Show Notes

Should you claim Social Security at 62? (:49)
What Joe and Al really think about tax hikes and cuts (11:54)
Big Al’s list: 10 common tax-filing mistakes to avoid (17:08)
6 myths about IRAs you can’t afford to believe (35:36)
Your email questions answered (39:25)
- What’s better, 40% annual return on short-term investments, or 20% annual return on long-term investments?
- I’m 24 and I have an inherited IRA. How should I move it into a Roth IRA?

Transcription

Why you shouldn’t claim Social Security early. Or should you? How not filing a tax return could land you in jail. And what would you do if you found $500 in an ATM? This is Your Money, Your Wealth.

Today on Your Money Your Wealth, Joe and Big Al discuss the pros and cons of taking Social Security before full retirement age, tax mistakes that could cost you huge penalties or worse, IRA myths, the morality of found money, and what they know and love about social media. The fellas also answer emails from the absurd to the sublime: from making 40% annual returns on your investments, to sound strategies for putting inherited IRA money into a Roth. Now, here are CFP JoeAnderson2323 on Instagram and CPA Alan.Clopine on Facebook.

:49 – Should I claim Social Security at 62?

JA: Alan I have this ongoing question that I’d like to get your input. We did our Social Security webinar.

AC: Right, last week. A lot of people came to that.

JA: Yeah, 500. So here was, break it down, a couple of key questions that were asked: Should I take it at 62. Because I’m retired, it’s hard for me not to take this money.

AC: I know, it’s like, it’s right there why shouldn’t I take it?

JA: So it’s like, let’s just go through the math here. So if you take it at 62, and let’s just assume that your full retirement age is 66. Just to keep things simple. If you take it at 62, you would receive 25% permanent haircut on the money.

AC: So that means, if you would have got $2,000 per month at 66, you get $1,500 at 62.

JA: $1500, so $500 less, but it’s four years earlier.

AC: So you get all that money every single month.

JA: And if you take it at 70. Well then, from 62 to 70, it’s like a 73% increase on your benefit. Because you get this delayed retirement credit they call it. It’s 8% per year after you turn full retirement age. So it’s like, well Joe, I’m retired, I’m turning 62. I want to take the money. Even though I understand that I’m going to receive a 25% permanent haircut, but it’s right there. I can invest it.

AC: Because it’s like a bird in the hand. It’s a sure thing.

JA: And that’s why. I mean you see the numbers, Alan. What 65-70%?

AC: Most. Yeah. In fact, when you look at the numbers of the people that actually take it later than full retirement age, which this year is 66 years and two months, it’s like 2% or 3%, if that.

JA: Right. So it’s like, I’m either taking it 62 or full retirement age because there’s no way I’m going to wait.

AC: Yeah, I’m not going to get past that. And some people do wait until their full retirement age because if they take it earlier, and they’re still working, they have to give some of the benefits back.

JA: Yeah but they don’t actually give it back. It’s just recalculated.

AC: Yeah that’s true, and it’s worth explain because people don’t really understand that.

JA: So there’s an earnings cap. So if you do take it at 62, there’s an earnings cap on it in 2017. I’m going to round here just to make my math easy and you’ve got a pen right there don’t you Al?

AC: Yeah.

JA: It’s $16,920. So let’s just call it $16,000. So let’s say you take it at age 62, and you go to work, and you make $40,000 a year. So then you take $40,000, and you minus $16,920 but let’s just do $16,000.

AC: OK. So that leaves $24,000.

JA: $24,000. And then you divide that by two is twelve? So then that’s your reduction of benefits.

AC: So they take 12 back.

JA: They take one dollar for every two.

AC: You give 12 back, and you get to keep 3.

JA: You get to keep 3. So if I do that math right, $1,500 a month is your benefit. So if you get three… so they’re going to take 10 months of benefit back from you. So let’s say you do that the next year. So the same thing’s going to happen, they’re going to take 10 months of benefit, so that’s 20 months of benefit. So they calculate Social Security benefits on a monthly basis. So they’ll just assume that you didn’t take it at 62. That you took it at 63 and, what, eight, nine, ten months. Right?

AC: Right. So in other words, by the time you get the full retirement age, they’re not going to ding you for the money you had to give back. So in other words, your benefit will be higher.

JA: They’ll just increase your benefits like you never took it.

AC: And I think that’s worth it because a lot of people just assume that, boy, once I give it back, it’s lost forever. But at least the Social Security Administration is a little bit fairer than that.

JA: So but let’s say if they made $60,000. Well, that would probably wipe out their entire Social Security benefit.

AC: Then you give it all back and it’s as if you never claimed it for purposes of future benefit.

JA: You got it. So even though I did claim it at 62, I’m getting that 25% permanent haircut, but if I’m still working, it’s like OK well no, you gotta give it back. So you have to tell the Social Security Administration as well, that you are working, that you plan on working. Because here’s what happens if you don’t. So let’s say you get that $1500 a month benefit. So you enjoy that benefit. And then the next year happens, you file your tax return, the Social Security Administration looks at the income, and people are saying, well why do they do that? Well because they have to look at your income to determine what your benefit is because it’s all based on how much money that you make, and how much money you put into the system. So then they’ll look and say, Clopine, what are you doing? You made $40,000. You claimed it at 62. We should have only given you a $3,000. So they’ll withhold your Social Security benefit the next year until it catches up.

AC: Well I suppose that’s fair.

JA: Sure. But it confuses people.

AC: It does confuse people, and of course they always know because of Social Security Administration talks to the IRS, and vice versa. So they know exactly what you’re making as far as earned income goes, so they can do the calculation after the fact, and then they’ll just ding you against your future benefits.

JA: Sure, they’ll just withhold it like a big fat tax.

