How to invest generational wealth

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Bremsstrahlung
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How to invest generational wealth

Post by Bremsstrahlung »

Hi All,

I was wondering if you could give me some help here. I've been generally following advice on this blog for several years and find it excellent. Conceptually I have a 3 fund portfolio. I keep my stocks in my Roth IRAs and use my traditional IRA to hold stocks and bonds. I also have a taxable account that is 100% VTSAX. I re-balance annually within my traditional IRA to keep my overall stock/bond ratio at 90:10, usually by simply adding to the account. I am currently in a relatively low income tax bracket, but will be in the top income bracket within a few years so I am converting all of my traditional retirement vehicles into Roth vehicles. It makes sense to pay the income taxes now as I am probably in the lowest income tax bracket I will ever be in. By the time I am in the top income bracket, all my tax advantaged accounts will be Roth. I will then begin contributing to a traditional retirement vehicles when I am within the top tax bracket. This is the money I ultimately plan on using in retirement which I am planning for 22 years from now. I will probably invest this in some simple way such as with a Target Date Fund or 3 fund portfolio.

The money that remains in the Roth (as well as my taxable account) I plan on mostly using to build generational wealth and for charitable giving. I imagine using it do things such as: buy term life insurance for all my heirs who become parents, funding 529s, funding weddings, help my heirs maximize contributions to their own retirements accounts, support local churches/charities. However, I am not planning on doing much of this for a long time as I will also have income that will allow me to do these things without tapping into my Roth. So my question is, does anyone have thoughts on how to invest over a 50-100 year horizon instead of the typical 30-40 year horizon? I'm not sure how to invest this money. I think the most simple would be to put it into VTSAX and just let it grow. However, as I can tolerate a considerable amount of risk with this bucket of funds, I would like to find higher return investments. The only idea I have really had was VSMAX or perhaps VSIAX, but that's pretty much the only idea I have come up with. I'm not super interested in high cost investing such as in hedge funds, as I do not think I am capable of determining which will do well. So, any advice on how to invest for higher risk, higher reward when you have an extremely long investment horizon while keeping cost low?
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arcticpineapplecorp.
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Re: How to invest generational wealth

Post by arcticpineapplecorp. »

avantis funds:
avuv
avdv
aves

but you have to tolerate the potential for large losses, especially in emerging markets. they're high risk and the potential for higher returns. Meb Faber years ago said he put his whole Roth IRA in vanguard emerging market index fund because he wanted the highest returns but was willing to tolerate the higher risk.

same goes for small cap. and value comes in short quick bursts but has long periods of underperformance relative to the market as a whole. so you have to be prepared for that. see below:

Image

if you're not prepared for that, then just hold the global stock market portfolio. VT or VTWAX. why exclude international when half the world invests outside the US. they may underperform or they may not. nobody knows. why not hold both and be more diversified?

Image

source:
https://am.jpmorgan.com/us/en/asset-man ... e-markets/
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
petulant
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Re: How to invest generational wealth

Post by petulant »

Why would you put charitable money in a Roth IRA? Shouldn't you keep charitable money in a traditional, tax-deferred account and then take the following actions?

1. Target specific years to make large withdrawals and itemize deductions within 50%/60% of AGI limits.
2. Satisfy RMD obligations with QCDs.
3. Allocate the traditional IRA/401(k) to charitable beneficiaries when you pass.

This way, you never pay income taxes on the amounts invested toward charitable causes.
chemocean
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Re: How to invest generational wealth

Post by chemocean »

For the Roth IRA, your intention and plan will last only through your lifetime. Your beneficiaries control the investment vehicle for 10 years later in a inherited Roth IRA and could continue your investment allocation in their inherited Roth IRA, or not. To make it easy on your beneficiaries at the time of your death, you can have the Roth funds in the investments that are appropriate for their horizon within the context of the 10-year rule.
dbr
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Re: How to invest generational wealth

Post by dbr »

You would want to talk to a trusts and estates lawyer to understand how to keep control of the investment plan after you die. Generational wealth usually means placing the assets in trusts or foundations.

