Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
August 21, 2018

2018 taxes will be very different than previous years. We’ve got 10 ways to make sure you’re properly prepared, and perhaps even reduce your 2018 tax burden. Plus, we talk about the benefits of Roth IRAs quite a bit – when might Roths be WRONG for you? And is it nuts to go with CDs in a traditional IRA?

Show Notes

  • (00:51) Section 199A: The Qualified Business Income Deduction
  • (10:10) When Roths Might Not Be Right
  • (19:28) Qualified Charitable Distributions Are Going to be a Bigger Deal This Year
  • (26:52) Big Al’s List: 8 Mid-Year Tax Planning Ideas
  • (35:21) Are We Nuts to Go with CDs in a Traditional IRA?


Taxes. You answered my podcast survey and overwhelmingly told us that’s what you want to hear about – taxes! Boy, you podcast listeners sure know how to party, dontcha? Well, we aim to please, so today’s show is almost exclusively about reducing your taxes for 2018 since this year is going to be very different from previous years. We’ve got 10 ways to make sure you’re properly prepared, and the fellas straighten out the cumbersome and confusing changes for small business owners – we’re talkin’ 199A, QBI, QCDs, plus, something I never thought I’d hear – Joe and Big Al talk about when a Roth IRA might be WRONG for you! And they tell Cynthia whether or not she’s nuts to go with CDs in a traditional IRA. Here are a couple nuts now, (sorry, I couldn’t resist!) Joe Anderson CFP® and Big Al Clopine, CPA.

:51 – Section 199A: The Qualified Business Income Deduction

JA: When it comes to tax reform, I think most people that listen to this program are probably fairly familiar with… there were a few changes in individual tax rate. Not a ton, but a few. There were some changes in deductions. No more exemptions and so on. So some small tweaks, but on the small business side of things, there were some significant changes that are somewhat cumbersome and confusing.

AC: Yeah, there’s a qualified business income deduction. QBI for short. Also known as “199 cap A” – you know I like to say that. (laughs) 199A. Anyway, so Joe, let me go back – why it happened is the corporate rate, the C corporation rate, was at 34%, 35% for large companies. It went down to 21% – from as high as 35 to as low as 21%. So some companies saved 14% on their taxes, but that was only for C corporations.

JA: Big, large corporations, publicly held companies in most cases.

AC: Yeah, the larger ones, and the rest of the C corporations were at 34%. But let’s just say that didn’t apply to partnerships or sole proprietorships or S corporations or LLCs.

JA: The majority of the businesses are those.

AC: That’s correct. Most are also known as small businesses. So anyway, here’s what they came up with, to try to make this a little more equal. They said, “well, we’re not going to lower the taxes for small business net income. But what we’re going to do is, we’re going to give you an extra tax deduction.” And so here’s what they came up with. They said, “20% of your profits would be a potential deduction.” So you make $100,000 of profits, 20% of that’s $20,000, so you pay taxes on $80,000, not $100,000.

JA: That’s an additional deduction.

AC: Yeah, because you think about the way this works: let’s say you have a business…

JA: Let’s say last year I had $100,000 of profit, that $100,000 of profit flowed through from my tax return, then I would pay ordinary income tax depending on whatever rate.

AC: That’s right. And so this year, the $100,000 still flows through to page 1 of your 1040, but on page 2 you get an extra $20,000 deduction that you didn’t have before. And so there’s basically one main limitation at certain income levels. So let me start there. So if you’re single and you make less than about $157,000 of taxable income, or married, $315,000 of income, it’s not that complicated. So the way it works is like this: you take your bottom line profit from your business, not your gross income, not your revenue, but your bottom line profit. Your revenue is $150,000, your expenses were $50,000, your profits $100,000. So it’s 20% of $100,000, that’s the maximum QBI deduction you can take. Now the other thing you have to look at is 20% of your taxable income. And if 20% of your taxable income is a lower number, you’re limited to that number. So let’s just say you only had income of $100,000 and you have the standard deduction, let’s say let’s say you’re single, so that’s $12,000, so you end up with $88,000. So 20% of $88,000, whatever that is, it’s about $18,000? $17,500 in my head?

JA: $17,600.

AC: 17.6, I got pretty close. (laughs)

JA: Oh my god. You call yourself a CPA.

