WCI #196: Understanding Tax Brackets

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dali.

This is White Coat Investor podcast number 196, how tax brackets work. Welcome back. We're recording this on the 21st of January. It's going to run on February 4th. So a little bit of a lag there. Hopefully nothing crazy happens in the financial world that makes this seem out of date when it runs. You know, I really think about that after last winter when we recorded a bunch of podcasts in advance and then.

Of course, you know, the entire market went to hell in a handbasket. It was very much a, you know.

Seemed out of touch a little bit.

Some of our podcasts there until we caught up with the ones we recorded.

So you never know what's going to happen.

Maybe bitcoin will, you know, drop by.

90% or double or who knows what's.

Going to happen in the next two weeks.

If you are finding our podcast informative and helpful, check out our website. Since 2011, we've been working hard to provide valuable personal finance and investing information. Through thousands of blog posts written by an array of authors, you can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate and so much more, all at no cost to you. You can find out more about the courses we offer, the conferences we put on, the newsletters we provide, and interact with other WCI readers through our online forum. Head on over to whitecoatinvestor.com to start learning today. You can do this, and the White Coat Investor can help.

All right, we're going to be talking about taxes today and our quote of the day is very fitting for this. It comes from Martin Ginsburg. He said, as Forbes magazine with rare accuracy suggested a dozen years ago, tax shelter economics were so bad that 19 out of 20 investments could only be sold to groups of doctors. The 20th scheme was awful beyond belief and could be sold only to dentists. And I think there's a lot of truth to that. So many doctors are just so terribly.

Worried about taxes that they do all.

Kinds of crazy things that cause them to come out behind even after taxes. So you got to be really careful about that. And we'll talk more about that as.

We get into the podcast.

Before we do that, I want to tell you about a couple of things that are going on. One, we've got the WCICON coming up, right? This is our conference. It's live but virtual this year thanks to the Pandemic. But it will be March 4th through 6th. You can still sign up for that at the website. You can go to whitecoatinvestor.com conference and you can sign up to get that. It's going to be really good because the virtual format, we've got a ton more content in it and we can charge you less for it.

And so it's just wonderful all the way around.

You can use your CME funds for it. It's got cme, it offers cme and.

You can obviously write it off as.

A business expense as well. So can't beat that. Check it out. If you are interested in physician life.

Coaching and if you're struggling with burnout.

Or you're struggling with balance, you may very well be. We want you to check out whitecoatinvestor.com coaching. One of our partner sites, the Physician Philosopher, has an Alphabet coaching service that they open periodically. It includes 12 weekly group coaching sessions as well as up to eight one on one coaching sessions with an alpha coach, along with a book, some video.

Lessons, some tech support and a community.

Of like minded physicians. It offers a 14 day no questions asked money back guarantee. And if you register, meaning get on the wait list before the 12th of February and buy it during the waitlist sale on the 12th of February, you get 500 bucks off. Not a bad deal. So check that out. All right, let's talk about taxes for a minute. You know, we do a lot of difficult things in our work and I thank you for that.

But you still have to understand a few financial things in your life, one.

Of which is how taxes work, particularly how the tax brackets work. And it's pretty amazing actually when you talk to typical Americans, including physicians, how few of them actually understand our tax code.

And we are talking today we are.

Talking about federal income taxes. We're not talking so much about state income taxes. We're not talking about payroll taxes like Social Security and Medicare. We're not talking about property taxes or gas taxes or sales taxes.

We are talking about federal income taxes.

And there are some things you should.

Understand about federal income taxes.

One of the first is that it's a very progressive tax system. Now, depending on where you fall in the political spectrum, you may feel like it's not progressive enough or you may feel like it's overly progressive. But the fact Is the way it.

Works right now is a little bit.

Over 40% of people either pay nothing.

In federal income tax or actually get money back in federal income tax.

And I'm not talking about a tax refund.

I'm talking about actually having negative taxes due to tax credits.

The top 10% of earners pay about 70% of taxes, and the top 1%.

Of earners pays 39% of taxes.