It might be you mean investing to turn the assets over to generations after you. I don't know what to add beyond just stay at 90/10 and pay attention to taxes as you are. Are you wanting suggestions for alternatives to stock and bond mutual funds? That would be a whole different thing. I gather you are already on a path of not spending much or any of the assets on yourself.
VanguardInvestor1972
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Re: How to invest generational wealth

Post by VanguardInvestor1972 »

Many investors who look beyond the excellent Three Fund Portfolio for the very long term consider private real estate. We are using private syndications in multifamily housing, self-storage, and so forth for our very long term investments as a supplement to the Three Fund Portfolio investments. This approach might also be worth your consideration for the 50-100 year time horizon. As deals and funds liquidate you can use the 1031 exchange process to invest in the next ones.
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Riprap
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Re: How to invest generational wealth

Post by Riprap »

VanguardInvestor1972 wrote: Wed Aug 03, 2022 9:49 pm Many investors who look beyond the excellent Three Fund Portfolio for the very long term consider private real estate. We are using private syndications in multifamily housing, self-storage, and so forth for our very long term investments as a supplement to the Three Fund Portfolio investments. This approach might also be worth your consideration for the 50-100 year time horizon. As deals and funds liquidate you can use the 1031 exchange process to invest in the next ones.
How do you find real estate opportunities like you describe ***AND*** not get hammered by fees, taxes and capital calls?
VanguardInvestor1972
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Re: How to invest generational wealth

Post by VanguardInvestor1972 »

It takes a fair amount of work, networking, and good due diligence. But it is do-able. I don't want to violate any forum rules here but I am happy to share a few firms that I think are reliable. In a few dozen deals I have not had any capital calls; the tax regime is extremely favorable for these kinds of deals; and yes the fees are very high compared to, well, pretty much any investment.
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White Coat Investor
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Re: How to invest generational wealth

Post by White Coat Investor »

VanguardInvestor1972 wrote: Wed Aug 03, 2022 9:49 pm Many investors who look beyond the excellent Three Fund Portfolio for the very long term consider private real estate. We are using private syndications in multifamily housing, self-storage, and so forth for our very long term investments as a supplement to the Three Fund Portfolio investments. This approach might also be worth your consideration for the 50-100 year time horizon. As deals and funds liquidate you can use the 1031 exchange process to invest in the next ones.
Hard to 1031 from fund to fund. Even syndication to syndication is tough. Both operators have to facilitate it and they often don't.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
VanguardInvestor1972
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Re: How to invest generational wealth

Post by VanguardInvestor1972 »

Yes certainly a challenge in some cases but syndicators with good deal flow do sometimes offer 1031 opportunities directly into the next deal as I am sure you know. YMMV and not for everyone. Just an idea for OP to consider.
JoinToday
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Re: How to invest generational wealth

Post by JoinToday »

How much money does one need to have for "inter-generational wealth" to be a factor or consideration in your estate/trust plan? Especially if the current heirs are doing well, are frugal, and don't appear to need my money. I worry about dumping my assets + 30 years growth on my grandkids.
I wish I had learned about index funds 25 years ago
AlohaJoe
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Re: How to invest generational wealth

Post by AlohaJoe »

Bremsstrahlung wrote: Tue Aug 02, 2022 5:48 pm So my question is, does anyone have thoughts on how to invest over a 50-100 year horizon instead of the typical 30-40 year horizon?
For what it's worth there are tons of FIRE ("early retirement") types who are looking at a 50+ year horizon and still invest in typical Boglehead portfolios. And if you look at past threads you'll see there are a lot of people with a fair amount of money who still invest in typical Boglehead portfolios. There are also a lot of institutions that tried to copy the success of Yale's more complicated investment model and have failed because they weren't able to attract the best talent. I also know a handful of quite rich people and while I don't know all the details of their investment strategies I've heard enough over the years to be pretty dubious about the quality of investment advice you get at that level. Nevada's public employee fund ($35 billion of "generational wealth") is run by a single person who just puts it all in index funds but routinely beats out CalPers and their huge staff of investment advisors.

