Author: Jeff

Understanding Personal Loans

One of my sons is going back to school full-time this month to get his MBA. While he did get a scholarship, it wasn’t for the full amount of tuition so…I put on my “Bank of Mom and Dad” hat and offered to help with a personal loan for the next two years of tuition. Borrowing from or loaning to family members can be complicated. Here are some rules and recommendations:

1. Most personal loans are “unsecured” which means all I’m relying on from my son is his promise to pay me back. If I said “I want the title to your car so that if you don’t pay I can sell it for what’s owed”, then we would have a loan “secured” by his automobile. If the security for a loan is real estate, then the loan is typically called a mortgage.
2. I’m going to write out the loan terms in a document that is called a “promissory note.” That’s just a personal loan written out and signed by the parties with a promise to repay. You can agree to some collateral in a promissory note, but it usually is unsecured.
3. Writing out the loan terms does several helpful things: 1. Memorializing the obligation helps to strengthen the obligation. Signing the document fortifies the seriousness of the commitment. 2. Memories can fade about the terms of the loan as years pass. The writing sets forth the exact terms and conditions from the start for future reference.
4. Loans and gifts are closely related, especially within families. Because there are limits on how much you can gift tax-free each year ($19,000 per person in 2025), the IRS is well aware that some folks try to use a “loan” to get around those limits. As a result, the IRS requires you to charge a minimum interest rate on the loan to show it’s legit. The minimum rate is called the Applicable Federal Rate (AFR) and can be found online. Determining the minimum rate depends on the length of the loan and how frequently you will be compounding the interest rate. My son’s loan will be a 10-year loan (he should be on sound financial ground by then), so currently I must charge him 4% interest under the IRS AFR tables.
5. Michigan, like most states, limits the amount of interest that can be charged on a loan. Laws limiting interest rates are called usury laws and in Michigan the limit is 25% annually. Unfortunately, there are lots of ways businesses can get around that limit and charge a higher rate, but you should stay within that boundary on any type of personal loan.

Now, despite being a lawyer I don’t have a heart of pure stone (close, but not pure). I may very well forgive the loan over the years and as long as I stay within the applicable gift tax exclusion, then there are no tax consequences. Heck, I even made him link one of my bank accounts to his university because if I pay the tuition directly then the $19,000 gift tax exclusion limit does not apply. I left all of my options open, and I told him I’m expecting first class treatment when I can’t get out of my rocking chair anymore. Things seemed so much easier when the only issue was what type of pizza to get for his soccer party sleep over. I guess I need to remind myself of something I tell clients all the time: Figuring out the best way to help out with tuition for an advanced degree for my son is a “good problem to have.”

Fun Fact: I was watching the Lions game this weekend with one of my sons and I complained about all of the downtime (mostly filled with commercials), so I looked it up: There are about 18 minutes of actual live gameplay during the typical NFL game that airs for over 3 hours from start to finish. I prefer to tape the games and run through all the downtime, and both of my sons remind me that’s proof of my old age (LOL).

Understanding the Word “Fiduciary”

I see the word “fiduciary” tossed around a lot these days. New clients sometimes ask if I’m a fiduciary. Yes indeed, as both a financial planner with a wealth management firm and an attorney. It is always good to ask, and the word fiduciary is important. However, you can’t just stop at the word itself.

By definition, a “fiduciary” is a person who holds a legal and/or ethical relationship of trust with one or more other parties. Fiduciaries are legally obligated to put the best interests of another person ahead of their own. A fiduciary obligation is created in many different settings. A trustee of a trust is a fiduciary to the trust beneficiaries. Corporate board members are fiduciaries to the shareholders of a company. Anyone who manages financial assets for the benefit of another person is a fiduciary, with the legal responsibility to look out for the best interests of that person.

But being a fiduciary and having integrity are not one and the same. A person can be in a fiduciary role but breach their fiduciary duty because they lack honesty and integrity. There are a myriad of examples of breach of fiduciary duty. Bernie Madoff, the infamous investment manager who swindled billions from his clients, was a fiduciary who breached his duty.

