Stephan Shipe
Welcome back to the Scholar Wealth Podcast. This week we're doing something a little different. Instead of our usual format, we're handing the mic over to two of the associate financial advisors at Scholar Advising, Noah Lewis and Evan Mills, for a Q&A speed round. They're tackling a few of your shorter questions ranging from how to think about dividend investing in retirement to 529-to-Roth rollovers, plus a few other planning topics. It's a quicker pace, more questions, and a chance to hear directly from the advisors who do a lot of the underlying research that shapes our planning conversations.

We'll be back next week with our regular format. So take it away, guys.

Evan Mills
Hi, I'm Evan Mills. A lot of what I work on day to day is the research and planning analysis behind the recommendations we make for clients, whether that be retirement income strategy, education funding, portfolio construction, or concentration reduction.

Noah Lewis
I'm Noah Lewis and my work centers on the analysis and planning that helps clients make confident and bold decisions, translating complicated financial topics into clear, actionable strategies tailored to your goals and circumstances.

Evan Mills
Let's get started with our first question. I believe AI is a structural shift in technology and not a bubble. How do I best invest in that trend? I think to look at this situation and say AI is a structural shift and not a bubble — these two things aren't necessarily mutually exclusive. Just because you think something is going to shift the dynamic of the markets or the workplace doesn't mean that future value isn't already baked in

to today's prices. We saw this in the late nineties when it came to the internet — there was already future value baked into those stocks. And although the internet completely changed the stock market and the workplace, we did end up seeing that crash at the end of the dot-com bubble. So to try to invest heavily into something because you think it's a structural shift

is just introducing concentration risk, because you're probably going to want to buy the bigger names like any of the names in the Mag 7. Direct exposure into the AI sector just because you're invested in those doesn't necessarily mean that you're going to be able to find a winner. I still think the broad exposure ETF is the way to go. You're not going to have to pick a winner.

In the long run, you're just going to be able to watch this structural shift, like you were saying, play out over time.

Noah Lewis
Yeah, I think it's exactly what Evan was saying. It's not necessarily mutually exclusive. AI can absolutely — and I think already has in a way — changed the dynamics of the workplace and the market. But that doesn't necessarily mean that there's not a bubble, right? I think even when you look at the dot-com situation back around 2000, there were multiple components to it. There was the structural shift, which changed everything. But there were also some pretenders.

Evan Mills
There were.

Noah Lewis
Just throw dot-com behind your name. I think it's the same thing with AI. How many companies right now that have nothing to do with AI are saying, well, we use AI, or we're an AI company. I think there's a lot of that going on. And it's just like Evan said, you can invest in the change, but I don't know that it's any different from the dot-com bubble in that individual names are not necessarily the way to do it. If you try to pick an individual name, in any case, we know

based on the last few decades of research that trying to pick individual names and seeing which one is going to beat out the others is very difficult, if possible at all. But we know that investing in an index which has underlying exposure to these sectors and technology — you buy QQQ, you buy VUG — you're going to get exposure to AI without taking all the risk that goes into picking an individual name. All right, our second question.

Every year I look at my portfolio and the international piece is dragging on the overall return. U.S. stocks have crushed it for over a decade. At what point do I just go all in on the U.S.? So this question is really interesting. It brings me back to a piece of advice I gave for clients. They were asking the lead advisor and me basically how to allocate their 401k.

And within 401ks you have to really look because all the 401ks have different options. They don't always have the basic ETF options or what have you that we're looking for. Comparing two bond funds within that 401k, I remember I looked at two. There was one that was a super high yield bond fund, which obviously tends to be junk bonds or riskier bonds. But there was a riskier bond fund that was returning like 6% over the past few years.

And there was a higher quality bond fund that returned like 3%. And that really does bring you to the question. Obviously for clients in that situation, you might ask, if the yield is higher on the high yield bond fund, why would I not just select that? And why would I select the bond fund that has a lower yield over the past few years? And I think that really forces you to zoom out to your broader philosophy. Why are bonds in there in the first place, right? If we know that bonds tend to have a lower

return over decades than equities, then why would we include them? It's not a question of how much yield can we squeeze out of every single investment. It's why the investment is there in the first place. And in the case of bonds, the reason is to reduce the risk in the portfolio. Now for international — you say the international piece has been dragging on the overall return. What that indicates to me is that maybe the correlation between U.S. stocks and international equities, it's not a one-to-one correlation. It's not a perfect correlation.