All of which is to say I'm very far from convinced that an individual investor has some kind of obviously better options beyond Boglehead portfolios. There are a lot more ways to lose money, though. The managers are always going to be more sophisticated at extracting alpha for themselves instead of passing it on to investors.
I'm not sure how to invest this money. I think the most simple would be to put it into VTSAX and just let it grow. However, as I can tolerate a considerable amount of risk with this bucket of funds, I would like to find higher return investments.
If you want higher returns with higher risk then the first obvious step is to use leverage. If you're afraid of leveraging VTSAX then I'd question how true your claims of higher risk tolerance. It's not a full-proof test -- there are valid reasons to eschew leverage -- but as a quick & dirty test of claims of higher risk tolerance I reckon it is pretty good. Leverage up to 125% for a few years and see how you go.
Weathering
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Re: How to invest generational wealth

Post by Weathering »

I inherited money from two generations in the past (held 30 years by the estate/executor until I reached age 50 because the wish of the benefactor is for me to pass the $ on to the next generation), so I guess you could call it generational wealth. It is invested in MSEQX and I was advised by my uncle (executor) not to ever change that. If you look at MSEQX it has a $3M minimum investment (but somehow I have less than $200k in it). The ER is >1%. Last year the fund performance was up >45%. This year it is down 50% (I think it was down >60% at it nadir). It is an active fund where the investment managers pick a set of highly aggressive/risky stocks (essentially betting the fund on a new pack of horses every year). It has SNAP in its top 10 holdings (that dropped 40% in one day recently). Cloud flare is another (that was up 25% one day last week).

MSEQX is the type of fund I think of when I think of generational wealth - very high risk for the potential of very high reward, or failure, with the (flawed) assumption that active managers can beat the market over long periods of time. But I will be selling it soon to just "buy the market" with VTI and leave that to my heirs eventually.
niagara_guy
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Re: How to invest generational wealth

Post by niagara_guy »

+1 for QCDs from a t-ira (once you turn 70.5). i would not pay tax dollars to convert to Roth and then give it to charity, would do QCDs instead.
afan
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Re: How to invest generational wealth

Post by afan »

You would need to work the numbers to see how much money in today's dollars you can expect to have decades from now. Since you are counting on earning it, that depends on your success in your job and the fortunes of the market on your industry. It will be great if it works out as planned but there are things that could go wrong. At this point, I would invest in a way that is appropriate for your current circumstances, then move to an asset mix suitable for generational wealth once you have some.

Even with an infinite investment horizon, I would not go 100% stocks. There is no guarantee that this will do better. It probably will, but there is a substantial possibility that mixing in some bonds will generate not only higher risk adjusted returns but higher overall returns over decades.

I do not believe there is any evidence that active management beats indexing over long periods. Quite the opposite. The longer you hold, the lower the likelihood that active management will beat simple cap weighted index funds.

Things like real estate require active management on someone's part. Either do it yourself or pay someone to do it for you. One could buy REITs but there is no reason to think they will beat VTI over decades. If you do direct real estate yourself, you need a plan for who is going to manage it after you.

Once you reach $10-20M in assets beyond that you plan to spend on college, weddings and other expenses, you could start looking at illiquid investments like private equity and venture capital. Again, I do not believe they beat stocks on a risk adjusted basis. And you have to keep picking active managers.

I would hold a simple 3-5 fund portfolio and keep adding to it. Perhaps start with a somewhat lower stock allocation while you are building up savings and might find a need to spend some of it. Once any further savings are purely for decades ling horizons with enough set aside to cover any plausible needs for yourself or heirs, then up the stocks. I would not go over 80%.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
flyingaway
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Re: How to invest generational wealth

Post by flyingaway »

I am having a three fund portfolio, which is intended for my children also. The entire portfolio is currently about 75/25, with international is about 30% in the stock part.

Implicitly, the children part is about 100/0, our part is about 50/50, but I do not manage them separately, and I don't pay much attention to the allocation on a daily basis. I'm lazy in portfolio management, busy in enjoying my life. Just let it ride the market.
dbr
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Re: How to invest generational wealth

Post by dbr »

Isn't the essence of generational wealth having lots of money and not spending it? Probably the fastest way to dissipate generational wealth is to excessively fund the ensuing generations who themselves do not add to the wealth.