So it's a fairly progressive system.

And you should understand that as you.

Make more, not only will you pay more money, but you will pay a higher percentage of your money. And that is often described as tax brackets. What a tax bracket is, is it really just helps you kind of comprehend.

Your marginal tax rate.

It's really important that you understand the difference between marginal tax rates and effective tax rates. Okay, A marginal tax rate is the rate at which you pay taxes on the next dollar you earn. So if you earn another 100 bucks and $43 goes to the tax man, your marginal tax rate is 43%. The other tax rate is called your effective tax rate. And the way you get this is you take all the dollars you pay in tax and you divide it by.

The dollars you made.

Your effective tax rate, due to the progressive nature of the tax code, is.

Always less than your marginal tax rate.

And so you know, your marginal tax.

Rate might be 43%.

And you may find your effective tax.

Rate is only 19%. And that's just because as you go along, you fill the brackets. And that's really, really important to understand.

For example, if you look at the 2,021 brackets for unmarried people, okay, these are for single people. You will see that the first, almost.

$10,000 is taxed at 10%.

You will then see the next $30,000 or so is taxed at 12%. The next $47,000, $46,000 is taxed at 22%. Then the next, what does that work out to be? $78,000 is taxed at 24%, and the next $50,000 is taxed at 32%. And then the next $300,000 is taxed at 35%.

And everything beyond there is taxed at 37%.

Now, those brackets are a little bit.

Bigger if you're married, filing jointly, and actually vary a little bit. If you file as a head of household, which usually means a parent and.

A child, the standard deductions also go.

Up with your status. In 2021, it's $12,550. If you are single is 25,100 dol. $100 if you are married, filing jointly, and it's $18,800 if you are filing as head of household.

And so what that means whether you itemize your tax deductions, you know, basically we're just talking about the ones that go on schedule A, which is basically.

Your mortgage interest, $10,000 of your state or property taxes. And your charitable deductions are basically the main things that go on Schedule A.

You either take the sum of all those or you take the standard deduction.

Which is $25,100 if you're married for 20, 21.

And that essentially functions as a zero percent tax bracket. Once you get down to your taxable.

Income, you know, then all of that is taxed.

But there's essentially money above and beyond.

That which is not taxed at all.

And that's covered by the standard deduction.

Or your itemized deductions. And so keep that in mind that.

It is entirely possible to have a.

Taxable income of 0 if your income is low enough.

All right. So the way those tax brackets work.

As you go along, you fill them up, right?

Just because you get bumped into the next tax bracket doesn't mean that all the money you make is taxed at.

35% or 37% or whatever the next tax bracket is.

Only the money you earn in that tax bracket is taxed at that rate.

And that's really important to understand.

All right.

Another thing that's important to understand is that there is a difference between taxes withheld from your paycheck and taxes that you actually pay. Very different numbers, right? The government has regulations on how much an employer must withhold from your taxes. And there are penalties if you do.

Not pay enough tax at the end of the year. You know, basically if you have not paid enough tax throughout the year, you get penalized for that. You might have to pay penalties, you might have to pay interest if you don't have a enough withheld from your.

Paychecks or that you send in voluntarily.

As quarterly estimated tax payments. If you don't have enough withheld, you.

May owe some penalties and interest when.

It comes time to do your tax return.

It is a pay as you go system. You know, my state taxes are not like that in Utah. You don't have to pay the government anything until tax day until April 15 of the next year.

You don't have to send them anything and there's no penalties whatsoever.

And so if you're self employed, you can just write one big check in April, no Big deal.

Obviously, if you're an employee, they're going to withhold some from you as you go along. But it's not a pay as you go system.

The federal income tax is pay as you go.

You're expected to pay as you earn the money. And so how they enforce that is by giving you penalties and interest if you don't pay enough as you go along.

So how much is enough? Well, you have to be in the safe harbor. That means you either pay 100% of what you owe for that year within $1,000. You can be $1,000 off and still be okay, or you can pay for a high earner 110% of what you owed last year. So if your income's rising rapidly, you can be in the safe harbor. Even though you weren't anywhere near right.