Some people working in the financial planning/investment industry take careful pains to make sure the word “fiduciary” shows up after their name. They hope that word will enhance their credibility, but credibility and integrity have very little to do with what title comes after a person’s name. As I often tell my clients and prospects when we discuss the term fiduciary, it really comes down to whether the person you are dealing with is at heart an honest and straightforward person. If they aren’t then having the word fiduciary after their name is meaningless.

Don’t stop at the word fiduciary. References and, most importantly, your personal experience with the person and their firm will go a long way to tell you if that person really takes their position as a fiduciary seriously. Start your investigation by looking at little things. Did the person follow-up on their promises? Did they get that piece of information to you, or schedule your follow-up appointment as timely as they said they would? As Albert Einstein said, “Whoever is careless with the truth in small matters cannot be trusted with important matters.”

It’s appropriate for you to ask someone if they are a fiduciary. It’s just as important to go beyond the answer to really explore what kind of person you’re dealing with.

Fun fact: Yes, I know the Lions were not fun to watch last Sunday. But let’s remember that since 2004 five teams lost the first game of the season and went on to win the Super Bowl: New York Giants, Baltimore Ravens, New England Patriots, Los Angeles Rams, and Kansas City Chiefs. Now, let’s see how the next game goes.

Tech Scams to Watch For

This past Tuesday I was in my office just finishing an appointment when a text popped up on my phone indicating that my bitcoin withdrawal had been confirmed and that if I had any questions to click on the link in the text.  Hmmm. I didn’t make any withdrawal request on my bitcoin, so I immediately logged on using my normal method to check my balance and it was safe. A new and dangerous scam just crossed my iPhone. That led me to think about looking up the five most dangerous current tech scams going around. Here they are:

1. Employment scams. These are phony job sites or recruitment ads. Some are intended simply to get your personal information. They can either ask for that information as part of the job application, or sometimes they claim you have been offered a job and need to fill out personal information. Some scams involve giving a bonus for training purposes or supplies. The bonus check bounces but not before they request a payback because there was an overpayment.
2. Crypto currency scams. I started this Up Early with the one that just hit me. Bitcoin values have soared, so the scammers are particularly interested in crypto. These are very sophisticated scams which typically start with slowly building trust with the victim and then offering an investment opportunity with large returns. The victim is asked to invest their crypto and it’s a disaster.
3. Celebrity imposter scams. As ridiculous as it may sound, the most common scam in this way relates to scammers who find emotionally vulnerable victims and make them believe they are in a romantic relationship with a celebrity. The “celebrity” then requests money to start a new charity or for the down payment on a house for both the victim and the celebrity to live in.
4. Tech-support scams. This one hit my family about six months ago. A “new” window pops up and freezes the window you are in and requests you click on a button. It usually has a logo of Microsoft or Apple and a menu to eventually get you to someone who asks to be able to get into your computer to fix things. Some scammers simply try to sell useless software maintenance or warranty programs. Remember, no legitimate pop-up window will ever ask you to click on a link and no legitimate company will ask you for permission to get into your computer remotely.
5. Card-decline scams. This usually happens with an online purchase. The victim tries to make an online purchase and is told the card was declined when in reality the charge went through and so they try a second time and either receive a second charge or a much larger charge than the first one. The best protection here is to use a credit card rather than a debit card because a debit card is an instant withdrawal while the credit card can be monitored and the credit card company can decline the charge.

The technological breakthroughs in the last decade have made our lives easier, but also made scams much more prevalent and dangerous. AI-powered scams, including voice impersonation and video cloning are not far off. You may read one or more of the five scams above and think it will never happen to you. Think again, in a moment of weakness anyone can fall for something that in hindsight seems ridiculous. Also, you may have a loved one who doesn’t think clearly enough and can get scammed in these areas.

We should all take note of the last command that the referee will give to Canelo Alvarez and Terence Crawford right before their epic boxing match next week – “Protect yourself at all times.” (I just cannot wait for that fight!!).