It is true that less liquid investments such as privately owned corporations, an acre of Manhattan, the family farm, etc. are typical of generational wealth, but the point is that one does not sell anything off and everyone keeps working in the business.

If the question is just how to pass on more money, a starting point for that, which is a change from simply funding one's own retirement is to invest more in stocks while spending less and assuming the next generations will also add to those stocks and continue to spend less.

A different issue is diversification, which is why real assets such as land enter the picture, and then after that businesses, full circle to above.
Topic Author
Bremsstrahlung
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Re: How to invest generational wealth

Post by Bremsstrahlung »

Wow. After reading this blog for several years, its a cool experience to be on the receiving end of the boglehead advice. Thank you so much everyone. You've given me a lot to think about, and potentially identified some holes in my strategy. Thank you so much!
Topic Author
Bremsstrahlung
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Re: How to invest generational wealth

Post by Bremsstrahlung »

petulant wrote: Tue Aug 02, 2022 9:37 pm Why would you put charitable money in a Roth IRA? Shouldn't you keep charitable money in a traditional, tax-deferred account and then take the following actions?

1. Target specific years to make large withdrawals and itemize deductions within 50%/60% of AGI limits.
2. Satisfy RMD obligations with QCDs.
3. Allocate the traditional IRA/401(k) to charitable beneficiaries when you pass.

This way, you never pay income taxes on the amounts invested toward charitable causes.
This very helpful. I'm not sure I've fully thought through the charitable giving side. Currently I plan on putting whatever expendable income that is taxed at the highest tax bracket into a charitable foundation managed by me and my wife, then making distributions from there. That was the income tax break I receive is at the highest tax bracket. I believe you then only have to distribute 2% per year from the foundation. I haven't fully looked into this yet though, so I am very open to advice.
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Bremsstrahlung
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Re: How to invest generational wealth

Post by Bremsstrahlung »

dbr wrote: Wed Aug 03, 2022 12:09 pm You would want to talk to a trusts and estates lawyer to understand how to keep control of the investment plan after you die. Generational wealth usually means placing the assets in trusts or foundations.

It might be you mean investing to turn the assets over to generations after you. I don't know what to add beyond just stay at 90/10 and pay attention to taxes as you are. Are you wanting suggestions for alternatives to stock and bond mutual funds? That would be a whole different thing. I gather you are already on a path of not spending much or any of the assets on yourself.
This is in the works. I'm still learning about this end of things, but I have a trust attorney I like and I think I am on the right path.
petulant
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Re: How to invest generational wealth

Post by petulant »

Bremsstrahlung wrote: Sat Aug 13, 2022 11:10 am
petulant wrote: Tue Aug 02, 2022 9:37 pm Why would you put charitable money in a Roth IRA? Shouldn't you keep charitable money in a traditional, tax-deferred account and then take the following actions?

1. Target specific years to make large withdrawals and itemize deductions within 50%/60% of AGI limits.
2. Satisfy RMD obligations with QCDs.
3. Allocate the traditional IRA/401(k) to charitable beneficiaries when you pass.

This way, you never pay income taxes on the amounts invested toward charitable causes.
This very helpful. I'm not sure I've fully thought through the charitable giving side. Currently I plan on putting whatever expendable income that is taxed at the highest tax bracket into a charitable foundation managed by me and my wife, then making distributions from there. That was the income tax break I receive is at the highest tax bracket. I believe you then only have to distribute 2% per year from the foundation. I haven't fully looked into this yet though, so I am very open to advice.
It's 5% of the balance of the previous year. But the point is that if you've got strong charitable motives, the Roth IRA end state for money is no longer as attractive as it first seemed. The numerical analysis might involve evaluating your desired lifestyle spending for the rest of your life, seeing what tax bracket you would be in to make that spending given spending sources with different tax treatment, and then backing from there into how much/if any to realize ordinary income and developing a good strategy. For example, if you are in the 22% bracket right now and still working, it might make more sense to keep deferring income into traditional accounts at a job while making contributions to the private foundation to the bottom of the 22% bracket, then supplementing income with any needed draws from taxable. Note also that funny things can happen if you've got large qualified dividend income and large charitable contributions; the math will basically work where the charitable contributions are offsetting the ordinary income first, so at some point you could knock the QD income into the 0% bracket. It's a lot of specific numbers and I wouldn't assume it's desirable to make any Roth conversions or not.
Topic Author
Bremsstrahlung
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Re: How to invest generational wealth

