“High Earner, Not Rich Yet”: Must-Have Money Hacks for HENRYs and HENRIETTAs

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Let’s talk about the many hacks for HENRYs and HENRIETTAs to move from high incomes into high net worths. We’ll go over some of the best tax-advantaged vehicles for high earners, alternative investment callouts, and hear from Chris Hutchins of All the Hacks) on little-known hacks to leverage in order to supercharge your wealth.

Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Mentioned in the Episode

• Money with Katie Budget Breakdown using Ramit’s example
• Top 10% of households in the US earn $248.6k+
• The reason Traditional 401(k) wins over Roth
• Our posts on the HSA
• Income limits on Roth IRA, per the IRS
• Backdoor Roth IRA
• 401(k) and IRA contribution limits in 2023 and 2024, per the IRS
• The IRS’s Pro Rata rule with the Backdoor Roth IRA
• The Mega Backdoor Roth IRA
• Investing outside of your retirement accounts
• 2022 Long Angle’s survey with 100 very high net-worth individuals
• The Augusta Rule (IRS Section 280A)
• The IRS mortgage interest deduction
• Cash-out mortgage refinance tax implications
• Business vehicle depreciation limits, per the IRS
• Cash balance plan for self-employed
• Tax loss carryforward
• Direct indexing and tax-loss harvesting
• All the Hacks episode: Optimizing Your Insurance Policies
• Umbrella insurance
• Estate and gift taxes, per the IRS
• Qualified small business stock (QSBS), per SBA.gov
• Chris’s referrals: Gelt (tax accounting), Daffy (donor-advised funds for charity), Trust & Will (creating a will, trust, and estate plan), valur.io (tax planning)

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Transcript

Katie:

Several weeks ago, our team came across a post from Personal Finance Pro, Ramit Sethi. He was analyzing the budget of two high earners, a couple making $280,000 a year, taking home nearly $18,000 a month. The part of their budget that shocked the community most. They were only saving $225 a month. We decided to put the old Money with Katie’s spin on it where we reshared that budget on Instagram with my recommendations for saving and spending, and the post popped off and we thought, huh, maybe this budget breakdown concept is a good idea. Clearly our audience is hungry for it, so let’s make this a regular thing and let’s use submissions from Rich Girl Nation and do community budgets. And let me tell you, our team was very surprised by the results. We asked respondents to share their age, location, relationship status, income, take home pay, and the largest parts of their budget, like their rent or mortgage payments, and then how much they allocate to savings or retirement accounts, and any one-off big expenses like dining or travel.

We also asked for their net worth. Now the obvious caveat here is that there’s quite a bit of selection bias in the sample set. These are people that self-selected to respond and follow a personal finance account. But nearly 300 responses flooded in from mostly 20 and early 30 somethings. And here’s what we found. Both the median and average salaries for a single Rich Girl was well into the six figures, around $113K for the median, and $119K for the average. As for their net worth, the median was $126,000. The median income for a dual income household was $184,000, and the average was $216K. The media net worth was $350,000, and nearly a third of respondents were in a household earning $250K or more. As an aside, I have to say go Rich Girl Nation, particularly given our respondents relatively young ages, high salaries and current net worths. I was very impressed by how much financial progress our community has already made. But more broadly, it reminded our team that the demographics of our audience probably skew a little more drastically toward high earning households where the financial calculus is a little bit different.

So welcome back to the Money with Katie Show, HENRYs and HENRIETTAS, aka high earners not rich yet. Today we’re going to talk about the must have education this population needs to grow their wealth. I’ll also be joined by my friend Chris Hutchins from All the Hacks who will share his best practices and of course some very little known hacks for high earners as a high earning, high net worth individual himself.

So how do we define a HENRY or more affectionately for Rich Girl Nation, a HENRIETTA? 20 years ago, Sean Tully first coined the term HENRY in Fortune Magazine, referring to households with annual incomes between $250 and $500,000 now adjusted for inflation. We’d be talking about $355K to $710K in 2023. Though given wage stagnation, high interest rates, student loan debt, I actually think sticking with that original range makes sense for reference. According to the survey of consumer finances, that would mean we’re talking about the top 10% of household incomes across the US are households earning $248,610 or more. And as Tully writes in Fortune in a 2008 piece, these folks are not America’s hedge fund managers, investment bankers or CEOs who boast net worths in the multimillions and qualify as rich right now. Instead, these are the doctors, the consultants, the attorneys, the marketing managers and CIOs, the owners of real estate agencies and security firms.

They write the contracts, inspire the sales teams and integrate computer systems they own. Many of America’s small businesses put simply the HENRYs are the bulwark of the professional and entrepreneurial class that drives the economy. The bottom line is we’re talking about folks who earn high incomes up to 500 K, but have not saved or invested enough to be considered rich. There’s no one definition of what rich is, of course, but according to Investopedia, HENRYs and HENRIETTAs are generally spending their take home pay on housing, education, childcare, and consumer goods. Their status is ultimately due to their income, not their net worth. But there are quite a few needle movers that high earners can use to shift from not rich yet to true wealth in the longterm because money simply works differently above a certain threshold of income. So let’s dive into each of them after a quick break.

The first important thing to remember when you graduate into this esteemed HENRIETTA class is that the traditional personal finance rules of thumb tend to go out the window. For example, a common guideline for housing says you shouldn’t spend more than 30% of your income on the roof over your head and early twenties. New Yorkers all over the five boroughs punch their pillows and rage. But when your household is taking home nearly $20k a month, that would suggest spending $6,000 on housing. For most people in most regions of the us, that number wouldn’t really make any sense. The same goes for the 10% guidelines for vehicles. This hypothetical couple probably should not strive to spend $2,000 a month on their cars. The reality is traditional budgeting frameworks work for a median subset of earners, but are not all that useful at really low or really high incomes.

There’s no real substitute in this case. So we’ll say that you should aim to shoot for a reasonable standard of living in your area. The next thing to keep in mind is access to specific investment vehicles. So we’ve talked on the show about how different investment accounts can help lower your tax burden now or build your wealth for the future, and a number of them are optimal for high earners who are not paying down debts or who can afford to put a sizable amount away with their discretionary income. That is to say if you’re a high earner building up your emergency savings working on debt, pay down or still optimizing your budget to access those extra discretionary funds every month, we would recommend focusing your efforts there first. But let’s say you’re sitting on that extra couple thousand dollars a month and you’re not sure where to get the best bang for your buck, so it just sits in your savings account.

Here are a few options for you to consider though, as my regular disclaimer, I recommend talking to a licensed financial professional to figure out what is best for your unique situation. Of course, my first and favorite investment vehicle for high earners is the traditional 401k, whether that’s provided to you via your employer or you open one yourself as a self-employed sole proprietor, I know very few high earners who couldn’t benefit from a $23,000 tax deferral, but once you’re already taking advantage of that, where do you head next? Let’s talk about the health savings account or the HSA, what I like to call the triple whammy. HSAs are not specific to high earners, but they can be ultra powerful for those earning a lot of money and hungry for additional tax deferrals. For those of you with high deductible health plans or HDHPs, the health savings account is both a savings and investment account that you can use to build long-term wealth contributions go in tax-free.