Fun fact: Well, here we are in September. Did you know it’s the only month that has the same number of letters in its name as its numerical order (nine).

Credit Card Debt After Death

Credit cards are important tools for daily and monthly expenses. When used correctly, they offer the credit card holder a 30-day interest free loan – you make a purchase on your credit card today, but you don’t have to pay the actual bill until you receive the next month’s statement. I wrote a piece about various creditor issues at death last April, but today I want to focus on what happens to outstanding credit card debt when you die. There are a few important factors to consider:

1. Was there a joint account holder? If so, a careful reading of the credit card agreement likely holds the surviving card holder responsible for the full debt.
2. Was there a probate estate opened? If there is no joint account holder, then the debt becomes the liability of the decedent’s probate estate. If probate is required at death, the appointed Personal Representative will be responsible for addressing all debts, including credit cards. Remember, probate is a court proceeding that can and should be avoided with proper planning.
3. Was probate avoided? Perhaps the decedent had a good estate plan and avoided probate through a combination of a trust and beneficiary designations. Without probate, the credit card company (or the debt collection agency that typically buys the debt) has less leverage to collect on the debt because there is no formal place to file the debt claim. Sometimes the fact that there is no probate results in the debt being dropped. Other times, the trustee of the trust can negotiate the debt down significantly because the only recourse the credit card company has is to open a probate estate on the decedent just to collect the debt—very costly.
4. Are family members on the hook for the debt? Generally, no, unless they co-signed for the debt or are joint owners on the credit card. There is no legal obligation simply because one is a spouse or child of the credit card holder.
5. What should I do if I’m handling the financial affairs of someone who dies with a credit card? Immediately contact the company so that they stop any future purchases that could be fraudulent. Proceed slowly and don’t feel obligated to give too much information. Remember, you might not have a complete financial picture of the decedent for several weeks. If you know that there will be no probate, tell them. If you aren’t sure if there will be a probate estate, let the credit card company know that too. Do not share any details of the decedent’s financials. The credit card company does not have a right to know that unless they actually sue for collection.

Credit cards make life easier. Hopefully, the information above will help to make credit cards easier after the death of the card holder, too.

If It Seems Too Good to Be True…

Boy, we are a really long way from this past April when the stock market was tanking and everyone was trying to remember what a tariff was and what possible harm it could do. The 12% drop in the S&P 500 in a single week following “Liberation Day” was nothing to sneeze at; and anything but liberating. Since those early spring woes, the S&P 500 has surged by approximately 20%, and the NASDAQ by about 28%, even with the pullbacks this week. How things can and do change.

Of course, it doesn’t matter if we are in a bear market or a bull market, there’s always room for fear. April’s fear was a big market drop. Here in August the fear is an overvalued market. Even though I am an experienced financial planner, I have the same emotional reactions that you have when I peek at my investment portfolio. Things seem…well…almost too good to be true.

With almost perfect timing, last Friday I stumbled upon an essay by the noted economist and author, Burton G. Malkiel. Best known (at least in my mind) for his must-read book A Random Walk Down Wall Street, which was published almost 50 years ago, Malkiel wrote a piece in the New York Times last week entitled “The Stock Market Is Getting Scary. Here’s What You Should Do.” It’s a great read if you wish to settle yourself down. I’ll save you some time and set forth the gems in the article:

