The more you learn about personal finance, the more complicated your questions are likely to get. But never fear: Hosts Robert Brokamp and Alison Southwick named their podcast Motley Fool Answers for a reason, and in today's episode -- the monthly mailbag show -- the co-hosts will tackle a whole bunch of money conundrums with a bit of help from Motley Fool Wealth Management Director of Financial Planning Megan Brinsfield, CPA, CFP, and all-around fine human being. The 13 topics they'll cover range from IRA required minimum distributions to self-directed brokerage accounts, plus a bunch of tax arcana. 

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Oct. 29, 2019.

Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm joined, as always, by...

Robert Brokamp: Robert Brokamp...

Southwick: Oh, that's no fun! Robert Brokamp...

Brokamp: Robert Brokamp...

Southwick: ... personal finance -- because that's his name -- personal finance expert here at The Motley Fool. Hello, Bro!

Brokamp: Well, hello, Alison!

Southwick: In today's episode it's the October Mailbag, and we're joined by Megan Brinsfield, the taxiest of tax experts, to help us answer your questions about the kiddie tax, living overseas, and do you really have to report everything to the IRS?

Brokamp: [Whispers] Probably.

Southwick: [Whispers] Probably. All that, and more, on this week's episode of Motley Fool Answers!

Hey, Megan! Thank you for joining us again!

Megan Brinsfield: Stoked to be here!

Southwick: We've got some questions to get through and I know you've got answers, so should we just get into it? 

Brinsfield: Let's do it!

Southwick: Our first question comes from Jared. "My family is having difficulty with IRA RMDs." When you say it like that, it makes them sound like weapons.

"And any insight on the following -- IRA required minimum distributions -- would be greatly appreciated. My dad turned 70 and a half in December 2018 but still hasn't taken the RMD I recently learned was required. Is there any way to avoid the stiff 50% penalty? Additionally, my mom passed away in 2017 before she reached 70 and a half, so no RMDs were required. Can we continue to defer RMDs based on her age and can my sibling and I transfer my mom's IRA that she left to us into our own IRAs?"

Brinsfield: So Jared has a complicated web of things to unwind...

Brokamp: Yes, absolutely.

Brinsfield: ... and it sounds like he's the primary point of contact for this grouping of IRAs that's built up in his family. For taking that on I commend him. 

Just a recap as to why we have RMDs. The government gives you this tax break while you're contributing to IRAs and your retirement plans over the course of your life. Eventually they're like, "We need to get our money sometimes. Like, pay up, guys." They require that you start taking money out of these accounts at a certain age. 

It gets really complicated when you have things happen like someone died before they started taking required minimum distributions -- or someone died after -- and who the beneficiaries are matters. 

One of the things in Jared's questions that isn't clear from the recap but I think is obvious in most cases is that a lot of times spouses leave their IRAs to one another and they might also set aside a separate account for the kids, and when it comes to required minimum distribution, who the beneficiary is matters when that's an inherited account. We'll get to that in a second.

For his dad who's still living -- he just hit 70 and a half in December and missed that first RMD that he was supposed to take in 2018 -- the question is, "Oh, gosh, what do we do about that? Can we go back? Can we fix it?" The good news is that the first RMD you can take the year after you turn 70 and a half, but it's still supposed to be done by April 1st of the following year. At least that gets you into 2019 and it makes it a lot easier to clean up messes that are happening in the same calendar year for tax purposes. 

There is kind of a mea culpa procedure on the required minimum distributions where it says, "We made a mistake, but we had a reasonable cause and we're correcting it quickly. We've taken swift action on this and it won't happen again. We promise." That's essentially what the instructions for the tax form say. So Form 5329 is where you pay penalties for all sorts of mistakes that you could make. 

The last one on the list is missing an RMD. You say, "I missed it, but I have this waiver," and you attach a statement that says why you missed it. Things like, "I was really ill and I couldn't take it," or one that we love seeing is, "My financial advisor didn't tell me to." That's not technically a good excuse, but it is one that people use a lot of times. Or, "The notification was sent to the wrong address." Technical errors and stuff like that. 

I think for his dad he can get things back on track in 2019 by taking last year's required minimum that was supposed to happen, as well as this year's and say, "Hey, IRS, we're on track, now." That's kind of nice because there are a lot of places that the IRS isn't quite as forgiving.

Southwick: And what about with his mom's IRA?

Brinsfield: So his mom's IRA -- the part that goes to his dad. I'm assuming that there's one IRA that went to his dad as a surviving spouse and then another IRA that went to the kids. That's important because as a spouse, to get these special benefits as a beneficiary, you have to be the only one inheriting it. So what's cool is that IRS allows people to treat an inherited IRA from a spouse as their own, which is really good if they are inheriting from someone who's older. They can roll it into their own account and take distributions over a longer time frame. 

But if someone is younger, like in this case -- I'm assuming his mom is a bit younger than his dad -- his dad could actually say, "I'm going to leave it in this inherited structure," because in that structure he doesn't have to take a distribution until his mom would have been 70 and a half, so he can leave it there and let it grow until she would have been 69 and a half. Then he can move it into his own name and take distributions in his own name. 