AC: Until you’re caught up, just like you said.

JA: So I guess, back to the argument of do you take it at 62 – well if you’re still working, you have to do this calculation. To see if that makes sense because some people want to claim it at 62 because maybe you have an older spouse that wants to claim the spousal benefit. Well, you cannot claim a spousal benefit unless your spouse is collecting a benefit. So, one spouse is older and that older spouse has a lower benefit, the higher benefit would be spousal. And again the spousal benefit is based on 50% of full retirement age. So if the other spouse claimed early, it’s still based on that 50% range, as long as the spouse is full retirement age. How confusing is this crap?!

AC: It’s crazy. I have to diagram it out myself, it’s so complicated.

JA: To say the least. But, now. Do I take it at 62? If I’m not working, then it’s like what’s right there. Take it and invest it. Well, that might work. Depending on what you’re going to use as assumptions. That’s the big thing because whatever assumption that you use is going to determine if it’s going to make sense for you or not. If you don’t need the money if you want to take it and invest it? Well, if you think you can get, I don’t know, a 10% rate of return. Well yes. That will pencil out. And if you if you die prematurely, prior to life expectancy at age 85? Yes, those numbers will pencil out all day long. So I guess you have to do a little bit of calculation, but I truly understand that, man, it’s right there. I don’t know what’s going to happen. We’ve got a lot of baby boomers that are collecting, 65 million people are already taking benefits, you got 10,000 a day turning 65 for the next several years, 15, 14 years, something like that. So I get the urge to take it, but I would encourage you to not necessarily look at it as an investment. And again, this is your money, we’re just a couple of kids having a conversation about some really boring stuff. But I’m kind of more in favor now of not necessarily saying “no, wait.” Run some numbers. And if you feel better, if it makes you happy. Life is short.

AC: Wow, we’re coming full circle: take Social Security early and pay off your mortgage. (laughs)

JA: What the hell! (laughs)

AC: If it makes you happy go for it. (laughs)

JA: I mean, if it makes you sleep better at night, I think that is what you do.

AC: Because you know you got the money coming in. The flip side of that, of course, is if you’re just going to spend the money anyway, and not save it, and you got other resources, why not wait. And then, you’ve got great longevity insurance. But you take it at 70, you’ve got a lot more income for life. Now there is a possibility, Joe, that there could be means testing down the road. And if you have a lot of assets, and a lot of income, well maybe this makes a lot of sense. Take it now while you can. On the other hand, means testing has been proposed for decades, and it hasn’t happened, so maybe it won’t happen. So it’s awful hard to say.

JA: Yeah, because there are so many different factors involved, you can’t necessarily look at this in a bubble of saying well I’m 62, here’s my benefit, let me take it. Well, you have to look at what other assets do you have, what other types of fixed income sources? Are you married or single? What is your tax bracket? Because the taxation of Social Security needs to come into play, because if you live in the state of California, the state of California doesn’t recognize it as income, so it’s tax-free to you from the state of California. Plus at the most, you’re going to get a 15% tax-free bump on the Fed side.

AC: Right, worst case. In some cases, less of it than that is taxable.

JA: The numbers for provisional income, so to determine how much of your Social Security benefit is going to be taxed, was based on a law from the 80s – 1983. Ronald Reagan. And so back then, everyone was up in arms, saying oh my gosh you’re going to tax Social Security. Because that was the first time Social Security ever became taxable was back in the early 80s. And so if you look at those numbers, a provisional income, it was only going to affect the top 1%. Those nasty one percenters. Those terrible people. (laughs) Then that everyone was like no big deal. They can pay it. But now if you look, they never inflated those numbers with inflation, and they don’t have any plans to. So, most people that listen to this program, will pay taxes on their Social Security benefit. So when you hear other things of, “well, it’s only going to affect this” like the AMT tax for instance. We could go on and on. So anyway.

11:54 – What Do We Really Think About Tax Hikes And Cuts?

AC: I found this kind of interesting, Joe, this is a recent survey. This is University of Maryland’s Program for Public Consultants. And what they came up with was, I guess they asked 1800 registered voters in Maryland about their opinions on income taxes and, to sort of put this in context, as a reminder, in September, at that point, candidate Trump, who became president Trump, promised to enact changes in the tax code by cutting personal taxes, cutting corporate taxes, cutting taxes on capital gains and dividends, eliminate estate taxes, and he talked about providing tax relief to small businesses, which are sole proprietorships, partnerships, S-corps, and the like. So that’s what was proposed. And then they asked 1800 people, what do you think? What do you make of all of this? Because, Joe, when you and I talk to people, almost everyone uniformly says you gotta reduce taxes. But I found I found this survey interesting. In general, the majority agreed to raise taxes, of course, caveat, for the wealthy. (laugh) And capital gains and dividends as well as higher rates for corporations, and the reason why they did was they were more concerned about having a balanced budget than lower taxes, which I found rather interesting. 52% of respondents are willing to raise taxes 10% for those making a million or more. Now that’s an easy thing to vote for if you’re making less than a million.

JA: Right. I mean how many people make a million bucks a year?

AC: Yeah. Not that many. So capital gains, the GOP plan, not the Trump plan, the GOP plan, wanted a maximum rate of 16.5%. Only 15% of those surveyed endorsed this idea. 85% thought it was a bad idea to reduce those capital gain taxes.

JA: Well, I guess most individuals as well, have most of their assets in retirement accounts. Liquid assets. They either have real estate, their primary residence, maybe a second home and then they have a giant retirement account.

AC: Right. Now in terms of corporate rates, right now the highest corporate rate is 35%. But if you take that total effective rate of all corporations in the country? Joe, it’s 19.2%. In other words, that’s the average tax rate that C-corporations are paying tax on.