They enjoy tax-free growth and they can be withdrawn tax-free when used for medical expenses. One little fun fact is that HSA contributions when made from payroll are also exempted from that 7.65% FICA tax. The funds are investible after you hit a certain amount, it’s usually around a thousand dollars in the account and then the balance continues to roll over every year. So unlike the FSA, it’s not use it or lose it and it can become a pretty sizable fund for medical needs. But wait, there’s more. The other reason that high earners want to leverage the HSA is because once you turn 65, it effectively mirrors the rules of a regular traditional IRA. You’re just going to have to pay taxes on the withdrawals, but you can use that money for anything, not just medical expenses. For example, in 2023, the contribution limit to an HSA for a single person is $3,850.

If you’re 30 years old and you max it out just one time, 35 years from now, you’ll have a balance of over 40 grand, assuming an annualized 7% rate of return. The contribution limit for family coverage is $7,750 and in 2024 the limits are going up to $4,150 for self coverage, and $8,300 for family coverage. So another great opportunity to get an additional deduction. Next up is the Roth IRA. We know that this is one of our favorite flexible investment vehicles. You enjoy tax-free growth and withdrawals, and you can access the principle at any time before age 59 and a half with no penalties should something go horribly awry. Now, if you’re a high earner who’s trying to retire early, it is a magical tool to supercharge your net worth. We’ve covered the Roth IRA and the backdoor Roth IRA both on the blog before.

So we’ll link those posts in the show notes. But essentially, high income earners are usually unable to contribute in the regular way to a Roth IRA given the income restrictions because there’s this income phase out range where people who earn over a certain amount are blocked from contributing. So the income phase out range for taxpayers making contributions to a Roth IRA is going to be increased to between $146K and $161K in 2024 for singles and heads of household up from between $138K and $153K in 2023. For married couples, the range where contributions begin to phase out is currently between $218K and $228K, and in 2024 it’s going to rise to between $230K and $240K. It’s worth noting that if you are contributing the maximum to your traditional 401k, you are probably claiming a deduction of 22,500 each or 45,000.

If you have two earners contributing the maximum, which means you’d probably actually need to make closer to$ $160K single and $263K married in order to be totally phased out because $263,000 income married minus those two contributions that equal $45,000 in deductions is that lower $218,000 income limit for married folks. But let’s say you are above those numbers pretty handedly there’s the backdoor Roth IRA that you can use as a loophole. So a backdoor Roth IRA effectively turns a non-deductible traditional IRA into a Roth IRA. No matter how much money you make, anyone can set up a traditional IRA and make a non-deductible contribution, meaning you won’t get an upfront tax break for doing so. But that doesn’t matter because we are going to convert it to Roth. The maximum total annual contribution across IRAs, so including traditional and Roth is $6,500 in 2023 if you’re under age 50 and if you’re 50 or older, the limit goes up to $7,500 and you can make that contribution for the current tax year up until April 15th of the following tax year.

So you have until April 15th, 2024 in order to make your 2023 contributions. And in 2024, the limit rises to $7,000 if you’re underage 50 and $8,000 if you are over age 50. So here’s how it works. Open a traditional IRA account with your brokerage firm of choice and then you’re going to open a Roth IRA with the same firm if you do not have one with them yet. And then you’re going to fund the traditional IRA up to that 2023 IRA contribution limit and you’ll leave the funds in the just money market cash balance, whatever, don’t invest it yet. You want to wait a few days for the funds to settle and then you’re going to convert the cash to Roth. So big brokerage firms know how to do this. If you need help, you can ask. There should literally be a button that says convert to Roth, and because the funds are not invested yet, there won’t be any gains to pay taxes on.

So you already have that Roth IRA ready and waiting for you from step one. And then once the funds have been converted to Roth, you’re going to invest them in the index funds of your choice within that Roth IRA with the funds that you converted. So before you skip off to your financial planner, foaming at the mouth, there are a few small caveats here that I will add. If you have a traditional IRA or two lying around that you made pre-tax contributions to, and now you’re trying to add post-tax contributions into the mix, you’ll be subjected to the IRS’s Pro-rata rule and you might get a tax bill come April. So you want to tread lightly here. For example, if you already have $50,000 in a traditional IRA, maybe it’s a rollover IRA, maybe it’s a step IRA, you name it. And this was created with deductible pre-tax contributions and you add another $6,500 post-tax, that non-deductible $6,500 contribution with the intention of converting it to Roth only about 11.5% of the total amount in your traditional IRAs is post-tax, right?

It’s at $6,500 of the total $56,500 as such, 11.5% of your Roth conversion will be tax free. You won’t pay additional taxes on the conversion of your post-tax dollars to Roth, but you will be taxed on the other 88.5% of the conversion. So if you’re in the 24% income bracket, you’d pay $1,380 in taxes on the conversion of post-tax dollars to Roth. The 88.5% of your conversion is $5,752 times 24%. So that’s a lot of math. The prorata rule is a little bit confusing, but the point is if you have a big balance in a traditional IRA, whether that is a straight up traditional IRA, SEP IRA, rollover IRA. I would maybe avoid this option or roll over any pre-tax IRA funds that you have into a different type of pre-tax account, like a 401k. But if you are able to swing it, this can add tens of thousands of ultimately tax-free dollars over the next few decades since you can do this process every year.

For example, even if you invest $6,500 in a backdoor Roth IRA just this tax year and let it sit for 25 years with a 7% compound annual growth rate, that’ll turn into around $35,000. It’s truly passive tax-free income for the future.

Next up is the mega back to our Roth IRA. And now listen, I know the names can get confusing, but you’re a higher earner baby. These are the hacked together solutions and options that we’ve got. So we also actually covered this recently on the blogs. We’ll link the full post in the show notes if you’re more of a visual learner. But if you’re a high earner who has already contributed the max to other tax advantaged accounts and you’re tracking towards your goals for your taxable contributions, this might be for you. Ironically, the mega backdoor Roth IRA is not a Roth IRA at all.

It’s technically an after-tax contribution to your employer-sponsored 401k or equivalent plan. So the key here is to know whether your employer’s plan allows for after-tax contributions beyond the standard contribution limit. So you’re probably aware of the $22,500 in 2023 and $23,000 in 2024, that elective employee deferral, but a mega backdoor Roth IRA allows you to add tens of thousands of dollars on top of that and you can still contribute to your Roth IRA or back to a Roth IRA if you want to outside of your 401k since technically this is all going into your 401k. Now I warned you this was confusing, but if you’re interested in trying it, you would open your company’s retirement portal and see if you have the option to contribute after tax dollars beyond the $22,500 limit. Then the plan administrator will convert those dollars into Roth in plan or permit in service distributions.