And you're looking at me like, "Why would you want to do that? That's like a lot of hassle and calendar reminders." But the reality is inherited IRAs use a different life expectancy table for distributions than your own IRAs and it's better, or more advantageous, to be using the table for your own IRA. I just looked at one random line on those different tables and it could mean a difference of over 2% distributions each year and that adds up quite quickly. 

I think the last question was whether the kids can take this inherited IRA and put it into their own and the answer is no, because that is a special rule that only exists for surviving spouses. 

Brokamp: So even though they're not 70 and a half, when you inherit an IRA from someone other than your spouse, you have to start taking required minimum distributions.

Brinsfield: Exactly. And if you don't get on that plan right away, you have five years to liquidate the whole account, which is pretty severe. 

Southwick: The next question comes from Matt. "I often hear that Fidelity estimates that a retired couple will need $285,000 to cover healthcare costs. Do you know if this number is an average total amount spent over the course of retirement or would this be how much is recommended to have saved at the beginning of retirement?

"Secondly, Fidelity gives out the rule of thumb that one should save 10x their income for retirement. For the median U.S. household, that's over $565,000. Does this figure include the healthcare estimate or would one need to save for the estimated healthcare costs on top of that 10x earnings?

"Finally, do you know if either of these figures assume long-term care insurance? I know rules of thumb are just that and it's better to talk to a financial professional to figure out my unique position, but all the same, any insight you can provide would help me relax."

Brokamp: Well, I reached out to Fidelity to get the answer to the question...

Southwick: That's so you!

Brokamp: ... just to make sure I understood it. So the $285,000 is for a married couple, so it's about half of that each if you're single. A little bit more for females because they live longer. But it is the total amount spent over your retirement. Ideally, it is better to have that saved up before you retire, but you can get by having less than that as long as that amount grows enough to cover those costs over the course of your retirement. 

That 10x your savings guideline for how much you should have before you retire is inclusive of the medical care. That's the good news. The one thing I want to point out, though, is that 10x assumes you retire at age 67, which is actually higher than the average retirement age these days, so according to Fidelity's guidelines if you're 62 and you want to retire, you should have 14x your salary and if you're retiring at age 65, it should be 12x your salary. I always worry about that with this 10x guideline. People think they can retire at age 62, but at 10x. You actually need more. 

It is important to point out that that healthcare estimate covers Medicare premiums, out-of-pocket costs for lots of medical stuff. It does not include the things that are not included in Medicare, which includes dental, hearing aids, and stuff like that. So Medicare doesn't cover that and that's not included in Fidelity's estimate.

And then finally, neither is long-term care. Long-term care is not covered in that $285,000 or in that savings guideline. So if you think it's possible you'll need long-term care -- and most people should assume they'll need a little bit -- you actually should have even more saved up. 

Southwick: The next question comes from Jackie. "This is an embarrassing scenario and I don't know where to go from here. I started out with $94,000 from my retirement fund which I converted into an IRA with an advisor. I realized they were taking unreasonably large commissions, so I removed my money but lost $10,000. I then invested some of it in Bitcoin and Ethereum and lost more money. I am down to about $64,000 due to bad choices and I'm wondering if it would help to remove the money and take a tax loss. I'm 65 years old."

Brinsfield: Jackie has had a bumpy road with investing and I think it's fair to say we've all had times that we've had some bumpy roads. When it comes to deducting a loss on your IRA, this is a place where our recent tax law changes come into play, because that used to be an itemized deduction subject to the 2% threshold. Those miscellaneous itemized deductions no longer exist under our current tax code.

I think the short answer is no, we can't deduct that loss. Even under the old rules, when you could deduct it, you had to completely close out any like accounts, so if this was a traditional IRA, she would have had to close down all of her traditional IRAs to be able to take that loss and then when you're calculating the loss it's based on your actual tax cost basis. Because you got that tax break up-front, most people don't have a tax basis in their traditional IRAs, so functionally it would be really difficult. 

I think one thing that's helpful, though, to put losses in perspective globally -- whether it's inside an IRA or not -- is what the value of a tax loss is. It is the loss times your marginal tax rate. So if I have a $10,000 tax loss and I'm in the 30% bracket, the value of that to me is max $3,000. And usually that is not as much value as just investing a little bit better. 

In Jackie's case, it's kind of saying, "I want a fresh slate." You can do that within the IRA without incurring all these tax consequences of taking the money out of the IRA and then claiming a tax loss against it to end up in a better place.

Brokamp: The one thing I'll add is she didn't say if this is her only retirement savings, but if that is the case, Jackie is a prime example of someone whose situation really would entail that she has to work a little longer because she's going to be relying on Social Security and by delaying that every year and getting that 8% bump to her benefit each year, that will make a world of difference for her. 