1. There are several identifiable risks in the stock market currently, and probably as many unidentifiable risks. We also have serious budget issues that may not be getting the attention they should be. Despite these facts, Malkiel does not suggest slashing the amount of common stock you have in your portfolios. Making investment decisions based on guesses about whether stocks will go up or down in the short-term is a recipe for poor results.
2. Moving any money to cash based on current asset levels amounts to timing the market. To be a successful market timer, you have to make two correct decisions: First, when to get out, and second, when to get back in. Every study comes to the same conclusion: trying to time the market ultimately ends in poorer results than staying the course.
3. To provide perspective and reinforce the market timing point above, Malkiel reminds his readers that an investor who bought a US stock market index the day after Alan Greenspan coined the term “irrational exuberance” in December 1996 – a time of huge market valuations – earned an average rate of return of almost 10% per year over the next 20 years with dividends reinvested.
4. Whatever funds you have committed investment-wise to the long term should stay invested and ride out this “too good to be true” bull market rush. That said, you should focus on revisiting potential changes on any invested money that you will need relatively soon (e.g. in the next 2-3 years). Mikael recommends safe short-term bonds.
5. You should also make sure that your portfolio hasn’t become overweighted in stocks versus bonds simply from the market increase. For my clients, we rebalance according to objective asset allocation rules, so we never get too far out of balance. If you are not exposed to that type of service, then you may want to check your asset allocations because if they don’t match your risk tolerance you may not be able to stay disciplined during a substantial market correction.
6. Young investors should not blink an eye at this frothy market valuation. Keep pushing money into your investments and stay aggressive. The most powerful tool in your investment tool kit is time to ride out market volatility.

Many people think about being disciplined and staying the course when the market is down. These days you can see that the discipline applies on the other side of the spectrum when the market is making a large advance. Check your emergency funds. Check your asset allocation. Condition yourself for the inevitable market drop. But remember, over the long term it’s very hard not to grow your wealth with equities.

Fun fact: I couldn’t help but smile at a great quote Malkiel referenced about all the worries that exist in our economy, politics, and world events. Despite all that, as Americans we do generally find a way to land on our feet and as the old saying attributed to Winston Churchill goes: “Americans can always be trusted to do the right thing once all other possibilities have been exhausted.”

What Is RMD and Why Is It Important to Me?

If you start to consider retirement planning, you will inevitably run across three important letters: “RMD”. Understanding what they mean and how they can affect you is important. Here’s a basic primer to help:

Why is it called RMD? RMD stands for “required minimum distribution”. Just to make things more complicated it is sometimes referred to as MRD, which is simply “minimum required distribution”. Regardless of the sequence of those letters, they represent the IRS rule on the minimum annual taxable distribution that needs to be withdrawn from a tax-deferred retirement plan such as a traditional IRA, 401(k), etc.

When do I have to start taking RMD out of my own IRA or 401(k)? The age at which you need to begin taking RMD has changed over recent years. Currently, the age is 73, but if you were born on or after January 1, 1960, your RMD age will be 75. There are some exceptions to taking RMD, primarily for those who are still working in companies that they do not have an ownership interest in.

Is RMD different if I inherited the IRA from someone else? Yes, the rules are substantially different when you inherit an IRA from someone else. Generally speaking, you have to fully distribute the inherited IRA and pay the taxes by December 31^st of the year that includes the 10^th anniversary of the original owner’s death (Short answer-you have 10 years to completely withdraw the inherited IRA). You may also have to take required minimum distributions in years 1 through 9 as well, but only if the original owner was required to take RMD before his or her death.

How is RMD calculated? RMD is calculated annually. There are two moving parts: the value of your IRAs on December 31^st of the previous year and your age this year. The value of all of your IRAs on December 31^st of the previous year is divided by the number corresponding to your age in the IRS tables. The result is your RMD for the current year.

When do I have to take RMD during the year? The only requirement is that you fully take your RMD by December 31^st of that year. You can take it all at once or spread it out over the year as long as the total amount distributed by the end of the year is equal to or greater than your RMD number. The reason I underlined “greater than” is because RMD is simply the minimum amount you need to take. You can always take more if you have the need or the desire.

Do I have to take RMD out of each of my IRAs? Generally speaking, no. Although you typically will receive a statement from your financial institution showing what your RMD is from each IRA, you can usually satisfy it from any one or more of your IRAs. It’s the total amount of RMD withdrawn that the IRS is interested in, not that the RMD comes out proportionately from each IRA.

