Mr. Money Mustache has been so popular and so in a way that who’s the early retirement extreme was not, is that Pete showed you you could do it, “This is something that’s possible. Here’s a math problem, and if you believe in math,” which you should because it’s real, “if you believe in math, I can show you that this works.”
Katie:
Yes.
Mindy:
Where Jacob is wonderful, but he’s showing you that early retirement can be achieved through extreme measures, eat rice and beans every single day and live in an RV, and he’s happy doing that, not everybody would be. So his message misses a lot of people where Pete’s hits a little bit more. Sometimes Pete can be a little bit harsh, so his message misses some people, but-
Katie:
He has that chart, Mindy, it’s infamous now, the chart that shows you your save rate and then years to retirement where he basically just emphasizes, “This is just math. If you are saving this much, that means by definition you are spending that much,” which tells you, it can then spit out the number of years you have. So if you think, “Oh, I’m cool with a five to 10% save rate,” and then you look at that and you’re like, “Oh, I have to work for 48 years, maybe I’m not so cool with that.” It really drives home the time, money, equilibrium and how connected those two concepts are, which I think is an unnatural jump to make on your own. I don’t think we often think about those two things as equalized levers in that way.
Mindy:
Exactly. Like you said, this is what’s modeled for you. I remember working in corporate America. I was one of zero other people who brought their lunch to work. You always went out. I didn’t go out because there weren’t that many restaurants around, and it was such a hassle to go and get something and I’m super cheap, spoiler, everybody who listens already knows that, but-
Katie:
Who would’ve thunk?
Mindy:
It was so much easier just to make lunch and bring it. Every once in a while I’d forget and I’m like, “Man, my entire lunch hour is wasted going out and finding something to bring back and then I have to eat it at my desk anyway. I might as well just eat at my desk and surf the internet or just get more work done.” It seemed like such a waste of time, but when you see everybody else doing this same thing, it’s part of fitting in with your co-workers. It’s part of just life and it’s fun to go out to lunch, so it’s super easy to just do that every single day.
Katie:
You hit on something so interesting about the timing and how I think there is a bit of that misconception, not to drill down too deeply on this one example, but that going out to eat is easier. In reality, what I realized about a lot of these things, going out to eat, going to the gel manicure appointments, going to get your hair done every six weeks, all of these things do not just take money, but they take time and planning and mental energy and brain bandwidth. That’s why finding the financial independence philosophy was a release valve for me, because it just totally gave me the freedom to wash my hands of all of it and be like, “I’m out. I’m going to embrace simplicity and try this.” I was shocked to find that, “Oh, my life is so much easier now. It’s not harder, it’s actually easier, and I don’t really miss many of those things.”
Scott:
What happens next in your financial position? You’ve embraced this mentality. You’re obviously not working at the same job now. How do things progress for your story?
Katie:
Rapid fire.
Scott:
Yeah.
Katie:
Yes, very quickly. I did stay at that same job until 2021. Yeah, last year. I continued to work there for a while, but the key differences that changed things, so the spending definitely got reined in. I instituted a far more strategic and austere plan for myself. Like we had said the first six to 12 months that were loosey-goosey, or I’ve jokingly called them the free love period of my personal finance journey, where I was just like, “Whatever, lunch every day, It doesn’t matter.” That period in that time on that $52,000 a year, and keep in mind, relatively low structural expenses. So the fact that there wasn’t much money left over meant I really was finding a thousand different paper cut ways to spend it. I had saved 10 to $15,000 that year, kind of on accident.
Just that was the money that was left over every month or that accumulated in savings with no real plan. So it took me a year to save 10 to 15K, without my income really changing at all. But with this new strategic spending plan, it took me, I would say 18 to 24 more months to get up to 100,000. It was like once we really got things right and tight, we were off to the races. I also got a side hustle teaching group fitness, and that added another incremental $500-ish per month in income, which pretty much entirely just got saved and invested too. We’re not talking about life changing amounts of money, but as a proportion of the take-home pay I had at the time, it was relatively substantial and it gave me that ability to kick it into high gear.
Scott:
Are we talking about $100,000 in personal net worth or $100,000 in cash here? If-
Katie:
Oh, personal investments.
Scott:
Awesome. Where were you putting that money during this period?