Post by Bremsstrahlung »

JoinToday wrote: Mon Aug 08, 2022 10:41 pm How much money does one need to have for "inter-generational wealth" to be a factor or consideration in your estate/trust plan? Especially if the current heirs are doing well, are frugal, and don't appear to need my money. I worry about dumping my assets + 30 years growth on my grandkids.
I think about the exact same thing. I'm not sure how much money I will need. I hope I successfully rear my children to be hard working, disciplined, frugal and wise money managers. I have several siblings and phenomenal parents. Some of us are frugal and manage money wisely. Some aren't and manage money poorly. Despite my best efforts, it may be the same with my children, so this is something I will want to protect against in making my Trust.

I'm not sure how much money I would need, but ideally I would have enough to allow my children/grandchildren to pursue careers that interest them (teacher, basic scientist, musician, clergy, etc.) over those that pay high incomes while still being able to:
- have financial protection from the financial repercussions of untimely death, disability, or the disability of children.
- have a spouse stay home to rear children
- contribute to meaningful causes
- receive quality education
- live in good neighborhoods
- have grand weddings
- go on nice vacations
- have occasional luxuries
- maybe even potentially retire early

One could easily end up with 15+ grandchildren. Let's assume these goals are accomplished for my children with money that does not become part of my estate, but my estate funds are used to cover these for my grandchildren. Lets assume that my grandchildren maximize their tax advantage retirement options (to keep the tradition going) and the average salary of each grandchild is $70k in todays dollars. Let's assume 12 of those grandchildren marry and of those 12, 7 have a spouse that stays home with children. Let's then assume that, in order to accomplish the above goals, the income of each family with children needs to be $160,000, and the income for each family without children needs to be $80k. That would mean the combined income of my grandchildren would need to be $2.16MM while their actual income would be $1.4MM, leaving a $760k per year deficit. This would require $38,000,000 in the estate in order to have a 2% withdrawal rate cover the deficit. So I'm not really sure how much I would need, but it could potentially be a lot. Beyond that I have no idea what I would do with the money.
Topic Author
Bremsstrahlung
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Re: How to invest generational wealth

Post by Bremsstrahlung »

AlohaJoe wrote: Mon Aug 08, 2022 11:27 pm
Bremsstrahlung wrote: Tue Aug 02, 2022 5:48 pm So my question is, does anyone have thoughts on how to invest over a 50-100 year horizon instead of the typical 30-40 year horizon?
For what it's worth there are tons of FIRE ("early retirement") types who are looking at a 50+ year horizon and still invest in typical Boglehead portfolios. And if you look at past threads you'll see there are a lot of people with a fair amount of money who still invest in typical Boglehead portfolios. There are also a lot of institutions that tried to copy the success of Yale's more complicated investment model and have failed because they weren't able to attract the best talent. I also know a handful of quite rich people and while I don't know all the details of their investment strategies I've heard enough over the years to be pretty dubious about the quality of investment advice you get at that level. Nevada's public employee fund ($35 billion of "generational wealth") is run by a single person who just puts it all in index funds but routinely beats out CalPers and their huge staff of investment advisors.

All of which is to say I'm very far from convinced that an individual investor has some kind of obviously better options beyond Boglehead portfolios. There are a lot more ways to lose money, though. The managers are always going to be more sophisticated at extracting alpha for themselves instead of passing it on to investors.
I'm not sure how to invest this money. I think the most simple would be to put it into VTSAX and just let it grow. However, as I can tolerate a considerable amount of risk with this bucket of funds, I would like to find higher return investments.
If you want higher returns with higher risk then the first obvious step is to use leverage. If you're afraid of leveraging VTSAX then I'd question how true your claims of higher risk tolerance. It's not a full-proof test -- there are valid reasons to eschew leverage -- but as a quick & dirty test of claims of higher risk tolerance I reckon it is pretty good. Leverage up to 125% for a few years and see how you go.



