#83 - Market-Based Cash Balance Plans with Jesse Reed

[00:00:00] Hey everybody, Ryan Gibson from Passive Income Pilots. We're excited to announce our very first in-person meetup. So come see me and Tait at Atlanta, Georgia on Veterans Day, November 11th from 5 to 8 p.m. And we're going to be meeting at the Line Creek Brewing in Peachtree City, Georgia. Come unwind, relax, meet fellow aviators that invest and fly and also meet myself and Tait. We look forward to seeing you there. If you'd like to register, check out the link in the show notes to register for the event.

[00:00:29] The space is limited, so please go in early and register. Thanks and let's get back to the show.

[00:00:36] Welcome back to Passive Income Pilots, everyone. Tait Duryea here with Ryan Gibson. Ryan, how you doing, man?

[00:00:41] Good, good. I'm excited to talk again to another episode with Jesse Reed, who is our financial expert here on all things aviation. And Jesse is going to come talk about the market-based cash balance plan. We've talked about it on the show before.

[00:00:57] For my opinion, like I say all the time, it's subject to change. I'm coming around. There's a ton of questions in the chat about what does the market-based cash balance plan mean for me? How much should I put in my mega backdoor Roth?

[00:01:10] How much can I contribute? When does it kick in? Who is it applicable to? And so Jesse is going to unpack that for every airline, every nuance, and we're going to go step by step.

[00:01:21] Doesn't matter who you're flying for. You need to understand this. Every major airline either has one or is in negotiation for one, and it's what happens to your money after the airline fills up your 401k.

[00:01:34] Does it go into your paycheck? Does it go into a health savings plan? Does it go into cash? Does it go into a market-based cash balance plan? So you need to understand this. You need to understand how it works so that you can advocate for your union leaders to create what you want and understand how this stuff works.

[00:01:53] Yeah. I mean, he who knows the contract has the gold, right? So know what you have available and then know a strategy that makes sense for you.

[00:02:02] Absolutely.

[00:02:02] Jesse's not going to provide you with what to do on the show today. He is going to educate you on all the tools in the tool chest, right? And so it's important to come up with a flight plan or a strategy that he'll talk about, but it's not necessarily applicable for everybody in every instance.

[00:02:19] So really important that, A, maybe listen to the show and get educated. And then once you're educated and you kind of think you know you have a plan, maybe a good person to talk to would be Jesse to help put the nuts and bolts together.

[00:02:31] Also, I want to put a shout out to our forum, which where a lot of these questions are coming from. If you haven't joined our Facebook forum, Passive Income Pilots, just search that on Facebook. You can join us.

[00:02:41] You can also go to ask at passiveincomepilots.com or email address and ask us a question. That's where a lot of this information and these questions are being generated from. We love the listeners asking us questions so that we can have episodes like this where we answer all of them in one fell swoop.

[00:02:57] Absolutely. Jesse Reed is a registered financial advisor with creative planning. He also is a pilot and knows the airline contracts in and out. So it's very rare to find a financial advisor that also knows airline contracts. He's probably the best person in the industry to come and answer these. So without further ado, let's get to the market-based cash balance plans.

[00:03:19] Let's get to the show.

[00:03:23] Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world-renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll.

[00:03:43] Jesse, thanks for joining us.

[00:03:45] My pleasure. Thanks for inviting me back, guys. Appreciate it.

[00:03:47] It was good seeing you again.

[00:03:48] Yeah, it's been a while since you've been on. So we have a lot of new listeners since then.

[00:03:52] I have been following closely and my hat's off to you guys. You guys have really kind of taken up this space in the airline industry and it's been cool to see it. And it's especially cool, Ryan, because we were training buddies once upon a time.

[00:04:05] Yeah, we did the ER training at Delta probably was at 2017. So we were going through, we went down to Miami and did that. And Jesse, thank you for being one of the guests that have made this show awesome.

[00:04:17] And thanks to our listeners who have left us awesome reviews and encouraged us to keep going here because this is a place that we want to educate pilots on about all things retirement, investing, bringing on great people, giving people things to think about with their kids and IRAs and HSAs and 401ks.

[00:04:32] And, you know, what a better thing to talk about right now, since the airlines have actually changed so much for pilots, specifically the market cash balance plan, the additional contributions to 401ks and all that stuff.

[00:04:45] And that's why we have you on here today, because everybody's got questions. What to do? How do I allocate? Where are we going? But could you just tell us a little bit about yourself, your background, where you're at right now?

[00:04:55] Yeah, so I work for a company called Creative Planning. It's not an airline specific wealth management firm. Our headquarters is here in Kansas City, where I live. And this, this company has been around for decades doing kind of high protein white glove wealth management for our clients, all sorts of demographics.

[00:05:12] And a couple of years ago, I just to tell your listeners, I've been working in financial planning with airline pilots specifically for almost a decade now and have had a team that has built up over the years doing that.

[00:05:24] A couple of years ago, we were invited to come here and basically set up shop at Creative Planning to fill that knowledge gap, if you will, that expertise gap here at Creative Planning, because this company had a lot of people that were airline pilots coming here going, you know, I've heard of your reputation as a company.

[00:05:39] I would like your expertise here. But of course, as we all know here, and it's why we have this show, airline pilots, financial lives, and in particular, their benefits and their contracts make this kind of a complicated topic for the average professional out there.

[00:05:53] And so that's really what we specialized in. And so that was kind of why I'm here, why our team is here, is to help out those folks that want to be clients of this company, but need that extra touch of understanding a lot of the stuff that we're going to talk about today.

[00:06:05] Yeah, Jesse, we were talking before the show. I don't think there's many people in the industry more qualified to talk about this sort of stuff because you're familiar with all the different pilot contracts. So we're going to get into that.

[00:06:18] The topic today is market-based cash balance plans. To get there, first, we need to unpack the 401k, right? Because it's so funny. You talk to any of your colleagues, right? And they're like, oh, so they match, right? And it's like, no, they don't match.

[00:06:33] You know, we have a very unique product. So let's start with the 401k. Let's talk about employer contributions versus employee contributions. The limits in 2024, Roth versus traditional, the fact that employers can only contribute on the traditional side. Let's set the table with all that.

[00:06:52] Yeah, absolutely. And anytime we start talking about this IRS regulated limitations, we start getting into number and alphabet soup. So if I misspeak at one point when we start talking about 401a or 415c or all that, I will hopefully correct myself or you guys can jump in as well there.

[00:07:08] So, you know, everyone is most familiar with the 401k really out there in corporate America. Airline pilots, like you already alluded to, are unique in that we don't typically receive matches. There are some airlines out there that do matching still, but for most part, if you're at a major airline with a 401k, you're getting what's called a non-elective contribution.

[00:07:26] That is where the company just throws money at your 401k, regardless of whether you contribute to it or not. And certainly all the airlines that are implementing market-based cash balance plans, they have that set up where you usually receive a pretty hefty non-elective contribution.

[00:07:40] But like you said, there's a couple of limits that the IRS has imposed there. I'll start with the one that's called the 402g limit. It's really the one that I think almost everybody I talk to is somewhat familiar with. And that is the elective deferral limit in your 401k where you make a traditional contribution to it. And this is your own contributions as a pilot. We call that an elective deferral. For 2024, that's $23,000 for a pilot or really anybody out there in corporate America.

[00:08:09] And so what that means is you can put $23,000 of your own paycheck money called an elective deferral, whether it's traditional, whether it's on the Roth portion of your 401k, it can be a combination of both. But once that combined limit reaches $23,000, you can no longer make what's called an elective deferral.