Katie:
It would’ve been 401(k), Roth IRA, and I did have a taxable brokerage account as well that I was contributing to.
Scott:
Awesome. How did you think about cash in your savings account?
Katie:
I think at that point I had my emergency fund in a CD and it was, I want to say $15,000 in that CD. At the time you could get a 3% rate on a CD. So I was like, “All right, that’s fine.” Like I said, because this was pre-pandemic, so I was a little bit naive about how easily someone could be furloughed, but because my expenses were so much lower than my income and I had a lot of margin every month, I never really ran into cash flow issues. It was just because I was just naturally living beneath my means and investing the extra every month, I felt pretty confident with the amount of money coming in, the emergency fund in that CD and in that two-year period, fortunately, I didn’t really ever run into any issues. I don’t know that that’s necessarily recommendable, but for me, it ended up working out okay.
Scott:
I think it’s a paradox. If you spend more, you need a larger emergency reserve because you don’t have any margin. If you spend less, you need a lower emergency reserve because you spend less and you will be able to replenish it very quickly, so it’s a paradox and it’s a huge multiplier. Going back to what you’re talking about earlier with Mr. Money Mustache, that post you’re referring to is called the Shockingly Simple Math Behind Early Retirements, which I think everyone should check out, and it compounds on that. The less you spend, the more you accumulate, the less you need long-term to generate from a passive income perspective, it’s more tax. There’s so many different benefits that come from that single lever in starting your wealth-building journey here.
Katie:
Yeah. Let’s see. I think where things really took a turn for the better, I would say, where are things really shifted, that would’ve been late 2021 because at that point, I had been writing Money with Katie and building up Money with Katie as a side project turned inadvertently into a business for about a year. So we had picked up some steam and we were starting to see, I’m saying we as if there was more than just me, it was me. I was starting to see some really impressive revenue months that gave me a lot of confidence about, “There might actually be something here. This might be worth going all in on.” I had also changed companies to go work for a tech company and effectively doubled my compensation overnight, so that was the point at which it was even just a year earlier, my financial position was unrecognizable.
I think it gives off that aura, now I realize as I’m saying it of, “Oh, overnight success.” It wasn’t really like that. There was a lot of groundwork that had been laid over the last 18 to 24 months to get to that point. But it did, for me, feel as though things were all culminating at the same time and paying off in spades at the same time. That was really cool, because for me it was like I went from being a relatively average earner if we’re talking literal averages for the national scale average earner to being an objectively high earner and realizing, “Oh, wow. There is a lot more you can do when you have so much more investible income to work with,” so that was a very fortunate lucky break. That has been the last, I would say, how the last year or so has been. Not exactly a long-term thing yet, working on making it a long-term thing, but it’s played out really well I would say over the last 12 to 18 months.
Scott:
Awesome. During this three-year period leading up to 2021, how much self-education would you say that you conducted in terms of hours? Is it 10 hours of reading? Is it 100? Is it a thousand? What’s the order of magnitude here?
Katie:
I would say we’re in the thousands by this point, because I was reading every personal finance book I could get my hands on. I was listening to all the podcasts. It went from being like, “Oh, this is something that I should know about to be an adult,” to, “I’m now obsessed with this,” and it has become a hobby in and of itself to learn about it. I, to this day, I’m not really sure why. I’m not sure why it gripped me or continues to grip me as much as it does because growing up, I never really cared.
Even as a young adult, it was not interesting to me. I would say I was just as intimidated and avoidant about it as a lot of people are. I’m not sure why once I got into the weeds, I was like, “Oh, my God, I want to know everything. I want to spend all of my time learning about these things.” Not only do I want to read about them, I want to write about them too and put my own opinions out onto the internet.” Yeah, definitely, I think in the thousands by that point.
Scott:
Yeah. I can completely empathize with this. It’s just like, “Oh, I’ve equated money with freedom and control over my life, and now I’m going to spend thousands of hours mastering this subject because of that is the amount of importance I’ve placed on it.” Then for me, it has transformed into a passion for doing this with my day job over a long period of time, so it’s perhaps similar in your situation?
Katie:
That was a far more succinct and beautiful way to put it, Scott. Yes, that’s exactly correct.