So you can then take those post-tax dollars, roll them over into a Roth IRA. You can do this up to, I believe $66,000 total in 2023. I think that’s going up to $68,000 in 2024. But like I said, we’ll link the full blog post that’ll have the breakdown of all the numbers for you. So we’ll get into all the details and nuances there. But the most exciting part is that there is no income limit for this. So if you make too much for that Roth IRA and you’re too busy to be bothered with the backdoor Roth IRA and your employer-sponsored 401k plan administrator offers this option, you can get pre-tax and Roth exposure all at once and track it all in one place.

Alright, and finally, yield brokerage account. If you are a regular listener of this show, you’re probably well aware of my stance on the power of taxable brokerage accounts because sure, they’re not tax free, but they’re invaluable for growing your money rather than just letting your hard earned dollars collect dust in a savings account outside of your dusty but valuable emergency fund, you can access brokerage account investments at any time, unlike a lot of the ones we just talked about that come with their fair share of limits and rules for withdrawing your funds. And thanks to the favorable capital gains tax rates in the us, even substantial withdrawals from taxable accounts will not generate too large of a tax bill. So like the tippy top bracket right now is 20% compared to the top ordinary income tax bracket of 37%. If you’re curious about investing outside of your retirement accounts, we have a full deep dive episode.

We’ll link for you in the show notes, but at the end of the day, the brokerage account will provide you with maximum flexibility, no contribution limits and no required minimum distributions to worry about. It is all on your timeline, which means you have a lot of tax planning wiggle room. Now, on a personal note, my husband’s and my taxable accounts are by far the largest recipients of our cash every year. Because of those contribution limits on everything else, we end up shoveling a lot of money into our joint taxable account. Okay? So those are the biggest investment vehicles that we normally talk about for high earners. But if you’re looking for other ways to move along on your journey, there are also some alternative investments that we should probably talk about, namely real estate investments in startups or collectibles. So long angle. A private digital community for very high net worth individuals did a survey in 2022 with their a hundred members.

And of that group, 23% of them were in the high net worth category of $2-5M. So the majority were in the 5 million to 25 million range, and 14% were ultra high net worth individuals above 25 million. The survey showed that from 2021 to 2022, the average portfolio shifted significantly away from public stocks toward alternative assets, primarily private companies and real estate. The allocation to cash and bonds remained basically unchanged and qualitative comments included in survey results indicate that these changes were driven by a combination of intentional portfolio adjustments and stronger returns over the last 12 months from real estate and private markets. So for the purposes of this study, long angle defined alternative assets as collectibles, hedge funds, precious metals, options and futures, cryptocurrency and NFTs, though I would not personally recommend investing in any of that, it’s also important not to confuse causation with correlation here.

There is a chance that ultra rich people just start dabbling in crazy shit because they’re sitting on $30 million and have nothing better to do according to the Motley Fool among ultra high net worth investors. So think $30 million or above alternative investments make up 50% of their assets as opposed to just 5% for the average investor. But remember, that still means they at least 15 million in stocks or bonds or other we’ll say normal, traditional investments. One thing I noticed from studying asset mix by net worth level is that as you ascend into that eight figure range, roughly half of people’s assets are tied up in business interests. So when we say alternative assets, we’re mostly referring to entrepreneurs whose equity and maybe their own companies or other people’s companies is fueling a large portion of their net worth. But as a HENRY or a HENRIETTA, you are not yet worth $2 million or more. Realistically, I would make sure that your tax advantaged and other long-term investment vehicles are fully funded and well on their way before you go venturing into the clown world of monkey JPEGs because alternative investments also take on quite a bit of risk. There is no guarantee that what I’ve invested in a tech startup will give me any ROI at all, or that the real estate your cousin just bought on a prayer with hopes that it’s going to 10 x in value is going to thrive in the next housing downturn.

So we’ll be right back after a quick break.

So those are some of the money basics money unlocks that I see as potential strong needle movers for HENRYs and HENRIETTA’s. But I also wanted to bring in someone who did take a high income and became pretty rich and spends much of their time thinking through best practices. So without further ado, let’s welcome Chris Hutchins of All the Hacks to the show. Alright, Chris, the audience is pretty nosy like me, so I would say in order for them to get acquainted with you, tell us a little bit about your story. How did you become a high earner? What is your professional background?

Chris:

Yeah, it took a little bit of a time out of college. I got a job as an intern at an investment bank and I ended up trying my hand at management consulting, which I guess at the time were both high earning jobs, but as a young person living in a city, I don’t know, I don’t think I saved as much as I should have. I got laid off and I found my heart went to San Francisco because I wanted to work in startups and I wanted to work in tech. And the trade off you make joining a startup is you get equity in the company for taking a low salary. So it was a little bit of a journey to get there, but eventually one of the companies I had worked at and helped start was acquired by Google and working at Google I think was the first time I made a six figure salary.

Katie:

Give me a timeframe here.

Chris:

I graduated from school in 2007 and short one and a half years in New York with those two jobs. Moved to San Francisco in 2008 and then got laid off in the wake of the financial crisis and then joined my first startup I think in 2010. So 2009, 10 was a little of freelance find work, not find work, try stuff out, burn all of our savings, traveling around the world and then get a job.

Katie:

And then you started a company that got acquired by Google.

Chris:

I worked at one startup that totally just didn’t work. Joined another one as I guess somewhere between a late co-founder and an early employee. It was called Milk. We only had seven employees. The product we built didn’t totally work, but the team was really strong. And so Google was like, we’ll give you all jobs and we’ll pay back your investors. And so it wasn’t like someone wired a million dollars into my bank account, but they said, we are going to give you a Google salary, which compared to every other salary I’d ever have,

Katie:

Basically a million dollars,

Chris:

It was more like, I think it was like $120,000, but it felt like a million dollars

Katie:

But wasn’t where the story ends. No, I know that you went on and started other things. So what happened after Google?

Chris:

I actually didn’t last very long on the product side where I was hired into, but I quickly found that there was an opportunity to go work at Google Ventures, which was the internal venture capital firm. Worked there for about three years, did a bunch of startup investing, ended up deciding I wanted to go back and do it on my own again this time as founder and CEO of a startup. So we raised some money, started a company in the financial planning space. We were trying to make fee only financial planning, both affordable and scalable, which is a very hard proposition. And so that also didn’t work out. About three years into the company, we decided it made the most sense to find a home for that company, and it was I guess acqui hired by Wealthfront. I went to Wealthfront and worked full-time building products.

Finally I think worked my way back to another six figure salary. I think I paid myself 30 grand as a startup founder, but at Wealthfront I kind of got to really just build products and we got stock, but it was not an acquisition, it was not a payday for me. So I’ve had a lot of jobs. I think some people, my wife over the course of almost that entire story, had one job for 10 years at one startup and I tried a bunch of different things but got a ton of experiences, things that kind of laid the foundation to pay off later. So some of that startup equity ended up being worth things. Some of the investments we made at Google Ventures ended up getting paid out when those companies iPod and got acquired and kind of all slowly laid the foundation. But if you look at our net worth, no single activity generated more than 20% of it. It was all little wins here and there or big wins to be honest, but none of them were like the bulk of everything,

Katie:

The win, right it I hear you. Y’all’s story is really interesting to me too because your wife was an early employee at a startup that I would say most of our audience has probably heard of and used. She’s definitely a success story as a startup employee.