If you study diversification, how do you achieve a diversification benefit in a portfolio? It's actually by seeking a correlation that is zero or negative one. You would want your different holdings to actually not be positively correlated because that provides that diversification benefit. So even though the performance has not been as good nominally, it's still providing some diversification benefit. How diversified is international really, right now,

from the U.S.? That's a really good question because other countries at some point can be dependent on the U.S. and how the U.S. economy performs. But in general, I think the diversification benefit is why you would continue to hold international.

Evan Mills
Yeah, going off of what you said, I think the main thing here is just looking at minimizing your regret versus maximizing your return. So you're going to look at saying that international has been a drag on your portfolio. It's fair if you're looking at it from a recency bias perspective to not want a certain portion of your portfolio invested in international.

But just because it hasn't outperformed the United States over the past decade doesn't mean that you should take it out totally. You should re-examine how much international exposure you have in your portfolio and whether that makes sense for you. And again, it's in there as a hedge and not necessarily to maximize return. Interestingly enough, last year we found that international developed actually outperformed the U.S. So

again, this kind of goes back to whether you're looking to maximize your return or whether you're doing this for a diversification reason and this is more of a hedge if anything were to happen in the United States. And you still have a certain allocation towards international. After that, on to the next question.

I retired last year and a friend told me I should reconstruct my portfolio to live off dividends so I never have to touch the principal. It sounds reassuring, but I'm not sure if it's actually the smartest approach. What's the case for just selling shares as I need income instead? So when you look at this, it's more about the psychology behind what feels safer to you. If you look at your share count and it stays relatively flat,

you feel like you're doing the right thing — your portfolio is not actually going down. So this feels safer. But when it comes to dividends versus selling stocks, a dollar is a dollar. Dividends, when they come in, you don't really have much control over when they hit your account. And when they hit your account, you start paying ordinary income tax on that. When you're selling shares, however, they're treated as hopefully long-term capital gains. So they're taxed at a lower rate and you have

complete control over when you sell. So that gives you a lot more control over what your tax picture looks like, where you can get income from, whether you're retired or not, and controlling what bracket you stay in — whether that's selling shares out of your taxable brokerage, or stepping into Roth to keep you in a certain tax bracket, keep you under a certain IRMAA bracket. These are all things you have a lot more control over.

And then the other thing that you step into when you look at dividend-paying stocks is you really start concentrating in financials, utilities, and you're concentrated in those sectors. So that's a huge concentration risk.

Noah Lewis
Yeah, I think what Evan said is great. The angle I would take with that is it really can depend on the size of your portfolio. I think we tend to think if you go into a portfolio and your equity percentage is somewhere between 70 and 90%, that's what we typically see and may typically recommend. If somebody wants to get really conservative and go full capital preservation and says, I don't really need to grow the principal, just want to live off dividends —

in the short term, that's perfectly fine and it may reduce your risk in the short term. Over the long term, however, there is some purchasing power risk that gets introduced. And I think it depends on the size of your portfolio. If your spending is very, very small relative to the size of your portfolio and you say, I'm never going to spend this down, maybe it is safe enough to go capital preservation mode. But if you want to spend a good percentage of this portfolio, maybe you do need to allocate more to equities so that over time

you're hedging against that inflation risk. So that's what I would think about there. And for the most part, it may actually be a little bit riskier to go too conservative, even though that's kind of counterintuitive.

All right, on to the next question. My parents have offered to pay for my kids' private school. They're talking about just writing a check each year to cover tuition, but I have a feeling there's a smarter way to do it. Are there better options? Yes, in my opinion, there are better options. It really depends on how much is being given. If it falls within a certain dollar amount, I don't know that it really matters because the annual gift tax exclusion limit is $19,000 per donor per beneficiary.

So if it's within that amount, it's not really going to affect anything. And it can really go to $38,000 if you're gift splitting. But if you write a check directly to an academic institution — and it actually doubles up as well, probably a hospital or something like that — you can write a check directly to them and there's no gift tax implication. So there's no $19,000 limit. If you give more than that, there's gift tax to be paid? Nope. It doesn't matter if it's $50,000 or $100,000. If you write it directly to an institution, there's no

taxes, there's no gifting taking place as far as the IRS is concerned. Obviously you can sort specifics with your CPA. But in my opinion, that's the way to do it — go directly to the institution. Now, room and board is not a qualified expense for that direct-to-institution approach. But if you have a 529, that's a great place to pull from for room and board.