Southwick: The next question comes from Joe. "You often mention the general rule of not investing money into the stock market that you need in the next five years, plus or minus, which I understand is based on roughly how long the stock market has typically taken to recover after a recession. Is there a similar guideline for bond investing? Assuming I'm investing in a bond fund rather than individual bonds, where I would know the exact maturation date of each investment, is there a rule of thumb for how long I should plan for it to stay in the bond fund? Thanks very much. Bonds!"

Brokamp: He makes the important distinction that if you invest in an individual bond -- you invest $1,000 in a five-year bond -- you know in five years you'll get that $1,000 back as long as the issuer is still in business. Bond funds go up and down in value and you don't know what it's going to be worth in the future. 

And they can lose money, except generally speaking, it's not very much. So when you look at the overall bond market, years when it's down we're talking like single digits. Since 1926, the worst year for the overall bond market was in 1969 and it was a drop of 8%, so not a big deal.

That said, it does depend on the type of bonds you own and the two important things to consider are interest rate risk and credit risk. Interest rate risk is more important. If you have a long-term bond and interest rates go up, you could see that bond fund go down 10%-15%. And then the other is credit. So if you have a high-yield bond fund -- otherwise known as a junk bond fund -- those can go down significantly. Most of those lost more than 20% in 2008. I generally recommend that you stay away from those. 

If you're going to go with bond funds, any money you absolutely need in the next year or two should probably be kept in cash, short-term CDs, or something like that. Maybe even three years. Otherwise you're fine to have a bond fund. I generally think you should keep it in a safer bond fund: investment grade, corporates, or Treasuries, intermediate term, low cost, and you'll be fine.

Southick: The next question comes from Joshua. "I'm in my mid-20s and trying to figure out the ideal allocation between a 401(k) and a Roth. I've heard that 50-50 is the best way to hedge your bets, but since the Roth grows tax-free and the 401(k) doesn't, wouldn't the Roth be a lot better for a younger person who is expecting significant wage growth? I'm thinking of going 30-70 or even leaning more toward Roth."

Brinsfield: I'll jump in here because Joshua is kind of calling to my 20s' self. Balancing taxable and Roth accounts...

Brokamp: You were thinking of all that back then, weren't you?

Brinsfield: I was also expecting significant wage growth, so we're in the same boat, here. I think one thing that he's kind of left out of these buckets is the taxable brokerage bucket and not just thinking in binary pre-tax or Roth. There are other tax-advantageous buckets, as well. 

So in terms of the 50-50 or other ratios, I actually look at roughly one-third in pre-tax, one-third in Roth, one-third in taxable as kind of the ideal ratio as you're building assets because that will lead to ultimately the most flexibility when you retire. 

That being said, one thing that a lot of people don't consider is their 401(k) match. Let's say Joshua is only saving in his 401(k) and so he's splitting his contribution between pre-tax and Roth. I'm just being totally hypothetical here. 

But your employer match is always in pre-tax dollars, so if he's getting a one to one match, there, he's actually loading up more in the pre-tax side of the equation than the Roth side of the equation, so if you're getting a one to one match putting everything in Roth will actually get you to a 50-50 breakdown on those buckets. 

And then one of the things to think about as you are building up these Roth assets is because I think people in their 20s can also get so attracted to the Roth "lifestyle," they just want to put everything in there and pay the tax now. I know my tax is low and you miss out, potentially, in the future on these lower tax brackets that you can take advantage of in the future because right now you're peeling off from the top. 

Each dollar that you save pre-tax reduces the very top tax bracket that you're exposed to; whereas, in retirement when I'm taking out money, I'm filling up those lower tax brackets first and so I wouldn't want to get to a place where I had everything in Roth because then I've missed the opportunity to get those 10-15% dollars out in the future. I think a balanced approach is appropriate and one-third, one-third, one-third is what I'd go for.

Brokamp: And generally your salary will go up. According to David Blanchett at Morningstar, a college-educated individual's income will likely be 50% higher when they retire than when they're 25, and that's adjusted for inflation. So someone who's very young will see significant wage growth as they get older, assuming that they're in some sort of a professional job. 

The other thing I'll add to this is we had that whole discussion about RMDs. When you have Roth assets, you don't have RMDs. If it's a Roth 401(k), you have to first transfer it to the Roth IRA, but then you don't have to worry about any of that mess if you have those Roth assets. 

Southwick: The next question comes from Isaac. "I recently discovered and opened an account through my 401(k) called a 'self-directed brokerage account.' My main reason for doing this was to expand my investing options due to the plan being very limited in what it offers. Could you please provide your knowledge and perspective on these accounts and the pros and cons regarding them? I feel as though very few people know they exist. In fact, when I asked my HR department about this option, they had no clue what I was talking about." Oh, Isaac!

Brokamp: Well, one reason why people don't know they exist is most people don't have the option. Depending on what source you look at, anywhere from 20-40% of 401(k)s have this side brokerage account. We have it, here, at The Motley Fool. And even of those that do have them, most people don't take advantage of them. So at Vanguard, for example, about 20% of the plans have the self-directed option, but only 1% of the assets are in the side-brokerage account, so most people are not taking advantage of them. 