In how much you paid as you went along through the year, those numbers.

Are a little bit lower. For lower earners, it's 90% and 100% instead of 100% and 110%.

But it's basically the same game being in that safe harbor to avoid taxes and penalties.

If you have any more than that withheld, if you have any more than.

That paid in estimated quarterly tax payments, you don't get any benefit for that. They don't pay you interest on it. Okay, Basically, you just gave the government a free loan, and that is what a tax return is.

It's just the government giving you back.

The money that you loaned to them.

Without any interest for up to 16 months.

That's what a tax refund is. It can be even longer if you got a tax extension.

But you just need to understand that.

There'S a difference between what is actually paid, what you actually owe in taxes, and what is withheld from your paycheck. If you were a W2 employee, you.

Can vary the amount that's withheld from.

Your paycheck by messing with your W4, you can have more withheld, you can have less withheld. A couple of years ago, as part.

Of the Tax Cuts and Jobs act.

They actually changed the numbers of how much was supposed to be withheld. And so people started getting smaller tax refunds because the government wasn't required to take as much money or the employer wasn't required to take as much money out of their paychecks.

And they were upset about it. They're mad about it because they're like, oh, I get a smaller refund. Well, you got to keep the money in the first place. It's just silly to be Upset about that.

Right.

So it's really important you understand that difference. Okay. Another factor that confuses a lot of.

People is that they don't understand what federal income tax is. They're assuming all this stuff taken out of their paycheck is all federal income tax. Right.

You have Social Security withheld, you have Medicare withheld.

Right.

You might have some other stuff withheld. Those are not federal income taxes. Just because you're paying other taxes doesn't.

Mean you paid them in federal income taxes. You know, if you actually run the.

Numbers, you will see that someone who.

Has $100,000 in income will pay about 8.6% of that in federal income taxes.

But their actual tax burden will be significantly higher than that at that level.

Of earnings, and particularly at levels of earning earnings under $100,000 a year.

Most of your taxes are actually payroll.

Taxes, Social Security and Medicare taxes. And so be prepared for that.

All right? And then lastly, some people just get confused. If it's taken out of the paycheck.

They think it's tax.

Right.

Even if it's paying for their health insurance or it's paying for their, you know, it's a 401k contribution or something.

Right.

Just because it's taken out of your paycheck doesn't mean it's a tax.

You have control over those things. If you don't want to pay for health insurance, I suppose you can do that.

I don't recommend it, but you can do that.

Even court ordered child support might be taken out of your paychecks, but again, that does not qualify as a tax.

Okay, let's move on to our next subject here. We'll start with a question off the speak pipe. This one comes in from Alex.

Hi, Jim. I'm a research scientist from California who works for a large pharmaceutical company. I have an option through my compensation for long term incentives, which means a certain proportion of my salary is provided by the company in forms of either stock options or restrictive stock units. There's a three year vesting period for each. And I'm just trying to figure out from an investment and tax perspective what would be the best one to choose, assuming all things, all else being equal.

Thank you.

All right, Alex, great question. Not one I get very often because this doesn't apply to doctors very often. Most doctors do not get, you know, restricted shares, nor do they get stock options. Something I've had to dive into a little bit with my own company, with.

The white coat investor when we were deciding how to compensate our own staff.

But Basically, these two things are similar, should provide similar motivation to you, but actually function fairly differently. Restricted stock shares are actual equity that you're given. You actually own the company. When they give you restricted shares, why are they called restricted? Because you can't sell them for a while, that's why. And a lot of times these are.

Used at a company that's already publicly traded.

Not always, but a lot of times.

They are given at a company that is already publicly traded.

They are usually vested, meaning that, you.

Know, they're given to you on the condition that you'll keep working at the company for a while. If you don't, you don't necessarily get to keep them. And that's not terribly different from stock options, which are often pested as well.

But what an option is, is it's a promise of future profits. It may or may not pan out, right? With restricted shares, you're going to own.