[00:08:28] Usually when I talk to somebody, they're pretty familiar with that, but then it kind of starts to get hazy. And so the way I teach people, because I'm a flight instructor at heart, I like to draw pictures or I can't draw a picture for your listeners here. So I'll use analogies.

[00:08:41] But I think of your 401k like a bucket. And in 2024, that bucket can hold $69,000. That is now what we call the 415c limit. That basically says, the IRS has said, you know, once that amount of money gets in that account, no matter how it gets there, whether it's a combination of the company, whether it's a combination of your own elective deferrals as a pilot, once it hits $69,000, at least in 2024, all contributions to that account completely shut off.

[00:09:11] So the bucket is full. And now what happens when we start to add water to a bucket that's already full? That bucket starts to spill over, right? I love that. That spillover is really what's that question here, right? When it comes to market-based cash balance plans, or even for the airlines that don't have those up and running yet, where's all that money going, right? We live and die by contracts as airline folks. And so the company owes you that money contractually, it's got to go somewhere. And we'll get into that as well.

[00:09:38] There's one other limit here, and this is the one that's least commonly known, and that is the max compensation limit, otherwise known as the 401A-17 limit. That's a mouthful.

[00:09:48] But that basically says for a given employer, once you have made a certain amount of money or compensation with that company, once you hit that point in a year, all company contributions shut off into your 401K.

[00:10:01] So even if you have not made a single contribution as a pilot to your own 401K, and meanwhile, your respective airlines been plugging away at your 401K, putting their 17% in there in the form of non-elective contributions.

[00:10:13] Well, even if you haven't filled that bucket up yet, that $69,000 bucket, as soon as you hit $345,000 for the year, boom, it all shuts off to the 401K.

[00:10:21] All right. I'm going to stop right there. Is that all making sense at least to you guys here with me?

[00:10:27] Absolutely. Yeah.

[00:10:28] Okay.

[00:10:28] And this is really what I want to dig into for the listeners in this segment of the show here, is the 401A-17 for this year is $345,000, right? So if you're newer, you haven't run into this yet, if you're making less than $345,000 gross, you're not hitting this spillover yet. If you're making a half million dollars a year, you are getting into this spillover.

[00:10:52] Yes.

[00:10:53] And what I want to call attention to is Delta, United, American, Alaska. I'm not sure what Southwest is, but Delta, United, American, Alaska are making 17% is what's going into your 401K.

[00:11:06] Correct.

[00:11:07] $345,000 at 17% is $58,650.

[00:11:12] That's exactly right.

[00:11:13] Right. So the maximum contribution limit of the total bucket is $69,000.

[00:11:19] So you take $69,000 minus the maximum amount that the company can contribute at 17%, you only have room for $10,350.

[00:11:30] Correct.

[00:11:31] Right. So everybody thinks, oh, I can put $23,000 into my 401K, but you can't if you're making that much money.

[00:11:39] Correct. And so for someone who wants to minimize spillover, you would let the company do their fully funded amount into your 401K up to that max compensation limit of $345,000.

[00:11:52] And for folks at home, if you want to do the math that Tate was just talking about, you just take your non-elective contribution percentage, 17%, let's say, you take it times $345,000.

[00:12:01] If you think you're going to make at least that, that's the maximum amount the company is going to put into your 401K that year.

[00:12:08] But just like he said, also, there's still some leftover, a little over 10,000 there.

[00:12:12] That's got to come from you as a pilot, as an elective deferral, if you want to put some money in there.

[00:12:18] Okay. So at 17%, it means that the company is contributing a lot of money and they're going to hit that when in, let's say, October, you hit $345,000 of gross income, the company must stop contributing to your 401K.

[00:12:35] The company must stop. And that's an important clarification to make. This has everything to do with company contributions, not you as a pilot making your own elective deferrals. Very important distinction to make.

[00:12:47] Now, I did some math here and next year, Delta and United go to 18%. If we were to get to a 20% company contribution, that, funny enough, would actually equal $69,000.

[00:13:04] So you would hit both limits simultaneously and you wouldn't have to contribute a single dollar to your 401K to max it out.

[00:13:12] Always remember that all of these numbers change every year. They go up, they're indexed to inflation.

[00:13:17] So that math may or may not work out for whatever the future numbers are. We don't know until they come out.

[00:13:22] And I should know this today. I would have, but I do believe the 2025 numbers are probably already out there. I need to go look at those.

[00:13:29] But yes, those numbers change every year. So we're talking, our conversation is applicable for 2024 today.

[00:13:35] The concepts are going to remain the same. Just all the numbers and the math are going to change though.

[00:13:40] So we're in this weird spot as airline pilots where there's a gray area and I want to dig into this.

[00:13:49] There's a gray area between how much I contribute versus how much the company contributes because the company contributes so much at 17% or 18% that there isn't room for your entire 23,000 or whatever it is for the current year's personal contribution to your 401K.

[00:14:06] And so let's break that down further and talk about what happens if you are the first to the finish line.

[00:14:14] You get your full 23,000 in early in February. You're like, hey, crank up those contributions. Let's get maximum in there.

[00:14:21] Or you just sit back and you say, hey, I'm not even going to contribute to this thing.

[00:14:24] Sure.

[00:14:25] And then we can talk about maybe topping it off at the end of the year.

[00:14:27] Yeah. There's all sorts of different strategies here depending on what your goal is.

[00:14:31] So we'll start with kind of the extreme case of the super duper saver as I call it.

[00:14:36] And this gets into a whole discussion about backdoor Roth conversions and whatnot or mega backdoor Roths.

[00:14:41] And this is the person who takes, will fill up right off the bat.

[00:14:44] Maybe profit sharing comes in for their respective airline early in the year.

[00:14:47] They'll take the entire contribution.

[00:14:49] They'll max out that 402G limit for 2024, $23,000.

[00:14:54] And then they go, you know what? I want to add some even more on my end, right?

[00:14:57] I want to beat my airline to the punch there.

[00:14:59] That's where after-tax contributions start to come in.

[00:15:01] So one thing we didn't mention yet here is there is yet a third way as a pilot to contribute your own money called after-tax contributions if your plan allows it.

[00:15:10] That goes in like a Roth contribution.

[00:15:12] You pay taxes on it today.

[00:15:14] It goes in after tax.

[00:15:15] And then the cool thing you can do is you can roll that into a Roth account.

[00:15:19] Again, it kind of depends on your airline and what they allow.

[00:15:22] You can roll it into a Roth IRA.

[00:15:23] You can roll it in to the Roth portion of your 401k, which is absolutely what you want to do if you make an after-tax contribution.

[00:15:30] Because unlike a Roth contribution, after-tax contributions, they go in after-tax, but they don't grow tax-free like Roth does.

[00:15:39] So you want to get that money into a Roth as soon as you can.

[00:15:42] So you'll have folks that do that early in the year, and they'll hit that $69,000, that 415c limit.

[00:15:49] They'll fill that bucket up early in the year, and the spillover starts much earlier for them.

[00:15:53] Okay, that's kind of the extreme case of someone that's really looking to just maximize the 401k.

[00:15:59] Maybe they have a goal where they really want to maximize the Roth money, so they're throwing in after-tax money and Roth contributions and all.

[00:16:05] So you have another person who may just fill up the $23,000 bucket and stop there and go, I'm good with that.

[00:16:12] I'll let the company do the rest.

[00:16:14] In which case, now that 17%, so that math we did earlier with the 17%, you're going to hit that $69,000 limit probably before you hit the $345,000 compensation.