Chris:

She joined Lyft when there were five people, and at the same time I was trying to join a hot startup. And so I was like, I knew one of the founders of Lyft. I was like, oh, you should go meet them. I’m not convinced what they’re doing is going to be the biggest, coolest, most amazing thing, but they’re really smart, cool people and it would be fun to get experience there since you’ve never worked in tech and it’s kind of a new industry for you. Meanwhile, I was like, I’m going to go join this company. It’s the hottest startup in Silicon Valley. They are going to the moon. It’s amazing. And one year in that thing fell apart. And this company that I had kind of told my wife, who knows what’ll come of it, ended up being five orders of magnitude more successful.

Katie:

You’re like, yeah, go cut your teeth. But I like y’all story because you both had different paths, but something that jumps out to me, you’ve tried so many different things and I think that diversity, the diversity of inputs, we’ll say that you had where you’re like, yeah, and then I did this and that didn’t work, and then I blew through my savings and then I tried this. It’s like you’re placing a lot of betts pretty rapidly and you’re being strategic, but sowing a bunch of seeds and being like, some of these are going to grow really big. Some of them will probably do nothing, but I’m going to be reaping these rewards for a long time to come. And I think that that’s how a lot of high earning people and successful people think. So you know what, I won’t sit here and I’m not going to rattle off your income and your net worth to the audience, but you are a high earner, I would say. You are rich now. You’ve done a really impressive job of fortifying your wealth. What are your personal best practices and pitfalls to look out for in general for high earners?

Chris:

One of the things that boded very well for this entire journey was that I had this kind of scarcity mindset early on where it was, I need to find a job that I love and if I don’t, then I’m never going to be able to work and I need to save money. So early on I just was obsessed with saving money, and I think that’s tapered off a little, but having that as my default was certainly helpful. Not thinking that, oh, I have a higher salary and now I should adjust. Now I should adjust. It was always, well, what if this job sucks and then I won’t be able to do it and then I won’t have that high salary. So I can’t keep adjusting my cost of living up and up and up. But I was surrounded by people who didn’t live that way.

I think anyone listening knows that they probably have a friend who has similar or even lower salary but lives a fancier, more glamorous lifestyle. And I can assure you that that will come with some consequences for most of them in the future. So that was my biggest mantra was like, don’t just assume that because you have more money, you can just spend more money until one day maybe you find enough money or stability in what you do and you love it and it works. So that was the basis for everything, was not constantly adjusting upwards, but that’s not a fun story that’s like, oh, yay, go save more money. We can all appreciate that, but I think everyone knows that story. But because I was so surrounded by people with money, I didn’t want to just not do the cool stuff. So I had this thing pulling me one direction, which is like, don’t keep up with the Joneses. And I had this other thing pulling me in that direction, which is like, well, but those are all my friends doing all those things,

Katie:

But the Joneses are having a good time.

Chris:

I know. And so I just basically decided I can’t spend the money, but I want to do the thing. And there has to be a way, and I think I’ve always had my entire life a perspective that teachers hated but was like, there has to be another answer. There has to be another way to do this thing that could be more optimal. And that just led me down this path of trying to uncover every way that you could live that same lifestyle but not at that cost. So you’ve talked a lot about points and miles and travel hacking. That was a huge component of it. When we wanted to buy our first home, it was like we were just looking at homes that had a third bedroom with a separate entrance so that we could turn it into a studio and rent it out and not need to sell our home when we needed a third bedroom because we outgrew the space and because of all the costs of selling a home and who knows what the future will look like with interest rates, which it turned out was a good call. All that stuff was like, let’s plan, plan, plan, optimize, optimize, optimize. So we could do all the cool stuff without having to put ourselves in the financial strain that I think so many people do. And so for basically every area of life, I would just try to drill down on what is the contrarian kind of different perspective you could take to further optimize something, whether it’s for saving or increased value.

Katie:

I love it. One of my favorite things to talk to you about personally are these what I would consider to be personal finance, kind of 5 0 1 concepts because you are one of the most savvy managers of your personal wealth that I know. So can you hit us with a couple of your favorite hacks? Now maybe these are business earner things or higher earner things, or we’ve had so many conversations over the last year or two about where I will be on the other end of the phone with you, just like jaw a gap being like, are you kidding me? I never would’ve thought about that. So maybe just rattle off a few of your faves.

Chris:

Yeah, so I’ll start with ones that are maybe more applicable. A few examples. So one fun hack that not everyone knows is there’s this thing called the Augusta Rule. I dunno if you’ve talked about this before, but Augusta is where they play the master’s tournament. And so people who own homes and wanted to rent them out for all the demand in Augusta during that short period of time, we’re like, we want to rent our home out. But gosh, it’s so much hassle to have to pay taxes and do all this business reporting. So there’s a rule called the Augusta rule that says if you want to rent your house out for 14 or less nights, you don’t have to pay taxes. The value of renting your house out for 14 nights a year is really great. The value of renting your house out from 15 to 21 nights a year is awful.

Once you cross that threshold, it applies to every night. And then beyond that, it goes up again. Probably in our last home when we didn’t have kid stuff strolled around the house, we were like, let’s rent our house out for 14 days a year. And so when we wanted to take a vacation, we would rent our house out and there’d be no taxes on that income because it was less than 14 nights. If you want to go a little further down the optimization, I think I’m not an accountant discussed with your accountant, but I remember at one point we had a studio in our house and then we had our room and then we had the whole house and it’s like are those different rental properties? If I rent just the studio and then separately I rent upstairs or I put one of our guest bedrooms on Airbnb, in my mind, the studio and a guest bedroom are completely different properties.

So you could rent one for 14 nights, you could rent another for 14 nights. I don’t think it’s defined well enough to know what that looks like, but it felt like there was always a way you could ask six more questions and figure out if there’s a better way to do it. So that’s one. If you live somewhere where real estate is very expensive and you want to buy a home, and this is arguably even more valuable today because of the interest rates we have, the IRS lets you deduct $750,000 of mortgage interest off of your income. So you buy a million dollar home, you put 25% down and you have a $750,000 mortgage. You can deduct all of the interest of that mortgage off of your taxes assuming you itemize, which is awesome. It’s one of the coolest parts about home ownership. But the challenge is if you live in lots of places, especially Bay Area, New York, la, a million dollar House, it might not be enough.

And so what do you do? And so it turns out that if you want to buy a home and you have the ability to buy, not even all of it, but if you do have the ability to buy it in cash or this is also true, if you have a house that’s appreciated and you want to refinance though given rates, you probably don’t. But if you were going to buy a house, let’s call it a $2 million house, you could buy that $2 million house with cash. You could then immediately within a few days, take out a new mortgage, take that cash and go invest it. And the IRS will treat the interest on that loan. If you choose to kind of follow a couple rules that I’ll explain as an investment interest expense, because you’re using that money to invest, similar to if you took a margin loan to invest, you can deduct the cost of that interest against your gains. I know a few people who, especially in the Bay Area maybe have enough cash to buy a home in cash but not enough to leave it in cash, will then buy it in cash, immediately take a cash recoup and be able to deduct millions of dollars of mortgage interest way over the $750,000 limit because they’re investing that money. Okay,

Katie:

So it’s a recap. So I’m buying a home in cash and then I am immediately taking out a mortgage, right?