JA: C-corporations? Well… because that’s the average of all businesses?

AC: Yeah, of all C-corps.

JA: Well I would say 80% of businesses are small businesses. Maybe 30% of those are not profitable. (laughs) They’re not making any money.

AC: That’s true.

JA: So you take a look at the majority of that. I mean they’re not talking about Google. (laughs)

AC: No, they’re definitely not talking about Google. (laughs)

JA: Or Microsoft. Or GM. (laughs)

AC: So anyway. 53% of the survey respondents wanted to raise the effective rate to over 20%.

JA: Yeah, well, I mean that makes sense when you look at it like that. That’s so misleading.

AC: It can be. (laughs)

JA: Oh, it can be. (laughs) What are you talking about, it is! Totally misleading! (laughs)

AC: Anyway, you know why I found this interesting though, Joe, is because, like I said, when you and I talk to almost anybody, they all want lower taxes. But when you think of it in the context of, do we want to balance our budget? Do we want to stop creating all this debt that is only going to compound our problem for future generations? I think a lot of people are pretty sensible about that, which I personally applaud. I think we’ve got to get our budget balanced before we can do much of anything because we’re really basically saddling our financial woes on future generations. So that’s my two cents. (laughs)

JA: Wow. Big Al. Runnin’ for office or something. (laughs)

AC: Not really. (laughs)

JA: Well, yes. I agree. I would like a society where we actually have law enforcement and not anarchy. And everything else, and nice roads, good schools.

AC: And what’s always interesting to me is, the campaign promises, which, you just think about it in your head and you know that no one can deliver on what they promise. I mean, they promise lowering taxes, they promise, in the case of Trump, and many, let’s increase the military, let’s increase the infrastructure, but let’s lower taxes, and let’s balance the budget.

JA: It’s not an easy gig.

AC: You don’t have to be an accountant to figure out that doesn’t quite add up. I like the thinking. Don’t get me wrong, I like the thinking, I like the idea. I think we should work towards that. But there has to be some compromises here.

JA: Well, I don’t know, the market right now is fairly… well, I guess good is relevant now because on who you talk to you. (laughs)

AC: True. (laughs)

JA: So. Alright, that was political talk with Big Al.

AC: That’s right. (laughs)

17:08 – Big Al’s List: 10 Tax Mistakes to Avoid

AC: A lot of people make mistakes, particularly when they try to prepare the returns on their own, particularly when they do it by hand. And we’ve seen that over and over again, and I guess, if you do your return by hand, I’m not saying not to do it, although I’d say be careful, because tax law is pretty complicated, and it probably behooves you to use a computer program, like Turbo Tax, or hire a professional. But a lot of people still want to do it by hand.

JA: But I think most people that do it by hand is like a 1040-EZ.

AC: Yeah it’s simple.

JA: But if you have like eight rentals, pass through S-corp, 1120S done by hand. (laughs)

AC: I don’t think I’ve seen a corporate return done by hand, but I’ve seen many individual returns done by hand that shouldn’t have been, because they own rentals, and there are passive loss rules, and they completely ignored that, and they ignored alternative minimum tax, because they didn’t really understand that. And all kinds of other things. But anyway, number one mistake, particularly if you’re doing it by hand, is transposing numbers. So you put an amount, you mean to put $6900, and you put $9600, or whatever the transposition is, and be aware that the IRS knows a lot of the numbers already. So they’re kind of just checking what you put down. For example, they know your wages, they know your interest income, your dividend income, they know the proceeds on your capital gains. Now they even know the basis, what you paid for the capital gains. They know what you sold a property for, they know you have a partnership. They know what you earn from the partnership.

JA: I’m surprised. When you look at the numbers of the audit, it’s fairly low. I’m guessing you’re not seeing a guy with some glasses sitting in a dark room checking returns and checking W-2 statements. It’s all computer driven.

AC: That’s right. And you would think that there would be lots and lots of audits.

JA: You would think 50% of people would get audited.

AC: Right, because there’s some kind of mistake somewhere.

JA: Somewhere, you just match it, red flag it, send out a letter.

AC: Right. We learned last week that the number of audits, the average audits are like about one in 120 people get audited, something like that, which means less than 1% are actually getting audited, and most of the audits these days are done by letter. You get a letter in the mail, “hey, we got this, you said that you need to pay us this much extra tax unless you disagree, if you disagree, tell us why.

JA: Right. I mean it’s real simple too because I get a couple of other W-2s from the schools that I teach at. Not a lot. Couple hundred dollars. And sometimes I forget to give it to my tax guy. So then I get a letter, and it’s like hey you owe us another $16. And I’m like whatever, and I pay it. So that’s why I was thinking, oh man, I totally forgot about it, but it was only a few hundred dollars, how the computer could catch that. That’s why I was thinking why wouldn’t there be more audits.

AC: Right. Anyway, here’s another mistake is not filing. Just forget it. I don’t agree with taxes. Unconstitutional.

JA: You just don’t file it. I’m not gonna do it. That is called tax evasion.

AC: The IRS doesn’t like that, our government doesn’t like that. But in some cases, people don’t really have to file, because their income is low enough, and right now, surprisingly, If you’re single and your income, your total income is less than $10,350, you don’t have to even file a tax return.

JA: Alright, how about if all of my income is, let’s say, Social Security, and I have a house. And I die, and my heirs sell the house. Maybe it’s a modest house, couple hundred thousand. But then I get the 121 exclusion, so there won’t be any tax on that primary residence, plus it’s a step up basis anyway. So Social Security is not taxed because there’s no other income. And then my house is sold, would the successor need to file a tax return?

