Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast.
Today we’re tackling two timely questions at the heart of long-term planning. First, we’ll look at what to consider when deciding whether to convert a 401(k) balance into a Roth, and the strategies that can help minimize taxes if the conversion isn’t the right move. Then we’ll turn to the headlines about gold hitting record highs and how investors should be thinking about gold as part of their portfolio right now.
And for today’s From the Field segment, I’ll be joined by Lindsay Tanne Howe, founder and CEO of Logic Prep. Lindsay and her team have helped thousands of students tell their stories and gain acceptance to top schools, and she’ll share her perspective on how high-net-worth families can navigate today’s competitive admissions landscape.
So let’s go ahead and get started with question one.
Question 1 – Roth Conversation Strategy
Listener: I have a significant amount of money tied up in a 401(k). What should I consider when deciding whether to convert to a Roth, and what strategies can minimize the tax impact if conversion doesn’t make sense?
Stephan Shipe: What we first need to do is take apart the actual trade-off that happens with the tax-deferred and Roth aspect of your 401(k).
When you’re trying to make that decision, typically you’re looking at an assumption — and it sounds like you’re getting into this case where the assumption is, I’m going to put money into a 401(k) now, tax-deferred, because I’m earning now, so I am in a higher tax bracket, with the expectation that once I’m retired, my tax bracket will drop. And then you would have made that delta between the two tax rates, and that would work out great.
That works for a lot of people. The only problem is if you start to build up a significant amount of money within the 401(k) and it’s all tax-deferred, the issue is the government still wants their tax money later on. And you’ve deferred a lot of money that needs taxes later, which means when you start pulling money out of that account, you’re going to be taxed on that money as income.
That tends to be not too much of a problem if you’re pulling out a reasonable amount. Where it becomes a problem is what happens with RMDs later on. So, in your seventies with required minimum distributions, this is where the government starts looking at you and saying, “Hey, you promised you were going to start paying tax on this money. You haven’t.” So they start requiring that you take a distribution from your 401(k) or from your IRA, so that way they can actually see that account depleted and therefore their taxes paid on it.
If you’re still working — and obviously we have to take some assumptions here on the details — but if you’re still working, then you may want to start considering decreasing those 401(k) contributions, because that assumption of being in a lower tax bracket later doesn’t sound like that’s going to be the case anymore.
Because that assumption has changed, that means the decision criteria has changed. And pulling money out of that contribution to the 401(k) and instead making contributions to something like a brokerage account, or changing contributions to Roth, could also be an option within contributions. Those all could be possible outcomes.
Now, if you don’t have the time to do that, and maybe you’re already in retirement, you have your 401(k) and it’s loaded up with tax-deferred, then we have to be a little bit more strategic around Roth conversions and timing them.
One thing we need to do — and the first thing — is we need to run some tax projections on this. I would start looking at how much money are you going to be pulling out every year from this account, and is there room for you to convert a little bit more without going into the next large tax bracket?
When I mean that next large tax bracket, our tax brackets are set up where there are two pretty significant jumps. There’s the jump that goes from 12% to 22%, and then there’s the 24% to 32% brackets. So your tax brackets are good — 10%, 12% — that’s not a jump I’m worried about. If you’re paying 10%, go ahead and pay the 12%. It’s a 2% hedge against future tax rates increasing.
I’m definitely concerned about the 12% to 22% jump, because that’s a 10% extra marginal tax rate on every dollar. So if you’re converting up to the 12%, that’s great. If you start converting in the 22% and you’re pulling out enough income from your portfolio — which is most of the time the case — to where you’re already in the 22% bracket, then you can go max out the 22% or even the 24% bracket before jumping into the 32%.
I’m a fan of capping out that 22% and 24% just because I feel the tax rates are pretty low historically, from any metric that we use. And typically if your country is running a deficit and you’re at low tax rates, a really easy way to knock down that deficit is to increase that tax rate.