I actually started thinking about leverage after my original post. At this point I think it is the direction I am most considering. Any thoughts on the best way to go about this? Vanguard Margin loan? Rates seem to be pretty high.
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illumination
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Re: How to invest generational wealth

Post by illumination »

If it's money you don't need for decades (or really ever in your lifetime) than I would just do something like 100% Total Market Fund and let it ride.

I do something close to that anyway in my Roth IRA. The reality is my Roth will probably never be touched by me, it's for my heirs (hopefully) as it will be the "last" dollars I take out. Makes it relatively easy to manage, I don't find myself "timing" the market in that account when thinking like that. It's like putting something in a time capsule and wanting the maximum output. Zero bonds, and I don't plan to ever have any sort of glide path from that.

But also realize that your Roth IRA is probably not going to be some enormous amount of money either because of the contribution limits, I don't think mine will be a source of generational wealth. Assuming you just follow the type of investing here with index funds and it's not some private shares of a startup. Or you make large conversions from say a 401(k).

I've basically maxed out my Roth since I started working (unfortunately though I hadn't embraced index investing right out of the gate) but the reality is in "today's" spending power, at this continued rate, my Roth will probably the equivalent of maybe $1.5 million when I die. (and that's making a lot of assumptions about average rate of return, longevity, inflation, etc) That barely buys a house in my area nowadays.
Topic Author
Bremsstrahlung
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Re: How to invest generational wealth

Post by Bremsstrahlung »

petulant wrote: Sat Aug 13, 2022 11:21 am
Bremsstrahlung wrote: Sat Aug 13, 2022 11:10 am
petulant wrote: Tue Aug 02, 2022 9:37 pm Why would you put charitable money in a Roth IRA? Shouldn't you keep charitable money in a traditional, tax-deferred account and then take the following actions?

1. Target specific years to make large withdrawals and itemize deductions within 50%/60% of AGI limits.
2. Satisfy RMD obligations with QCDs.
3. Allocate the traditional IRA/401(k) to charitable beneficiaries when you pass.

This way, you never pay income taxes on the amounts invested toward charitable causes.
This very helpful. I'm not sure I've fully thought through the charitable giving side. Currently I plan on putting whatever expendable income that is taxed at the highest tax bracket into a charitable foundation managed by me and my wife, then making distributions from there. That was the income tax break I receive is at the highest tax bracket. I believe you then only have to distribute 2% per year from the foundation. I haven't fully looked into this yet though, so I am very open to advice.
It's 5% of the balance of the previous year. But the point is that if you've got strong charitable motives, the Roth IRA end state for money is no longer as attractive as it first seemed. The numerical analysis might involve evaluating your desired lifestyle spending for the rest of your life, seeing what tax bracket you would be in to make that spending given spending sources with different tax treatment, and then backing from there into how much/if any to realize ordinary income and developing a good strategy. For example, if you are in the 22% bracket right now and still working, it might make more sense to keep deferring income into traditional accounts at a job while making contributions to the private foundation to the bottom of the 22% bracket, then supplementing income with any needed draws from taxable. Note also that funny things can happen if you've got large qualified dividend income and large charitable contributions; the math will basically work where the charitable contributions are offsetting the ordinary income first, so at some point you could knock the QD income into the 0% bracket. It's a lot of specific numbers and I wouldn't assume it's desirable to make any Roth conversions or not.

My apologies, I'm having a little trouble following you - no doubt because you are on a different level than my in this arena. I've run a lot of these numbers and done some pretty detailed modeling. The problem is that in a few years (as long as there aren't any astronomical shifts in my direction) I will be in the top tax bracket. I will then be able to max out a profit-sharing tax-deferred account, $61k per year. After this, I will still have a considerable amount of expendable income in the top tax bracket. I though it would make sense to move this money into a foundation, then distribute 5% per year from it. It will then still be available for charitable giving once I no longer have a large income. Re-reading what you wrote, I think we are saying the same thing.