And it doesn't surprise me that the HR person didn't know this. I love HR people. They're wonderful people, but they're not necessarily the best expert about your plan. That's not true, here, at The Motley Fool, in case any of our HR folks are listening, but my experience interacting with HR folks is they don't always know the details of their plans, so it's often better to contact the financial service provider of your plan to ask the real nitty-gritty details.

Why would you do this? Thousands and thousands of investment options. Once you go to the side brokerage account you can buy any stock, any bond, just about any mutual fund, any ETF. If you are an educated investor and you're comfortable with that flexibility, go right ahead. There might be some extra costs involved. Maybe an annual account fee. The Motley Fool plan used to charge an extra five basis points. Now The Fool covers that, but just be aware of any additional costs.

From the 401(k) provider side, why don't more plans do this? Well, a lot of 401(k)s feel like this isn't a good idea for most employees. They feel like giving them that much freedom is basically too much rope to hang yourself with. Hopefully if you are going to do this, you are a knowledgeable investor, a good Fool, and you won't do too much active trading or anything too crazy in your 401(k). 

Brinsfield: And the employer, to some extent, is on the hook for the decisions that they make available to you, so having too much rope to hang you with; you, as an employee, in theory, let's say you take the rope. This is a horrible analogy, but you take the rope, you do the trades and you mess up. Then you're like, "Actually, employer, you shouldn't have let me do that. You should have known better." There is a possible course of action, there, because the employer, as a 401(k) provider, has to be making sure that the boundaries are set up appropriately for the participant. It's not like a slam dunk.

Brokamp: That's why most plans don't offer it, because the 401(k) providers don't want to take on that potential liability. 

Southwick: The next question comes from Sean. "I was going through my old Scottrade account that has since turned into a TD Ameritrade and noticed that one of my positions is no longer being traded, EFFC, but I still have some shares of them. What are the options available to me? Can I write off the loss of my investment and do some tax-loss harvesting?"

Brinsfield: Yes. One interesting thing is what we deem worthless. The IRS says you can write off the value of worthless securities, but there are a few ways that you have to determine that something is worthless. One way is the company goes out of business. Being delisted is not the same as the company going out of business. It's kind of in limbo where it's like no one's going to buy these shares, but there's also nowhere to dispose of them if you want to. 

One interesting thing that I learned is that aside from stocks actually having a value of zero, you can also abandon your stocks. Just walk away in the night and say, "I don't want you anymore," to those stocks and that allows you to claim the worthless securities deduction eventually on your tax return. You treat it as if you sold the security for zero on the last day of the tax year. 

And if you're holding one of these securities at a place like an online brokerage, they actually have a process for buying back your worthless securities and they charge you a fee for it. They're like, "I'll buy them back for zero, but you have to pay me ten dollars for the privilege of that transaction taking place." It just depends on the size of the loss you're talking about. If you invested in penny stocks, or whatever, it might be that the cost of the transaction is going to be more, especially if you have to put in that transaction over the phone. You get charged with a phone transaction fee. Transaction fees are totally in flux right now.

E*Trade actually has an online form called "Worthless Securities Liquidation Request," which I thought was fascinating.

Southwick: Worthless!

Brinsfield: Yes, and you actually get to write that on your tax return when you file, which I thought was fun. Worthless! It relates to that line item, not like a big red watermark across the thing, but...

Southwick: The next question comes from Ralph. "I have just retired and read that if my taxable income for any given year is $75,900 or less, then long-term capital gains taxes are not applicable. Does it make sense to liquidate all of my stock holdings and use the proceeds to live off of and put any excess cash into savings or back into the market starting a new tax basis?"

Brokamp: Well, I wouldn't say any given year, but certainly in 2019 if your adjusted gross income is below $78,750, but basically -- and he's married -- half that if you're single, if your adjusted gross income is below that and you have long-term capital gains, you'll pay a tax rate of zero on that. But you shouldn't sell all your stocks because as you sell those stocks that will add to your adjusted gross income and at some point you'll get over that $78,750 or whatever threshold it is. 

It certainly makes sense to do that up till that point. You sell the stock. You owe no taxes on the capital gains. You can buy it back immediately. There's no 30-day waiting rule like there is for losses and you set a new cost basis. It's a perfectly fine idea. Just don't do it all and then all of a sudden you have a $400,000 income and then you will pay long-term capital gains on most of those. 

Brinsfield: I have the threshold up in front of me. For married, filing jointly it's $78,750 of taxable income, which means to get to your gross income, you can add back your standard deductions.

Brokamp: So the standard deduction for married filing jointly for 2019 is over $24,000. 

Brinsfield: Yes, $24,400.

Brokamp: So you could have a gross income of $100,000, take those deductions, and still have some of your capital gains. And also your qualified dividends, as well. 

Brinsfield: And the other cool thing is if you itemize deductions because you have a house, or you give to charity, you can back off even more than that standard deduction, so you could have even more than $100,000 of gross income and still get to the right taxable income number. The magic one.