So when we’re looking at decades of retirement timing, being able to hedge against that future tax rate increase by converting at the 22% or 24% bracket can make a lot of sense.
We do have to be careful, though, that if you go convert too much too early — let’s say you look at your account now and you max out the 24% bracket with hundreds of thousands of dollars of conversions — what that could also do is set you up where you have a lot of conversions now happening at 24%, but 10 years down the road your tax bracket actually drops down back into the 12% bracket, and you missed out on that opportunity.
So in most cases, you’re doing some sort of partial conversion throughout retirement, where you’re going to start converting — you’re going to pick a level of conversion that keeps you in kind of the Goldilocks scenario throughout retirement: converting enough where you’re taking advantage of lower tax rates, but not converting so much that you end up dropping into lower tax rates later.
Now, after all that is taken into account and you’ve done some of your tax planning or some projections, if at that point you look at it and say, “Stephan, there’s still too much money here. I’m not spending it, and I’m going to have these huge taxes from RMDs and I don’t need it,” then you can start looking at things like QCDs — doing some charitable giving, taking your RMDs and essentially giving them to charity through qualified charitable distributions.
But one that could make a lot of sense, especially if you’re doing a lot of Roth conversions earlier on, is really starting to think about asset location in a real way.
In other words, if you start converting and now you have a pretty sizable Roth bucket and a pretty sizable tax-deferred bucket, those asset allocations should be very different. Let’s go put the high-growth or high-expected-growth assets in the Roth, and let’s go put the boring stuff — the low-expected-growth assets, like the bonds — into the traditional IRA or the traditional 401(k).
That way, over time, that growth slows, which therefore decreases your required minimum distributions out into the future.
So lots of good options there, depending on what phase or what stage of the 401(k) contribution and withdrawal process you’re in.
Question 2 – Gold in a Portfolio
Listener: I’ve been seeing all these record high gold headlines. It seems like I should consider more gold in my portfolio. What do you recommend?
Stephan Shipe: The key word in your question is more, which is showing us that you have some allocation to gold already. And then I would throw the question back at you and ask, why was gold in your portfolio?
So what percentage did you have in there, and what was the purpose of adding it into the portfolio? And whether or not the assumption then has changed from your assumptions now about the economy and the market.
Why I say that is because it’s very common that when we have anything — whether it’s gold, or technology stocks, or AI, or Bitcoin, or stocks in general — we always run into these situations where you build an asset allocation. You say, I did all this work to determine what is the appropriate weight for gold in my portfolio.
And maybe you’ve drawn in on the fact that you should have 5% of your portfolio in gold, and you say, that’s the number — 5% in gold. And now gold does great and continues to grow and it’s doubled and moves, and now it’s seven or 8% of your portfolio. That is a great feeling. Portfolio keeps going up. Should I add more?
And that is the greed portion of the fear-and-greed dynamics in behavioral finance that we have to be really careful about. Because we have to ask, why would you want 10 to 15% gold, for example, in your portfolio now, when a year ago or two years ago, you only wanted five in your portfolio? Has enough changed in your assumptions around the economy and the markets to say that you would like to increase your gold amount in a large way?
So that’s the first question. I would take a step back before looking at anything related to gold’s increase in price over the past year or the large returns, and say, what is gold’s role in my portfolio — and have I met that?
In many cases, the role of gold is going to be inflation protection. It’s going to offer some diversification. It could offer some hedge against uncertainty. But when we’re talking about hedges, especially hedges that don’t provide a cash flow, as is the case with gold, very rarely do we want that to be a large portion of the portfolio.
So we want to be careful there that we’re not just chasing returns, and instead we’re looking at this from a 10,000-foot view of saying, do we actually need gold? What is its role? And what are the other commodities maybe we could add to this?
In other words, if your goal is inflation protection and you have gold already in there, then is this a good time to add any other kind of precious metals, any other kind of commodities to the portfolio, to also diversify away from gold as an individual asset in the portfolio? So we have to be careful of that overconcentration whenever we’re seeing this increase.