[00:16:27] In fact, you are definitely.

[00:16:28] And the company's going to throw less of their money in there, and once again, spillover starts.

[00:16:32] So, let's take another pause here so everyone can kind of digest what we're saying here because we're throwing around a lot of numbers here.

[00:16:39] Is all this making any sense at least to you guys here?

[00:16:41] The only thing that I think people might be confused on is the difference between a straight contribution up to that $23,000 limit, and then we threw around a lot of after-tax, backdoor Roth, all that sort of stuff.

[00:16:55] Can you just break down that portion of it because I think that might have gotten lost in the crossfire?

[00:16:59] Yeah, really, your pre-tax contribution is always going to be part of that $23,000.

[00:17:06] So, if your goal in a given year as a pilot, which is I hear so many guys I talk to, guys and gals, I pay too much tax right now.

[00:17:13] Well, one way to reduce today's taxable income is to make a normal, traditional 401k contribution, elective deferral.

[00:17:21] What does that do to your paycheck? It reduces your taxable income for the year.

[00:17:25] So, if you're someone who really is sensitive to that and you want to maximize reducing your taxes today, you max out that contribution.

[00:17:33] You do it pre-tax, $23,000.

[00:17:35] It's going to reduce your taxable income by that exact amount.

[00:17:38] You can also make that $23,000 contribution as a Roth.

[00:17:42] So, let's say you're not as tax sensitive.

[00:17:44] You don't mind paying the taxes today.

[00:17:46] You can make that all Roth and then it goes in.

[00:17:49] It's super easy.

[00:17:50] It grows just like Roth does.

[00:17:51] It's tax-free the rest of your life.

[00:17:53] When you withdraw from it, it's tax-free money.

[00:17:55] It grows tax-free.

[00:17:56] You pass it on to your heirs, tax-free as well.

[00:17:59] So, you know, Roth is a good thing if you can stomach the tax bill today.

[00:18:04] That third way, after tax again, kind of feels like a Roth contribution.

[00:18:08] You pay the taxes on it today, but again, it goes in.

[00:18:11] Again, it's not a part of that $23,000 that we talked about.

[00:18:14] It's kind of just filling up the big $69,000 bucket.

[00:18:18] I'm using the numbers, the dollar amounts instead of the IRS code.

[00:18:22] Just to try and make it the least money possible here for the listeners.

[00:18:28] But that's going in irrespective of the $23,000 limitation.

[00:18:32] It's filling that bucket up.

[00:18:33] But again, if you put it in there and you don't touch it, all the earnings from that over the years will grow tax-deferred.

[00:18:40] You will pay taxes on that again someday if you do not get those contributions into a Roth.

[00:18:46] So what are the nuts?

[00:18:47] Is that the mega backdoor Roth component?

[00:18:50] Yes.

[00:18:51] So again, you know, pilots, you fly with somebody, you go, hey, somebody told me about a mega backdoor Roth.

[00:18:56] And then they come here and they go, yeah, I want to do that.

[00:18:59] What's that?

[00:19:01] Right.

[00:19:02] Mega backdoor Roth is making an after-tax contribution into a 401k and then immediately rolling it into a Roth account.

[00:19:09] The reason they call it a mega backdoor Roth, and I'm not sure if in your episodes, if you've had someone come in here and just talk about what a backdoor Roth conversion is in an IRA,

[00:19:19] you're essentially achieving the same thing, but usually at a much higher level of funding, right?

[00:19:25] An IRA right now, you know, you're limited to 7,000 bucks.

[00:19:31] So people do that in normal IRAs that are outside of your employer accounts.

[00:19:35] That's called a backdoor Roth.

[00:19:36] When you basically make an after-tax contribution to an IRA, you roll it or convert it immediately to a Roth.

[00:19:42] That's called a backdoor Roth.

[00:19:44] This is doing it at a much higher level typically because now we're dealing with 401k limits, which are much higher.

[00:19:49] Right.

[00:19:49] Yeah.

[00:19:49] Understood.

[00:19:51] And for anybody who isn't familiar with what we're talking about here, an IRA has a contribution limit of $7,000 per year.

[00:20:00] Currently in 2024, for reasons unbeknownst to us, if you make over a certain dollar amount of W-2 income per year, you cannot contribute directly into a Roth anymore.

[00:20:14] They tell you, no, you make too much money.

[00:20:16] Oh, but you can contribute to a traditional and then in the same day, roll it over to a Roth.

[00:20:22] And here's the reason you can do that.

[00:20:23] So again, I know.

[00:20:25] It's like who knows what goes in the minds of the IRS?

[00:20:27] Yes.

[00:20:28] Well, along with that income limitation, right?

[00:20:31] So the IRS has determined, well, you just make too much money.

[00:20:33] You don't deserve to put money into a Roth IRA, but you can put it in this traditional.

[00:20:37] But guess what?

[00:20:39] Because you make too much money, we're not going to give you a tax break for that either.

[00:20:42] So strangely, when you make a contribution to an IRA, traditional one, and let's say you were earlier in your career, you were working at Republic or you're working at a gas station or something like that.

[00:20:56] And you didn't make that much money.

[00:20:58] If you put money in an IRA, you got a tax break for it.

[00:21:01] Well, the IRS says you make too much money.

[00:21:03] Now you don't get a tax break for it.

[00:21:05] So those monies go in the traditional IRA after tax, just like we were talking about with the 401k.

[00:21:11] You pay taxes on it today.

[00:21:13] It goes in there.

[00:21:13] If you leave it in that traditional IRA, all the growth on those after tax contributions grow and will be taxed someday.

[00:21:21] So the backdoor Roth basically says, okay, let's take that $7,000, if you max it out, $7,000 after tax contribution.

[00:21:29] Let's get it out of that IRA immediately and convert it to a Roth.

[00:21:33] If you sit around, let's say you put seven grand in there and you wait a year and it grows.

[00:21:37] I'm just going to use easy math here since public math is always fun for me.

[00:21:42] Let's say you take $7,000 contribution.

[00:21:45] It doubles in a year and now it's 14.

[00:21:47] Well, seven of that was after tax.

[00:21:50] You'll never pay tax on that.

[00:21:51] But the other seven, they grew over the year.

[00:21:53] You will pay tax on that.

[00:21:55] So now if you decide to wait a year and do that Roth conversion, you're going to pay extra tax to make that happen.

[00:22:01] Got it.

[00:22:02] Yes.

[00:22:02] Yes.

[00:22:03] Good to know.

[00:22:04] Yeah.

[00:22:04] Yeah, yeah.

[00:22:05] It's coming into focus.

[00:22:07] Yeah.

[00:22:07] So we talked a lot.

[00:22:09] We educated a lot.

[00:22:10] Let's get to a question that was in the forum from a pilot.

[00:22:14] But is there an advantage for us to mega backdoor Roth 401ks?

[00:22:19] I max out both my portion and the company portion by mid-year.

[00:22:24] Then it's market-based cash balance plan after that.

[00:22:27] I want to kind of go like there was a bunch of comments that went into this and all that.

[00:22:30] And I kind of want to unpack each comment.

[00:22:32] So let's demystify this a little bit.

[00:22:34] Yeah.

[00:22:35] So my background as a certified financial planner is it's all goals-based.

[00:22:41] I treat all this stuff, like I said in your previous episode, like a flight plan.

[00:22:45] I work from the end result that somebody wants to where they are today.

[00:22:48] That's how we make decisions here.

[00:22:51] So if you really want a lot of Roth money in retirement, a mega backdoor Roth makes sense for you.