A piece of the company no matter what.

With stock options, the idea is that in the future you'll be able to buy shares of the company at a lower price than what they're then trading at. And of course, the difference is what you earned, what you were paid. You don't have to keep the stock after that point.

Once you exercise the option, you can sell it, but, you know, usually you can't do that for a certain period of time after the ipo.

But this is used a lot in.

Startups before they're traded publicly with the hope that you're going to have this massive windfall down the road.

And that's the way it's worked out.

A lot in the Bay Area for a lot of these tech workers, you know, that become millionaires when their company goes public and they get to exercise their stock options and make all kinds of money.

So all else being equal, I guess I'd take the ownership of the company versus potential future profits.

But the truth is, all else is never equal.

Right?

And so you just have to really examine both of those. The better you think the company is going to do in the future, the more likely you are to take the.

Stock options over the restricted shares.

Whereas if you don't necessarily think it's going to be spectacular in its growth, you may be more happy to actually.

Get something because the stock options might.

Be worthless if the company really doesn't become valuable. And, you know, even if the company doesn't become valuable, owning shares of it may still be worth a significant amount of money. So I hope that's helpful to you.

All right, our next questions Came in.

Via email as part of a longer email, but I'll spare you that.

The email said, I'd greatly appreciate a more in depth discussion on your podcast or elsewhere of bonds, since you have.

A great talent for explaining things in practical terms. And then he lists, oh, five or six questions about bonds. So let's go through each of these one by one.

What are the major classes of bonds.

The average do it yourself investor should understand and consider?

Well, I think there's about six treasury bonds. A bond is a loan.

It's a loan to an entity. They pay you interest for it, and.

At the end of the period when.

The bond matures, they give you your principal back. That's what happens if you buy an individual bond.

If you buy a bond fund, the fund manager is essentially doing that same thing. So the major classes, major asset classes of bonds. Well, perhaps the most important one is treasury bonds.

These are loans to the US Government.

They're considered very high quality loans because.

They'Re backed by the country's ability to tax its citizens.

Right.

As you've learned, they can just issue debt if they want.

Right.

They basically create money out of thin air and give you your money back. And so they're considered very safe.

Next step down is a municipal bond.

These are generally loans to states or local government entities, and they're considered slightly.

Riskier than Treasuries, although the default rates are still very, very low.

People worry about them a lot when they see these cities and states that aren't run very well financially.

But the truth is, if you look.

Historically, default rates are incredibly low on municipal bonds, but they're a little more risky. The big reason why people may invest in municipal bonds is because they are federal income tax free. At least the yield on them is the payouts. The coupon from the bond is federal income tax free.

If it's a bond issued by your.

State or municipality, it may also be state tax free.

And so because of that, these are.

Attractive for people who are in a high bracket and who are investing in a taxable account.

Basically, the municipality or state gets away paying less in interest because that investor after tax comes out ahead with a.

Municipal bond than they would with a regular bond, whether it's a Treasury or a corporate. And so they're willing to take and buy those municipal bonds.

So for a lot of us that.

Are in high brackets, when we invest in bonds in a taxable account, we use municipal bonds.

The next step up in risk is a corporate bond. And these are loans to corporations.

Maybe you're loaning money to Apple or Ford or Exxon or whatever, you know, you don't own equity in the company.

So if the company does really well, you still only get what the bond.

Promised to pay you.

You know, if it's a 5% bond.

You know, even if the company doubled.

In price, you still only get your 5%. And of course, if the company goes.

Bankrupt, you may not get anything, you.

May lose your money. However, you are more likely than an equity investor or a stock investor to get some money out in that situation.

Because the bondholders get paid first. They get paid before the stockholders do because they're not owners, they are a creditor of the company.

So we've talked about Treasuries, we've talked.

About municipal bonds, we've talked about corporate bonds.

One type of treasury that is worth understanding is a Treasury inflation protected security or a tips. And these are inflation index bonds. You know, one of the big risks.

With a nominal or regular bond is inflation. If inflation goes crazy, yeah, you'll get.