Now, when it comes to the percentage of gold in the portfolio, lots of different ways to think about that. In fact, here coming in November — November 13th — we’ll be having a webinar to go over just that. We’ll talk about the relationship between gold and inflation, the relationship between gold and the dollar, and how to think about it as a portfolio, and really talk through what those percentages would be for different people and different types of portfolios.
But in your case, when you’re looking at all the record high headlines for gold, that is the least useful information. Anything that goes to past performance — that’s the grand phrase of finance — past performance is not indicative of future results.
In fact, the research would show that it’s the opposite. If a company has done really well, or an asset class has done extremely well over the past year, the odds that it does really well for the next year are very low. That’s why value stocks tend to outperform growth stocks over time, because value stocks are the ones that have dropped.
So whenever you’re looking at a stock that has had a great run, the odds that it continues to have a great run the year after go down. And that’s the case for any asset, including gold.
So if anything, the way I would look at this is saying you’re seeing gold at all-time highs and record highs continuing to increase. What that really should tell you in the back of your mind is that statistically, from a probability perspective, the higher it goes, the less likely it is to continue going up — at least in the short term, over the next year or two.
So we want to be careful there. Take a step back. Look at why is gold in your portfolio, and what role does it play. And use that as the guide for whether or not you should be adding more now as opposed to using the guide of current returns as a reason for adding something to a portfolio.
From the Field – Interview with Lindsay Tanne Howe
Stephan Shipe: For our special segment today we’re shifting gears from financial planning to education planning – a topic that’s just essential to many families long-term goals.
Lindsay, welcome to the show. You’ve built Logic Prep into one of the premier firms advising students and families on Ivy League and top-tier admissions for universities. Before we dive in, could you tell us a little bit about yourself and your background and your firm?
Lindsay Tanne Howe: Absolutely. Well first of all, thank you so much for having me. It’s a pleasure to be here. So for nearly two decades, my team and I have been supporting families through what is an exciting and sometimes fraught chapter, which is the journey of high school to college.
I started the firm back when I was a student at Harvard. Really, I was just a kid helping kids. My background and interest is in writing and storytelling. I was an English major, commuting back to my hometown to help what were essentially peers at the time to tell their stories.
Now, flash forward — it’s been quite a while — we support thousands of students all over the country, all over the world, in bringing their most authentic stories to life and setting up a proactive, thoughtful, intentional path to the schools of their choice.
We now have a team of advisors, all of whom are former admissions officers. They’ve been on the other side of the desk at schools like MIT, Duke, UVA, and USC, and they really leverage that expertise to help manage the inevitable stress of this process and help students and families make long-term, thoughtful, strategic decisions.
Stephan Shipe: So when we’re talking to clients — to people in these positions — and you’re talking to a high-net-worth family, one of the things they’re looking for is, where’s the ROI? In their mind, if they can focus on something to put time or money into to help their kids get into these types of schools, where are those big drivers for helping to get into these top 10 schools or Ivy League admissions?
Lindsay Tanne Howe: That’s such a good question. There are so many different ways of looking at success in this process. When we’re working with high-net-worth families, we’re specifically tapping into: what would you define as a win? Because I think that is really individual on a family-to-family basis as well.
You can look at the U.S. News & World Report rankings, and that tells one story. But that doesn’t necessarily answer the question of what’s going to be the right investment for your student and your family.
When we’re having conversations about rankings or about defining success, we’re often talking about things like building your global network, gaining skills to potentially bring back to a family business, or thinking about the recruiting pipeline from various schools.
So this is really distinct and, I would say, individual to the family — but that is inherent to our process: to really define what’s important to you as parents and how we can support your child on that path.
Stephan Shipe: So when you look — and you mentioned rankings — how much do rankings impact the demand for different colleges? I know you’re having those conversations, and families are coming to you saying, here are our top five or top 10 schools we’re trying to get into. Do you see rankings impact that at all, or is it really more legacy and reputation of these schools?