Regarding Roth conversions, I'm pretty sure I am currently in the lowest tax bracket I will ever be in - 22%. At $61K per year contribution to a traditional account plus $12k for IRAs, I will end up having to start making conversions or taking distributions from (72t plan) the traditional account in order to avoid some whopping tax bills later in life, especially if you consider social security income and income from investments outside of my retirement accounts. Also I was thinking that by converting these to Roth, I would pick up an extra 30 or so years of tax deferred growth.
Topic Author
Bremsstrahlung
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Re: How to invest generational wealth

Post by Bremsstrahlung »

chemocean wrote: Wed Aug 03, 2022 10:05 am For the Roth IRA, your intention and plan will last only through your lifetime. Your beneficiaries control the investment vehicle for 10 years later in a inherited Roth IRA and could continue your investment allocation in their inherited Roth IRA, or not. To make it easy on your beneficiaries at the time of your death, you can have the Roth funds in the investments that are appropriate for their horizon within the context of the 10-year rule.
This is great advice. Thank you.
petulant
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Re: How to invest generational wealth

Post by petulant »

Bremsstrahlung wrote: Sat Aug 13, 2022 1:02 pm
petulant wrote: Sat Aug 13, 2022 11:21 am
Bremsstrahlung wrote: Sat Aug 13, 2022 11:10 am
petulant wrote: Tue Aug 02, 2022 9:37 pm Why would you put charitable money in a Roth IRA? Shouldn't you keep charitable money in a traditional, tax-deferred account and then take the following actions?

1. Target specific years to make large withdrawals and itemize deductions within 50%/60% of AGI limits.
2. Satisfy RMD obligations with QCDs.
3. Allocate the traditional IRA/401(k) to charitable beneficiaries when you pass.

This way, you never pay income taxes on the amounts invested toward charitable causes.
This very helpful. I'm not sure I've fully thought through the charitable giving side. Currently I plan on putting whatever expendable income that is taxed at the highest tax bracket into a charitable foundation managed by me and my wife, then making distributions from there. That was the income tax break I receive is at the highest tax bracket. I believe you then only have to distribute 2% per year from the foundation. I haven't fully looked into this yet though, so I am very open to advice.
It's 5% of the balance of the previous year. But the point is that if you've got strong charitable motives, the Roth IRA end state for money is no longer as attractive as it first seemed. The numerical analysis might involve evaluating your desired lifestyle spending for the rest of your life, seeing what tax bracket you would be in to make that spending given spending sources with different tax treatment, and then backing from there into how much/if any to realize ordinary income and developing a good strategy. For example, if you are in the 22% bracket right now and still working, it might make more sense to keep deferring income into traditional accounts at a job while making contributions to the private foundation to the bottom of the 22% bracket, then supplementing income with any needed draws from taxable. Note also that funny things can happen if you've got large qualified dividend income and large charitable contributions; the math will basically work where the charitable contributions are offsetting the ordinary income first, so at some point you could knock the QD income into the 0% bracket. It's a lot of specific numbers and I wouldn't assume it's desirable to make any Roth conversions or not.

My apologies, I'm having a little trouble following you - no doubt because you are on a different level than my in this arena. I've run a lot of these numbers and done some pretty detailed modeling. The problem is that in a few years (as long as there aren't any astronomical shifts in my direction) I will be in the top tax bracket. I will then be able to max out a profit-sharing tax-deferred account, $61k per year. After this, I will still have a considerable amount of expendable income in the top tax bracket. I though it would make sense to move this money into a foundation, then distribute 5% per year from it. It will then still be available for charitable giving once I no longer have a large income. Re-reading what you wrote, I think we are saying the same thing.