Brokamp: The magic one.

Southwick: The next question comes from Dustin. "My question is about small amounts of taxable income." I see banks won't necessarily send out a 1099-I unless you make $10 in interest. Do I need to report my interest income from savings accounts if one, it's less than $10 total and two, it's less than $10 per bank? Is all interest income taxable or is there a threshold in putting my slowly growing emergency fund to work?"

Brinsfield: So Dustin, the bad news is it is all taxable. Like everything. The former tax preparer side of me is there's kind of a different answer. The right answer is it's all taxable and you need to report everything. The practical answer is you have to pick your battles. Do I want you going through every single bank account you had in the year and finding down to the penny the interest that you had, or do I want you to focus on giving me your brokerage statements? 

I used to definitely pick my battles in that area as a tax preparer. Hopefully I'm not putting myself out there too much. Sometimes if people had $7 of interest I didn't report it, but technically it is all taxable. 

Brokamp: But good for you for building your emergency fund. 

Southwick: Yeah. Way to go, Dustin! The next question comes from Ahmed. "If healthcare costs have tripled, college tuition has skyrocketed, and housing has become impossibly expensive, then what kind of inflation is the Consumer Price Index actually measuring?"

Brokamp: That's an interesting, complicated, and controversial question, and the more I dug into it, the more I realized, "Boy, this is complicated!" The point you're making is if you look at the current reading for the CPI, which is inflation, generally speaking, it's only 1.7%, so it's basically nothing. Yet we keep reading about how all these other costs are going up. 

Like I said, it's complicated. If you want to understand it, you could start by reading, "The Bureau of Labor Statistics, Handbook of Methods," which is 107 pages long. I didn't get through it all, so I'm going to try to sum up...

Southwick: I'm sure you tried, though. 

Brokamp: ...sum up what I learned. The first thing you have to understand is that the CPI measures, basically, a basket of goods. What the average, typical American household spends money on. First of all, to figure that out, they do a bunch of surveys and there's a two-year lag on how they determine the basket of goods. 

And what gets incorporated is how our spending changes, so one obvious example is to look back like 20 years ago and think, "We didn't have smartphones. Now everyone buys a smartphone. They have to get a data plan. They buy their apps and all that stuff." That was not an expense that was in the basket of goods 20 years ago. So every couple of years the folks at the Bureau of Labor Statistics have to fiddle around with this basket of goods so they can do some sort of an apples-to-apples comparison from year to year.

But then they also have to adjust for the quality of the goods. Again, think of your smartphone. You can't really compare the price of the first iPhone to the current iPhone because the current iPhone has more memory. It has a better battery. It has a better camera, so they have to adjust for quality for what they call "hedonic adjustments."

So as you can see, the whole idea of the CPI is, to a certain degree, like economic hocus-pocus to come up with an actual number and the more you dig into it, the more you realize, really, that it's not reflective of the actual spending year-to-year of what you may see in your own household. To address the specific things that he mentioned, you have to look at the weightings of those items in the CPI.

Let's start with college. In the current CPI, education and communication makes up 6.5% of it and college tuition is only 1.6% of it. You can see how college tuition could skyrocket, but it's not going to really affect the CPI so much. 

Healthcare -- when you look at healthcare and medical care -- they're only measuring the out-of-pocket expenses, so it's not total insurance. It doesn't factor in what Medicare has to pay or what your employer is paying. It's just your out-of-pocket expenses, and that only makes up 8.6% of the CPI. So again, it's not a big component, so you can see how healthcare can keep going up, but it doesn't necessarily have a big weighting in the CPI.

The biggest one is housing. How do they calculate housing in the CPI? Well, rent is part of it. And this, again, is where it gets kind of funky. Homeowners -- they figure a home is part investment and part consumption and they strip out all the investment part. So if you put the down payment, if you're improving the house, closing costs; none of the that is incorporated in the CPI. Basically they calculate an implied rent that someone who owns the house would have to pay to live in the house. Again, you're getting very theoretical. It's not what's really reflected in the pocketbook of the average American. 

The bottom line is the CPI is fine for economists. It certainly suggests a hint of where prices are going, but if you look at it from an individual basis from household to household, it's not really a very accurate reflection of how someone's budget changes from year to year. 

Brinsfield: I thought you were making economists proud until you used the phrase "hocus-pocus." 

Brokamp: Here's the deal. The more I dug into it, the more impressed I was with it like all the things that they try to do. They use examples that at some point, maybe, the typical suit was a two piece suit, but then later on the typical suit is a three-piece suit. Well, you can't compare the price of the suits. You have to make an adjustment. And what if they're different fabrics? So they pick out the different fabrics.

Southwick: What about men's hats? No one wears a men's fedora anymore.

Brokamp: Exactly. 

Southwick: Why, we're going to hell in a handbag. 

Brokamp: Some people will look at it and will claim basically conspiracy theory because a lot of what the government does is based on the Consumer Price Index. For example, Social Security benefits. And if they can hold down that CPI, they don't have to pay so much in Social Security. I don't think that's the case. I think the Bureau of Labor Statistics is just trying to tackle a very complicated problem.