Lindsay Tanne Howe: I think rankings continue to matter, but I think reputation and legacy are probably the number one drivers.
What’s interesting — and confusing to families — is the variability in rankings lists and just the number of rankings lists out there. There’s a lot of noise. LinkedIn just put out a rankings list and families said, “Well, should I be looking at that? Is that actually important?”
And that opens up the conversation of, well, what’s actually important to you? How do you define success for your child?
So often we’re talking about, what is the end goal beyond college? What kind of job do you think your child will have? Where do you want them to live and build their network?
We’re seeing more families actually taking a more global mindset. Even some families are starting to explore options in the U.K., Europe, and Canada alongside U.S. universities as they just take a more global perspective.
Stephan Shipe: When students are applying — it’s obviously their profile, their essays, grades, and all these extras — how much do legacy admissions, philanthropy to a university, or the family profile play a part in likelihood of success, however that’s measured, but mostly in the admissions process?
Lindsay Tanne Howe: Yeah, of course. So I think legacy admissions and donations are part of an evolving landscape. Some colleges — like Amherst, Hopkins, Carnegie Mellon, among others — have explicitly stated that they’ll no longer consider legacy status in the admissions process.
That said, that’s the exception, not the rule. Relationships and philanthropy can definitely still play a large part at many institutions.
I just think that for families navigating that, thoughtfulness and discretion are really important. So we advise families on how to leverage the relationships that they may have at these institutions to support their child’s application in a way that’s going to be most impactful for them.
Stephan Shipe: Can you expand on that a little bit? What would you advise? So let’s say my kids are nowhere near this process — let’s say 10 years from now they’ve got a school that they really want to go to, and someone recommends that I make a donation to that school. Because that’s the kind of stuff you hear, and that seems like a very high-level and opaque way to describe that process. Is that really how it works?
Lindsay Tanne Howe: I think, you know, as sort of a general rule, more sustained, regular commitment — in terms of time, in terms of financial investment — over a longer period of time is going to be most impactful.
That said, I think colleges are understandably sensitive to perceived overreach. So a well-intentioned outreach about your 7-year-old is probably not going to be the most strategic thing you can do.
But I think establishing a track record of involvement — in terms of both time and money — is important, which will then culminate in, ultimately, the child’s application to the school.
And then there’s a question of what letters are going to be sent or phone calls made on their behalf, and how does that timing and messaging coincide with the student’s expressed commitment to that school.
So, for example, we advise our students who have legacy connections at particular institutions — for the most part, where the option is available — to make an early decision commitment to that school. Because that gives the student the opportunity to say to the institution, “You are my first choice.”
And then if there’s going to be background support, it all sort of comes together. Without that student commitment, the background support is probably not going to be as meaningful as it could.
Stephan Shipe: And that kind of ties into another question I was really interested in getting into — what are the mistakes that people make?
Because from a parent lens, when your child is going through this process, you don’t have many shots at this, right? Sometimes there’s one child going in. That puts a lot of anxiety on that decision. I equate a lot of this to retirement planning as well — you retire once, so you want to make sure everything’s all right.
You don’t have an opportunity to really go through and say, “I made these mistakes; I really wish I wouldn’t have.” But it’s not like you get another shot — they’re in college now, and they’re at School A. But you have the unique lens of seeing a lot of people go through this process. What are the mistakes that you see made most often that you’d look back and say, that could have been navigated in a different way that would’ve led to a better outcome?
Lindsay Tanne Howe: Yeah, so I’ll point to one mistake that I think many well-intentioned high-net-worth families make. They have an understanding of the importance of narrative and storytelling as a component of the application process, which is wonderful — that they’re coming to the table with that insight.
But I think sometimes that translates to supporting what are sometimes referred to as “passion projects” for their children that feel performative or forced or obviously enabled by adults.