Chris:

Yep. The rule is if you’re using money that you’ve borrowed to invest, you can deduct the interest on that loan against the income you make from an investment. So if you get a loan from the bank for your house, technically it’s for your house, but it’s also if you take the proceeds of that loan and there’s interest tracing requirements, which means you just need to be able to trace where the money went. So I’d recommend if you’re doing this, open up a separate bank account, tell the mortgage lender, Hey, can you wire all these funds into this specific bank account? Then take that bank account, take all those funds and go put it in an investment account. So for me, I had a Wealthfront account, I went and dumped it all in our Wealthfront account. And so now I’ve invested that money. So now I can go to the IRS and say, Hey, all the money I borrowed from this, yes, the collateral was a house for my mortgage, but it was a loan that I invested.

So that expense is an investment interest expense, and I can document exactly the path that money took from the lender to an account to an investment. And as long as I have enough investment gains, whether it’s interest or capital gains, I can deduct the interest expense from it in my taxes. So how this will play out very favorably, hopefully in a few years for people listening is let’s say you buy a home for $500,000 and it’s now appreciated to a million dollars. Well, you can take the cash out of that house with what’s called a cash out refinance, and you’re going to have to refinance your whole mortgage, which is why you wouldn’t want to do it now, because chances are if you have a mortgage, you locked in a rate lower than whatever the rates are today. But then if you invest the money you’ve cashed out, then it’s the same thing.

That whole mortgage now qualifies as investment interest expense as long as you can clearly show that that mortgage went to a bank account and was invested and was not taken out of that investment account. So you have to really follow these interest tracing rules, but the right accountant will know how this works, which I think is a macro theme. A lot of people are like, Ooh, I want to optimize my finances. Let’s hire an investment advisor. I think the accountant or at certain stages of wealth, the trust and estate planner is infinitely more valuable than the financial advisor. And I say this as someone who previously was a financial advisor,

Katie:

The find a great accountant underscores that is the theme of your answer, which is even if you are now sitting there being like, I actually am not a hundred percent clear on how I would make something like that happen. To your point, the right accountant will, do you have a recommendation for how to find the right accountant?

Chris:

This is a biased answer, but there is a company that I was really excited about what they were building called gelt, and it’s a tax accounting firm, and they’ve built a bunch of cool technology to try to make it really efficient to do a lot of tax prep. When I talked to ’em, I was like, this is awesome. I want to invest in this company, so I invest in the company. They’re like, do you want to use the product? I was like, let me see. I had been using a major accounting firm that people would know if you were looking at nice accounting firms and they were like, Hey, did you notice that you made this mistake two years ago and it cost you $50,000? And I was like, I had no idea. And they’re like, did you know that you only have 90 days left to file in order to recoup that $50,000?

So biased in that, yes, I met this company and then I invested in them, but then I used them and paid them. It’s not like they gave me my accounting services for free, but then they save me more money than I’ll probably pay them for the next 10 years. So how often do you hire a company? And then they pay for themselves for the next 10 years, but then they became a sponsor of the podcast. And so that’s gelt join gel. Well, I guess I should be saying go to allthehacks.com/glt. I think you could get a faster line on the wait list, but I would say in general, one fun way that I evaluated accountants was, and even if the situation doesn’t apply to you, I would ask them about this particular mortgage interest. I would just interview five accountants and be like, Hey, I have a question. I’m thinking about buying a home and the mortgage balance is going to be over $750,000. Is there any way to optimize this? And two of the five I interviewed said yes, and three of the five said no. And I was like, well, if you don’t, I know the answer. I’m just asking you to see if you know the answer. Yes.

Katie:

You’re like, if you don’t know about this, then that tells me you’re not as up on this stuff as I would need you to be for what I need you to do.

Chris:

So that is another big area where I just try to find some tax hack optimization that I want someone to be up to snuff on. And if they’re not, then I know it’s probably not the right fit.

Katie:

I got you. What about vehicles? Yeah, anything interesting on the vehicle front?

Chris:

Yeah, so this goes into the business owner thing, which is if you have a business vehicle that’s a business expense and the laws are constantly changing as far as what percent you can, but if you buy a vehicle, you can depreciate that over the life of the vehicle as a business expense, which is totally reasonable. Cars depreciate, and if it is over a certain size, if you have anything over that weight, and I think its like 6,000 pounds, but it’s not the weight of the car, it’s actually like the weight of the car plus what it’s rated to carry. And I believe the history of the rule was like businesses were buying trucks and machinery, but now cars are so heavy that you could buy a Range Rover or maybe a Suburban or a pickup truck and it might qualify, and then you could take what’s called bonus depreciation.

You could take it all in the first year. And so what ends up happening is whatever percentage of usage you had that was business in year one, you can accelerate that depreciation, take it all on year one. And so if you were to buy a car, and this sounds crazy, but people do this, you buy the car December 30th, you use it to go to one business meeting, that car was 100% business for that calendar year bonus depreciate the whole car. I believe they’re starting to ratchet back. So I think it was like in 2023, maybe you could only depreciate 80% and then it’s going to go back. I can’t remember the nuance. Talk to an accountant, don’t do any of this because I told you, definitely talk to an accountant. It has to be a business to, you have to have a business to depreciate the income from, you have to use it for business, but you only have to keep it over 50% in the following years.

So it’s like if you time when you buy it, there’s a way to make that work. Wow. So that’s one. You’ve probably talked about backdoor contributions to Roth IRAs before, which is fantastic. Along the lines of that, if you’re a very high earner business owner, there is a plan called the cash balance plan, which is way too complicated for me to explain. But at the highest level, if you’re making mid hundreds of thousands of dollars a year in profit, you can put away way more than the 66,000 that you would get to in a solo 401k or a regular four one K if your company allows it. And it could be as much as a few hundred thousand dollars a year. And it’s a very complicated defined benefit plan. It’s almost like creating a pension at your company for yourself. So I would definitely work with a company that specializes in managing these, if that’s your circumstance, which unfortunately it’s not yet my circumstance. I would love to have a business that’s making mid hundreds of thousands of dollars a year in profit. I do not yet, but when I do the cash balance plan is something I’m interested in.

Katie:

Speaking of business owners and business expenses, you’ve told me a really crazy story about what I’m going to call the cashback entrepreneur. Oh yeah. Can you regale us with this tale?