[00:22:58] It might be worth investigating that.

[00:23:00] If that's not one of your goals, let's say you get into retirement and yeah, you got a lot of money that you're going to pay taxes on, but you're a super charitable person.

[00:23:09] So you're reducing your tax bill by charitable giving and other things.

[00:23:12] You might not need as much Roth money.

[00:23:15] I know I'll just speak for myself again.

[00:23:17] This isn't a blanket statement.

[00:23:18] I've got kids that I want to pass assets on to someday and I don't want to have a tax bill associated with it.

[00:23:23] So from an estate planning perspective, I like Roth money and passing on it.

[00:23:27] Just like I would like real estate or taxable investments that get a step up on basis.

[00:23:30] You guys have clobbered that topic over and over again here on the podcast.

[00:23:35] So there's pros and cons to all these things.

[00:23:38] And I never, ever, ever tell somebody, and I truly believe this in my heart, there's never a right or wrong answer on any of these things.

[00:23:46] Financial stuff, working out in the gym, all the things you can do in the world with your life.

[00:23:51] It's not a one thing is better than the other.

[00:23:53] There's trade-offs for everything, right?

[00:23:55] What might work for one person or be appropriate for them might not apply to the other person as well.

[00:24:00] Can I offer a couple of quick concepts that people might be able to chew on?

[00:24:07] One is something that has helped me in my financial life is thinking of money in different buckets of time.

[00:24:16] So I have a now bucket where I want current cash flow, passive income that I can spend, save, do whatever I want with now.

[00:24:23] I have a medium-term bucket that I have money in illiquid real estate deals that is going to mature in two to five years.

[00:24:33] It's sort of my medium-term bucket.

[00:24:34] And then I have my later bucket, which is my 401k and my retirement assets that I can't touch for 25, 30 years from now.

[00:24:45] And I kind of think to myself that I want to balance those buckets.

[00:24:49] And that's something that works for me.

[00:24:51] Of course, everybody's different, but that might be something that's useful to a listener out there.

[00:24:56] And then the other thing I wanted to bring up was how are 401k withdrawals treated from a tax perspective from both a Roth and a traditional?

[00:25:08] Yes.

[00:25:08] Yes.

[00:25:09] Great question.

[00:25:09] So starting with distributions, for the balance, so let's say you retire from an airline.

[00:25:17] You've got $2 million in your 401k.

[00:25:21] $1.5 million of that is all traditional money.

[00:25:24] So that's the combination of your pre-tax contributions you made, the company contributions, and all the growth associated with it.

[00:25:30] And then let's say you've got a half a million of Roth in there.

[00:25:33] Well, you can choose which bucket you want to pull from, whether it's the traditional or the Roth.

[00:25:38] And if you pull from the Roth, first of all, that's the easy one.

[00:25:41] It's tax-free.

[00:25:42] It comes out.

[00:25:43] You could distribute all $500,000 of that in this theoretical example if you wanted and it's not going to make a dent in your tax bill.

[00:25:52] Do you want to do that?

[00:25:53] Not necessarily.

[00:25:54] I'm just using it for illustrative purposes.

[00:25:56] The money you pull from traditional retirement accounts, and this goes for traditional 401k, traditional IRA.

[00:26:03] Oh, by the way, because we're going to be talking, we're talking about market-based cash balance plans, that same sort of thing as well.

[00:26:08] That money, I tell people, treat that like a paycheck in retirement.

[00:26:12] It's going to come out.

[00:26:13] It's going to get taxed by the IRS at your tax rate, right?

[00:26:17] As if it was income.

[00:26:19] As if it was income.

[00:26:20] That's how the IRS treats it.

[00:26:21] It's an ordinary income, or that's where it shows up essentially on your tax return.

[00:26:27] So this is why I wanted to lay this example out there.

[00:26:32] A concept that has helped me is to think of my Roth bucket like a toy fund.

[00:26:38] I've got my Roth bucket, and if I want to go buy a really nice airplane, I can pull a million dollars of that out in one year and make that purchase.

[00:26:46] The traditional bucket is more useful as a paycheck.

[00:26:52] Yeah.

[00:26:53] You pull a hundred grand out every year, and you're at a fairly low tax rate.

[00:26:57] But if you want to pull a million dollars out of your traditional account in order to go buy an airplane, you're going to get hit hard as if you just made a million dollars in your W-2.

[00:27:06] Yeah.

[00:27:06] Hey, Tate, do you want an application for a job here on our team?

[00:27:10] I feel like you're describing one of the biggest issues because a lot of people we talk to, they just view this whole financial plan to be solved or this kind of puzzle to solve ending when they hit 65 and they retire.

[00:27:24] And they're like, okay, I'm good now.

[00:27:26] And they don't understand the next 30, hopefully, 30 years or so that you're going to live in retirement.

[00:27:31] But you're just now entering the next phase of the puzzle here, which is income distribution.

[00:27:35] And so thinking of money in buckets and time horizons is exactly what we encourage people to do here.

[00:27:41] And you're exactly right.

[00:27:42] If you want to go buy that retirement house, lake house somewhere, and you pull 500 grand out of your traditional 401k to go do it, guess what?

[00:27:50] But you're paying taxes on at least 500 grand in income that year, and you're going to be in the top tax bracket for that, assuming we're in 2024 numbers.

[00:28:00] Yeah.

[00:28:00] So it's a problem for sure.

[00:28:04] That's excellent.

[00:28:05] And just to put a bow on this, the traditional is like taking a paycheck out and retirement, paying tax on it.

[00:28:12] The Roth is the opposite where you're getting a tax free.

[00:28:15] The HSA is the turbocharger in this, right?

[00:28:20] Yes.

[00:28:21] It goes in tax free.

[00:28:22] It comes out tax free.

[00:28:24] Yes.

[00:28:24] It grows tax free.

[00:28:25] So when everybody's like, oh, what's the HSA all about?

[00:28:29] And we're not giving financial advice or whatever.

[00:28:33] But the HSA is something that you should really pay attention to because you're getting the benefit of both things.

[00:28:40] It really is one of the most amazing little accounts out there.

[00:28:46] Because again, you put money in there, it reduces your taxable income right now.

[00:28:51] It grows tax deferred, so you don't pay any taxes on the growth throughout the years.

[00:28:55] And then if you use it on medical expenses in retirement, it comes out tax free.

[00:28:59] What we tell people to do, and again, don't take this as specific financial advice, but this is a technique that is really powerful,

[00:29:07] is in your working years, you pay your stuff, your medical expenses that are out of pocket, just pay them out of pocket.

[00:29:13] Don't dip into that HSA.

[00:29:14] Let that sucker grow just like your 401k does.

[00:29:18] You can invest it.

[00:29:19] All HSAs have investment options in there that are pretty reasonable.

[00:29:23] You can get the same sort of market returns that you would get, say, in a 401k.

[00:29:27] Let that sucker grow.

[00:29:28] And then when you get in retirement, so let's say now you're 65, you retire.

[00:29:32] If you've done a good job of documentation, which is easier than it sounds, what I'm going to say here,

[00:29:37] but if you've kept records of all your out-of-pocket expenses over the years,

[00:29:41] you can actually retroactively reimburse yourself for all those out-of-pocket costs from the HSA.

[00:29:47] Essentially what you've done now is you've made the HSA a tax-free income bucket in retirement

[00:29:52] by paying yourself back for all those years that you paid for the emergency room visit for your kid

[00:29:58] when they broke their arm or something like that.

[00:30:00] Does that make sense?