How does RMD affect my taxable income? The effect can be substantial. Every dollar withdrawn from the IRA is considered a dollar of taxable income, just as if you earned it by working. Most people will set up withholding, both Federal and State of Michigan, for each withdrawal they make so taxes are addressed immediately upon withdrawal. One way to minimize the tax impact of RMD is through the use of a Qualified Charitable Distribution (QCD). That IRS rule allows people over 70 ½ to donate directly from the IRA to a charity without the donation being considered taxable income. The limit on a QCD for 2025 is $108,000, and you don’t have to itemize to take advantage of this rule.

This is a basic description of what RMD is and how it works. The rules are extremely complex so don’t just rely on the statements above in your tax planning and RMD withdrawals. Give me a call or talk to your tax preparer before making any important decisions related to withdrawals from your own tax-deferred retirement plans or any IRAs that you inherit.

Fun fact: As we head into the heart of August and late summer, you might be interested in knowing that the month of August is named after the Roman Emperor Augustus Caesar. It marks the last month of summer (ugh!), which is often referred to as the “Dog Days of Summer” with the most hot and humid weather of the season.

Who Should Know About Your Net Worth

I recently came across Dave Ramsey’s “Millionaire Theme Hour” on YouTube. For those of you who don’t know, Dave Ramsey has a very popular financial planning show, and the “Millionaire Theme Hour” is a segment where “common” people announce their net worth and then answer Dave’s standard questions to explain how they managed to save so much on relatively normal incomes. I went back to review a recent segment to write this piece and up pops a picture of Glenn and his wife from Oklahoma City, Oklahoma with the clear heading that their net worth is $5.5 million. The 8-minute segment is inspirational as Glenn explains the saving and discipline it took to create a net worth that large, but I can’t help but think it is a bit dangerous. In my mind, when it comes to finances, it’s best to keep things close to the vest. Your view may differ, and I respect that, but let me explain my concerns.

First, just to be clear, a person’s “net worth” is the total fair market value of all of a person’s assets (e.g., bank accounts, real estate, investments, retirement plans, etc.), MINUS all outstanding debt. If someone owned nothing but a $300,000 house with the mortgage paid off and a bank account with a $20,000 balance, then their net worth would be $320,000. If that person still owed $100,000 on their mortgage, then their net worth would be $220,000 ($300,000+$20,000-$100,000). It’s natural to work toward increasing your net worth, and crossing the one-million-dollar mark is a big accomplishment, as are all the subsequent million-dollar thresholds.

My first problem with sharing this information concerns relationships. You never know how someone will react once they compare what you really have with what they guessed you have. I’ve seen children drastically change expectations regarding all sorts of things after they become aware of the large amount of wealth their parents have accumulated. The same holds true of friends and more distant relatives. I’ve also seen friends and relatives assume a much larger net worth then really exists. Money, or more importantly, information about someone’s money, can change people.

My second problem concerns fraud. We all know there are some terrible people lurking out there just looking for opportunities to cheat, steal or otherwise swindle. Announcing an impressive net worth on the internet, along with your picture and the city you live in, seems to me to be a recipe for problems. These days that is enough for a determined crook to figure out exactly where you live and who you and your family members are. In my book, that’s not a good idea.

I’ll share with you a personal change that has occurred for me over the span of my professional life. I worked very hard and built two successful businesses that I still love to work in. I have been rewarded in immeasurable ways by having wonderful client relationships. I will tell anyone who asks about the personal rewards of a holistic estate planning/financial planning practice. But our net worth will always stay private. In part, the more my wife and I have accumulated, the less we seem to care about what we’ve accumulated (isn’t life funny!).

I certainly don’t want strangers to know what I make or what I’m worth. When I financed my last car because of the great interest rate, I had to fill out a loan application. I put down the absolute minimum income level and net worth I thought would get me accepted for the loan instead of the actual numbers. Who knows where that information ends up?

Someday I’ll probably share all the details of our investments and net worth with my two sons, but the goal there will be to make sure they help my wife with it after I’m gone. They’re both in finance and my wife has little interest in investing. But other than that future event, I’m not comfortable sharing much information in that regard. I think it can do more harm than good.