AC: (laughs) I’m off by a hundred bucks. Anyway, so it’s the lower of those two. So in that example, $17,600 is your deduction instead of the $20,000. Now in many cases, you’ll have other income – if you’re married and your spouse is working, or maybe you’ve got interest or dividends or rental property income or something.

JA: Real estate? You could take that deduction in regards to some real estate holdings, right?

AC: Correct. That’s true.

JA: All right good, I didn’t make that up. (laughs)

AC: (laughs) You are correct.

JA: So what if I had a business and some real estate, can I do a QBI on both?

AC: You can. Yes, you can.

JA: Ah, double dippin’ here.

AC: Right. So it’s 20% on the rental property profits after depreciation. So maybe you make $10,000 a year on a rental property, but your depreciation is $9,000. So you’re left with $1,000 of profits, so 20% of that is $200. Right. So in most cases, the QBI deduction on rental properties won’t be that great, unless you’ve got lots of rentals. Then it could be a pretty big number. But let me just say, that’s when your taxable income is below $157,500 single, $315,000 married – when it’s above that it gets a lot more complicated.

We don’t need to go into that. That was fairly straightforward and all I heard was mumbo jumbo numbers. (laughs) “You just carry the 4 and the 1 follows after that and next thing you know you’ve got $17,600…”

AC: (laughs) And I’ve explained the more complicated rules to advisors probably at least five times, and I always end my conversation by saying, “if that happens, come talk to me.” (laughs) So if that happens to you, just come talk to me because I’ll help you out.

JA: Yeah. OK. Let me just wrap this up into real life. So I’m a small business owner, and maybe I have let’s call it $1 million of revenue. But I’ve got a ton of expenses and inventory and all that other stuff. So my profit might only be $100,000

AC: OK. So you’ve got $900,000 expenses. $100,000 of profit. You gotta go to business school. Do a little bit better margin. (laughs)

JA: (laughs) What are you talking about?? Because I might have my cell phone bill in that expense, my car, my mortgage… (laughs) it might be padded just a smidge. That’s never happened to anyone that’s a small business owner, I’m sure.

AC: No. I’ve never seen that ever!

JA: (laughs) You’ve been a CPA for 30-some years.

AC: (laughs) I’d be shocked if I saw that! Someone would actually pad their expenses??

JA: (laughs) Are you really using your cell phone 100% for business??

AC: (laughs) I’m sure it’s only 90%. I’m sure everyone goes through that discussion with their accountant. Don’t you think?

JA: (laughs) Oh sure. So with that $100,000, that’s my profit. All right. So let’s say if I do a 401(k) plan. So then I’m putting $24,000 in my 401(k), I’m just rounding – that’s going to reduce my deduction.

AC: Your profit, yeah.

JA: Right? Because after my 401(k) plan that I contribute to, then do I take the QBI deduction, or do I take the deduction first because… my profit is going to be after my 401(k) contribution, correct?

AC: Yeah, it’s a good question and there’s a little twist to that question. And so, there’s one answer if you’re an owner only, if you have no employees, slightly different answer if you have employees. So let’s just say it’s you. We’ll start there. So you’re $100,00, and then you do a 401(k), and you’re over 50, so you do $24,000 as a deduction. So now you’re paying taxes on, what, $76,000. But your QBI is on the $100,000, so the 20% is on the $100,000 without regard to the self-employed pension plan. So you get the $20,000 and the $24,000.

JA: Interesting. But then it’s going to be the higher of the taxable income 20% versus the profit 20%. So if my taxable income is lower the QBI is going to be lower.

AC: Yeah. So it’s the lower of taxable income, 20% of taxable income, or 20% of your business profits without regard to your self-employed pension plan, or self-employed health insurance. But see, when you have employees, now, the money that you’re paying for their pension plan, that actually is a deduction that reduces your business profits.

JA: All right. There you go. Little tax chat with Big Al.

AC: Pretty good, huh? Now did that make the list of things people liked? (laughs)

JA: (laughs) No that definitely didn’t make the list. You know, you’ve got the QBI and the 1, you gotta figure out the deduction between taxable income.

AC: I would think that would be near the top. Of course, I’m biased.

JA: Oh yes. That was one of the best segments I think we’ve ever done.