Regarding Roth conversions, I'm pretty sure I am currently in the lowest tax bracket I will ever be in - 22%. At $61K per year contribution to a traditional account plus $12k for IRAs, I will end up having to start making conversions or taking distributions from (72t plan) the traditional account in order to avoid some whopping tax bills later in life, especially if you consider social security income and income from investments outside of my retirement accounts. Also I was thinking that by converting these to Roth, I would pick up an extra 30 or so years of tax deferred growth.
I think we're tracking and saying the same thing except I am asking why even try to move money into Roth. If you are going to have so much wealth and income that you might be able to realize income through the 22% bracket all the way into the 30+ tax brackets, why bother paying more taxes to build a giant Roth account? Imagine a situation where you're 75 and taking an RMD. Imagine the RMD is $400,000 in today's dollars (implying traditional balances of $8.6M using current tables), you've got $100,000 in qualified dividends (implying $6M in taxable accounts at 1.62% dividend yield) in today's dollars, and you get social security taxable income of $75,000 between you and spouse in today's dollars. That's $575,000 in total income before any charitable giving. Let's say your lifestyle spending is $150,000. Let's also say they fix QCDs so that they are available at $100,000 in today's dollars (they are currently not inflation-indexed). You could do a $100,000 QCD off the top, show AGI of $475,000 on the tax return, give 60% of that as a cash charitable contribution, and show $190,000 as taxable income. The 22% bracket tops out at $178K for MFJ, but the top $100,000 of income is qualified dividends in the 15% QD bracket. (Note, you should be able to stack the charitable contribution with some to private foundation and some cash contributions directly to a charity, but you would want to double-check the stacking rules in effect the time to be certain.)

Compare that to converting enough into Roth such that the RMD is only $200,000 in today's dollars. That implies $4.3M less in the traditional IRA; now, assume just for the thought experiment that the Roth IRA was converted entirely in the 24% bracket, and it was invested in the same mix of assets. That means there's a Roth IRA balance of $3.27M floating around. Let's say that the dividends and social security income are the same. So you've got $375,000 in total income with the same lifestyle spending. You could do the same $100,000 QCD off the top, show AGI of $275,000, do an $85,000 charitable contribution, and end up with the same taxable income of $190,000.

So let's review. There's an implied stock asset of $6M not getting touched except for the dividends it throws off. Lifestyle income is easily satisfied without touching the Roth IRA. In the first example, more of the traditional account is being drawn down to transfer to charitable purposes. In the second example, less is being drawn down to transfer to charitable purposes. More portfolio is being preserved in the Roth IRA.

So where this is going to go is, it depends on your desired split between heirs and charitable organizations, and the specific numbers for your lifestyle spending. I know the numbers I proposed are made up, but they're trying to illustrate that it's possible you might still be in lower tax brackets for your actual spending than you think, even if you have very large RMDs. Especially since as your RMDs and qualified dividends get larger, it's possible to make charitable contributions, then have ordinary income that fills up lower brackets and then QDs top out at 23.8%.

There's some point at which you will have enough money coming in from qualified dividends and a small portion from RMDs that you would never need to pull Roth IRA, and if the taxable account at that point would be enough to satisfy heirs ($6M and still appreciating in my example above), then if everything else is going to charity, it would be better not to have done the Roth IRA and to just drag out the years like the one above (and list private foundation as beneficiary on IRA for when you pass). And for everything that ends up going to charity (especially as beneficiary), the charity gets more money because you never paid taxes on it.

Hopefully that helps illustrate what I'm getting at. Now, I'm not sure something like the above is the situation. It's possible you've looked at it and you want more in Roth for heirs, for example, or your traditional balances would end up so large that even after deducting 60% of AGI, you're still realizing too much income in those later years--and those balances might just end up in the taxable account, so moving them into Roth for better tax treatment now is possibly better, depending on life expectancy and the potential size of tax savings from having charities as the beneficiary designation on the traditional account. Can't really tell without the numbers and your actual desired split between lifestyle spending, heirs, and charity.
Last edited by petulant on Wed Aug 17, 2022 3:27 pm, edited 1 time in total.
AlohaJoe
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Re: How to invest generational wealth

Post by AlohaJoe »

Bremsstrahlung wrote: Sat Aug 13, 2022 12:03 pm Any thoughts on the best way to go about this? Vanguard Margin loan? Rates seem to be pretty high.
There are other brokers out there.
Topic Author
Bremsstrahlung
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Re: How to invest generational wealth

Post by Bremsstrahlung »

So generally you'd go the margin loan route versus assets with built in leverage? I can't imagine using options for this objective, but maybe I'm wrong.
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