Evan Mills
Yeah. And going off of that, if you want to pay for near-term education expenses, writing a check straight to the institution is super beneficial. But if you're looking for education expenses down the road as well, 529s can give that optionality and allowance for tax-free growth. If you're looking short term, definitely writing a check straight to the institution is probably the best way. But if you're looking for long-term education expenses, a 529 definitely has its benefits.

And now for our next question. Why is BIV preferred over a money market fund that has a good yield right now? So a money market is very beneficial for those short-term expenses, whether they're known or unknown. We usually recommend money markets for the emergency fund, but the risk there is they follow short-term rates. So when short-term rates drop,

all of a sudden the yield that you're getting on these money markets drops with it. BIV is the other side of the spectrum, which locks in the current rates over the intermediate maturities — that four to ten year mark — and it's more about duration, protecting your money more than anything. However, that comes with its own risk in that when rates fall, bond prices actually go up. So they work

the opposite of money markets.

Noah Lewis
Yeah, I definitely agree with what Evan said there. I think if you're going money market, that's going to protect against rates going up because your yield is going to adjust with more agility. As rates go up, your money market yields are going to go up. However, the concern there would obviously be if rates are going down, your yield is almost immediately going to adjust downward — that's reinvestment rate risk. But if you're going with an intermediate-term bond, it's exactly the opposite. If rates go up, the price of the bond is going to fall.

And if rates go down, the price of the bond is going to increase. So that's kind of playing the duration game there.

And now for our next question.

I bought a bunch of I-bonds back in 2022 when the rates were huge and I'm trying to figure out what to do now. The fixed rate on new I-bonds is actually decent right now, but the inflation component has come way down. Does it still make sense to hold these or buy more? And where do TIPS fit into all this? Yeah, I think that's really interesting. So back in 2022, indeed, the rates were huge. There was no

fixed component of the yield on those. What did it get up to, like 9% or something like that? It was really crazy. And I think that was a great move back in 2022. Right now, the current I-bonds do have a fixed component — I think it's like 0.9% or something. There's also an inflation component. All in all, the yield stacks up to just under what current high yield savings accounts or money market yields are. So right now, I don't think that'd be as attractive. Does it still make sense to hold those from 2022?

If there's no fixed component — a 0% fixed component and it's all variable — I don't really think so. Should you buy more? You could. I think right now, money market yields and high yield savings accounts are pretty competitive against those. So it's hard to argue for an I-bond. Also, there's a fixed amount you can buy per person per calendar year — you can only buy $10,000 in I-bonds. And over five years as well, if you don't hold an I-bond

past five years, you forfeit the last three months of interest. I think for liquidity purposes and flexibility, a high yield savings account or a money market account right now is probably a little bit better on that end. Where do TIPS fit into all this? I think TIPS are interesting. There's no limit as far as how much you can buy — you could buy $100,000 worth of TIPS. However, anticipated inflation is already priced into the yield of TIPS. So if corporate bonds right now are paying 4%

and you expect inflation to be a certain percentage over the next 10 years, the TIPS may have a yield of like 2%, which would be lower than the corporate yield. So you really have to bet that inflation is going to increase past what we already expect. And if it doesn't live up to that, then you end up losing money as compared to the typical corporate bond.

Evan Mills
Yeah, I totally agree. I think at the time in 2022, I-bonds probably were a great investment and a great purchase. But now when you have the inflation rate adjusted after six months and it's coming down, and you're almost at a 0% fixed rate that's what you're carrying along for this ride, it doesn't necessarily have a place in your overall portfolio at this point.

I-bonds are really good for when inflation is relatively flat and expected. And that's where TIPS kind of fit into this planning. TIPS, like Noah said, the price of inflation is already baked into the price of the TIPS. So TIPS do really well for unexpected inflation. But when inflation is relatively flat and expected to remain so for a fair amount of time,

then TIPS don't really have that much upside to them. And on to our next question. We funded a 529 for our daughter starting when she was born and she ended up getting a significant scholarship. So there's a lot more left in the account than we expected. How does SECURE 2.0 work for rolling into a Roth? Yeah, so looking at this, there are a couple of different rules when it comes

to rolling 529 contributions into a Roth IRA. Those include: the account has to be open for 15 years, the rollover cap is still the Roth contribution limit so there's no going over that, and there's a $35,000 lifetime cap. The beneficiary of the 529 and the Roth has to have earned income at that time, and contributions from the last five years and earnings from the last five years

are ineligible for rolling into the Roth. So again, it gives you a good escape valve for any overfunding of that 529, but it's not really the escape hatch that everybody is looking at it as. You're not going to be able to roll the whole amount into a Roth IRA. There are a couple of different ways you could handle the rest of the 529. If you have another kid, you can change the beneficiary of this 529, or

it could just become a 529 for grandkids. It can be a 529 for the parents. There are a lot of different options. But rolling any extra money into the Roth is going to give a great start towards your kids' retirement funding. And obviously Roth is a fantastic account to get started early on — it's going to have tax-free growth. So getting that started early for them is a great benefit.