Mindy:
Katie, you pride yourself on questioning conventional wisdom with regards to traditional money concepts. What are some of the big financial truths that you’ve discovered are actually wrong or being preached and there are alternatives that you prefer?
Katie:
Yeah, it’s funny because I think that almost to answer this, I have to contextualize a little bit because I think that there are “truths” out in broader society that when you compare that to the financial independence world, it’s like, “Oh, well, all of that is wrong and this is right, for sure.” But I think within the financial independence world and the things that we teach ourselves and learn about and believe and prescribe to others, I think there are things that maybe lack nuance or miss the mark a little bit. A classic one that I had to reckon with personally was this idea of DIYing everything, and if something breaks, you figure out how to fix it. Basically, if there is even a chance that you can do something yourself, you should do it yourself. You should not be paying somebody else to do it. I think that that makes sense up to a certain point.
If you are me circa 2018 and you’re making $52,000 a year, you should probably be making your own lunch. You should probably be cleaning your own apartment. You’re not there yet. But there did come a point where I was working so much because I was working this new tech job and I was trying to build Money with Katie nights and weekends and the ROI on my time that I was getting for spending an hour or two working on a product launch or impressing my boss at work, the ROI on that time was far higher than the ROI that I was getting from vacuuming my house and mopping my floors. It got to a point where I thought, “All right, I can actually pay somebody else to do this for me. I can buy back my own time that way because now I’ve reached this point in my life where I actually have more money than I do time.
I have more income than I do expendable hours in a week because of the expectations and the workload that I have, so I need to actually give back some money to buy back some time, get those two things a little bit more in equilibrium.” For me, the economic output equivalent was that my income continued to go up and went up at a rate faster than the incremental spend that I had on some of those services, goods and services that I was paying for to buy back that time in my own day. I will say that the flip side of this or the watch out is that it can become very easy to start to see everything through that math equation and to say, “Well I’m going to outsource everything.
I’m not going to do a damn thing for myself. All I’m going to do is work.” Then it flattens your life into this one dimension. So I don’t always recommend that people take that approach and fully run with it because it can mess with if, “Well, if I don’t have to cook, if I don’t have to clean, if I don’t have to watch my own kids, well, now I can sit at a desk for 14 hours a day,” and you get to the point where you’re like, “But is that really the lifestyle that I wanted when I set out on this path? Is that actually the best way to structure a day?” So I think it’s, as with all things, not black and white, but I do think that there does come a time when it makes sense to start exchanging a little bit of money for time again.
Mindy:
Yeah. That first part I feel a little, targeted isn’t the right word, but definitely seen.
Katie:
Attacked?
Mindy:
Attacked is not the right word, although not the wrong word either. I struggle with that though because on the one hand I want to do it myself because I don’t identify with my current bank balance, my current investment balance.
Katie:
Yeah. Yeah.
Mindy:
I am still the kid that has to shop at the thrift store, not wants to shop at the thrift store but has to shop at the thrift store. I’m still the kid that brings lunch from home because that’s the only option there is. You don’t buy lunch at school because that’s more expensive, you bring it from home because that’s what we can afford, and getting over that is really hard. When you can do it yourself, why would you hire it out? Also, can you talk to my husband because he won’t stop DIYing stuff.
Katie:
Good for him. What I thought you were going to say is that all of these things fall on you, which is traditionally how it works in heterosexual couples, particularly, if one person is working from home or whatever, that you’re just, “Oh, that’s odd. I do tend to be the one that does all the laundry and cooks the meals and then cleans up after.” I don’t know, every single time I talk to a woman that’s married to a man I hear the exact same thing, so I’m like, I don’t think this is just me.
That, I think, is the other reason why I’m a fan of this because I think it helps to assign some economic value to these tasks and if someone else isn’t going to come in and get paid to clean the house, I should be getting paid to clean the house because it’s labor. It’s my unpaid labor at this point, but no, that makes sense. I think that’s totally fair. We definitely, I think, inherit and internalize those types of money scripts very early in life and I don’t think that that’s unusual at all to find that your behavior or your feelings about money are not necessarily representative or correlated with the amount of money that you have.