[00:30:02] Absolutely.

[00:30:02] Totally.

[00:30:03] Yeah.

[00:30:03] So you just have to keep those receipts.

[00:30:05] You do.

[00:30:06] And the way I do that is, and I'm speaking for myself, every healthcare provider is a little bit different

[00:30:10] and sometimes the providers change.

[00:30:12] But almost all insurance carriers out there that any airline pilot's using,

[00:30:16] they have an option for you to download 2023 or 2024's out-of-pocket expense summary.

[00:30:22] It'll have all your claims in there.

[00:30:24] You just throw that in the file cabinet.

[00:30:25] Don't toss it or save it somewhere in the cloud.

[00:30:28] And now you've got your documentation.

[00:30:30] All right.

[00:30:31] Stay tuned for an HSA-only episode.

[00:30:34] That's going to be upcoming.

[00:30:36] We want to dive into that.

[00:30:37] But this episode is about the market-based cash balance plan.

[00:30:41] We're getting there, right?

[00:30:42] We're getting there.

[00:30:43] We're getting there.

[00:30:43] We're scaffolding, right?

[00:30:45] Just like a lesson in flight school.

[00:30:47] So we understand how the 401k works, the contribution limits.

[00:30:52] All right.

[00:30:53] Now we're talking about spill.

[00:30:54] So at some point, if you are, particularly if you're in the left seat, you're going to be hitting

[00:31:00] that $345,000 gross income dollar amount throughout the year.

[00:31:06] Some people earlier in the year than others.

[00:31:09] But at some point, that thing's going to start spilling over.

[00:31:11] And if you're not spilling yet, don't turn this episode off because this is going to apply

[00:31:15] to you in a few years.

[00:31:16] Yes.

[00:31:17] What happens with the spill?

[00:31:20] Depends on where you work, right?

[00:31:21] So Delta sort of led the charge on this.

[00:31:24] So the first ones to implement this.

[00:31:26] And it's become very in vogue, by the way.

[00:31:27] You're seeing all the newer contracts are having stipulations in here.

[00:31:31] FedEx was the most recent one to try it.

[00:31:32] Their TA got rejected recently.

[00:31:34] But there was, guess what?

[00:31:36] A little addition in there in the contract, the TA for a market-based cash balance plan.

[00:31:42] Now, why are companies doing this?

[00:31:43] We already saw, I think we've talked about this in previous podcasts, or I think you guys

[00:31:47] have talked about it.

[00:31:48] We've heard, we've used the term dead zoners.

[00:31:50] The folks that lost their pensions, they went to PBGC or they got reduced benefits.

[00:31:55] That's not good for the pilots.

[00:31:57] That was tragic in our industry for those folks that that applied to.

[00:32:00] And it was hard for the companies too.

[00:32:02] These obligations are very, very expensive for companies to fund.

[00:32:06] Market-based cash balance plan is this weird little thing that not many people outside

[00:32:10] the airline industry have really heard of.

[00:32:11] There's some other weird industries that use this thing, but it's a pension plan.

[00:32:16] So it's a defined benefit plan, but it sort of behaves like a defined contribution plan,

[00:32:21] like a 401k.

[00:32:23] And that you get this balance someday and it's yours.

[00:32:26] Your name's on it.

[00:32:26] You can take it with you.

[00:32:27] You leave the company.

[00:32:28] It's not affiliated with your airline anymore.

[00:32:30] There's not some trust running it and investing it and divvying it out to you.

[00:32:34] And it's not subject to bankruptcies or anything like that.

[00:32:37] But so, you know, for all the kind of haters that I've talked to about market-based cash

[00:32:41] balance plan, which is fair.

[00:32:44] Again, everything's about trade-offs, but it really was a great way to solve the problem

[00:32:49] of, okay, we need an option for pilots to keep their tax bill lower in the year when

[00:32:54] they start making gobs of money.

[00:32:56] We need an account that can receive that and keep their tax bill lower while they're in

[00:33:00] their working years.

[00:33:00] Because let's face it, you're a wide body captain in an airline.

[00:33:03] You're making the most money you will ever, ever make in your life by far.

[00:33:06] So we needed something to mitigate that.

[00:33:08] And they wanted to treat it like a pension.

[00:33:11] I mean, that's where these big non-elective contribution percentages came from was sort

[00:33:14] of a, whoops, we're sorry.

[00:33:16] Here's how we're making up for it as an airline to sort of give you some semblance of

[00:33:20] what it would have been like to have a pension.

[00:33:21] We're going to throw money at you.

[00:33:23] Uh, so this was a solution to that problem to give people a pension.

[00:33:27] And the cool thing about it is it takes the liability off the company.

[00:33:30] Yes, they're throwing money in there for you, but if they suddenly disappeared tomorrow,

[00:33:34] you know, Hey, it's your money now.

[00:33:35] You got it.

[00:33:35] It's in your name.

[00:33:36] You can take it with you.

[00:33:37] You can roll it somewhere else.

[00:33:38] Um, so it's good for the pilots.

[00:33:40] I think this is just Jesse Reed talking here and it's good for the companies.

[00:33:44] And it really is kind of a win-win on both sides there, especially in an industry where

[00:33:48] it seems like both groups are sort of at odds with each other all the time.

[00:33:51] So the alternative is receiving it in cash.

[00:33:54] Yes.

[00:33:55] You know, if you didn't have a market-based cash balance plan, it's going to, it's going

[00:33:58] to spill over into your paycheck.

[00:33:59] And that's the issue, right?

[00:34:00] Is, Hey, this money was going to be a direct contribution to my 401k, but because we hit

[00:34:09] these, these limits, uh, it's now flowing over into my paycheck and I'm paying 37% tax on

[00:34:16] it at a federal level plus state.

[00:34:18] If you live in a high tax state now, so this is a way to, to shelter that income and pay

[00:34:24] zero tax on it.

[00:34:25] Get it into today, right?

[00:34:27] Not maybe not when it comes out, but today paid zero tax on it.

[00:34:31] So that going from, you're not going to go from 500,000 to 550,000 or from 600 to 670

[00:34:38] or whatever it may be.

[00:34:40] Where does that money go?

[00:34:41] Once it's in the market-based cash balance plan, what are the investment options?

[00:34:45] Does it look like your traditional core account?

[00:34:49] Is there a way to self-direct it?

[00:34:51] What's that look like?

[00:34:51] Great question.

[00:34:52] So because it is still a pension plan, it is the, the, the pilots or the, or the participants

[00:34:59] do not have a say in how it gets invested.

[00:35:01] And that that's where it kind of behaves more like a pension plan.

[00:35:04] So it's up to the plan consultants.

[00:35:06] In this case of Delta, we were using that as the example, their plan consultant is Fidelity.

[00:35:10] It's up to them and obviously the company as well to sort of decide how that gets done.

[00:35:15] Now, one of the big complaints that if I dip my toes in the forums and I heard from everybody

[00:35:20] is people started kind of pounding their chest and going, Hey, I want that money in cash.

[00:35:25] I can do a lot better with it.

[00:35:27] And my answer to all the people I talked to is I'm sure you can, because the pension has

[00:35:32] to be invested conservatively by law.

[00:35:36] There's a law called a RISA employee.

[00:35:38] I'm going to mess this up.

[00:35:39] Employer Retirement Income Safety Act of 1974, that kind of dictates how these plans work.

[00:35:46] And so there was a trust that's managing a market-based cash balance plan investments.

[00:35:51] When the monies go in there and it's very conservative.