Your 5%, but inflation will have decreased.

The value of that bond by the time you're paid back. And the idea behind the TIPS is.

That if unexpected inflation rears its ugly head, there is actually an adjustment factor.

That you get paid more. So it's a Treasury with an inflation indexed component to it, makes it a.

Little bit more complicated and sometimes surprises.

You how it acts in various different types of markets. But the idea behind it is that it gives you more protection than a typical bond from inflation. Another asset class that a lot of.

People think about are international bonds.

Rather than just loaning money inside the US you can loan money outside the US to international companies, to international governments and get a little bit more diversification there. Vanguard has started a fund like that a few years ago. They've incorporated it into all their target.

Retirement funds and their life strategy funds.

And so that's another asset class that people more frequently invest in other types of bonds.

Well, there's treasury or not treasury bonds, but savings bonds. These are the EE bonds which are nominal bonds, and the I bonds which.

Have an inflation adjustment similar to tips.

The downside of these, if you want to buy a lot of them, it.

Doesn'T work out very well. You can't just walk in and buy half a million doll of these. You can basically buy $5000 a year. Your spouse can buy $5000 a year. I think if you use your tax return money, you can buy another $10,000 a year, but you're kind of limited, you know, you can't put a ton of money into these. They're really designed for the individual investor, not a more wealthy investor or an institution.

So those are the major classes of bonds to consider. And even among all those bonds, you know some of them are better than others.

Right.

There are companies that are more likely to pay you back than others. So the ones that are really unlikely to pay you back are called junk bonds.

And the, the better ones get higher ratings, whether it's a AAA or a double A or a single A or whatever. But as you take on lower quality bonds where the likelihood of them giving your principal back starts to fall, you can earn higher yields.

Same thing with longer term bonds. As you take on that interest rate.

Risk, the risk that interest rates will go up dramatically and decrease the value of your bond, you generally earn higher yields as well. So longer term bonds tend to pay more than shorter term bonds, which makes sense.

All right, let's take the next question. During times where US and international total stock index funds are performing poorly, which.

Bond classes are least correlated? Well, the safest ones, right.

We're talking about treasury bonds for the most part.

And if you really want to decrease your risk, you can choose very short term treasury bonds. You know, with a short term treasury bond index fund, that sort of a thing, and that's a very safe bond.

It's very sheltered from default, it's very.

Sheltered from interest rate changes, but it's.

Probably not going to pay you all.

That much in yield.

However, when markets tank, stock markets tank. A lot of times the bonds that do the best are not necessarily the short term bonds. Sometimes they're the longer term bonds because often when markets are tanking, the economy's.

Tanking, the Fed cuts interest rates and.

Dropping interest rates increase the price of.

Long term bonds more than short term bonds.

And so in that effect, many times as long as there's not a big bunch of inflation that comes with it.

A long term treasury bond is actually has the most negative correlation with dropping stock index funds.

Not necessarily a reason to carry them because then you're taking on all that interest rate risk.

But that is the answer to the.

Question, okay, what are reasonable overall bond allocation percentages as a percent of total.

Portfolio for someone 20 to 30 years out from retirement? Well, reasonable is a pretty wide range. I would say reasonable is anywhere from 0% to 50%.

If you're in that range at 20.

To 30 years out from retirement, I think you're in the range of reasonable. Now I have about 20% bonds in my portfolio I'm 60% stock, 20% real estate and 20% bonds. And I feel pretty comfortable with that. But I've also been through four or five bear markets and I know that that's enough bond sense for me to stay the course with my plan. You know, if you don't have any idea how you're going to react in your next bear market, maybe you want to hold a little bit more bonds than otherwise. But those are all very reasonable numbers. Jack Bogle gave a recommendation that you use 100 minus your age.

So if you're 25, he'd recommend that.

You have 25% bonds. If you're 35, he'd recommend you have 35% bonds.

Some people are more aggressive.

They say 120 minus your age.

So if you'm 20 years old, you'd have 0% bonds.