Noah Lewis
Yeah, I think it's awesome that SECURE 2.0 added that optionality to roll those funds over to the Roth. If you don't want to do that for some reason, another thing you can do is — the government's not going to punish you for your kid receiving a scholarship, right? Typically, if you withdraw 529 funds for a reason that's not a qualified educational expense, you would have a 10% penalty and you would also pay ordinary income tax on any of the gains in the account.

If your kid receives a scholarship and you pull because of the scholarship, they're actually going to waive the 10% penalty. You'll still pay ordinary income tax on the earnings, but that's just a little benefit there if you don't roll it to a Roth for whatever reason.

All right, on to our next question. What are the key differences and pros and cons between a charitable remainder trust and a donor advised fund? Yeah, there are really quite a few differences between these. A donor advised fund is really the vanilla recommendation. If somebody already has charitable goals, especially when appreciated securities are coming into the mix — like, well, I could just give cash, but if you have securities that are appreciated

you don't want to sell those and pay a high amount of capital gains taxes on them. But you already have charitable goals. What you can do is actually donate those to the donor advised fund, and then from there they can go to different charities. That way you can actually deduct the full fair market value of those. It's subject to a limit of about 30% of your adjusted gross income for the given year. So that's a really nice strategy — if you already have appreciated securities, you might as well give those and save the cash that you have.

The one caveat I do want to say is if you don't already have charitable goals, it's really not worth donating anything to a donor advised fund. It's a common phrase — don't let the tax tail wag the dollar — because the benefit is basically just not paying the marginal tax rate if you were to sell those. However, if you're gifting, you lose the whole thing. It's a tax trade-off, but we have to remember the real benefit is what you're paying in taxes there.

A charitable remainder trust is a little bit different. You gift it to the charitable remainder trust — you give a certain amount and you can actually collect an income stream off of that as an annuity for a certain number of years. Now you cannot deduct the full fair market value of whatever you gift into the charitable remainder trust. It's calculated as the present value of the remainder interest.

So how it works is, let's say I put $100,000 into the charitable remainder trust. I'm not going to be able to deduct all of that. Let's say over the next 10 years I'm going to collect a certain percentage of those funds as an annuity. And then whatever's left at the end of the term in that charitable remainder trust is going to go straight to the charity. Now that estimated amount that's going to be left is what I take as a deduction on my tax return, not the entire fair market value. So those are a couple of the main differences.

Evan Mills
Yeah, when you would use the two really varies. If you have ongoing charitable goals, a DAF — just because of the simplicity and cost benefit — is super beneficial. But when you use a charitable remainder trust, it's when you have those highly appreciated assets or concentrated positions and you're really going to try to offload those in a single period of time. You're not going to do that ongoing year after year just because of the complexity it adds.

So it's really only for a one-time gifting situation where you're going to get an income stream off of that. But usually how the trust works is you would put those assets into the trust, the trust would then sell those assets, and then you get an income stream off of those because of the concentration in that one set of assets.

Noah Lewis
And one thing I want to point out too with the charitable remainder trust — you don't necessarily have to designate just a single charity as the beneficiary. What you can do is actually designate the beneficiary as a donor advised fund. The real advantage is just a flexibility advantage. Let's say I set a charity and I say the charitable remainder trust after 10 years or after 20 years is the end of the term. All that time passes and then the remainder interest goes to that charity.

What if that charity has changed over time and you don't really like what they're doing these days, you don't really feel like it's effective? Instead, you can set the beneficiary as a donor advised fund. At that point, you still get the same tax deduction and everything, but your family can say, all right, we still have control over the donor advised fund. You don't take the assets back out, obviously, but you have more control over where it goes as opposed to a single charity that you don't know what's going to happen to over 10 or 20 years. That's going to wrap up our Q&A speed round. Thanks to all of you for sending these questions.

Evan Mills
If something we covered today raises questions for you, or if there's a topic you'd like us to dig into in more detail, send it our way. We read everything that comes in and questions like yours are what make this show.

Noah Lewis
Stephan will be back next week with the regular format. Until then, thanks for listening and we'll see you next week.