Scott:
Yeah. I think that this is a fantastic framework to think through. A toolkit I would offer up here is to just value your time on a per-hour basis and use that to make a number of decisions about this, because we can’t resist bringing real estate investing into all of this stuff. I’ll use a rental property example where when I first started real estate investing, I self-managed my property and I would fix up everything myself. Then as my income went from $48,000 a year to 75 or $80,000 a year, you need to start hiring out some of those tasks and doing others DIY.
Then as income grows and grows and grows over time and you’re building wealth and investing in those types of things, then you move on and outsource more and more of that. I think the vast majority of folks are going to be in this gray zone for much of their lives if you’re building wealth and you’re going to be constantly having to make those trade offs bit by bit in the general tendency of stopping doing low-value work, whether that’s at work, in your business or at home, and do the things that make you happy, do more of the things that make you happy or that are higher value. That’s an art and a science, to your point.
Katie:
Yes.
Scott:
But at least a good toolkit is valuing your time after tax and saying, I’m not going to pay somebody twice my hourly rate at work to do a task I’m capable of doing. I’m also not going to do a task that I can pay someone half of my hourly rate right at work and I don’t like doing that.” Avoiding those extremes can be a really good way to solve for this, but I think it’s a great framework.
Katie:
I love that.
Scott:
Okay, let’s talk about more of, you’ve put together I think a really robust philosophy about money in a general sense out of those thousands of hours of self-education and writing and creating stuff. I’d love to go into a couple of areas that I think are really interesting that you’ve come up with. The first one I think is the Roth versus 401(k) debate. Can you give us your thoughts on this? You have a very strong stance, I believe, and I love it.
Katie:
I do, as with most things, come out of the gate with a strong opinion. No, I’m going to try to say this as concisely as possible. I’m going to take a page out of the Scott playbook and try to be really tight with this answer. My approach is that I think a very optimal combination is taking full advantage of the traditional 401(k) because it has the highest contribution limit really, of any qualified account that you’re going to have access to, for the most part, to get enough of an upfront tax break every year to then turn around and create more investible income than you would’ve had otherwise. In order to determine how much you are going to save personally by contributing $20,500 to a traditional 401(k), you just look at what your marginal tax rate is and multiply that by 20,500. If I make somewhere in the 24% bracket and I contribute the full 20,500, then I’m going to save almost $5,000 on my taxes, and that’s money that theoretically is staying on my balance sheet because it’s not being turned over to the IRS.
I can then turn around and take that $5,000, theoretically, and invest it in a Roth IRA. I think for me it just comes down to doing more with less and trying to create the most optimal upfront investment to get the most money into the accounts and then you play this out 40 years down the road, you can actually use some pretty … I would consider them relatively simple, I think they sound complex on their face, but I think in reality they’re relatively simple methods of then strategically withdrawing money from these various accounts in such a way that you are minimizing your tax liability on the back end too. I don’t think it’s for everybody, but I do think that to suggest that everyone should just be doing entirely Roth’s strategies ignores a big piece of the puzzle in that upfront tax break. If you’re putting in 20,500 and getting 5,000 back on your taxes as a result of that, that’s what? An upfront 25% ROI right there. I don’t know why we tend to just discount or ignore that.
Scott:
I love it. Now, I’m a big proponent of the Roth IRA as a significant component, so I have a slightly different view on this. But I want to see if I can summarize your position and then give you even more supporting ammunition for the argument including what you said there. First, I think that the argument that you’re positing is you can have both, but if you’re all in a Roth IRA and have no 401(k), you’re missing out on potential tax advantages today and optionality down the line that can only be done from a 401(k) to a Roth, because you can’t go back the other way from a Roth to a 401(k). Is that correct?
Katie:
That is correct. I’d also say that some people will say go do full Roth 401(k) and Roth IRA and again, that making the bet that your effective tax rate in retirement is going to be higher than your marginal tax rate now. In order to make that happen, you got to be spending a lot of money in retirement or not earning very much now. That, I don’t think is very representative of how most people … In order to actually have enough money in retirement to be spending that much in retirement, you’d have to be earning a lot, so I think that’s where the logic breaks down.
Mindy:
Now who’s feeling seen, Scott?