AC: Yes. And the reason is because…

JA: So you’re saying I should file the tax return for my grandmother? (laughs)

AC: (laughs) Yeah, they’re comin’ after you. In other words, if you sell an asset, and the proceeds are greater than $10,350, you have to file a return to show the tax basis. You might get a letter on that. (laughs)

JA: That was a few years ago.

AC: Well, maybe. Because they can audit you three years after you file. As long as you filed. You filed timely, right?

JA: Yeah, well, there’s no tax anyway, so I’ll just give the stuff to you. Bust out a return.

AC: That’s right, you didn’t file a return.

JA: No I didn’t even file the return.

AC: Yeah right. OK. Well here’s the number for married…

JA: So what are you saying?

AC: I’m going to visit you in jail. I’ll bake bread. You like pumpkin bread or banana bread? (laughs) The number for married is $20,700. But here’s another mistake. People are under those amounts and they worked some part jobs, they are withholding, you’re not going to get your withholding back unless you file. You don’t have to file because your income is low enough, but you should file so you can get a refund on your tax withholding. How about number three: fear of filing. Fear of filing? So some people figure out how much they owe the IRS and decide not to file their return because they don’t have the money to pay it. That’s not a good idea.

JA: No. Because it’s just going to compound the problem.

AC: Because here’s what happens is, if you file and don’t pay, well then you want to get set up on a payment plan and there are different ways to do that. But if you don’t file at all, because you think well then they’ll never know, well by the time that they get around to catching you, they actually charge you a non-filing penalty of 5% per month, in addition to the tax, in addition to late payment penalties, in addition to interest. Oh man, that’s the last thing you ever want to do. Plus I’ll tell you what, not filing is a criminal offense. And actually, some people go to jail every single year for not filing. So don’t be one of those people.

JA: Well, this is just a really wonderful show. (laughs)

AC: Trying to keep people out of trouble. (laughs) The fourth item is putting your wrong bank information, your routing number’s wrong, and so that the refund, who knows where it goes. It doesn’t come to your bank account. That apparently happens all the time. People forget to check their bank account number and routing numbers and so the IRS can’t send it.

JA: So let’s say it sends it to a different bank account. So you’re waiting for it. Don’t get it. You call the IRS and they’ll say, no we sent it to this routing number, and you’re like, oh no, I’m sorry, I changed banks, here’s the right routing number. Are they going to send me more cash, or?

AC: I doubt it. I think you’d have to settle that with the bank, probably, the bank got put into the wrong account. I don’t know. Not really sure. I don’t think that they’re in the business of sending out a refund twice. (laughs) Number five, Joe, is people put incorrect names. That’s ridiculous. But it happens, like people get married and they put their new married name, but Social Security Administration has down as the old name, the return gets kicked out. There’s a problem. Here’s the example. His friends know him as Machine Gun Kelly. But the IRS knows him as George Barnes. So he’ll put Machine Gun Kelly. (laughs) Here’s the next one, extension confusion. You can extend your tax return, in fact, the tax due date this year, Joe, is April 18. It’s not April 15th, April 18th is the last day you can file on time, but you’re allowed to extend your return for six months by simply filing an extension, and the IRS gives you six months no questions asked. But make no mistake, that does not extend your period to pay. In other words, if you owe, or you think you owe, you have to pay that with the extension. If you don’t pay it with the extension, then you get charged late payment penalty, as well as interest penalties, so be aware of that.

JA: You know we had a discussion with a hypothetical client that receives a K-1 at the end of the year. And so it’s like, do I pay quarterlies on this, or do I just kind of… because a lot of small businesses, you don’t really know what those profits are going to be until you close the books. So what’s what’s your advice there? What happens if you don’t pay quarterlies and you have a large K-1? I mean what’s the worst that can happen?

AC: Well if you don’t pay quarterlies, like let’s just say you should have paid $3,000 per quarter, and the quarters are April 15th, June 15th, September 15th, and January 15th.

JA: Didn’t they change those dates to kind of some weird stuff recently?

AC: No, that’s been that way for a while. But the weird thing is, it’s not April 15th and July 15th, it’s April 15th and June 15th, so that the government would get it before June 30th, fiscal year end. That was a while ago. California changed their dates. So that they could get money quicker, and they changed the amounts that have to be paid. (laughs)

JA: Yeah, right. It’s not an even split of four.

AC: But like, let’s say you should’ve paid $3,000 per quarter, so that first payment was April 15th. And if you pay it the following April 15th with your tax return, you’ll get charged 3% interest on that $3,000 for a year. So that’s 90 bucks interest on that payment. The second payment should have been paid June 15th, so you’d get charged 3% for 10 months. So I don’t know what that is, but call it $80 something like that. And then the next payment you should’ve paid that September 15, so you get charged, whatever, 40, 50 bucks for that payment. And the last payment you should have paid January 15th, you’re three months late, you probably get charged about 20 bucks interest on that. So that’s how that works. Now, if you don’t pay the payment with your tax return or extension, not only does that 3% continue but then they charge you a half a percent per month for late payment. Which equates to 6% interest, so now you’re basically, past April 15, you are paying a 9% interest rate. And if you don’t file an extension and don’t file, now you’re late filing. Now it’s the 3% per year, and 5% per month. Although that does cap at 25%. So you don’t want to not file.

JA: So what have we learned?

AC: (laughs) To summarize, we learned to not transpose numbers. Make sure you file, even if you have fear of filing. Get the routing number right.

JA: Yeah, a ton of people have that. I mean we’ve had people come into our office with a box, you know, almost in tears, saying, I haven’t filed a tax return in four years. What do I do?

AC: Should I move to Mexico?

JA: I don’t know. Should I file all four at once, or are they going to come after me? It’s ok.

28:58 – What Would You Do If You Found Money In An ATM?