Chris:

So this was an awesome kind of optimization for someone who wants to pay very little taxes. And so they were run a business and they were like, gosh, I don’t want to pay a lot of taxes on this business. And what they realized was they could decrease their margins. So they were actually making less money as a business from a profit standpoint, but they were by decreasing their margins, the business grew so much and they were buying and reselling things, I think on Amazon. And so every time they bought something, they put on a credit card and then they would sell it. And there wasn’t that much margin, but enough to pay if there were any credit card fees or shipping fees or anything like that. It covered everything. So the business wasn’t losing money, but they were just racking up credit card points. And in this particular case, they were racking up cash back. And the interesting thing about cashback and credit card points is we don’t have to pay taxes on them because they’re considered a rebate of the cost of buying something. And so this person, I want to say if I do some quick math, was probably running somewhere on the order of 10 to 15 million a year on a credit card, earning 2% cash back, which netted them somewhere on the order of two to $300,000 a year of cash back. It’s

Katie:

Unbelievable.

Chris:

But they didn’t have any income. And so their was, instead of making a more profitable business, they were like, forget profit, let’s go for growth. Business isn’t going to make any money because we’re lowering our prices, but we’re so competitive that we have a lot of business. That means we could do more volume. That means I can run my credit card more. That means my cash back is going to go up and I don’t have to pay any taxes on that cash back. So they’re making two or $300,000 a year running a business that’s making 15 million, 10, 15 millions of dollars a year in income, but no profit because they piled the profit all back into the business. It’s

Katie:

So insane. I love that story. My brain does not work that way. I would not be thinking on that level. So it’s just really fun to hear how some people are creating some creative solutions to give themselves their income needs. One thing that HENRYs and HENRIETTA’s, as we’ll call them probably do more often than your average investor, is they have enough money to where they can invest in tax advantaged accounts and taxable accounts in a pretty meaningful way. And you had shared with me at one point that you use a direct indexing feature in Wealthfront, which as you mentioned is the company that kind of acquihire you in the past. And how that feature, which I would say is probably a little known. I’m not sure that many people realize that this exists or that this type of tax loss harvesting is possible, but can you kind of give us the spiel on your direct indexing hack?

Chris:

Yeah, so direct indexing is something that rich people have been doing for a long time, but it’s been very cumbersome to manage because the general idea is instead of buying the s and p 500, what if you just bought all stocks in the s and p 500 and now you’re thinking, well, if I log into my Vanguard account and I’ve got to buy 500 things and every time I make a contribution, I have to buy more shares of 500 companies and then rebalanced amongst them, it would just be way too much work unless you had hundreds of millions of dollars. Technology makes that a lot easier. And if you combine technology and in the future like fractional shares, it could just be really efficient. The reason why it’s exciting is because in any given day, the market may go up, the market may go down if you own the s and p 500 as an index fund, if the market goes down, you have a loss assuming you bought it today, and if it goes up, you don’t.

And so tax loss harvesting in general allows you to, when your portfolio is down, you could sell the total stock market fund from Vanguard and buy the s and p 500 fund, which are not identical. And so the IRS allows you to take that loss and hold onto it, and you can hold onto losses for your entire life. And so later you’ll have gains and you can knock your losses off your gains, net them out, and only pay taxes on the Delta. And so what direct indexing allows you to do is say, Hey, well, on any given day, the market is going to go up or down, but once it’s up a bit, then you’re kind of stuck at this high place where you’re not going to have a lot of losses. But if you buy all 500 companies, I don’t know the exact number, but every year some percentage of the s and p 500 goes to zero.

And so if you’re holding all the companies in the s and p 500, those ones that goes to zero allow you to capture losses against them, even though the market as a whole went up. So some of your holdings will have losses in the s and p 500, even though in that same time period, the s and p 500 as a whole, which is massively overweighted to the top 20 companies, but some of those losses you can take if you own the individual companies and if a company is managing that for you. With technology, it’s a lot easier. So I’ve been able to just harvest more losses each year because I turned on that feature at Wealthfront. What we found was that explaining it on a landing page was almost so complicated that we just lost people. And so it’s there, and if you want to go dig in and read, you’ll be like, wow, this is really powerful. I want to do this. The only downside is if you ever decide you don’t want to keep your money at Wealthfront and you transfer all of your positions to Vanguard, you are transferring all the positions, which means you now have a Vanguard account with 500 individual stocks.

Katie:

Yeah. Isn’t there a limit too, on how many losses you can write off a year? I thought it was like three grand in losses that you can take at a time.

Chris:

So you can only write $3,000 a year off your income. So if you have a year where you have no capital gains and you have $10,000 of capital losses, you can take 3000 off your income, your W2 income. But if you have gains somewhere else, then you can subtract an unlimited amount of losses against an unlimited amount of gains. So right now I’m carrying forward a five or six figure amount of losses because during the pandemic, when the market dropped massively, Wealthfront automatically sold a bunch of stuff at the bottom, and then on the way back up it was a different index fund. So I have a lower cost basis and I will owe more taxes in the future, but I have those losses now and I can use them for other things.

Katie:

Okay, that makes sense. And so you are carrying forward those losses. Is the thought being that maybe there is some year that you’re going to have five or six figures in capital gains realized, and so you would apply your losses to that? Could you get to net zero?

Chris:

The idea was that maybe I have gains external. So an angel investment I invested in did well, or Wealthfront one day gets acquired, which would be awesome, just like other capital gains. Or for example, every now and then, I think any one of us decides, oh, let’s go invest in some random stocks just for fun. And I was like, gosh, I don’t want to sell this. I don’t want to pay all these taxes right now. And then I’m like, oh, you know what? I’ve harvested some losses and I can net it out and it makes me feel better about selling these. But I will say, if you’re sitting on something with capital gains and you happen to be a charitable person, optimizing your giving strategy around things that are highly appreciated is like 100% what you should do. If you are listening to this podcast and you donate any money a year to charity, maybe there’s a small enough amount of money where it’s not worth your time, but if you donate anything to charity and you own any stocks that are highly appreciated, you are doing it wrong if you’re not donating those appreciated stocks.

So for example, let’s say you hold Facebook or Meta now and you bought it for $400 and now it’s at $800, you got $400 of gains. If you sell that stock, you’re going to owe taxes on that $400 gain at whatever the IRS, somewhere between zero and 20% plus whatever your state tax rate is. And so you will not get back the full 800 that stock’s worth. You might get back 600. It just depends on what your tax rate is. If you donate that stock, you can donate $800. You do not have to pay taxes on the capital gains. You get a deduction as if you donated the full amount. So if you look at $800 of meta stock that you’re going to eventually owe taxes on and $800 cash, and you donate them both to a charity, in both those cases, the charity gets $800.

In one case, you have an asset that is worth $800 to you. In the other case, you have an asset that when you sell, you will owe taxes on it is worth less than $800. So you never want to give the asset that is worth more. And there’s two ways to make this a lot easier. So one, this used to be something that I think only rich people had, but there’s something called a donor-Advised fund. And you can open one up at Fidelity Vanguard, I use a company called Daffy. You basically have your own little investment vehicle for charity. You can contribute $20 a month, you could contribute stock, you can contribute crypto, and then from that fund you can give it to any number of charities whenever you want. And while you’re waiting, you can just let that money grow and then be invested and you don’t pay taxes on that.