If you’re dying for more tax chat and based on those survey responses, I know at least 75% of you are, stick around – coming up we’ll talk about Qualified Charitable Distributions, Roth conversions and a whole bunch more mind-numbingly useful stuff to help you lower your tax burden. I’ve also got links for you to some tax reduction strategies for high-income earners and more details on this year’s tax reform – check them out in the show notes for this episode at YourMoneyYourWealth.com.

10:10 – When Roths Might Not Be Right

JA: Hey Alan, you’ve heard of a Roth IRA, correct?

AC: Yes I have. And I have an article on it too. So you start with yours.

JA: You’ve got one that says… (clears throat) just took a sip of my energy drink.

AC: Didn’t go down that well?

JA: Need a little bit more vodka. (laughs)

AC: Didn’t put enough in? (laughs)

JA: Yep. When Roths May Not Be Right. How about that? Ed Slott wrote this, our good friend Ed Slott. I don’t know if we can call him a good friend since he’s never been on the show and I never met him. (laughs)

AC: No, but we like his stuff. (laughs) You went to a seminar and I’ve seen him live. So that’s about as close as it gets. (laughs)

JA: OK. So he wrote something here, and it’s like When Roths Might Not be Right and I was like, “Come on, Ed.” There’s never a situation where a Roth IRA might not be right. But here’s a couple. I won’t go through the whole deal here.

AC: How many do you have, four?

JA: No, there’s quite a few, there’s 12. There’s a page for each. Why don’t you take a guess, throw a stab at when do you think a Roth IRA is not applicable for someone’s overall situation?

AC: Well, when someone has a real high-income year and they’re going to be in a lower income year maybe through retirement. In other words, you look at tax brackets. If you’re a high tax bracket this year and you’re always going to be in a lower bracket in future years, you wouldn’t do a conversion this year.

JA: “A fundamental principle of tax planning is, always pay taxes at the lowest rate. The best situation is for clients to take deductions when tax rates are higher and pay taxes when the rates are lower. Those planning Roth conversions must know when their bracket is going to be higher or lower.” How about this Alan. This is where I get into arguments with some people. Let’s say if I’m in a 24% tax bracket today and then it’s like, I will be in a 24% tax bracket in the future, then it’s a wash. It doesn’t matter.

AC: Yeah in principle right. I agree with that.

JA: I disagree with that because I think there’s a significant value to converting if I’m going to stay in the same tax bracket.

AC: I think there are four reasons, but let’s hear yours. (laughs)

JA: (laughs) Wow, you got four!

AC: I already got this nailed.

JA: Well yeah because we’ve been talking about it for, I don’t know, 15 years. The reason why you want to do a Roth conversion, if I’m going to stay in the same tax bracket – because you always read the B.S. It’s like, “if you’re in a high tax bracket, don’t convert.” I still think it depends on the brackets. If I’m at a 24% tax bracket and I’ll be in a 22% tax bracket, I still think it makes sense to convert. Here’s my reasoning. A: the number one biggest reason is that it’s going to give me tax diversification. If all of my money is in a retirement account, everything is going to be taxed at ordinary income rates. I have no choice. Every dollar that comes out of the retirement account, I’m paying ordinary income rates on it. If I have Social Security, if I have a pension, I have real estate income, whatever, all of that is going to add up and it might jump me actually into a higher tax bracket. If I’m willing to pay a little bit of tax today to have tax diversification to pull money from different accounts to keep myself in a lower bracket? So I could potentially pay 24% tax today and keep myself in the 12% tax bracket in retirement. Do you agree with that?

AC: It’s possible.

JA: It is possible. And the reason for that is that, especially now, how big these brackets are? At the 22 or 24% level? I mean those brackets go forever. So there’s a lot more money that you can convert at lower rates.

AC: Yeah. So I would say it this way, Joe, I would say let’s start with the same bracket: you’re in the 24% bracket now, you’re always going to be in the 24% bracket. So theoretically it wouldn’t really matter. But one of the reasons that you just mentioned is the fact that you get more tax diversification. So let’s say you have a year when you need more money for whatever reason. And so you can then stay in that same bracket instead of pushing yourself into a higher bracket. That’s one of my four reasons.

JA: Yes. Second, there are no required minimum distributions in a Roth IRA. That money is going to continue to compound tax-free for their lives. Then when you pass it’s going to grow tax-free for the kids’ life.