Brinsfield: I hope that they have meetings between economists, there, that are like, "All right, we're talking about suits today. We need to nail this down."

Southwick: I'll bet they have all the meetings.

Brokamp: All the meetings. 

Southwick: The next question comes from Robert. "I was excited to hear y'all mention custodial brokerage accounts on the April Mailbag because I've been debating about starting one for my son but was disappointed y'all didn't touch on the kiddie tax. Can y'all discuss this please?" I am not putting those y'alls in myself. Robert? Thank you!

"Can y'all discuss this please, specifically the income brackets and what changes were made in 2017? I asked my CPA and he never got back to me. I guess I need a new CPA." Womp, womp.

Brinsfield: Robert, I commend you for thinking of your kids and trying to improve their future. 

Southwick: And your down-home, folksy way of writing. 

Brinsfield: Yes. I mean, you are representing...

Southwick: I love a good womp, womp.

Brinsfield: He's from Baton Rouge, so he had to bring that through.

Southwick: Yes.

Brinsfield: Kiddie tax is one of those things where someone, long ago, found this tax loophole and they were like, "I know how I'll avoid taxes. I'll just give my kids all these income-producing assets and the kids don't have any other income, so they'll have super low taxes and then they won't know that I'll take those assets back because they're six months old, or whatever."

Southwick: Stupid baby!

Brinsfield: Yes. Pull the wool over their eyes. At some point people caught onto this and they were like, "Look, we need to close this loophole, a little bit. We're going to set up this kiddie tax to make sure that if people are abusing this kind of transfer of assets to kids to reduce their tax rates," -- something known as "income shifting" -- "we're going to make them pay," which is a consistent theme in the questions I seem to be answering today. 

The kiddie tax applies to kids that are under age 18, so, kids, and then full-time students up to age 23. And the idea is that you can only have a certain amount of unearned income and over that amount gets exposed to higher tax rates than would otherwise be applicable. 

So if I'm a regular person and I earn $9,000, I'm in the 10% tax rate with zero for long-term capital gains. But if I'm subject to this kiddie tax, it really matters what the composition of my income is. Did I earn that money from working a job or did I earn that money because my parents gave me some stock that's paying dividends? And if it's from stock that's paying dividends that's where the trouble comes in.

In 2019, kids can earn $2,200 of unearned income before this negative implication takes place. And the negative implication changed, again, with our recent tax code. It used to be, "Well, we're going to tax you at your parents' rate." Now it's, "We're going to tax you at the trust tax rate, which reaches the highest bracket at something like $14,000." So instead of your parents just accumulating and paying what they would have paid anyway, it really is a little bit more punitive to income shift to your kids. 

I think the threshold is such that if you think about what it takes to generate $2,200 of unearned income in a year, you'd probably have to be invested in like, I don't know, $100,000 in a decent bond fund to kick that off in a year. And so, I think if you're thinking, "Maybe I'll give my kid $10,000," you're probably not going to have that risk until they go to sell that asset down the line.

Southwick: The next question comes from Nick. "How long does my employer have to deposit my money that is being withheld from my paycheck into my retirement account?"

Brokamp: The quick answer is as soon as possible. There is this other thing that's basically like the absolute drop-dead deadline which can be no later than the 15th business day in the following month in which you receive the money, but you should not be doing that. Every company takes the money from your paycheck. They should be getting it into your 401(k) within one or two business days. 

The reason I chose this question is there have been times where the businesses are hurting for cash...

Southwick: I was going to say. It sounds like shenanigans.

Brokamp: Yes, so they hold onto it for as long as possible. This happened to the husband of an employee, here, at The Motley Fool. 

Southwick: No way!

Brokamp: The money was not getting deposited into the 401(k), so it is something to keep an eye on, because if they're strapped for cash, they're going to do everything they can to stay afloat.

Brinsfield: An interesting piece of my professional history is that when I started in accounting, auditing 401(k) plans was like the stuff that interns get to do. I was auditing 401(k) plans for multiple summers in a row, and this is the kind of stuff that we have to check. We had to take a sample of the employees and look at how much match they had elected and make sure that that got into the plan and that the appropriate match formula was used. 

And my claim to fame as an intern was I found an error in an employer match calculation and I just thought it was like the greatest thing. And everyone just groaned, because they were like, "This means that we need to reallocate two cents to every employee." 

And I was like, "But it was wrong!" But in any case, one of the things that we look for is whether the companies are contributing their match in a timely manner. And back when I was doing it, the rule was something vague like, "15 business days following the time when the assets are reasonably segregable from ongoing cash flows." 

The company that I worked for used to wait until the end of the year to make a one-time deposit and you compare that to working here, at The Fool, where our match is made every paycheck. That is more of an administrative burden. We should all go by and like high-five payroll for doing that for us because legally they really don't have to. They're held to a little bit more liberal standard in terms of when the match is made and I think we all know the earlier you can be invested, the better. So high-five for Fool payroll, here!