[00:35:54] I mean, we're talking, you know, probably somewhere between a 30 and 40% equity to 70

[00:36:02] to 60% bond allocation is very conservative and it's designed to be that way to keep it

[00:36:07] relatively safe.

[00:36:08] It's still growing, just not nearly as aggressively as someone could do.

[00:36:11] Now, a little, Oh, by the way, here on my team, when again, the Delta pilots were the

[00:36:17] first ones to see this and they had a decision to make last summer.

[00:36:21] They basically got told, you've got a window of opportunity here.

[00:36:23] If you've been at Delta before this day to either opt into this thing forever or opt out

[00:36:29] forever.

[00:36:30] You got a choice to make.

[00:36:31] And we fielded a ton of calls when that was happening.

[00:36:33] So we sat down with our financial planning team and we ran a bunch of theoretical scenarios

[00:36:37] about, okay, what if you do this?

[00:36:40] What if you opt in and opt out?

[00:36:41] What's the difference?

[00:36:41] And without getting in all those numbers, oh, by the way, there's a website.

[00:36:46] We have our website here that has a link to that article.

[00:36:48] If anyone's ever interested that I can give, I can give you guys later.

[00:36:52] We'll put in the show notes.

[00:36:53] Okay, great.

[00:36:53] So we, we put, we ran the numbers in that article and essentially the takeaway was because

[00:36:59] if you had that money put in cash into your paycheck and not the market-based cash

[00:37:03] balance plan, if you took into account the tax rates, you're going to pay on it immediately

[00:37:07] and the union dues that most likely were coming out of it, you were taking a third, basically

[00:37:13] almost 34% of that money is just getting chopped off the top right off the get-go.

[00:37:19] So the example we use for easy math in the article is we said, hey, if you got $20,000 that would

[00:37:24] have been put in the market-based cash balance plan, if you had opted to have that in cash,

[00:37:29] it's more like $13,000.

[00:37:31] And then we just ran the numbers.

[00:37:32] We said, okay, let's assume you're a savvy investor and you make roughly an eight to

[00:37:36] 10% rate of return for the next however many decades on your own.

[00:37:40] And you put that in a taxable account and it's got a little bit of a tax drag associated

[00:37:44] with it because of dividends and income and other things.

[00:37:47] And so we kind of ran a realistic situation on that.

[00:37:50] And then we compared it to the, just dump it in the market-based cash balance plan and

[00:37:54] spend it on down the line.

[00:37:55] In almost all cases, the market-based cash balance plan still won as far as what you would

[00:38:00] accumulate the most at retirement at 75, 85.

[00:38:04] We basically ran decade by decade.

[00:38:05] We assumed somebody was spending money and spending these accounts down.

[00:38:08] And we found that the market-based cash balance plan still beat a savvy investor who was able

[00:38:12] to pull an eight to 10% rate of return on their own every year.

[00:38:15] That is the power of compounding.

[00:38:18] That's the power of even with a lower rate of return of not having that huge chunk just

[00:38:23] chopped off the top due to taxes and dues and all that stuff right off the bat.

[00:38:27] Did I explain that well to you guys?

[00:38:29] Absolutely.

[00:38:30] That makes a lot of sense.

[00:38:31] And so we were talking about mega backdoor Roth conversions and all that.

[00:38:34] And is Roth money good today or tomorrow?

[00:38:36] That becomes a really tough tax bill to swallow.

[00:38:40] Again, to use the example of the wide body captain, he's making half a million a year,

[00:38:44] maybe more.

[00:38:45] And to have those contributions get taxed at that highest tax rate, that's a tough pill to swallow.

[00:38:50] Yeah.

[00:38:51] So one of the things that we look at approaching retirement for a lot of our airline pilot clients

[00:38:56] is no matter what kind of lifestyle you're going to live in retirement, you're probably

[00:39:00] not going to be spending $500,000, $600,000 a year.

[00:39:03] The hope is we've done a good job.

[00:39:05] You've got everything paid off.

[00:39:06] And now you're just spending your retirement income, right?

[00:39:10] Typically, not always, but typically for someone who's done really well for themselves

[00:39:13] and is that wide body captain, they get into retirement, their tax bracket goes way down.

[00:39:18] And now you have between retirement age of 65 and really the next kind of big age wicked

[00:39:22] is 75.

[00:39:23] For most pilots, that's when your required minimum distributions start to kick in.

[00:39:28] I'm not sure if you guys have done an episode on that or not, but that's essentially

[00:39:30] where the IRS starts to make you take money out of your traditional IRAs and 401ks because

[00:39:37] they want to tax it.

[00:39:37] They force you to do it.

[00:39:39] And it's based on a formula.

[00:39:40] And if you've got a lot of money saved up in there, those RMDs are going to be huge.

[00:39:44] I've seen plans where people who only want to spend $200,000 a year end up spending $400,000,

[00:39:48] $500,000, $600,000 or getting pulled out of their 401ks because they did so well.

[00:39:52] And now they're sitting there going, hey, I don't want to pay taxes on this.

[00:39:55] I don't want to spend that, but you have no choice.

[00:39:57] All right.

[00:39:58] So kind of getting back to the original point there.

[00:40:00] What we do is we look at an opportunity in those 10 years.

[00:40:03] I call that the tax valley, kind of my nickname for it, of where you can look to do strategic

[00:40:08] Roth conversions those 10 years.

[00:40:10] Hopefully you've got some cash on hand as well.

[00:40:12] It's between 65 and 75.

[00:40:14] Yeah.

[00:40:14] You got 10 years to kind of do that and sneak some of these Roth conversions under the radar

[00:40:18] at a lower tax rate.

[00:40:19] And now you get into the RMD age of 75 for most people.

[00:40:23] And now you've got hopefully some more Roth money and a way to kind of cushion those RMDs

[00:40:28] a little bit more if that all made sense to you.

[00:40:30] That's fantastic.

[00:40:31] I want to take us back to the, do I contribute my 23,000 early or do I let the company fill

[00:40:39] up the bucket early?

[00:40:40] Because this is a very important conversation that you need to be writing down on paper to

[00:40:46] figure out, do I want more money in this market-based cash balance plan than is necessary?

[00:40:52] Because if it's being invested at a lower rate and you have the opportunity to keep your

[00:40:58] cash in your pocket, it seems to me like it would be, I mean, for me, it wouldn't be the

[00:41:03] best idea to go out and shove 23 grand into my 401k and block the company from putting the

[00:41:10] maximum possible amount that they can, they can put in, um, up to my $345,000 gross.

[00:41:17] Would you agree with that?

[00:41:18] Yeah.

[00:41:18] So again, it's the flight plan answer, right?

[00:41:20] It depends on you.

[00:41:21] Now I know you guys personally, and you want as much cash on hand for deals in the near

[00:41:27] term.

[00:41:27] That, that's your mentality.

[00:41:28] And that's, that is what is correct for you.

[00:41:31] So it, let's say you're, let's say at a Hawaiian there, Tate, um, they, they, they create a market-based

[00:41:38] cash balance plan in the next contract and you have no choice.

[00:41:41] You have to opt into it.

[00:41:43] Well, gosh, well, I don't want that.

[00:41:44] I don't want my spillover.

[00:41:45] I want the cash in my hand.

[00:41:46] One of the ways you can do this.

[00:41:47] And I have to give a shout out to my buddy, Jason Depew, who's been on your podcast many

[00:41:51] times.

[00:41:51] He writes all kinds of great stuff about this too.

[00:41:53] And he has done this.

[00:41:54] He's put it out there on LinkedIn.