JA: If you didn’t hear it last week, Big Al said we’ve been on now for 10 years.

AC: 10 years together. You’ve been on longer than I have.

JA: Well yeah. I’m the lucky one.

AC: I think you preceded me by about…

JA: Six months.

AC: Yeah, I was going to say three maybe six.

JA: Well maybe. Whatever. Totally guessing, I have no idea. Yeah. I was a wily veteran.

AC: Yeah I know. By the time I came on you had the show me the ropes. You said, “Al. You gotta talk into the microphone.” (laughs)

JA: That was about it. That’s all I still know. (laughs)

AC: Because the rest of it is just talking. How hard can that be?

JA: Not too much.

AC: Yes. It’s not that hard.

JA: Alright. I’ve got a question for you. Let’s say you go to the ATM machine. And you’re going to take some cash out.

AC: So you’re presuming I got money in my bank account.

JA: You have a big wallet. We all know this.

AC: You think I got money there? (laughs)

JA: Guaranteed. (laughs) And so, you go, you’re going to put your card in, and all of a sudden you look down and there’s $500 in the machine. What do you do? And you’re not at a bank branch. You’re just like outside somewhere in a mall.

AC: Like the airport, like there’s -I use Bank of America. So there’s BofA ATMs at the airport.

JA: You’re not at the bank branch. Anywhere you want to imagine. If you want to imagine yourself at the airport. That’s all be it. You’re going to Hawaii.

AC: Cause I’m going on a trip.

JA: Yes there you go, your little happy place. What do you do?

AC: That’s a good question because part of me wants to just take it because it’s just free money sitting there. Another part of me wants to turn it in, but it’d be easier to turn in if I was at the bank. I’d say you know this was here.

JA: Where would you turn it into?

AC: Well if it were the bank you’d take it to the bank.

JA: So then you go to the bank. Let’s say you’re at the bank. So you’re saying, you’re going to take it if you’re not at the bank, you’re at the airport, you got 500 bucks.

AC: If I just got out of the church, I would probably go to the bank teller and say this isn’t mine, (laughs) but any other day I might be tempted to keep it.

JA: Right! So let’s say you go to the bank, and you’re like here, there are 500 bucks. Would you wait at the teller? Wouldn’t you just wait at the ATM machine? Just in case the person comes back that forgot to grab the cash?

AC: Well yeah, I mean, I would.

JA: How long would you wait? (laughs)

AC: (laughs) I don’t know. This is a moral question.

JA: Yes, I’m sorry. Because it happened to a friend of mine.

AC: I guess I would probably pick it up and hold it in one hand while I did my transaction so I am waiting because I’m doing my transaction.

JA: Got it. Yeah, that’s a tough one. I don’t know, what would you guys do out there? If I was at the bank, I would just say hey, you know, outside…

AC: Yeah, that to me is an easier thing, if you’re the bank, it’s clearly not yours, and it just wouldn’t feel right to keep it. But like, if it’s somewhere else like sometimes there are these kiosks in a shopping center, like nowhere near a bank. It’s like, well that seems like you found it on the ground. (laughs)

JA: (laughs) Kinda. It’s like you just brush your arm against it a little bit.

AC: Have it fall out of the container.

JA: And then you do your transaction, “Oh look at this! What’s that on the ground?” I got you, Clopine.

AC: I mean if a hundred dollar bill’s on the ground, you’d pick it up and keep it right?

JA: Yes I would.

AC: Yeah. But if it’s three feet up in the air? (laughs)

JA: That’s the moral dilemma. (laughs) Yeah. Well, it happened to a friend, and what she did is that she called the bank. Because it wasn’t an actual branch.

AC: So she couldn’t like walk in.

JA: Exactly. So she was like hey, did anyone call or something? I found this money. And then they’re like, well, you could give it to us. And she’s like well what are you going to do with it. Well no we would just hold it, just in case someone claims it.

AC: And she could come in after if no one claimed it?

JA: No.

AC: No, they keep it. (laughs)

JA: Bank keeps it. And she’s like, well, that’s weird. So it’s sitting in her underwear drawer. She’s waiting.

AC: Waiting for somebody to call?

JA: I guess. For something bad to happen. (laughs)

AC: Waiting for the feds to show up? “We’re aware that you took $500 out of an ATM.”

JA: I’m not sure it was 500. I think it was maybe a couple hundred bucks, but still. She can’t spend it.

AC: Because it’s not really hers.

JA: Right. I’m like, I would never want that to happen to me.

AC: I know. Well maybe if you kept it… maybe you do this, maybe keep it for a couple of months, and then no one calls, and then you give it to charity. How about that? Then your conscience is good.

JA: Yeah. There you go. Alright.

34:06 – Joe and Big Al on Social Media

JA: Hey, you’re a big social media guy aren’t you?

AC: Yeah I’m on Facebook, you bet. That’s it though. Well, I’m on LinkedIn too.

JA: You know I’m not really in any of that.

AC: You’re more into LinkedIn than I am, but I do enjoy Facebook and I’ll tell you why. It’s because I originally got into it to kind of follow my kids, and then I got to where I kind of liked it, I get to follow some of my friends and what they’re doing.

JA: I’m on Instagram.

AC: OK I’m not on that. (laughs)

JA: Well. JoeAnderson2323. Yeah, you can follow me, Al.

AC: Alright, good. Are you on Snapchat?

JA: No. No Snapchat. No. (laughs)

AC: Twitter?

AC: No. Yes! we are on Twitter.

JA: Pure Financial.

AC: You’re not personally.

JA: Oh, I’m tweeting all the time. (laughs)

AC: Do you tweet at 3 in the morning?

JA: I do. But no, this Instagram. I like it. I put some backstage pictures of you and I doing the TV show, and all sorts of kind of things that we do, kind of behind the scenes.