Brokamp: Thanks Fool!

Southwick: Yet again. Yet again. The last question and it's so perfect that the person who's answering it has a "frugal weirdo" sticker on her computer. And she went to FinCon. 

Brinsfield: Yup.

Southwick: "I took your advice on FI -- financial independence -- and now I'm going to RE -- retire early. That being said, I'm moving overseas to do it and I'm just trying to understand tax implications. I will be in my mid-40s and plan to take a bunch of cash and move it into an index fund or funds. For simplicity, let's say I'm starting with $1 million in cash and I'll need $50,000 a year for my comfy lifestyle. 

"Every year when I cash out $50,000, will I need to be specific about which specific shares I sell? Will I need to pay capital gains tax, or does this qualify for the Foreign Earned Income Exclusion?"

Brinsfield: Great questions, here! I'm just slightly concerned for this person's RE plan based on a 5% withdrawal.

Brokamp: That was my first thought, but he said it's hypothetical.

Brinsfield: Just round numbers. 

Brokamp: Right.

Brinsfield: That aside, I'm assuming we're just using round numbers and making easy math. The important thing is any time you are selling or disposing of an asset is understanding what disposition methods might apply. We all know I could take first in, first out. I could take last in, first out. I could take an average cost. And with any sort of fund, you have the option of doing an average cost, but that eliminates specific ID in the future. 

So when you open any sort of brokerage account, one of the many things that you're agreeing to is what disposition method you're applying to your account and most of the default is last in, first out. And you can change that, if you want to, to I actually want the highest cost basis to come out first, or the lowest cost basis to come out first. 

It's one of those things that gets lost in the weeds for a lot of people until it really matters, because if you are selling something that you have -- in this case, dollar-cost averaged into -- over a period of time, it's going to be much more advantageous to sell the stuff you just bought and has very little gain than selling the stuff you bought 10 years ago that has, in theory, accumulated more. 

But, yes, you will be subject to capital gains taxes on that and so one thing we just talked about was the fact that you can have a certain amount of capital gains every year that's tax-free, so even as a single person, you can have about $50,000 of long-term gain income before you're paying any tax on that. To me that is an advantageous approach.

One thing to keep in mind is that the Foreign Earned Income Exclusion is something that sounds really exciting...

Southwick: Because it has the word "foreign" in it...

Brinsfield: And "exclusion."

Brokamp: Who doesn't like exclusion? 

Southwick: It's a fancy beach somewhere in Greece. Call it Billionaire's Island. 

Brinsfield: Yes, it's a lot of trigger words. It sounds cool. It is cool for people that fit into the boxes necessary. People think, "Oh, because it's foreign, if I'm just out of the country I apply it." No. It means that you are working and earning income overseas, like for a job. So if you are retired early overseas and getting capital gains income, that is not earned income and so the Foreign Earned Income Exclusion does not apply.

And the other thing just to keep in mind for this individual who's trotting off to retire early is that the U.S. is one of the few countries that taxes on citizenship. No matter where you are in the world, you still have to pay U.S. taxes and file a U.S. tax return. That could get really messy depending on where you reside, because many countries are tax based on residence. The idea is your first tax is on the place where you reside and then you file in the U.S. and sort of reconcile what you might owe to the relative taxing authorities. A lot of people live in Singapore for this reason.

Southwick: So try Singapore, Cody. Did he say where he was going? Just overseas, somewhere. Maybe he's thinking Singapore.

Brinsfield: Maybe. If you remember back years ago, one of the Facebook people said, "I'm relinquishing my U.S. citizenship and moving to Singapore." That was like the thing to do.

Southwick: I love how you make it sound like they just stood off of a cliff and just shouted it out and then made it legal.

Brinsfield: It's similar to abandoning your securities. 

Southwick: I abandoned my securities. I relinquish my citizenship.

Brokamp: It's worthless. Worthless!

Southwick: Megan, we did it! We made it through 13 questions today. Lucky No. 13, so perfect for October's Mailbag. Did you guys do that on purpose?

Brokamp: Absolutely not!

Southwick: You could have lied.

Brokamp: Yes, we did!

Southwick: There we go! Megan, thank you so much for joining us! Please come back!

Brinsfield: I will!

Southwick: Yaay!

Oh, hey! Let's head to the snail-mail mailbag, shall we? 

Brokamp: Let's do it!

Southwick: I guess I mentioned on the podcast that I received cards from beautiful places, so he sent a very brown card. This could be from the 1960s, but it's "Courtesy of the Youngstown, Ohio Chamber of Commerce." It's a postcard of a steel mill. 

Brokamp: It's an unbeautiful card. 

Southwick: Yes, it's beautiful. 

Brokamp: But thoughtful. We still love it!

Southwick: Oh, we still love it!

Brokamp: Absolutely love it!

Southwick: Derrick wrote in from Clemson and he says he's applied to the 2020 Summer Internship. 

Brokamp: Oh, good luck!

Southwick: Yes, it is very, very hard to get into our internship program. We get...