Scott:
No, I love it. I think it’s a great argument and I think that I agree with the premise that having no 401(k) contributions, no tax-deferred retirements and 100% Roth over the course of an entire career is a mistake. I think you’re missing out on those advantages because there should be, over the course of 40 years of a career working or not working, there will be years when your income is very low or you have a large taxable loss, for example, you’re a real estate investor and prices go down or you end up doing a lot of acquisitions one year, that will be a loss. You can use that loss to move the money from a tax deferred account like a 401(k) to something like a Roth IRA. The end goal, however, is to get all the money into a Roth IRA when it’s time to withdraw.
That’s where we want to start with. And for a lot of people, the most efficient way to do that will be to start with most of the contributions in the Roth and then put enough into the 401(k) to harvest some of these tax advantages as they come up. Now, I personally put the vast majority of my stuff into a Roth 401(k) and then into the Roth IRA as well. The reason I do that is because I’m so arrogant about my financial profile over the course of my career, no, literally, that I believe that I’ll be in a high income bracket today and an even higher income bracket in retirement, because I plan to build businesses and own assets that will have passed through income on my tax return at that point in time.
Katie:
Interesting, okay. What I would highlight, though, there is that strategy is a conscious choice and a plan based on your track record of being a successful business person and real estate investor where you have reason to believe that your income in retirement, that you actually may be able to live quite large in retirement if you have a crap ton of income coming in that you want to be spending. I think, so I would really find no fault in that approach. I think where I do find fault is people that do not have that plan and say, “I don’t need the 401(k), I’d rather just take the money now.” “It’s like, “You really don’t want the upfront tax break, are you sure? It’s 5,000, that’s not insignificant.” I think by and large, for most people their spending in retirement will probably be lower than their highest earning years.
Scott:
Mm-hmm. I think that’s great. I think one other question I wanted to ask you about this is you’re keeping the $5,000 in your example on your balance sheet. Yes. But you’re not really doing that unless you have a plan to arbitrage that with using a loss or a low- income year to move that money from the 401(k). You’re just deferring the tax and paying it later. I think one of your arguments that I think is really interesting is that you don’t think it’s necessarily a good bet to bet on income tax brackets increasing over the course of a career if I remember that correctly from one of your posts [inaudible 00:39:26]
Katie:
Like not thinking that the marginal rates are going to go up.?Is that what you’re referring to?
Scott:
Yes, because that’s another big reason why I also contribute to the Roth is because I figure, “Oh, tax brackets have to be higher in 30 years.” Now that’s anybody’s guess, but that, to me, seems unchallengeable until you challenged it, and I love it.
Katie:
Well, I think the reason that I challenge it, well, I say there’s two reasons I challenge it. The first reason is because politically it’s very unpopular to raise tax brackets, marginal rates for the middle class and lower. Obviously this country has an issue with figuring out how to tax billionaires. We haven’t really gotten that straightened out yet, but when you look at even the numbers, or they’re jockeying back and forth, we’re usually talking about, “Should the top marginal rate be 37% or 39%?” We’re not often being like, “Okay, that 10% bracket now it’s 20.” We’re not really changing those lower ones measurably, so I would point to that just the political incentive to keep taxes low in the popular brackets.
The other thing I would point to comes back to that marginal tax rate versus effective tax rate because your income today and the income that you are putting into the Roth account is being taxed at your highest marginal tax rate, and the income that you’re going to be spending in retirement is filtered through bottom up, so you’re going to be looking at your effective tax rate. The marginal rates would actually have to rise quite substantially for your effective rate later, that is, bottom up to be competitive with your personal top marginal rate now when you’re being taxed top-down. That’s the other, I guess, piece of this that I think we … It’s really not apples to apples, I think, in the same way that it would appear on its face.
Scott:
Okay. Final question on this from that, because I think that’s another good argument. If you are middle class today, middle or upper middle class today and you plan on having a portfolio that allows you to live a middle or upper middle class lifestyle at retirement, then it’s reasonable, I think you have a very good argument that there’s a good chance that tax brackets won’t be materially different, inflation-adjusted at that point in time because tax brackets do change with inflation as well.
Now, the one question I would ask is, if you’re 30-years-old and you spend your free time, your commute to work, listening to Money with Katie or BiggerPockets Money or Choose FI or these other things and you’re doing that for a long period of time, is it reasonable to assume that at retirement you won’t be having a middle class level of wealth because you’re going to become financially free fairly early in life, and that financial freedom we find nobody actually starts withdrawing their portfolio when they become financially free. They all find other creative ways to cover their expenses and then some, many go on to make even more money and they have multiple decades of wealth growing and therefore, will have to withdraw more money from their 401(k).