At 30, you'd have 10% bonds. At 40, you'd have 20% bonds. At 50, you'd have 30% bonds. And that's obviously also well within the reasonable range. Nobody really knows the answer here. I think the key, like with all.

Portfolio construction questions, is pick something reasonable.

That you can stick with for the long term. And every asset class is going to have its day in the sun and the day when you'll be happy you own it and it's going to have times when you are not happy that you own it. And that's the cost of diversification.

All right, within the bond allocation and portfolio, what is a reasonable approach for determining the individual bond funds and sub allocations such as total US bond versus short term tips? Well, people are all over the map with this, right?

There is no right answer to this. Nobody really knows. I took that to be well, maybe I'll just split it in half.

So half of my bonds are nominal bonds and half my bonds are inflation index bonds. I figure the biggest risk to my portfolio is probably inflation.

That's the most common of the deep risks that Bill Bernstein talks about is inflation. It's much more common than devastation or deflation or confiscation, which are the real risks that investors face. And so I think it's reasonable to have a pretty significant allocation to inflation indexed bonds.

But I'm probably a little bit out.

On the spectrum as far as that goes. If you look at something like how Vanguard makes its target retirement funds, they don't put half of their bonds into a TIPS fund. They have a significantly smaller percentage of that.

So I guess what would reasonable be? Well, I would say anywhere from 0%.

In TIPS to 50% of your bonds in TIPS is probably the range of reasonable amounts to have in there.

Okay, next question. Are there certain bond classes that individuals.

Who live in high cost of living.

Area should consider, such as municipal bonds.

And what happens when someone moves out of that state?

Well, it's not so much that you.

Live in a high cost of living area. The issues are really your tax bracket and how much your state taxes your income.

For example, let's say you're in California.

In top tax bracket, right?

You're paying 37% federal.

You're paying 13.3%. I think it is in state tax.

Well, shoot, if you're holding bonds in a taxable account, yeah, municipal bonds are.

Probably going to be pretty important to you.

And it would sure be nice to have California municipal bonds that also don't.

Pay that 13.3% tax. If you moved out of California in.

That situation, well, those bonds would still.

Be sheltered from your federal income taxes. But if you moved into, you know, Utah, for instance, you're still going to pay 5% on the proceeds of those municipal bonds because they're not Utah bonds.

So you still get the federal tax break.

You wouldn't get the state tax break. But hopefully if you're moving from California or New York or New Jersey, you're going to a lower tax state anyway. Maybe you're even going to a no state tax like Nevada or Washington or Florida. But that's basically what happens with it. So, yes, municipal bonds and particular municipal bonds in your state become much more attractive to you as you make more money.

Okay, in your opinion, should investors diversify.

To international bonds as they often do for stocks? I note that Vanguard made the international bond a smaller ratio than the comparable international stock. I think he's talking about target retirement funds there. I'm agnostic on this. I don't own international bonds. I don't think it's an unreasonable thing to do. They were not really accessible.

When I wrote up my investing plan.

16 years ago, I haven't felt a huge need to add it to my portfolio. I feel like it's adding complexity without a lot of benefit to me. Do I think it's crazy if you.

Put some of your money into international bonds?

Absolutely not. But it does add one more asset class to keep track of and rebalance. I've been pretty happy just owning US Bonds for now. There's no real right answer there. If you want to split your bonds between US and international, that's not unreasonable. If you want some smaller amount in international, I think that's reasonable, too.

I Split my stocks 2/3, usually US 1/3 International.

That's probably a reasonable thing to do as well with your bonds, if you would like. But I think investors are all over the place there, and I think the whole range is pretty reasonable. The key, pick something reasonable, stick with it in the long run.

All right, let's take another question off the speak pipe.

This one from Danny.

Hi, I'm Danny. I'm a transitional year resident. I was wondering if you could talk a little bit more about the LLC and AOTC tax credits. My specific question is for me, and it is, would I be able to claim that tax credit even though my medical school tuition in the spring of this year was paid with a scholarship, as well as getting a little bit of money above tuition? So I made $5,000 for school related expenses. I was wondering if I'd be eligible to claim that and would I need to have that $5,000 of extra scholarship money be counted as taxable income in order to be eligible?