Brokamp: My sister graduated from Clemson, so good for you!

Southwick: Greg and Ashley sent a card from Peru. They asked what's on the list of states that we have not gotten a card from and you know me. I'm not really good at keeping very good records, but I'm pretty sure we haven't gotten one from Delaware, Arkansas, or Wisconsin. I need to do an audit. I'm sorry! Because I can hear listeners yelling right now saying, "I sent you one from Maryland!" 

Our listeners have been getting a lot of delicious breakfasts. Here's the first one. Henry from New Hampshire got breakfast at Biscuit Love Gulch in Nashville. Yes, I went online, looked at the menu, and it looks amazing. 

Brokamp: Biscuit Love?

Southwick: Biscuit Love. He also sent us a card from KC's Rib Shack Barbecue in Manchester. 

Brokamp: Oh, goodness gracious!

Southwick: I'm not huge on ribs. 

Brokamp: Sweet Jesus!

Southwick: I didn't go there. Jake wrote us some questions from Scranton, which I will need to add to our Trello board. Dave writes, "Stocks, aye?" from Ontario, Canada.

Brokamp: Canadia.

Southwick: Canadia. Gene and Patty are back on the road and they sent us cards from Tennessee and Georgia and then they also went to Boston. They're always traveling, those two.

Brokamp: Those two!

Southwick: Phil and Andrew wrote from another delicious looking restaurant in Massachusetts called The Friendly Toast and they wanted to thank us for getting their son investing.

Brokamp: Oh, good! Oh, man, a VW Microbus. Awesome!

Southwick: What? A VW van life? 

Brokamp: Van life. Yeah, yeah. That's the Friendly Toast logo, I guess?

Southwick: I don't know. Thank you! Vicki went to Durango, Colorado, and passed along her grandpa's wisdom. "Save, then invest." Good wisdom!

Kevin wrote from the Balkans where he is doing ground research. I don't know what that means, but it sounds pretty cool. Mike sent a belated card from California. It got left in his suitcase. 

Congrats to PT for the promotion and thanks for the cards from New Mexico and the Smoky Mountains!

Brokamp: I love the Smoky Mountains. 

Southwick: I want to thank Daniel. Do you remember Daniel from Dubai? I thought I already mentioned that he got us a postcard. Anyway, here's Daniel from Dubai's postcard. It was so great to meet you, Daniel. Bruce went the extra mile of forgetting to send us a postcard from a remote location in Washington state, like Chelan. I should know how to say that, actually, being from that part of the country. So he had it mailed back there and then mailed to us. He really went the extra mile.

Brokamp: Wow, it's beautiful!

Southwick: Rich sent us a cool wooden postcard from Carlsbad Caverns. Wood postcards always look so cool.

Brokamp: They do.

Southwick: Hanna, who spells it the right way, may I add...

Brokamp: As the mother of a Hanna...

Southwick: As the mother of a Hanna sent a card from New York, but she just moved to Old Town, so we're neighbors, now.

Fifty Billion Cent -- again speaking of people who are always on the road -- is back on the road and this time doing some cheese tasting at the Tillamook Creamery. I know it well. I'm a big fan of Tillamook. And then Thad or Tad -- I never know how to say it, so sorry Thad/Tad -- sends greetings from N'awlins. I do love that town!

Brokamp: Yes. It's such a unique area. 

Southwick: Thank you, everyone, for continuing to send in the postcards! They make our day! I should maybe start parsing these out every episode rather than saving them just for the Mailbag. 

Brokamp: We're getting an awful lot. Thank you very much!

Southwick: We are! It's awesome! We love it! Just yesterday David Gardner was showing off our postcards to a visitor that he had...

Brokamp: Oh, yeah?

Southwick: So it was really cool. Anyway...

Brokamp: We do hang them up, so they're on display here at Fool Headquarters. 

Southwick: Yes, for all to see. If you would like to send us a postcard, our address is 2000 Duke Street, Alexandria, VA 22314 and you can send that c/o Answers Podcast or Rick... Not Rick. Well, Rick. You can send them under Rick. 

Brokamp: They can put Rick on there. 

Southwick: I mean Rick, Bro, Alison. You can send it to any of us. It will make it all to the same pile. 

Brokamp: I think we're the only people who get postcards here at The Motley Fool. 

Southwick: Well, Peter used to send postcards to Fools when he would go on vacation.

Brokamp: Peter ...

Southwick: Mm-hmm. 

Brokamp: Ah!

Southwick: But he retired and now he's in Portugal. Oh, so hopefully he'll send us a card from Portugal.

Brokamp: Yes!

Southwick: All right, that's the show! It's edited nostalgically by Rick Engdahl. Our email is [email protected]. Please send in your questions and we will eventually try to get to them. We do our best. We try. Bro feels guilty about not answering every question we get.

Brokamp: It's impossible!

Southwick: Yeah.

Brokamp: It's impossible!

Southwick: But we love you, guys!

Brokamp: We do!

Southwick: All right. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!