Mailbag! Accounts for Early Retirement, Roth Conversions, Closed-End Funds, and More

Robert Brokamp (0:03)

D-Bills, Closed End Funds, The Best Accounts for Early Retirees and more. This week on a financial planning mailbag episode of the Motley Fool Hidden Gems Investing Podcast.

I'm Robert Brokamp, aka Bro, and it's time for our second personal finance mailbag episode. And like the last time, I'm joined by longtime Motley Fool contributor, Dan Caplinger, who is a former financial planner and trust attorney. Dan, welcome back to the show.

Dan Caplinger (0:33)

Thanks again for having me. Always glad to be here.

Robert Brokamp (0:35)

So like our last mailbag episode, we have chosen six questions that we've received from our wonderful listeners. I'll read each one. Dan and I will take turns taking a first crack at it, and then the other one of us will add some thoughts. So with all that said, here's the first question, and it comes from anonymous, who asked, recently, have you mentioned buying treasury bills directly through Treasury Direct or Vanguard? Could you guys expand on how doing that compares to holding other short-term options like the iShares 0-3 month treasury bond ETF, ticker SGOV, the Vanguard 0-3 month treasury bill ETF, ticker VBIL, or Vanguard Treasury Money Market Fund, ticker VUSXX?

Dan Caplinger (1:17)

So anonymous, I would say that the do-it-yourself, buy treasury bills directly, either through your broker or from the government's own treasurydirect.gov website.

It's whether you decide that you want to pay the fees to an ETF that will do that for you. If you feel like saving that depends on how much money you were investing, if you only have a couple of hundred dollars, probably is not going to make that much of a difference. You've got a couple of hundred thousand dollars, then suddenly even a tenth of a percentage point can make enough of a difference that take you out for a nice dinner once a year or something like that. But with treasury bills that you buy, you are responsible for monitoring when you buy them by participating at auction or by buying them in the secondary market. You are responsible for knowing when they mature and then when they mature, either if you need the money, you withdraw it. If you don't need the money, then you're responsible for then reinvesting that matured T-bill into another T-bill, or if you want the stock or another investment, whatever that may be. With the ETFs that you're talking about, they handle most of that for you. Once the money is in the ETF, you essentially own a piece of many different treasury bills with many different maturities. All of the ETFs that you were talking about, as well as the Money Market Mutual Fund, all of those have maturities that are come and do probably every day, at the very least several times a week.

They are handling, their management team is responsible for jumping in, reinvesting that they'll charge a modest expense ratio. It's not that much, but it is something that if you are doing the self-serve option, then you can avoid that while also customizing to your particular needs with the ETF. It's all on them to decide what they're buying when.

Robert Brokamp (3:14)

I'll just point out a few stats about these. Both SGOV and V-bill are yielding about 3.6 percent. The Vanguard Money Market Fund is yielding 3.8 percent. But if you go and buy a three-month T-bills straight from the government, it's yielding 4.2 percent right now. You'll see that in a situation where interest rates are rising, what you get from the Money Market Funds and the ETFs will lag what happens.

Because they have older T-bills. Now, the opposite will happen when interest rates go down. So if you're buying a new T-bill, it's going to be lower than what you're getting from these ETFs. So that's just something else to think about, and I'll also point out that because these are treasuries, they are free of state income taxes, so that's always something to consider. All right. Let's move on to our second question from Ben. I'm 38 and hope to retire well before age 59 and a half. I have consistently maximized my available tax advantage retirement accounts, but this has left me with less that I would like in my taxable brokerage account to fund the years before traditional retirement age. Should I continue maximizing my tax advantage accounts and plan to use Rule 72T substantially equal periodic payments for early retirement income, or should I redirect some future contributions into my taxable brokerage account for greater flexibility? So Ben's concern here is obviously the 10% early distribution penalty when you take money out of a tax advantage retirement account before age 59 and a half. Now, there are many exceptions to this. You can get away around that 10% penalty. So you should certainly know those if you're going to retire early. The IRS website has a whole page of them.