And you can take the deduction when you do it. So if you’re in a year where you’re like, my business is amazing, my company got acquired, I got a huge bonus, I crush my sales numbers. You could say, you know what I’m going to do? Normally I make a hundred thousand dollars a year, but this year I’m at 200,000 and that means I’m at a higher tax bracket. Well, you could donate three years of your donations. You say, I donate $4,000 a year this year. I’m going to put $12,000 into my donor-advised fund. You get the full deduction this year. But you can take as long as you want to give that money away. You don’t have to give it away to the charity that year, but you give it away from your bank account, you can’t get it back. It’s gone. This is not a tax hack for the non charitable, but it allows you to take the deduction now and it makes it a lot easier than if I was going to try to make a donation to Charity Water for a hundred dollars. It’s a huge pain for me to be like, Hey, can I find one stock that’s appreciated and hey, will you guys set up a stock transfer for my a hundred dollars? Instead, I donated depreciated securities to a donor-advised fund, then I can just dole out a hundred dollars here, $50 here or $20 here. And I don’t have to worry about the complexity of donating stock, but I get the benefit of giving them an appreciated asset instead of cash.

Katie:

And you like Daffy for this,

Chris:

Allthehacks.com/daffy, you get $25 to give to a charity of your choice.

Katie:

I love it. Well, you’re right. I mean in that sense, it’s not like it is a tax hack that’s truly a loophole. It’s just that like, oh, if you’re going to give to charity anyway, here’s a way to be more effective in your giving and more tax efficient in yourself. So it’s truly a win-win. So I think something that occurs to me as people get wealthier is insurance needs and that as you have more, there’s more that you need to protect. So you have a pretty nice deep dive on. You kind of did this insurance optimization rundown where you tried to find what are the best insurance providers and what are the insurance hacks. I’m curious what the headline was there for you.

Chris:

Yeah, so two things. One, the things I learned arguably apply more to anyone than just high earners. Obviously if you can save 10% on your insurance, it’s going to be more meaningful in terms of absolute numbers if you spend more on insurance. But if you have less money and you could save 10% on your insurance, that’s awesome. So by all means, if you want to go down the deepest rabbit hole on insurance, which I hope will end up saving you money, definitely go back. Listen episode 1 0 4, however, here’s some high level takeaways. One, bundling not always a good deal. You might think it is. I remember I had State Farm, my parents had State Farm and they were like, we were giving you the 10 year super loyal customer pricing. And I was so nervous to ever leave State Farm because I was like, they’re giving me all these discounts.

And then I actually did the comparison. I was like, well, their discounts don’t make up for the fact that they cost way more than everyone else. So that was one interesting takeaway. Another one is in the realm of liability, you have to remember that as your circumstances change, you want to change your insurance policies. Some people get a policy on their car or their home and they never touch a thing. And so if you get buy home and you live in it for 20 years and you keep renewing your insurance policy at the price you paid for your home, it’s not going to cover the cost to rebuild that home. So that’s one thing that’s super interesting. Same thing goes with liability. If you’re driving a car, I don’t remember what the minimums are in certain states, but the minimum liability insurance you need, in some states it’s like $15,000 in California, I think it’s 15 per person and 30,000 for other people.

So you can get an insurance policy that when you get an accident, if you hit another car and let’s say God forbid, everyone in that vehicle dies and they’re all families in a states are going to sue you, the insurance policy, you are allowed to have a policy that only covers you up to $30,000 for that circumstance. Now, if you only have $5,000 to your name, it’s probably fine. They’re probably not going to try to come at you for more money than you have. But if you’ve saved $250,000 and your liability policy covers 30,000, I am 100% sure that someone is going to come after you for more than your policy covers. And so I would say as your net worth goes up, you want to increase your liability coverages for all of your home policy auto policy if someone slips on your steps. And keep in mind that if someone slips on your steps even though they’re your friend, that doesn’t mean that they can cover all the medical bills.

That doesn’t mean that their medical insurance might say, well, we’re not going to cover this because we think it’s someone else’s fault, so we’re going to go after them. And so it might be out of your control. So I would say overall, you need to increase that liability coverage at a certain point, depending on the carrier, somewhere around 250 to $300,000, it caps out and it doesn’t necessarily cap out, but I would say it should cap out for you because you can layer an umbrella policy on top of it, and that is where you can kind of continue to protect your net worth. And in some states, you can be sued for future earnings. So let’s say you only have a hundred thousand dollars of savings, but you make a hundred thousand dollars a year. Someone could say, well, you got in this accident and unfortunately the whole family died, we’re going to come after you for 500 grand and because you make a hundred thousand dollars a year over the next 10 years, you’ll be able to pay us back. And you’re like, well, but my policy only covers a hundred grand. So you’re on the hook after that. And so for something on the order of a hundred dollars a year, you can add a million dollar umbrella policy. Maybe it’s 150, prices are changing, but it’s not like thousands and thousands of dollars a year.

Katie:

Very inexpensive umbrella policies are very cheap. And I think you pay by the million. Yes. So you should adjust it upward as you have a higher net worth.

Chris:

There’s various schools of thought on where the ceiling is. In general, I think at least keeping up with your net worth to $5 million is probably kind of safe. But if you have more than a hundred thousand dollars saved and your liability coverage is at $50,000, you have a gap. And that is not good. And if you have a hundred thousand dollars and you’re at a hundred, you might have a gap because in some states coming after future earnings is possible. So that is one where I’m like, absolutely double check your coverages, double check. Also, forget whether maybe you have no money, at least make sure you’re getting the best deal. The one crazy thing that most people never do, especially if you live in a city, is like if you live near a city and you don’t drive that much, you can lower the amount of your insurance premium by changing the estimated mileage.

And it is a massive, massive impact. I think we cut off something like a third of our insurance bill for our auto insurance by lowering the mileage that we drive. And the only annoying thing is that every year they’re like, by default, we assume you went back to the standard 12,000 miles per year and you have to call and say, no, no, no, this year I’m still at 3,500 miles. And then sometimes they’re like, can you report your odometer and all this stuff? So you’ve got to be accurate. It’s got to be honest. Yeah. Yeah. You’ve got to be honest. You don’t want to go get an accident and then you’re going to get a repair. And then the insurance company gets the bill from the, and they see the mileage and they’re like, wait a second. You’ve been reporting your odometer at this, but the insurance bill says this.

But if you’re sitting here bored because you don’t own a car, okay, that’s fine. But keep in mind when you rent a car, that liability coverage is also something you need. And so this is something that I think a lot of people miss that don’t own cars is that when you rent a car from a car rental company, you’re like, no, no, no. My credit card covers me. I’m going to decline all the insurance policies. Totally fine, except your credit card covers the vehicle. They don’t cover that liability portion. So if you are someone who does not have a automobile yourself and you’re not on a car insurance policy and you are renting a car and you are declining liability coverage, you have no liability coverage. Some states require a minimum, but if that state minimum is 5, 10, 20, $30,000, that is what you’re driving around with.