[00:41:56] Uh, and him and I talk about this on occasion, but you can achieve the sort of same

[00:42:00] thing by having more cash in hand by just don't contribute to your 401k.

[00:42:04] Keep those contributions out of it.

[00:42:05] Let the company fill it up and keep more of your own cash at the end of the day.

[00:42:09] It's going to get taxed the same.

[00:42:11] It's going to get taxed at the highest rate, just like spillover would.

[00:42:14] And isn't an exact, you know, one for one, you know, situation is going to, is going to

[00:42:18] pan out exactly the same.

[00:42:19] Maybe not exactly as if you just opted out of this thing to, uh, you know, from the get

[00:42:24] go, but it's still going to be pretty darn close.

[00:42:26] It's going to allow you as the investor to allow the company to kind of fill that bucket

[00:42:30] up for you.

[00:42:31] And you're going to be able to keep your own money and use it towards whatever short term

[00:42:35] sort of goals that you have.

[00:42:37] I don't know.

[00:42:38] Did I answer that for you to absolutely.

[00:42:40] Yeah.

[00:42:40] And, and I, we're definitely coming from, from that side, you know, Ryan and I have a lot

[00:42:45] of, a lot of knowledge in real estate.

[00:42:47] You know, I know how to control my adjusted gross income by using real estate and cost

[00:42:53] segregation studies.

[00:42:54] I'm a real estate professional.

[00:42:55] My wife and I use the 750 hour strategy.

[00:42:59] Uh, and we have, you know, obviously records, a lot of, of detailed records that we have

[00:43:03] to keep for that.

[00:43:04] I have the ability to control my taxable income.

[00:43:09] So if I make five 50, you know, in, on my W two in a year, I can whack 200, 250,000 off

[00:43:16] of that by going out and buying real estate.

[00:43:17] So for, for someone like me, it, it's a hard pill to swallow to be told that I have to get

[00:43:24] this spillover put into this market-based couch balance plan that is going to earn five, six

[00:43:31] percent.

[00:43:32] When I know that I could take that cash, not pay taxes on it because I can, I can offset.

[00:43:38] I, I am savvy enough to, to have strategies in my pocket that I can offset that and go

[00:43:43] and make a whole heck of a lot more.

[00:43:45] So anyway, that's, that's sort of where we're coming from.

[00:43:48] And it's a, it's a good conversation.

[00:43:49] The good news for you, Tate is again, because we talked about how that market-based cash balance

[00:43:55] plan, and we'll talk about options here, what you can do in retirement with these things

[00:43:58] here in a second.

[00:43:58] I assume we'll get to that, but you know, again, that's just normal taxable income.

[00:44:03] When you retire, if you're still doing real estate into retirement, guess what?

[00:44:06] You can pull the same thing off as well and still achieve the same thing.

[00:44:09] It's just not going to happen today.

[00:44:10] It's going to happen later on.

[00:44:11] You can still use those techniques that you're talking about that work on your normal,

[00:44:15] income now today and do that in retirement as well.

[00:44:19] And I know you guys, you guys aren't going to be at 65, just walking away from real estate.

[00:44:22] This is your passion.

[00:44:23] So I assume you're going to keep doing this even after you're not flying airplanes.

[00:44:27] Well, and, and to be fair, you know, for 97, 98% of pilots who, who aren't real estate

[00:44:33] professionals, they don't have any really good way to offset that, that additional income.

[00:44:38] I think it's a fantastic solution.

[00:44:40] And so a lot of times we're talking to people like that, right?

[00:44:44] They want real estate exposure.

[00:44:45] They even want to get into private investments and private markets, but they are not savvy

[00:44:48] enough or they don't have the time or the inclination or the patience to do all those extra hard

[00:44:55] things to kind of get that, that same goal accomplished with their own hard assets.

[00:44:59] I actually, I'm one of those people just psychologically not built to be a person that would ever have a big

[00:45:03] real estate portfolio stuff floating around out there.

[00:45:05] I'm too busy taking kids to school and stuff like that.

[00:45:09] That's totally fair.

[00:45:11] Yeah.

[00:45:11] Could we quickly just go down the list of airlines and, and talk about who has one, who doesn't,

[00:45:17] who's negotiating?

[00:45:18] So, so hot topic for us, uh, Hawaiian and Alaska emerging and we don't, neither airline has a market-based

[00:45:25] cash balance plan right now.

[00:45:27] And the joint collective bargaining agreement that we're going to be negotiating, um, will likely have

[00:45:32] one of these and I'm hoping that there's an opt out for folks like me.

[00:45:36] This is a really good topic to cover right now because I'll talk to you about, I'll talk to you

[00:45:40] about some of the hiccups that some of the airlines have run into with implementation, because this is

[00:45:44] a new, this is kind of like paving new roads with the IRS.

[00:45:48] This has become very in vogue with the airlines and everyone's jumping on this bandwagon and they're

[00:45:53] running into problems with it for implementation.

[00:45:55] So let's start with Delta.

[00:45:56] First of all, they're the ones that have their plan truly fully up and running.

[00:46:00] I would chalk it up to the fact that their plan was probably designed with the most simplicity in

[00:46:05] mind.

[00:46:07] Essentially, as we've already talked about, the plan is funded from spillover and that's it.

[00:46:12] They gave pilots a one-time opportunity that were already on the property to either opt in or opt out.

[00:46:17] And that door has closed.

[00:46:19] Every new hire will now be grandfathered in to the market-based cash balance plan.

[00:46:24] And that's just what you get.

[00:46:25] There's no option to opt out.

[00:46:26] Because of that, they were able to implement that fairly quickly.

[00:46:29] For everyone out there who just, a little bit of inside baseball, these things have to go through a

[00:46:34] very rigorous process with the IRS.

[00:46:36] It's called a private letter ruling and they make a determination.

[00:46:39] And essentially what the IRS is doing is they're scrubbing all the details of these plans to make

[00:46:44] sure it's compliant with their goal of taking the most money away from us that they possibly can.

[00:46:50] Right?

[00:46:50] So it's a little joke there, but so Delta's was relatively simple plan and got approved.

[00:46:55] Let's start next.

[00:46:56] So the next company to jump on this, and I guess you should say union and company, was United.

[00:47:01] So they kind of looked at Delta.

[00:47:03] They said, we want that too.

[00:47:04] When they were doing their contract negotiation, they threw it in there.

[00:47:07] There's, it's kind of bad news for United folks, was supposed to be implemented January of next year,

[00:47:12] was supposed to be up and running.

[00:47:13] It, the last I heard with some context that I have at United is that it's completely in limbo right now.

[00:47:19] The problem is United, again, every contract's a little different.

[00:47:23] Every airline's a little different.

[00:47:24] United has a lot of other stipulations about where their spill cash can go.

[00:47:29] So for Delta pilots, it was just, it's either in your paycheck or it's not.

[00:47:33] United pilots have all these other little gizmos in their contract.

[00:47:36] Like they have a retirement health care, a retirement health account or a health reimbursement account

[00:47:40] that can receive spillover.

[00:47:42] They have vacation forfeiture that can go into their 401k in the form of cash.

[00:47:47] They have a long-term disability plan that is tax-free income, which is different than Delta.

[00:47:54] And so there's all these rules about what kind of money can fund a market-based cash balance plan.

[00:48:00] And they're finding that all these little stipulations and the optionality,

[00:48:04] they want their pilots to be able to basically jump in and jump out of this plan every year in open enrollment.

[00:48:09] All those things are causing a complication that has really tied this thing up with the IRS.