AC: OK good. I’ll have to get on Instagram to check it out.

JA: Yeah. Gettin’ some followers. I’m like who are these people? I don’t even know what following means! I’m going to be an expert here soon Al.

AC: So what is it? Joe?

JA: Joe Anderson2323. Michael Jordan.

AC: OK, got it. I see.

35:36 – 6 Myths About IRAs You Can’t Afford To Believe

JA: Ah, whaddya got?

AC: I got six myths about IRAs you can’t afford to believe.

JA: IRAs, there’s a lot of funny rules when it comes to individual retirement accounts, so you want to make sure that you understand them.

AC: Yeah, you’re not kidding, Joe. And the first myth that is definitely not true is, people think that the IRS does not let you contribute to a 401(k) and a Roth IRA, or a regular IRA, in the same year. In other words, those are different. You can contribute to your 401(k) and your IRA, or your 401(k) and your Roth IRA, in the same year.

JA: Absolutely. That’s missed all the time. Then there’s probably the spousal thing on there too?

AC: Yeah you wanna go to that next?

JA: Well no. I mean it’s kind of like, let’s say if you’re married and you have one spouse that’s working, maybe one spouse that’s not working, a stay at home parent, maybe already currently retired, or whatever. As long as one spouse has earned income, the other spouse can still contribute to a retirement account. So if you have excess cash flow, if you have money sitting in a brokerage account or savings account or things like that, it makes a ton of sense for you to max out those Roths. $5500, I would much rather have it in a Roth than sitting in a brokerage account.

AC: Well that’s right Joe, and there are income limitations if you’re married and you make more than $196,000, you cannot do a Roth contribution.

JA: But it’s 194 still for 2016. So if you still have not made that Roth IRA contribution, or IRA contribution, you have a couple of weeks. Get it done. Especially if you don’t have a Roth IRA because there’s this five-year clock when it comes to Roth IRAs. So how the five-year clock works, and I’ll just talk about contributions, not the conversion one, is that if I make a contribution to a Roth IRA, there’s a five-year waiting period, where I cannot take any of the growth out of that Roth IRA for five years, or 59 and a half, whichever’s longer. So Al and I see a lot of people that are in their 60s, that have never established a Roth IRA before, so they contribute to Roths for a couple of years, until maybe they retire at 65, so they get five years of contributions. So they’re all good. But how about if they want to retire at 62? Well, they can’t touch any of the growth of those dollars until age 65, if they started at age 60. So if I make a contribution before April 15th, my five-year clock would start January 1st of 2016. So absolutely, just put a few hundred dollars into it. That opens the five-year clock. I highly encourage you to do that before it’s too late.

AC: Yeah and that’s one of the other myths is that you cannot contribute to the 2016 tax year because it’s already passed. Not true. You can contribute all the way to April 15th, and this year it’s actually April 18th, because that’s the tax filing day. Joe, another one is that I make too much money to contribute to an IRA. And there are different limitations here, but anybody can contribute to an IRA that has earned income, as long as they’re younger than 70 and a half. End of story, period. Now you may not be able to deduct it, but you can contribute. And in some cases, even if you can’t deduct, it because you’re in a company retirement plan and your income is too high, you may still want to do a nondeductible regular IRA, because then you can do what’s called a backdoor Roth. And of course, this is only if your income is in excess of the Roth contribution income limitations. But if it is, you can do a non-deductible IRA and turn right around and convert it to a Roth and there’s no tax to pay on the conversion because you get no tax benefit putting the money into the IRA. I mean there are some caveats. You can’t have other IRAs otherwise this gets more complicated, but you can have 401(k)s, 403(b)s to be able to do this. It’s a great strategy.

39:25 – Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com

“40% annual return on short-term investments, or 20% annual return on long-term investments?”

JA: OK. ladies and gentlemen, this is a doozy here.

AC: Really? OK. Why do you say that? Is it a long question? Do you have a long thing to read?

JA: I do. I see some percentages here that, this is going to be interesting. And I think this will be a good lesson to all of us to learn. “I need guidance on my investment strategy. I’m considering two strategies, and I need a professional to guide me through the pros and cons of each of them. My first strategy is do short term investments by selling the stock as soon as I have a 3% gain on that stock, and then reinvest that money on another stock, assuming each stock goes up by 3% within a month. My return would be roughly 40% per year, with the compound effects. (laughs) That’s pretty easy to do.

AC: Yeah, 3% per month, that’s 36%, compound interest 40%. I’ll give you that.

JA: All right. I understand that things don’t always come out as planned. So my conservative target return is 20%.

AC: (laughs) Now let’s go back. That was the first correct thing I heard in this whole statement. It’s things don’t always turn out like you predict.

JA: OK. So he’s got three sentences out of six.

AC: expecting 40, I’ll take 20.

JA: He’s conservative. Hey, twenty. My second strategy is to do long term investments by buying stocks that have good dividend history and hold it for the long term. I don’t expect to use this money in my brokerage account to cover any monthly expenses, so either way will work as long as my money can grow. My investment goal is to maximize the take home gains, after tax. So what say you, Clopine?

AC: Well I’m not a fan of either one. If I had to pick one of the two, I’d pick the second one. Long term stocks with dividend history. But I see major issues with both. So first of all, the first one. Short-term investments, I own a stock, when it goes up 3% within a month, then I sell it, and then I buy the next one.

JA: To get another 3%, so each month he’s doing this.

AC: Yeah. How do you do that? I mean who does that?

JA: 40% returns, Al! Come on!

AC: Who can do that? I mean, probably the seminar gurus tell you that you can do it, but in reality, that’s not practical or possible.

JA: Why is that? It sounds easy enough.