AC: Agreed. And so it kind of depends upon their brackets too. And then you go to asset location, which simply means, a globally diversified portfolio, you’re going to have some assets that have higher expected returns and some that are safer. And if you can push the higher expected return assets into a Roth IRA, over the long term you’ll be able to keep more of your income that way.

JA: Yeah. Okay, give me another reason why I should not convert or put money into a Roth.

AC: Well, it gets difficult to do, Joe, if you don’t have any money outside of retirement plan to actually pay the tax.

JA: Yeah, the upfront tax bill. Anyone just can’t cut a check to do a Roth conversion.

AC: I mean sometimes you’ve got no money outside your 401(k) or IRA and you’re under 59 and a half. So the only way to pay the tax is to withhold money from your IRA, which is tax plus penalty.

JA: Which is stupid.

AC: Yeah, it would be stupid. So I got two out of 12?

JA: Yeah. You got a couple more here? What do you think?

AC: Uh, let’s see… How about when you’re single. How about this one. Maybe Ed Slott didn’t think of this one. What if you’re single this year, in a higher bracket, and next year you’re going to be married? Your date is February 2nd, next year you’re in a lower bracket because you’re married?

JA: (laughs) I would know nothing about that.

AC: (laughs) I know you do, I’m speaking to our listeners because it’s not something you have experience with.

JA: (laughs) Nope, that’s not on the list here bu.

AC: Should be.

JA: Yes. Couple of them here, like stealth taxes with Roth conversions. Increase your Medicare expense, premiums. You could put yourself into a higher net investment income tax potentially.

AC: We actually had a hypothetical case earlier this week where a Roth conversion would have eliminated the QBI deduction, so that’s exactly right.

JA: For example, medical deductions, child tax credits, the taxation on Social Security is another one, and the potential loss of the new 20% deduction for QBI.

AC: Yep. So in other words, more income would mean you’d lose deductions, so yeah, that’s obviously one you’ve got to consider.

JA: Let’s see, the effect of qualified charitable deductions. So we could talk a little bit more about that next segment, but we’ve talked quite a bit about those in the recent shows.

AC: Yeah we have – QCDs, qualified charitable distribution, I think it is.

JA: What did I say?

AC: Deduction.

JA: Well it’s not a deduction, it’s a distribution. Come on. (laughs)

AC: That’s why I corrected you. (laughs)

JA: I don’t I would ever say that. (laughs)

AC: Rewind the tape, please. (laughs)

JA: QCD, it’s a qualified charitable distribution – you’re distributing assets out of the retirement account. So yeah, you could give money up to $100,000 from your retirement account directly to a charity. So that does some pretty cool tax planning for a lot of individuals now, because of the lack of individuals that will be filing a schedule A.

AC: Yeah. That’s exactly right, because first of all, they increased the standard deduction. So single it’s $12,000 and married is $24,000, that’s about twice as much as what we had last year. And then they eliminated a bunch of things that we could otherwise deduct, like for example, state and local taxes, property taxes, we can only deduct $10,000, regardless of what we pay, and miscellaneous itemized deductions, unreimbursed employer expenses, tax prep fees, investment fees, those are no longer deductible. So a lot of us are not going to be itemizing anymore, so if you’re not going to itemize, when you give to charity, it feels good but you didn’t get a tax break. So the QCD, we can get in after the break, can help that.

JA: Yes. Well, I really didn’t want to, but I guess we have to now since you mentioned it. (laughs)

Stick around, the fellas are about to explain how a QCD can help with that. In the meantime, I’ve got links to more on Roth IRAs and Roth conversions linked in the show notes at YourMoneyYourWealth.com. And San Diego listeners, we’re hosting a free Halftime Market Report Lunch n Learn in our office here in Mission Valley THIS THURSDAY August 23rd at 11am, lunch included! Learn a bit more about current market conditions, tax reform and minimizing taxes in retirement – it’s this Thursday August 23rd in San Diego and it’s free! Sign up in the Learning Center at YourMoneyYourWealth.com. Now Al, about those QCDs?