[00:48:14] There's lawyers involved now.

[00:48:15] It's kind of a mess.

[00:48:16] So, you know, the good news is you guys negotiated it if you wanted it.

[00:48:20] The bad news is I don't know when it's actually going to hit the streets and get approved.

[00:48:23] So that's the latest on United.

[00:48:26] And then I'll kind of, I'll tell one more airline here and I'll take a breath so you guys can jump in.

[00:48:30] But Southwest is the next airline that has theirs up and running now.

[00:48:35] Now, for them, they have different funding means.

[00:48:38] They have right now, if you're a Southwest pilot, you're getting contributions in the form of 1%.

[00:48:43] So think of it as like another non-elective contribution, except this one's going into the market-based cash balance plan.

[00:48:48] So it's an extra 1% is going in.

[00:48:50] That'll soon be, I think in a couple of years, it'll be up to 2%.

[00:48:52] And that's just funding the market-based cash balance plan.

[00:48:56] They have a spillover provision as well.

[00:48:57] Guess what? It's going through private letter ruling and IRS approval and all that.

[00:49:02] So their goal will be to have spillover from the 401k as well.

[00:49:06] However, their plan is different.

[00:49:08] Their spillover is only on the 415c limit, that $69,000 bucket.

[00:49:12] And then once you hit the max compensation, no more spillover goes into the market-based cash balance plan.

[00:49:17] That's how theirs is developed because they have a separate, what we call top head plan in the financial industry,

[00:49:24] that is a non-qualified retirement account.

[00:49:26] So all their spillover above 345k goes into that.

[00:49:30] Completely different plan.

[00:49:32] Too much to talk about in this episode today.

[00:49:34] So there you go.

[00:49:35] So those are the three airlines that are kind of like the closest alligators to the canoe.

[00:49:39] American has one also.

[00:49:41] They've been very quiet about details other than it's still an IRS approval, and that's all we know about it.

[00:49:46] Wow.

[00:49:47] I thought more of them were implemented.

[00:49:49] That's great.

[00:49:50] And what about, selfishly, can I ask about opt-outs?

[00:49:53] You know, what airlines allow to opt-out or have opt-out provisions, which ones don't?

[00:49:58] Sure.

[00:49:59] So the only one that had an opt-out provision that actually came to fruition was Delta.

[00:50:05] That was a one-time thing like we've already talked about.

[00:50:08] United is going to give their pilots, or what they want to give, this is what they want to have.

[00:50:12] And this is the great thing about contracts, right?

[00:50:14] The union, the companies negotiated all these things, and then they went to the IRS and they said,

[00:50:17] Hey, Mom, Dad, is this okay?

[00:50:18] And Mom and Dad have not said it's okay yet.

[00:50:21] So what they wanted to do was give pilots the option to go,

[00:50:25] Okay, I've got this spillover.

[00:50:26] I want to put this much in the market-based cash balance plan,

[00:50:29] and I want to put this much in my little healthcare Viva plan,

[00:50:31] and I want to put this much in cash.

[00:50:34] The IRS don't like that.

[00:50:36] That's fair.

[00:50:36] It's a lot to track.

[00:50:38] And again, like the other things that I talked about,

[00:50:41] you know, the long-term disability at United is tax-free income.

[00:50:44] There's IRS rules that state,

[00:50:47] to fund a retirement plan with company dollars, it's got to be taxable income.

[00:50:51] And so now they're trying to figure out,

[00:50:52] Well, how do we allow a pilot on long-term disability to get money in this thing if it's tax-free income?

[00:50:56] There's all sorts of problems they're running into.

[00:50:59] So as far as I know, Southwest has no opt-in, opt-out.

[00:51:02] If I'm mistaken there, I'm sure I'll hear about it.

[00:51:04] But as far as I know, there hasn't been any opt-in, opt-out discussion.

[00:51:10] Understood.

[00:51:10] That's fantastic.

[00:51:11] Thank you for the overview.

[00:51:12] Yeah, yeah.

[00:51:13] So real quick, just options of with a market-based cash balance plan.

[00:51:17] This is another confusing part because people get in their plan documents,

[00:51:21] Oh, you can have this paid in a lump sum.

[00:51:23] By the way, folks, don't ever take any kind of retirement benefit in a lump sum.

[00:51:28] That from a tax perspective, unless I guess, I don't know.

[00:51:32] I can't think of a scenario where you'd want to do that.

[00:51:36] But you're trying to get all your money out of the U.S. and run for it.

[00:51:38] I don't know.

[00:51:41] But usually that's one of the options that is touted as an option.

[00:51:44] I wouldn't recommend it typically to someone because just like in the example you used,

[00:51:48] Tate, where you take a million dollars out to go buy your house, you're going to pay a

[00:51:52] million dollars or pay tax on a million dollars that year.

[00:51:55] The other option is to annuitize it.

[00:51:57] I don't typically recommend that to people either.

[00:51:59] You're essentially buying some form of a life insurance product with it that pays you an

[00:52:03] annuity for the rest of your life.

[00:52:04] You completely lose control of it.

[00:52:06] It's an irrevocable decision.

[00:52:07] I don't typically recommend that.

[00:52:09] In practicality, what most people are going to do with these market-based cash balance

[00:52:12] plans is they're going to roll them into their 401k after 59 and a half or roll them into

[00:52:18] an IRA.

[00:52:18] Anyway, the cool thing about doing that, this is pretty cool, I think, I'll use Delta as

[00:52:22] an example, is for all those people who said, I've lost control of this money and someone

[00:52:27] else is investing it and I don't like the way they're investing it.

[00:52:29] What?

[00:52:29] 59 and a half?

[00:52:30] Go ahead and start rolling it to wherever you want.

[00:52:32] You've got complete control of it.

[00:52:33] It's in your name.

[00:52:34] It's in a retirement account.

[00:52:35] You can go buck wild.

[00:52:36] You can go buy Tesla.

[00:52:37] I'm not saying you should do that.

[00:52:39] Or you could go buy ETFs or you can put it in all stocks or all bonds or whatever you want.

[00:52:43] You've got control of it.

[00:52:44] And oh, by the way, guess what?

[00:52:46] But you're still avoiding those alpha dues and those other things on there.

[00:52:49] So essentially, it's kind of a company-funded rollover mechanism for you starting at 59 and

[00:52:54] a half.

[00:52:55] And that's really what we would probably, again, I can't say always in this industry, but

[00:53:00] most likely what most pilots are going to do is roll that sucker into an IRA or into

[00:53:05] their 401k when they get to that point.

[00:53:07] Oh, so good.

[00:53:08] This is such a good overview of just the 401k, the market-based cash balance plan.

[00:53:13] And I think this has given me a really good perspective of all the nuts and bolts.

[00:53:19] Thanks so much, Jesse, for coming on the show, giving us an overview of all these things.

[00:53:24] I know that our listeners are really going to benefit from that.

[00:53:26] So thank you so much for coming on.

[00:53:29] And we're sure we're going to have you back on another episode.

[00:53:32] Yeah, next time we can talk about alternative investments and private investments and how

[00:53:38] those increase the overall rate of return in your portfolio, according to statistics, and

[00:53:42] decrease the volatility.

[00:53:43] So I think that's a good topic for another day.

[00:53:46] Fantastic.

[00:53:46] Thanks again, Jesse.

[00:53:47] We appreciate you coming on.

[00:53:49] Thanks for having me on, guys.

[00:53:50] Appreciate it.

[00:53:50] Thanks, guys.

[00:53:50] Thanks, guys.