I think there’s a fallacy or a myth out there that one can sort of construct the perfect applicant. From my perspective, the perfect applicant is really the most deeply engaged and impactful version of your child.
So we absolutely support our students in going deeper in their interests, developing a really differentiated, unique, compelling story — but it has to come from a real and authentic place.
An example I would give of this: we have a student who’s actually at Stanford right now. She started taking Latin as a ninth grader — it was required by her school; it wasn’t anything driven by an initial interest. But she liked it. She found it kind of cool and interesting.
And so her advisor said, “What can we do with that? Maybe we can sign you up for an ancient Greek class. Let’s go explore the classics, see what that looks like.”
And she actually really liked it. That drove her commitment the next summer to participate in an archaeological dig in Morocco.
And what happened was, by the end of this four-year engagement, we had a really cohesive, connected, compelling story that was absolutely grounded in her real and authentic interests — that we listened for and cultivated, and then helped make actionable.
Stephan Shipe: That sounds like the perfect scenario — finding something, an interest as a freshman, and continuing to build on that, which makes perfect sense.
In your ideal world, for someone to start this process, when does that process start — having those conversations, that coaching of, if this interests you, let’s build on that instead of having this scattershot approach to just trying a bunch of different things? When does that process start? Is it freshman year? Is it in middle school? Should I be worried now in elementary school, or is this something—
Lindsay Tanne Howe: You’ve got a little bit of time. So earlier is better.
What does that really look like? It looks like probably eighth or ninth grade. And more of our families are engaging with us around that time, which is really wonderful for them and for our team, because it gives us a longer runway to make more strategic, more thoughtful decisions together.
I also think that planning early is really the antidote to the inevitable anxiety that comes along with this process. Beginning at the tail end of middle school or the beginning of high school allows us to break the process into pieces, to set a long-term game plan, and gives students the space for their story to take shape — since, in an ideal world, it will be an organic evolution of their interests.
And then there are just some considerations that families might not be aware of the first time around. And that’s why we find our younger siblings starting with us earlier than the first child, because parents know more about the impact of earlier decisions on the ultimate outcomes in the process.
For example, one of the earliest and most important decisions a student can make is around ninth-grade course selection, which is often happening at the end of middle school. The academic path that a student sets at the beginning of high school can really shape their access to sufficient academic rigor to make them competitive at the most selective universities.
So when we can, we really want to be thoughtful about building the right portfolio of classes from the very beginning of high school.
Stephan Shipe: When you’re looking at this now toward the future, what are the trends you’re seeing, or any advice in the selective admissions process that families should be paying attention to going forward?
Lindsay Tanne Howe: I think more and more colleges are placing a stronger emphasis on fit and on narrative.
That often takes the form of authentic storytelling for the student — the student really being able to articulate, why do I want to be here? Why do I belong here?
It’s a crowded landscape. Outside of the story, most students have very similar statistics on paper. Application numbers are tremendous and only growing.
And in a world where AI can sort of flatten the narrative, it’s more and more important for students to be able to clearly and dynamically articulate who they are, what their story is, and why they’re the right fit for those particular universities.
Stephan Shipe: It seems to be the theme throughout all the answers there, which is always good when that all comes together — just finding that fit and really doing that research.
This has been wonderful. Thank you so much for coming on. I know I learned a lot. I’m sure others will as well. Thank you so much.
Lindsay Tanne Howe: Of course. Thank you.
Outro
Stephan Shipe: That’s our show. If you’re interested in joining the Gold webinar, I mentioned, you’ll find the registration link in the episode description. Thanks for listening, and we’ll see you next week.
Hey, this is Stephan Shipe. Thanks for tuning in to the Scholar Wealth Podcast. If you have a question you’d like us to tackle on a future episode, share it with us at scholaradvising.com/podcast. We’d love to hear from you. Until next time.
Disclaimer: The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice. The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your individual financial situation, objectives, and risk tolerance.