19:28 – Qualified Charitable Distributions Are Going to be a Bigger Deal This Year

AC: QCD: qualified charitable distribution. So this is not new, Joe, but it’s going to be a bigger deal now with this new tax law. Because a lot less of us are going to be itemizing our deductions, for reasons I mentioned before the break, meaning that the standard deduction is higher than it was before and a lot of otherwise allowable itemized deductions were taken away with this new tax law. So if you’re not going to be able to itemize, when you give to charity, you’re not going to get a tax benefit.

JA: So let’s talk about this for just a second. This came out, I don’t know, what, ’06? I remember we were in KOGO studios. So ’06 probably ’07? Because we were talking about maybe the Pension Protection Act of ’06, is that when it came out?

AC: I don’t remember. That was a decade ago.

JA: Right. And I have just a steel trap memory.

AC: I know you do. (laughs) I thought we’d look it up on Google!

JA: (laughs) Yeah, fact check me.

AC: (laughs) You sounded convincing though.

JA: Anyway. So now it makes a lot more sense. I wonder who came up with this law? You could give directly to charity, or you could get part of your RMD to charity. Who thinks of that?? IWhat would be the benefit for someone to do that prior to now because I think it makes a lot more sense because more and more people will not itemize their deductions. So they get that good feeling of a tax benefit, and still being able to give to the charity, versus if I don’t itemize I’m giving to charity but I’m not writing anything off.

AC: So to clarify, you’re supposed to get a good feeling from giving to charity, and the tax benefit is after.

JA: I do, and absolutely, I totally agree with that. (laughs)

AC: (laughs) But you would get a good feeling from the tax deduction, screw the charity. (laughs)

JA: (laughs) That is not true.

AC: (laughs) OK. I know it’s not.

JA: It sounded like it. It’s fair.

AC: I can tell our listeners when you’re talking live, it’s easy to make mistakes. We all do it, and usually, we do it all day long and no one calls us on it because they think they’d make you sound like an idiot. But that’s part of our show. (laughs) So they came up with this QCD, meaning that if you’re over 70 and a half, you’re allowed to give your required minimum distribution directly to charity instead of taking it yourself. So what that effectively does – and there are some rules here – but what that effectively does is, when it goes directly to charity, it doesn’t show up on your return as income. You don’t get to deduct it either, but it doesn’t show up on your return as income. And in the past, it wasn’t that big a deal, people were going, “well, what’s the difference whether I have extra income and I have a similar charitable deduction, my taxable income is the same.” Now there were reasons to do it, because when you had a higher adjusted gross income, maybe more Social Security taxable and some of these other deduction limitations, but there was less reason. Now there’s a lot of reason to do it because a lot fewer people are going to actually itemize their deductions. So in this way, you think about it, let’s say your itemized deductions would be $12,000 – I’m talking about a married couple – and the standard deduction is $24,000. So of course, you take the standard deduction, the higher the two. If you give a couple of thousand dollars to charity, now your itemized deductions would be $14,000. You still take the $24,000 standard deduction, so you didn’t get a tax break, and you paid taxes on your $2,000 RMD because it’s added income. Instead of that, you do this QCD, you give that $2,000 directly to charity, it doesn’t show up as income. You still deduct the $24,000 as your standard deduction and end up paying less taxes. That’s the idea. You can do your entire RMD up to $100,000. In fact, if you required distribution’s a couple of thousand dollars you can give up to $100,000 if you want to. And it can count for your required distribution. Married couples, $100,000 each from each individual IRA. So I think because of this new tax law it’s going to be a lot more common. But my feeling is that not too many people know about it.

JA: Right. They’re going to still give, but they’re going to give from the wrong account.

AC: Right. And they may not learn about this for a while which is why we need to talk about it, because if you want to give – and this is predicated on the fact that you want to give. And not everyone wants to give. I’ll just be honest, we see all kinds of people, and a lot of people say, “my charity is my kids,” and I’m totally fine with that. And other people say, “yeah, I want my kids to get X, but I want charity to get some.” If that’s your case, then let’s make sure that you also get a tax benefit as well. Now this QCD is only for when you’re 70 and a half. So if you’re younger, then it doesn’t apply. There are other strategies, like donor-advised funds and bunching deductions that could apply to you.

JA: Yeah. So when you’re looking at this, if you’re under 70 and a half and you’re giving, now is the time to take a look at, do you have a highly appreciated stock or highly appreciated real estate or some asset – and that’s what you want to give to charity versus let’s say cash.