Katie:
From an RMD perspective?
Scott:
From an RMD perspective, so I would love your thoughts on that particular last point.
Katie:
Sure. Figure that one out.
Scott:
Yeah.
Katie:
Okay. I guess for this one I will use myself as the Guinea pig, because I am maxing out that 401(k). I’m like, “Let me get as much pre-tax money in these buckets as I can to try to lower my tax rate this year and pay less taxes this year.” My grand scheme here is that at some point in my, call it early 50s, we’ll say, I would want to start, assuming things are going as well as you’re describing and I’m like, “Yeah, I got more money than I know what to do with. I’ve spent the bulk of my life earning and creatively whatever,” now I’m not sure how having a substantial real estate portfolio would change this, so I don’t want to go as far as to say that this would apply to everybody, but my hope would then to be in a position in my early 50s where I’m sitting on several million dollars, hopefully we’re looking at 8, 9, 10, a lot of money.
At that point, I would want to start doing those RMDs and realistically speaking; not RMDs, I’m sorry, conversions, getting the money out of the 401(k) into the Roth IRA using that standard deduction, using those lower tax brackets, if you will, to start making those Roth conversions at a time when I have more control over the tax bracket because maybe I am living off of income from a taxable brokerage account. This is assuming the 0% capital gains tax bracket sticks around and I’m able to really spend quite a bit of money, up to 80 something thousand this year as a married couple completely tax-free if I want to spend up to 400,000 on paying what, 15%, but really being able to leverage the amount of control that I would have in those years to make those rough conversions and to start chipping away at that 401(k) balance.
Now sure, if you assume that someone is putting in the max for 40 years, they’re probably not going to be able to fully empty or convert away that entire balance by the time they’re 72-and-a-half. But I do think that at that point the “problems,” I’m going to put problems in air quotes, they’re like the tiny violin “problems” of like, “Oh, no. I’m going to have to pay a little bit of money on this RMD out of my $8 million net worth. Like dang. So I think it’s obviously you’re hedging your bets, and I think for me, having money across the different tax statuses, taxable, tax-free and tax-deferred creates the most optimal mix for flexibility later and isn’t placing too big of a bet on any one outcome.
Mindy:
Okay, so I hear what you’re saying. I love all of what you’re saying. I am a couple of months older than you and I find myself in a similar position to what you just described and-
Katie:
Good for you. I’m thrilled to hear that.
Mindy:
Yeah. Yeah. “Oh, my god, this horrible problem.” I am in a position that when I turn 72- and-a-half I will have to take RMDs in, I don’t know what they’re going to be, but they’re going to be a lot. I don’t want to leave them in my retirement accounts because that’s where I want them to be, but the government says that they know better than me and I can’t argue with them. But anyway, I digress. When I chip away, whenever I stop working, I have a W2, I’m a real estate agent, so I have income from there and I’m currently doing pre-tax 401(k). It’s a self-directed solo 401(k), so I can contribute way more-
Katie:
A lot.
Mindy:
Yeah, my company contributes and I have reduced my taxable income by as much as I can, but there’s a big balance that I am going to have to chip away at, and you can chip away, you can convert the whole thing at once, you’re just paying a boatload of taxes on it. If you’re chipping away there’s a lot less that you can … In order to, let’s see, tax advantageously do it, you’re essentially converting what $100,000 a year? When you’ve got a million dollar portfolio, that’s 10 years that you can Roth ladder conversion over and then you’ve taken it all out. But when you’ve got multiple millions, then that’s multiples of 10 and maybe you don’t have that much. If I could go back in time, I would do what you’re doing with the Roth 401(k) and the traditional 401(k), or what Scott is doing with … I would split it because I’m all traditional 401(k). When did the Roth 401(k) come out, because I don’t know that I’ve had the option for a Roth 401(k)?
Katie:
I think early 2000s.
Scott:
BiggerPockets offers a Roth 401(k), Mindy, so you might want to check with the HR team about that following this call.
Mindy:
Yeah. Yeah.
Scott:
I max it out every year.