Side Note: Please don’t confuse what I stated above with not keeping clear records with instructions and details on assets. We all should strive to make things as easy as possible for our loved ones if something unexpected happens. Once you are gone, your family should have a clear roadmap concerning all of your finances.

Fun Fact: YouTube was created in 2005. The first video uploaded on YouTube was titled “Me at the Zoo” and was posted by co-founder Jawed Karim on April 23, 2005. Today there are 4.3 billion videos on YouTube. It is estimated that every second, 6 hours of videos are uploaded to YouTube.

I Found a Bubble While Getting an Oil Change

Last week the computer system in my car “reminded” me (under no uncertain terms) the I was due for an oil change. The timing was perfect as I was literally driving to drop off my car at the dealership for just that scheduled maintenance. My service guy—we’ll call him Heinz—is the greatest. He treats me like a king (I highly recommend finding a service guy who is a big golfer and then dropping off a sleeve of balls every service visit 😊).

Heinz and I were shooting the breeze a bit while he was waiting for a service ticket and out of the blue he asked “the question.” Well, first he said: “Hey Jeff, can I ask you about something unrelated?” My mind always goes completely blank for a millisecond when I hear that question. Then, I check my watch to start billing my time (kidding). I replied the only way I could to the world’s greatest service guy: “Sure!”

Here was the question: “If a person’s crypto (digital currency) takes off and they suddenly have $30 million, what should they do?” Well, I admit that I didn’t see that coming…at all!! My first reply was a question back: “Has that happened to you, Heinz?” “Oh no,” he said, “but me and my friends have been investing in crypto for a long time, and we just started wondering about that question.”

Pretend you hear a big buzzer, and there is graffiti dropping from the ceiling right now, because that, my friends, is how you start to identify an asset bubble. When people who are investing in an asset start to daydream about the perceived problem of what to do with the $30 million they will make off that asset, then you know the asset is starting to stoke irrational excitement that will create irrational behavior. When they think it is important enough to run it by a financial advisor who is getting his oil changed, your eyes should pop wide open.

“Bubbles” are best thought of as a period when the value of an asset rises substantially above its fundamental value. Trying to determine something’s fundamental value is a challenge in and of itself, but when it comes to a bubble, I’m reminded of the famous quote from Supreme Court Justice Potter Stewart in the renowned Jacobellis v. Ohio obscenity case. Justice Stewart acknowledged the difficulty in defining the word “pornography,” but famously stated “I know it when I see it.” The same holds true for me and asset bubbles. It is speculation at its highest level.

There have been many asset bubbles in financial history, one of the first being The Dutch Tulip Bulb Market Bubble in Holland in the 1600s. The rarest tulip bulbs traded for as much as six times the average annual salary in Holland. Needless to say, it ended badly for many who eventually lost it all, probably not long after they were daydreaming about what to do with their $30 million.

Now, I don’t know for sure if crypto is in bubble range, and/or when the bubble will burst if it is. I do know that the bitcoin I inherited from my 86-year-old mother (that still amazes me) has grown in value by almost 75% in the last year. I don’t own enough to start daydreaming, but if I did, I would think strongly about cashing a lot of it in to diversify. As Kenny Rogers famously sang about poker and life: “You got to know when to walk away, and know when to run.”

The stock market also seems to be going nowhere but up in recent months. While I wouldn’t attach the phrase “bubble” to the general market (yet), I would caution you to be ready for a pullback sometime soon. It may not happen this year, but a stock market pull back is and always will be inevitable.

I have a hard time getting my arms around crypto. I think it’s here to stay, but I don’t know how to value it because it doesn’t produce anything I can identify except convenience. That hasn’t stopped Heinz and his friends from piling more and more money into it as it continues its dramatic rise. Sounds like a mistake to me, but I hope I’m wrong because Heinz is a great guy and I know he’s had some health problems so he could use a windfall. If he gets it, my only regret will be that I’ll have to find another service rep who really appreciates a sleeve of golf balls.