So they do make non-owners liability policies that just cover you for renting cars in other people’s cars, that kind of stuff. Or you can buy it. But I would say you absolutely, as you have any money to your name that you do not want to lose, you want to make sure you’re taking the right precautions to protect that. Another one outside of insurance is on the realm of estate planning. And obviously never fun to talk about death, but making sure that your money goes to the right place if you die. Once you have it, you have this gift that you can make sure goes to the right place if something were to happen to you. And depending on the state, the default of what happens can be simple or super complicated. In California, I don’t remember the limit now, but it’s somewhere between a hundred, $200,000.

Once you cross that line, if you haven’t set up a revocable trust, your money just goes to probate. And a probate court, which can be public record, which requires lawyers and whatnot to go through this process and decide where the money goes, all of which costs time and money is just a pain. And if you set up a very simple revocable trust, which I would say the most basic version you could probably do for a few hundred dollars, you can avoid that entire process completely. And you can actually put some thought into what you want to happen and not leave your loved ones to be like, Hmm, does this person want this kind of medical intervention? Does this person want their sister to take their kids or their cousin? All these decisions, do you want to make them a really interesting thing? It’s like everyone has an estate plan.

It’s whatever the state says is what’s going to happen and how it’s going to happen. So you can basically decide, do I want to create a document and get it signed and notarized that says, this is what I want to happen, or do I want to let the state decide what happens to my money and the speed at which it happens and who’s involved in the decision-making process. So I think as you have more resources, that’s something to think about. And then once you get to a lot more resources, the reason when you die there is an estate tax. When you cross a certain threshold of money that you get levied in estate tax, it’s very high. I think it’s like 44% or something in that regards, but it’s

Katie:

Above 11.7 million per person.

Chris:

So right now it’s $12.92 million, but in January, 2026, it’s supposed to revert down to 5 million. Oh,

Katie:

Wow.

Chris:

Okay. Adjusted for inflation from 2017. And it applies per person point being, any amount of money you have over that limit, the gift and estate tax exclusion is going to get taxed at a very high rate. I want to say it’s 44%, but somewhere between 40 and 50. If you have more than that money, you would ideally not like it to be taxed at almost 50%. And so I would say, what’s the threshold? The threshold is if you see a clear line of sight to crossing that number right now, that number is 26 million. If you see a line of sight to crossing that threshold, and if that threshold drops to five, then it would be 10. If you’re married, you want to start thinking about other things. And those other things could be charitable remainder trusts, these crazy trusts in different states. There’s some in Nevada and Dinging and Ning Trust, and there’s a lot of stuff you can do here. And I’ve actually had an episode on estate planning where for half of it we talked with, I think it was the head of legal for trust and will, which is an automated online estate planning tool. It’s the one I use for my own personal estate planning,

Katie:

Allthehacks.com/trustandwill

Chris:

Of course, of course. Course. Although I actually, I should probably shout out that you get 50% off if you’re a member. So all the hacks.com/join,

Katie:

Oh, there you go.

Chris:

But then the second half, we talked to the founder of a company called Valor, V-A-U-L-U r.io, and they have all kinds of very cool solutions for optimizing your financial situation with fancy estate planning tools. And they break it down by like, do you have a lot of ordinary income? Do you have capital gains, but you already sold them? Do you plan on having capital gains in the future? What is your problem? And we will help you find a solution to get past that. And one of the most interesting ones that I don’t know a lot about yet is the solar marketplace and all these solar credits. So the Inflation Reduction Act created all of these wild tax incentives for solar. If you have a really high income, you can unlock crazy tax benefits. I don’t know a lot about it, but I would say if you have a really high W2 income, there are very few things that let you optimize that. As well as these solar projects, that’s

Katie:

So random solar projects

Chris:

To encourage people to invest in clean energy, the government has decided they’re going to make it really advantageous to do that. And just to be clear, I believe in people paying their taxes. The IRS has decided there are some rules that they’re going to create, and if you follow them, this is what you pay. And if they get rid of them, I will gladly pay more taxes. But as long as they’ve decided there are a bunch of rules out here that some people are allowed to follow my mission with All the Hacks the podcast I run is let’s let everyone know about them. You don’t want to take ’em fine, but they’ve created rules to benefit people. If you could benefit from them, I think it’s at least fair to understand them. If you’re starting a business, this is a rabbit hole, we won’t go down, but if you don’t understand QSBS, you 100% need to go and read up for a long time about QSBS, which is qualified small business stock.

And as long as your company I think has less than 50 million of assets, when you make this election, you get the first $5 million tax free if you ever sell your company, as long as you’ve had it for I think five years and there’s some crazy stuff, you cannot elect it, start an LLC and then wait until that LLC is big enough and then convert it to an S corp or C corp. And there are ways to hack your way to half a billion dollars of QSBS exclusion, which I haven’t done, but there is a rabbit hole of tax optimization to encourage innovation for small business owners. And I think anyone should be looking at that. I

Katie:

Think if someone is interested in that and wants to go down that rabbit hole a little bit, I literally just plugged it in chat GPT, and it is very clearly laying out eligibility criteria, tax benefits, holding period rollover provisions. So you can have a little convo with chat GPT to decide if you think that this is something that you need to go find a guilt accountant to help you with.

Chris:

Yes. But do not just solely rely on chat GPT because I’ve gone through some fun experiments and I’ll give an example of where chat GT can be really valuable. I was trying to decide whether it made sense to do a mega backdoor Roth to put money in after tax or to try to increase my salary and put it in. And so I said, Hey, chat GPT, could you build me a model that would look into the future of the benefits? Oh,

Cool. Having a higher salary, which would require me pay more FICA taxes, social Security and Medicare, but would benefit me in the future because I have higher salary to contribute to my social security credits, which would increase my social security and retirement, but would have these trade-offs. And they actually built out an entire model. And the first version of it, I had done this myself and I was like, the first version was like 80% of the way there because I had done it myself. I was like, Hey, I think you forgot about this. And they’re like, oh, you’re right. Let me rebuild the model so they don’t always get it right. But when it comes to stuff like build me a model that forecasts out this thing and takes into account these five things, I think it’s surprisingly good. It probably would’ve saved me like three hours of Excel model building time. And then my advice is at the end, just take the list of all the things you wanted it to account for and be like, can you confirm that you included and paste the list? And sometimes it’s like, oh no, I’m so sorry. Forgot about that one.

Katie:

That’s really good advice. I like to use it as kind of a thought starter where if I need it to kind of point me in the right direction or I’ve never used it for modeling though. That’s great. Alright, Chris, thank you so much for all of the insights. We’re really glad that you could be here to share your wisdom with Rich Girl Nation. And as Chris mentioned, if you loved his enthusiasm and kind of outside of the box thinking the same way that I do, you can listen to his podcast. It’s called All The Hacks. And that is all for this week, HENRYs and HENRIETTAs. I will see you next week, same time, same place on the Money with Katie Show. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatiti Tassin with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer and additional fact-checking comes from Kate Brandt.