Katie:
Yeah, but I would say that was a perfect case study of obviously if you’re going to wake up at the age of 65 and get to choose, “Do I want an all Roth portfolio or an all tax- deferred portfolio?” You’re probably going to be like, “I’ll take the Roth, all day, every day.” But I think in either case, having all tax-deferred or all tax-free both are pigeonholing you into … In one case, it’s pigeonholing you into now having to figure that out now; whereas, if you went all Roth but wouldn’t have needed to, or then you’re being pigeonholed into, you overpaid probably on your tax at the time if you were contributing to a Roth while you were paying a 37% marginal tax rate. That’s cutting out a third of that contribution. So I would say having all of either is probably not going to give you the most flexible outcome.
Scott:
I’ll try to wrap this up with one example that I think will highlight Katie’s great point here, which is I think the optimal way to manage this is to max out your 401(k) every year for 35 years. Then right before you hit retirement age and are capable of withdrawing from your Roth, you do some business activity that creates a $10 million loss and then you have that $10 million loss, you move the entirety of your $10 million in your 401(k) to your Roth. That’s no tax because you have a $10 million loss offsetting that income from the distribution, rolling it over and then you have it all in a Roth-
Katie:
You solved it.
Scott:
If you’ve contributed to a Roth the entire time, then you have missed out on an opportunity such as this. To lesser a greater degrees, things like that may occur in your lifetime. A good one to Google, I don’t want to get political or anything, but go Google how MITT Romney was able to get so much money into his Roth IRA, very similar concept to what I just articulated.
Katie:
Oh, he actually did. Oh, wow.
Scott:
Yeah. What I said there is absurd, of course, from a perfection standpoint, but the premise is really applicable and I think it’s a very powerful argument in addition to the other good points that Katie’s made for having something in the 401(k) in the tax- deferred accounts at some point in your career because that is true net worth arbitrage if you ever do have a loss or low income year.
Katie:
Totally. Yeah.
Mindy:
Yeah. I’m hoping that somebody who is listening who is a little bit younger, a little bit farther away from retirement than I am can pick up on this and go with Katie’s method of distributing it a little bit. I definitely recommend maxing out your Roth IRA for as long as you can. Scott, did you say you’re eligible to participate in a Roth IRA?
Scott:
You’re eligible to participate in your company’s Roth 401(k) plan, Mindy-
Mindy:
Oh-
Scott:
I guarantee you, because [inaudible 00:50:39]
Mindy:
No, I know that I am, but I have-
Katie:
She’s like, “What I’m trying to do is go back in time, Scott, so unless you’ve got a time machine.”
Scott:
There’s still time this year.
Mindy:
Well, no, I already maxed out my self-directed solo 401(k) and you can only do one.
Katie:
Wait, can I say something about that?
Mindy:
Yes, please.
Katie:
You could put, Mindy, $61,000 into your solo 401(k) as the employer and make no employee contributions because you’re both, you’re like employer-employee because you’re self-directed. Then you can put 20,500 into your work 401(k) as the employee because they’re two different sources of income. That’s just a little loophole to keep in your back pocket is that as long as your contributions … You may be able to switch them over too, if you’ve already made them as employee contributions. You could just say, “Yo, I’ve got … ” 61,000 would have to be your 20% of your net business income. As long as you’ve got $300,000 of net business income, you could go. “Yo, putting 20% in 61K as the employer, that’s it. No employee contribution.” Turn around, go to BiggerPockets, put 20,500 in.
Mindy:
Oh.
Scott:
Mindy’s got open-mouthed shocked at this advice, which is fantastic, I love it. But I do want to call out Katie’s point here that if you are a business owner and you have very high income, then the Roth argument goes out the window because you can put incredible amounts of money into the tax-deferred plans through this where you should be taking advantage of those. Those are the plan that Katie just described there are profit sharing plans, when you have employees it actually gets even better because you can put even more-
Katie:
Oh, that’s good to know.
Scott:
… more into that, because you can put your spouse, for example, on the plan with those as well. Both of you can max that out and you can do that through profit sharing things. So talk to financial planners and those types of folks when you get into that level.
Katie:
Yeah, definitely.
Mindy:
I have to call up my plan administrator and see if my plan allows for that or what I have to do to make my plan allow for that, because when you’re the boss of your plan, you can change the rules. It’s really nice.