Fun Fact: The Dutch Tulip Bulb Market Bubble saw tulip bulbs selling for about 10,000 guilders at its peak. That equaled the value of a mansion on Amsterdam’s Grand Canal at the time. Tulip bulbs were bought on credit under the assumption that when the tulip bulb was sold the loan could be repaid. When a few loans defaulted, everyone headed for the door and the price of tulip bulbs crashed. Since then, history has repeated itself over and over with different assets rising into bubble range, only to come tumbling down to earth.

Debt Paydown vs. Investing

Some folks who have a mortgage, student loans and/or car loans are in the enviable position to consider paying down or paying off that debt from their cash or investment accounts. If a person I’m meeting with has that option, then here’s how I approach the issue:

Financing a big purchase isn’t a bad thing, despite the stories of family members from the past who “only paid cash for everything.” For our purposes, let’s assume a client named John asks for my advice on his $50,000 mortgage balance with 8 years of payments remaining. He has $75,000 in a bank or investment account and wonders whether he should just pay off the mortgage and be done with it. Three factors need to be considered:

1.  Emergency Money. If John pays off the mortgage, will he still have sufficient funds for an emergency? Everyone should always have easy access to cash that will cover 6-12 months of recurring expenses. Paying off debt is not recommended if it minimizes or eliminates your emergency fund.

2.  Rate Comparison. If the emergency fund is covered, then the next question I ask is the rate of interest John is paying on the debt (in this example, a mortgage). If it is equal to or greater than 6%, then I recommend he seriously consider paying down the debt as quickly as possible while still having an ample emergency fund. Why 6%? Because if your debt interest rate is less than 6%, and you are willing to invest your money appropriately, then you will likely get more bang for your buck by investing and paying the debt in installments.

Here’s an example: Let’ say John’s mortgage interest rate in the above example is 4%. Let’s further assume John’s investments are in a diversified low-cost index portfolio with an average annual return of 5.75% – a very reasonable assumption. While invested for the year, the $50,000 John is considering paying off the mortgage with is making $2,875 (5.75% of $50,000). At 4% interest, John’s annual interest payment on his mortgage is $2,000 (4% of $50,000). By keeping the mortgage and investing the balance, he can make $2,875 and owe $2,000 for a net gain of $875. If he cashes in the investment and pays off the mortgage, he is saving $2,000 in mortgage payments but losing out on the $2,875 gain on his investments. The net loss is $875.

Realistic returns on a well-diversified and moderately aggressive investment portfolio are around 7%-10%, but they don’t produce that every year, so I err on the conservative side by using the 6% rule in debt repayment analysis. If John was a more aggressive investor, he may consider keeping debt with an interest rate of 7%; or only 5% if he is a very conservative investor.

If John’s money isn’t really working for him because it is just sitting in a checking account making 1%-2%, then his money can work much harder for him by paying off that 4% mortgage. But before I would tell John to take that cash from the bank account to pay off the mortgage, I would gauge his comfort in investing it. If he can’t stomach the market volatility, then debt repayment makes better sense than a low interest checking account. If he can take the volatility, then I usually recommend he keep paying on the mortgage and invest the money.

3.  Peace of Mind. Finally, John can’t forget the intangible component that is peace of mind. How you sleep at night should always be a factor in your financial decisions because your money is there to make you feel protected. If paying off the mortgage just makes John feel better and he doesn’t want his loved ones to worry about the debt if he dies unexpectedly, then debt repayment makes sense despite the numbers we looked at above. This same analysis applies to any debt – student loans, car loans and the like.

As you can see, there is no absolute objective answer to the debt vs. investing question. But there is a methodology that can certainly help you make an informed decision. Feel free to call my office if you have any questions because every situation is unique.