All right, so let me get this straight, Danny. You want to take a tax deduction for something you never actually paid for? No, that's not the way the tax code works.

You can't do that.

If you go specifically to the IRS site and you read on their American Opportunity Tax Credit page, it says who is an eligible student. Student for aotc to be eligible, you got to pursue a degree, you got to be enrolled half time. You can't have finished the first four years of higher education at the beginning of the tax year. You can't have claimed it before. You can't have a felony drug conviction. You have to get Form 1098T from an eligible education institution and make sure it's correct. And perhaps most importantly, you have to actually pay the bill. Same thing if you go to the LLC page, right. It says to claim the llc, you must meet all three of the following. One, you, your dependent, or a third party pay qualified education expenses for higher education. And if you don't pay for it.

You can't claim the credit.

So that's basically the first thing is.

If you don't pay, you cannot take the credit. That's just the way it works. So, sorry, no, you can't basically double dip there, take a scholarship and get a credit for the scholarship.

Okay, next question comes in via email. What, if any, financial books are you recommended for your kids and at what ages?

All right, that's, that's a great question.

It really depends on the kid and the age. If the kids are really young. There are some books out there you.

Might consider that are designed for young kids.

One is called how the Moon Jar Was Made.

Teaches kids how to save and spend and share lemonade in Winter.

A book about two kids counting money.

You might try that.

The Go Around Dollar. This is by Barbara Adams and shows.

How dollars move around through the economy.

There's a book called A Chair From.

My Mother which talks about a daughter and a grandmother saving coins to buy a comfortable chair for the girl's hard working mother.

Neil Godfrey's Ultimate Kids Money Book. This is a mother and a grandmother who was a executive at Chase bank.

Who basically put a whole bunch of stuff about finance into a kid friendly guide. And the last one for younger kids is Pretty Penny Cleans Up. You know, these are all books with, with illustrations. The kind of thing you would use to try to teach a younger kid about money. You know, once they get into the teenage years. I think you probably need to go a little bit more dense. Maybe you're looking for more of a chapter book than you are an illustrated book to read at bedtime.

You know, something like maybe Richest man in Babylon might be a good choice. Rachel Cruz, Dave Ramsey's daughter, has a.

Book out that's kind of aimed at teenagers. You might take a look at that one.

We reviewed one on the blog not long ago called Dad's Guidebook Finance A.

Kid's Guide to Saving and Investing. You can find that review on the website. It's a pretty short book, but talks about, you know, a lot of that stuff. That's a, that's a good option for a teenager.

If they're getting to be an older teenager and they're really interested in finance, you might try handing them something like Millionaire Next Door.

You know, I've got the next Millionaire Next Door right here. If you're watching this on YouTube, we had Sarah Stanley Fala on our podcast not long ago. She helped author that book. And that's a great option. You know, it's really important for kids to understand the main lessons in that book, which is that money is what you don't spend. You know, what wealth is, is the money you don't spend. Not the flashy stuff you see the cars and the watches and the clothes.

If you're looking for books that are.

More about how you should interact with.

Your kids, I'd recommend these two. This one is from Kevin McKinley. It's called make youe Kid a Millionaire and it's got some awesome stuff that.

Really demonstrates the power of compound interest from starting to save early for your kids. You know, especially in something like a.

Roth ira, but even just in a.

UTMA account, which is basically a kid's taxable account or even some annuity options and what you can do with that.

So lots of great options there for.

What you can do with your kids.

But the book's not written for your.

Kids, it's written for you.

And the other one is called Silver.

Spoon Kids, which I reviewed years ago on the blog. This one's really good, subtitled Communicating About Money in Healthy Ways, Teaching Strong Values and Compassion, Preventing a Feeling of Entitlement, How Successful Parents Raise Responsible Children. And if you worry about a lot of the issues that I worry about with my kids, that's the book for you.