AC: Yeah that’s right. And a lot of people don’t realize this, that charities are generally happy to accept your stock, and so you give your stock worth $10,000 that you bought for $1,000 and your tax deduction is $10,000 and you don’t pay capital gains tax on the $9,000. So that’s that’s the benefit. Now in some cases, that $10,000 deduction still isn’t going to help you, because you’re not going to itemize your deductions. So what you might do instead is set up a donor-advised fund and say, “I’m going to take the next five years of donations, so $10,000 a year, $50,000, I’m going to put it into a special account called a donor-advised fund. $50,000 all at one time with my appreciated stock.”

JA: Yeah but on the flip side of that, even though I don’t take the deduction, I don’t have to pay the tax on the increase in capital gain.

AC: That’s true, but I’d rather get both.

JA: No, yeah, I get it. I get it.

AC: And a lot of people don’t – it’s hard to say because we talk to a lot of folks right before they retire, and we give them all these charitable strategies, and I know what they’re thinking, they’re thinking, “what do you mean? I haven’t even retired yet. I don’t even know if I have enough money. And you want me to start giving it away?” And the truth is, the only way you can really sort of know is to kind of pencil this out, just some conservative assumptions through the rest of your life. Are you going to have money left over or not?. If you are and you’re charitable, then why not give while you’re living instead of wait till you pass?

To get into the weeds a bit more on planned giving strategies for creating charitable tax deductions with donor-advised funds and QCDs and more, you guessed it, find the links in the show notes at YourMoneyYourWealth.com. Joe and Big Al did a whole TV show on the topic and you don’t want to miss it. Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, 8 Mid-Year Tax Planning Ideas.

26:52 – Big Al’s List: 8 Mid-Year Tax Planning Ideas

AC: This is from ETFtrends.com, we know that tax planning, although we tend to think about it in April of the following year, but the truth is almost every strategy that you can come up with needs to be done in the tax year. So there are things you want to do at the beginning of the year. Things you want to consider mid-year, and things at year-end. So this is mid-year. So number one here is to forecast your 2018 taxes and potential refund because the tax law changed – withholding changed, and the tax rates changed.

JA: And a potential refund, some people might be a little…

AC: They may actually owe. So I have an idea for you on how to do this. Just go to Google and type in TaxCaster. That’s actually a free calculator on the Intuit website. And what it does is it asks you questions about your 2017 return and calculates as if it were 2018 taxes. Now, if you know your 2018 taxes are going to be different maybe you can sort of put those numbers in there, but it’s going to give you an idea, roughly, of what sort of change – are you going to owe more taxes or less taxes?

JA: Question for you – did Lacerte do that automatically?

AC: Yeah. If you have an account that uses Lacerte software, they actually have a schedule that shows your 2017 taxes, income, deductions, taxes.

JA: If you have the same exact income next year.

AC: Yeah in 2018, same income, same deductions, what it turns out to be. And I would say, Joe, in most cases what we’re seeing is the taxes are a little bit lower. And we weren’t so sure at the beginning of the year, because of the loss of the state tax deduction. But in most cases what I’ve seen is that 2018 taxes are a little bit lower than 2017 as advertised.

JA: What about you?

AC: I haven’t done mine.

JA: You didn’t do your 2017 taxes?

AC: No. Not yet. It’s on extension.

JA: Oh that’s right I suppose.

AC: Have you done yours?

JA: You know what, I did.

AC: You beat me this year.

JA: It’s amazing. I’m usually October 14th.

AC: I’m usually October. Last year I did it in April.

JA: What do you think, you think you’ll pay more taxes? Big wallet on Big Al.