Personally, I paid off my mortgage sooner than I needed to because I wanted the peace of mind. However, I financed my last car that I could have paid cash for because the dealership offered a 60-month 3.9% rate. I jumped at that rate because I’m confident I can make my money work harder through my investment portfolio.

Fun Fact: For those of you old enough to remember, CD rates in the 1970s were almost unfathomable today. In 1979 the average 3-month CD rate was 11.2%, but before you long for those days gone by, remember that inflation in 1979 was at 11.3%, so that CD was really producing a net loss in purchasing power of .1% annually. Today 3-month CD rates are closer to 4%, and with inflation currently around 2.67%, your current CD is gaining purchasing power each year despite the much lower rate. The “good old days” weren’t necessarily that good on the CD front.

A Follow-Up to the Big Beautiful Bill: Investment Accounts for Children

As a follow-up to last week’s Up Early, a thoughtful client of mine inquired about the “Trump Account” created under the new tax bill. At its simplest terms it’s an IRA for children. At its more complicated terms it’s, well, fairly complicated. Here’s what I’ve been able to figure out so far:

The new tax bill creates what are called “Trump Accounts” for children who are US citizens with Social Security numbers. For children born from January 1, 2025, through December 31, 2028, the Federal government will contribute $1,000 to start. Parents of children born before 2025 can also open a “Trump Account” but that account is not eligible for the initial $1,000 government seed money.

Once open Trump Accounts can be funded by parents or others through a contribution of up to $5,000 annually until the child’s 18th birthday. Companies can contribute up to $2,500 annually for an employee’s eligible child and that contribution won’t apply toward the employee’s taxable income. These contribution limits will be indexed for inflation annually as well.

All families with children born during the eligibility dates can receive the $1,000 seed money regardless of income or net worth. The accounts are supposed to open mid-2026 with the $1,000 seed money available at that time.

No withdrawals are allowed until the child reaches the age of 18, and at that point for all intents and purposes the Trump Account is an IRA for the child. As such, IRA rules will apply, including additional contribution limits for IRAs that are currently $7,000 per year and, importantly, a 10% withdrawal penalty for distributions made before age 59 1/2, with some exceptions as noted below.

Investment options will be limited to low-cost index funds, but they have to track “primarily United States companies.” There is no clear understanding yet of where or who will be offering these eligible investment accounts so stay tuned.

The taxation of these Trump Accounts is where things are really complicated. Contributions made to the Trump Account do not count as taxable income to the child (even if they are made by the parent’s employer). The accounts will grow with all taxes deferred until withdrawal after age 18, and then any withdrawals made will be taxable.

How the funds are used will dictate how they are taxed. If the funds are withdrawn for school tuition, a first-time home purchase or small business expenses they are penalty free and will be taxed at capital gains tax rates. Funds withdrawn for other purposes (like a new car the 18-year-old may be eyeing) will be taxed at ordinary income tax rates which start at 10%, and they will also be subject to a 10% penalty if withdrawn before age 59 1/2.

Are Trump Accounts worth it? Yes, if the child is eligible for the $1,000 seed money. After that, I’m not so sure. The most power tool in investing is time, so starting an investment account for an infant allows for powerful compounding… at least until 18. Then, the 18-year-old is in charge (!). Will they continue the compounding, or buy a new car, taxes and penalty be damned. No way to know. Investments limited to only American companies doesn’t sit well with me either.

Like everything in this massive tax bill there’s a little bit more to clean up and learn about but I’m glad my client brought this issue up because I think it’s worth following carefully. I wouldn’t blink at opening the account if you can get the “free” $1,000. I would think twice before adding additional funds except those that your employer might be willing to contribute. Finally, I don’t think we’ve seen the last in terms of rule changes to the Trump Accounts. Stay tuned.

Fun fact: Amaze your friends and relatives by understanding the Rule of 72: That is an easy way to estimate how long it takes for any investment to double in value based on a given interest rate. Simply divide 72 by the interest rate. For example, with an 8.5% annual return it takes 8.47 years for the money to double. (72÷8.5). At a 6% annual interest rate it takes 12 years.