AC: Because that presumes the stock market goes up in a straight line at all times, and it doesn’t, it’s very volatile.

JA: Yeah, but, when those stocks go down, other stocks go up don’t they?

AC: Yeah. But so what if you buy your stock and it doesn’t make the 3% for the month, it goes down 8%.

JA: So how does he find the information of that particular company before it goes up that 3%?

AC: Yeah, what information does he or she have, that no one else has?

JA: Right. Because if the company was going to go up by 3% for that month, something that has to happen for that to have a 3% jump in a month.

AC: Right, because if it’s already expected to happen, well the price would already reflect that. So in other words, based upon all known news, then it’s already priced in. That’s how stocks work because they’re forward looking in terms of price.

JA: Yeah, they’re already taking a look at 10 years out, of what those cash flows of those companies are anticipating to generate, and then take the present value of those future cash flows and they call it a price. In layman’s terms, it’s more complicated than that, but you get what I mean.

AC: Now let’s say even that you could do this. Let’s say you made, I don’t know, 40%, that seems very unrealistic, even 20 let’s say you made 10. Just to throw out a number, and they’re all short-term gains. So they’re all ordinary income taxes, if you’re in the highest tax bracket, you’re paying 50% tax, between federal and state, California. So you’re only keeping half of it. And one of the last sentences was, I want the most after-tax return, which is why the long-term investing is better, because it’s after tax, but if you’re investing just in long term stocks that have high paying dividends, you’re very segmented in what you’re owning, and you’re taking a lot more risk than you know, and furthermore, in low-interest rate environments like we have right now, you and everyone else is looking for high dividend paying stocks, so do you think the price of those stocks is actually pretty high because they’re in demand? The answer is yes, so you’re buying something high, which may not be the best strategy.

JA: But you hear stuff all the time. It’s like, if stocks go up, I’m not going to get greedy. I’m only going to take 3% profit per month.

AC: Yeah, what’s so hard about that? (laughs)

JA: I mean, that’s the lack of information and education when it comes to people investing.

AC: And here’s the thing about that is, let’s just say this individual does that for three or four months, and then it’s overconfidence bias. Now they think they’ve got the secret sauce until things turn around.

JA: More and more people, Alan, because I’m out there just about two-three nights a week, doing education classes to the public. And I would say over the last six, eight months, I’ve never seen so much more overconfidence in the U.S. markets. In my almost 20 years of doing financial planning.

AC: Yes. And that’s because we’ve had a tremendous bull run. And so whatever you invested in the U.S. market did well. And so, then you start thinking you’re a great investor, when actually you just kind of rode the tide.

JA: You got to be careful too because the downside happened quickly. And it’s like when we least expect it because if we knew it was coming, we would have gotten out. But to get the money back, it’s a harder road up than it is down. Because if you do the math, if you lose 50% of your money, you don’t need a 50% rate of return to get your money back. You need a 100% rate of return to get your money back.

AC: Yes, so if you if you bought a stock for $1000, it went down 50%, so now it’s worth $500. If it goes up 50%, 50% of $500 is 250. So you only get 750, you don’t have your thousand back yet.

JA: You need a full 100% rate of return. So the market could drop 50, but for you to get back up, it takes you twice as much to get it back up as a percentage. So if you don’t have a strategy in your overall portfolio, of looking at things to say, “hey, I need some downside protection in regards to Treasury bonds, government bonds, short-term TIPs, or whatever, because it’s like, well, why do I want to buy something safe? Look at the markets, the markets are going to continue to roar, and I’ve already missed out, I need to catch up, I haven’t saved enough. I mean, all of this leads to disaster. Absolute disaster. So you want to understand the risk that you’re taking on the portfolio, making sure that it’s appropriate, given what your goals are. I mean, if you want a super high octane portfolio, you want the highest expected return possible. Here’s what you do. You have one asset class, it’s called small value in emerging markets. That will give you the highest expected return. So if you want really high-octane returns over the long term, that asset class will probably outperform any other asset class by a long shot.

AC: Yeah, and that’s the key word is “over the long term,” because in any one year, it can lose 50% or 80%. But then it goes up 160%. It’s a wild asset class, but it is amazing when you look at 10 years or 20 years history, it’s very often at the highest rate of return of all asset classes. And that’s because it is so volatile, and it is so risky. So investors, the only way they invest, they expect a high rate of return and they generally receive it over time.

JA: You need to get compensated for that risk, Alan. That’s what people don’t necessarily get, I think, is that if you got like a small startup company that you’ve never heard of. But it’s a little bit larger than a mom and pop shop, that is traded on an exchange. But still, all these small companies, no one’s ever heard of any of these companies. And then you have the big company like Facebook or Exxon Mobile. Well if they had the same expected rate of return, no one would ever invest in the small company.

AC: Yeah, you’d always go at the stronger one.

JA: Why wouldn’t you? The stronger company gives me a better return. Why wouldn’t I just put all my money there? Because this small company I don’t know. Never heard of them. They don’t have a track record. They’ll probably blow up next year. Why would I invest? Well, you’re going to receive a higher expected return. That’s why you invest because when you invest in smaller companies, you probably have a little bit more ownership in the overall company. The cost of capital equals expected return, Merton Miller, right there, Nobel Prize winning economist. (laughs) But you have to think there is no free lunch, at all. So you just have to kind of put things in perspective. If someone could get 3% every single month, God bless you. I’m not saying it’s impossible. I think it’s highly improbable. And how we want you to look at your investments, is to make sure that you have the highest probability of success for your financial goals.

AC: Good way to say it.

49:20 – ”I’m 24 and I have an inherited IRA. How should I move it into a Roth IRA?”