Scott:
We are being told that we’re coming up on our time limit here, which is unfortunate because we’re having a wonderful conversation here. Katie, we’re not going to get a chance to debate another issue here. Can you just bring up one and leave us dangling with your thoughts there and we can discuss that next time we have you back on?
Katie:
Ah, would love to. All right. Dangle away, people. I’m going to go out on a limb and say that all the advice that says that you should never allow any lifestyle creep is, it’s sad and depressing. I think that you should intentionally institute as you earn more money, you should allow yourself to live a slightly nicer, more comfortable life as a result of that, as long as you’re still living beneath your means. Let’s not go crazy, but I do think that there’s a difference between the lifestyle creep that we hear about. We’re like, “Oh, mid-level manager gets a increase in pay and then suddenly finds new ways to spend that money, and is somehow is still not saving very much.” I think there’s a difference between that and being like, “Okay, my increase in income was 20%. I’m going to increase my spending by 5% and invest the rest.” I do think that there’s something very motivating about treating yourself in that way and intentionally scaling up a little bit, just as long as you’re proportionally still in a good spot. That’s my cliffhanger.
Scott:
Interesting. Next week we’ll bring on a guest who is adamant that you should not do that [inaudible 00:54:20] Katie’s point. Katie, this has been wonderful. We really appreciate you coming on. I think you’ve shared a lot of wisdom. Your journey is really fun and the debate is really fun. So where can people find out more about you?
Katie:
If you like podcasts, definitely check out the Money with Katie show. If you go to moneywithkatie.com, I have hundreds of blog posts that you’ll probably enjoy, free resources, downloadables, things of that nature. I’m Money with Katie on Instagram and Twitter, which are the two platforms where I’m the most active, so come follow along for the unhinged fun.
Scott:
Katie, because 500,000 people viewed it and gave you a bajillian likes and all that, can you just share your biggest financial mistake with us before you depart?
Katie:
My biggest financial mistake was being in eighth grade in 2009 when I should have been buying foreclosures.
Scott:
Oh, I don’t know how you can live with yourself after making-
Katie:
How I screwed that one up, right?
Scott:
… after making that kind of mistake.
Mindy:
How can you call yourself qualified to give financial advice with mistakes that big, Katie? You know what? We’re just going to scrap this whole show. Never mind.
Katie:
No, don’t publish it.
Mindy:
Katie, this has been so much fun. Thank you so, so, so much for your time today and we will talk to you soon.
Katie:
Thank you.
Mindy:
Okay, Scott, that was Katie. I love her even more because she is challenging you. She is challenging me. I think we both felt a little seen during her conversation today, and I think that’s awesome.
Scott:
Yeah, I think she’s got really good, smart challenges to a lot of these things that are taken for granted in the financial independence community. I think that a lot of things that Mindy and I and that perhaps other folks that you hear talking about personal finance take for granted are really art decisions, not science. There’s things that have been generated or thought through that are, “Hey, I’m going to make a long-term bet about where tax brackets are going to be 30 years from now, and oh, that’s what I accept as my reality,” and I’ve done that for the Roth versus 401(k) debate. That’s a complete guess. There’s no right answer there. That’s a complete guess. I’ve just made that guess long ago and settled on it, and I just treat it as my stance on a go-forward basis. But it’s good to have those things regularly challenged because there is no right answer and no one can know the right answers to questions like that.
Mindy:
Yeah, I really don’t hear that a lot, question conventional financial wisdom. Do it. Maybe you’ll discover that what people are saying is right. Maybe you’ll discover that what people are saying isn’t right for you, but how many times have I said, “Personal finance is personal?” This is a choose your own adventure scenario and find what works best for you. Maybe what I’m saying doesn’t work best for you. Maybe you identify more with Scott. Maybe you identify more with Katie, or maybe you identify more with somebody who has yet to be on the show, but find what works for you and put that into play because that’s what’s going to help you on your path to financial independence. But yeah, absolutely question what people are saying and make sure that it’s going to work best for where you are at, what your idea of financial independence looks like and how you’re going to get there. Okay, Scott, should we get out of here?
Scott:
Let’s do it.
Mindy:
This is the end of this episode of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, share your power, you bright little flower.