Hope that's helpful. All right, let's take one more question off the speak pipe here. This one comes in from Ricky hi.

Jim, Hope the situation in Utah is getting better. I assume it is as this is probably going to air later on. I had a question about contributing to a non governmental 457. I was wondering if there's any resources or should you Benjamin Graham it when you're thinking about actually contributing to your non governmental 457? Is there maybe also a resource similar to Benjamin Grant's security analysis when it comes to actually evaluating whether you should contribute to a non governmental 457 or even if the same principles of security analysis will go into contributing? I know that the 457 non governmental that's available has a triple B bond rating investment grade. So is that enough or are there any other resources that you should look at or any other financials that you should evaluate in the hospital system and the employer to see how Secure non governmental 457is? Thanks so much.

Some of you might not have any idea what he's talking about. A457 is tax deferred compensation. It is money from your employer that.

Basically they don't give to you now.

They will give to you at some later date. A lot of times however, they put it into an account that you can actually control the investments on. So it's kind of like a 401. That way the contribution amount is exactly the same as your employee contribution to.

Your 401, although the catch up contributions work a little bit differently and then you can control the investments and then.

You can decide when you take the money out later. But there's a couple of things to.

Keep in mind with it.

The first is you want to make.

Sure the investments are Good. If they're just absolutely terrible investments, you may not want to use much of the 457.

The second thing you want to look at, whether it's a governmental or A non governmental 457 is what the options.

Are to get the money out.

With a governmental one, a lot of.

Times you can just roll it into.

A 401k or an IRA. With a non governmental one, that is not an option. So you really want to look carefully at what the withdrawal options are. Sometimes they make it.

You take it all out in the year you leave your employer, which is obviously less than ideal.

Sometimes you can spread it out over five years.

Sometimes you can spread it out as.

Long as you want.

Sometimes you can wait 10 years and.

Then you got to take it all out. But understand the options and make sure.

There'S an acceptable one in there to you. That's really, really important to understand.

The third thing is the one that.

This whole question is revolving around.

With a governmental 457, essentially it's backed by the government.

With a non governmental 457, it's backed by your employer.

So it's really good for your asset protection. If you get sued, they can't take your 457money, but it's subject to the creditors of your employer. So if your hospital goes bankrupt, you could lose the 457.

If it's a non governmental 457, so.

This is the big risk, right? You defer all this compensation, then all of a sudden they go out of.

Business and you don't get that compensation. So that's obviously a bad thing.

So you want to make sure your.

Employer is very stable before you take a 457 like this, before you use a 457 like this, at least in any significant way.

If the hospital seems to be going out of business, maybe you don't want.

To use it at all. Maybe you don't want to run that risk. Just invest in a taxable account. It's not that big of a deal.

So what's Ricky talking about?

He's talking about trying to evaluate the stability of your employer. And that's a pretty hard thing to do, especially if you're going to be there long term.

Right.

Because their fortunes today may not be the same as their fortunes in 15 or 20 years. And so I think the way most people do this is they just kind of ballpark it. If they're hearing rumblings about the hospital going out of business or they know.

That the hospital is not being run very well.

They just avoid the 457 or they just put a little bit of money into it.

Maybe you contribute for two or three.

Or four years, but you don't contribute for 15 years, for instance, because then you'd have a really big 457 in there. But I don't think there's any necessarily right answer to trying to do a heavy duty analysis on the value of your employer today, because it may change in five or 10 years. Certainly you could dive into that. I think if you're that worried about it, you probably ought to just limit how much you put into your $457,000. Maybe instead of putting in $19,500 a year, you put in $5,000 a year and you invest the rest in a taxable account just to hedge against that possibility of them going out of business. I don't know that I would necessarily try to get all the financial statements for the hospital and pour through them before deciding whether to keep it or not. You're not buying the hospital, but all you have. It really doesn't depend on their success whether you get your money. All they have to do is stay in business, which is a much lower mark than whether they're going to be a successful investment on their own, which is really what a Benjamin Graham style security analysis would teach you how to do. Hope that's helpful to you.

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