JA: Let’s talk about this one. I am a 24-year-old college student working full time, roughly $24,000 salary, and I have a Roth IRA in addition to an inherited IRA. With the inherited IRA I have to take a distribution to cover my entire life.

AC: True.

JA: In the Roth IRA, I am contributing monthly, and have roughly $8,000 in there so far. My inherited IRA is $18,000. My intent is to take a distribution and put it back into the Roth IRA after paying the taxes. When discussing with my father how much I should withdraw annually, his advice was to take the minimum each year to put out the tax bill. To me, it makes more sense to take as much as I can up to $5,500 contribution limit, without going up a tax bracket. This way I have it all moved out, and I can grow it in a Roth IRA before I reach the point where my income has increased, and I face a higher percentage tax rate. Which one of these strategies would you recommend? Or is there a different strategy to manage the IRA that you would suggest? I’m aggressively investing in both accounts due to my very extended timeline for retirement, and have a separate brokerage account that I can withdraw from if I need the money in the short term. Now, this kid is sharp.

AC: This is a great question if I do say so myself. So 24 years of age, making $24,000 a year. First of all, even if you don’t itemize, between standard deduction and exemption, that’s about 10,000 bucks. So let’s just say taxable income is $14,000. The 10% bracket goes to, for a single person, about $18,000, so at an absolute minimum, you ought to be pulling $4,000 per year out of this inherited IRA, because that’s only 10% federal tax, and probably almost nothing if it’s California. I don’t know if it’s California or not. That would be a no brainer. Even anything above that is taxed at 15%. That’s a super low rate. So you could even withdraw the whole thing and only pay 15% tax, or maybe a straddle a couple of years, do nine one year, nine, you know, whatever. But the sooner you get it out, then it’s going to stop growing in our retirement account. Now you can only put $5500 into a Roth per year. But make sure that you maximize that. And man, 24 years old, already got $8,000 in a Roth, adding $5,500 per year. That’s good stuff because that Roth IRA in retirement will be 100% tax-free.

JA: So I got two comments, three comments on this. Some of you might be thinking, OK well, if there’s an inherited IRA, he’s gonna take the distribution over his life expectancy. On $18,000 at 24 years old, that distribution is probably a few hundred bucks.

AC: Yeah it’s not very much.

JA: So he’s got to take the distribution. You cannot convert an inherited IRA to a Roth IRA. So that distribution, he can not convert it. However, he’s making a contribution, which is a little bit different. The IRS doesn’t necessarily track where that money is coming from, as long as you have earned income. So if he’s making $24,000, he has earned income. And maybe that $24,000 that he’s earning, he’s spending every last dime of it, but he’s got this inherited IRA that he’s taking distributions. He’s taking more – well, his father said no, just take the minimum distribution and let that continue to compound tax deferred. Why would you want to pay the taxes before? Again, that’s where the father’s messed up, and that’s where most clients are still screwed up, in a sense, of like defer, defer, defer, defer. I don’t want to pay the tax now, I want to kick the can down the road. Well, don’t do that in this scenario, as Big Al just said, your tax bracket is almost zero. Take as much money out of there as possible. I like him just taking out $5500. Then it goes directly into the Roth IRA. So he takes it out of the inherited IRA – again, you cannot convert a distribution from an inherited IRA. If he did not have earned income, he would not be able to do that strategy. You cannot take the distribution from an inherited IRA and make a contribution to a Roth IRA, if you don’t have earned income. Since he has earned income, he can do this. So he’s taking the distribution. I would suggest take the $5,500 out, pay a minimal tax on that, he’d be in the 10% bracket, most of it, and another $1000 in the 15, so your tax bill is a couple of thousand dollars. Not even that, couple of hundred bucks?

AC: Right. So on the other hand, Joe, I’m thinking at this, he’s already got $8,000 in a Roth at age 24 so he’s got a source to do that. Or maybe it’s even from his current income, so maybe let’s just say he’s already putting four grand in, so he can only put in another $1,500. I would still take at least $4,000 out of the inherited IRA because he’s in such a low bracket. And then you’ve got that money that you can then keep contributing to the Roth IRA as you qualify.

JA: But here’s where I’m coming into real life and you are the CPA number guy. He pulls out more. What’s he potentially gonna do with the money?

AC: He could spend it.

JA: Yes. I don’t want him to spend it.

AC: I don’t think he’s going to. He’s disciplined. How many 24-year-olds do you know that have $8,000 in a Roth?

JA: I don’t know.

AC: None.

JA: My future wife. (laughs) But no. Because you’re 24. You know, when I was 24 if I had an extra – hey, I maxed out my Roth IRA. Got a couple of thousand dollars, fellas. Key West! Let’s do this! (laughs)

AC: Yeah but that’s you. He’s more disciplined. Or should be.

JA: Or she. So congratulations. That’s the question of the month.

AC: Yeah that’s a good one. I like that one.

JA: That’s a great question. You know, it’s a smart kid. Don’t listen to your father on this one. Don’t listen to Big Al. Listen to me. Just take out enough, let the rest continue to defer, just do enough to put in your Roth, get all that $18,000 out, a very low tax bracket. But if you know you’re going to get a big fat raise, then I would listen to Big Al. All right guys. That’s it for us today. Hopefully, you enjoy the show, check us out on iTunes, and we’ll be back again next week.

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So, to recap today’s show: Whether taking Social Security early is a good idea or not depends entirely on your situation. People like the idea of raising taxes – on the wealthy. Filing a tax return and paying your taxes on time are always good ideas. There is still time to contribute to your IRA for 2016, and a distance of 3 feet might just make a difference when you find money. How you decide is up to you.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, this show is about you! If there’s something you’d like to hear on Your Money Your Wealth, just email info@purefinancial.com. Listen next week for more Your Money Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.