AC: Hard to say. (laughs) I’m hopeful pay less but I don’t really know. But anyway, so calculate your taxes and then number two would be to revisit your W-4 if you don’t come up with a good answer. In other words, maybe your taxes went down but your withholding went way down and you’re not going to have enough withheld. So you might want to adjust your exemptions or have a little bit more withheld between now and the rest of the year. If you wait till December to do the same calculation there’s probably not enough paychecks to make much of a difference in your withholding. Number three is, know that a number of deductions have been eliminated. So if you’re counting on, if you’re in California, we have high state taxes and high property taxes, and the combination of those two, for some people $20,000, some people $50,000, some people more. You’re limited to a $10,000 deduction. They call that SALT. State and local tax deduction. So that’s been reduced, the exemptions have gone away. Miscellaneous Itemized deductions are gone. So just be aware of that so when you’re thinking about your taxes for the current year, you may not have as many deductions. And Joe, that’s why some people may actually pay more taxes because they’ve lost certain deductions. Number four I already did. SALT deductions are being adjusted. Number five is home equity loans may get more expensive. So it used to be you could borrow $100,000 on your home for any purpose, use it for vacations, cars, paying off credit cards, whatever, and that was deductible. Now it’s no longer deductible. There’s no grandfathering in, it just not deductible anymore. Starting in 2018. So realize if you did that, if you have a home equity loan and borrowed $100,000 for whatever and you’ve been deducting in the past, you cannot deduct it this year. But Joe, this is where it gets confusing, because a home equity loan, in and of itself, sometimes that’s deductible, sometimes it isn’t. It’s based upon what the money was used for. If the money was used to improve your home it’s still deductible, as long as your total mortgages add up to $750,000 or less.

JA: So you take it to go on a vacation to get refreshed to do some manual labor on your home? That wouldn’t work.

AC: Doesn’t work. Six is, bundle your charitable giving.

JA: Yeah or you can do a QCD. (laughs)

AC: Like we talked about, or donor-advised fund – mainly because if you give the same amount to charity each and every year and you don’t have enough to itemize, maybe you want to kind of front load some things so you can have enough to itemize so at least to get some benefit for that. Number seven, state and federal tax law is now different on college savings plans. They changed the rule, remember it used to be only for college. Now it’s for kindergarten through 12th grade, private education. If you give your kids go to a private school. $10,000 per year is the max per person.

JA: $10,000 per year that can be used out of a 529 plan per student.

AC: Right. So you have three kids, you could pull out $30,000 for that purpose. K through 12 but be careful because not all states have conformed with that rule. California being one of them that has not conformed. So if you pull out $10,000 and pay for K through 12 in California, you will be penalized and you’ll have to pay income on those gains – only for state of California.

JA: Yes but the federal tax would be tax-free still.

AC: That’s right yeah exactly.

JA: That’s what is so weird sometimes. The federal law, I’m not paying federal tax on it, but now I gotta pay state tax on it.

AC: Right. And penalty too. And California is not the only state. There are other states that didn’t conform to it. Number eight is fewer people will be affected by alternative minimum tax. And that’s actually a pretty big deal, especially if you live in a high tax state like California or New York or New Jersey, let’s just say. So a lot of you folks were itemizing your deduction. You had high state taxes, you had high property taxes, these are big deductions – or maybe you’re a salesperson at your company and unreimbursed expenses, so you had all of these expenses. Those expenses, the taxes, and miscellaneous itemized deductions were never allowable for alternative minimum tax purposes. So a lot of people were subject to this extra tax. Now this year, since those deductions are either eliminated or reduced, less people will be subject to alt-min. And then they increased the alt-min and they increase when it starts phasing out. So we probably have done 500 or 600 projections this year so far, and I would say less than five people have been subject to alt-min this year, where last year it probably would have been a third of all taxpayers.

JA: I think I totally fell asleep during that last segment. (laughs)

AC: I know, I could tell. That’s why I know you didn’t say anything the whole time. (laughs)

JA: I was like, “oh God,” I was just thinking about Succession, the TV show, to try to get my blood going again. (laughs)

AC: (laughs) You do need some more Monster Energy drink with vodka.

JA: Yeah. That whole AMT… .whurrrrr. (laughs)

AC: (laughs) I’ve got actually three…

JA: (laughs) You’ve got 15 more to go, all right let’s do this!

AC: I’ve got three more that I added but we’ve already talked about them, so I’m not going to bore you – QBI deduction, QCD, qualified charitable distribution, number 11, Roth conversions.

Yes, knock back that energy drink because it’s all request Tuesday and we’re playing the hits… but I think we’ve all had it with taxes for the moment. According to the podcast survey, one of your other favorite things about Your Money, Your Wealth® is the guest interviews – and actually, a bunch of you want to hear Joe and Big Al interview Warren Buffett, Elon Musk and Donald Trump. I’m working on it, but don’t hold your breath! In the coming weeks we will hear from everybody’s favorite index investor Larry Swedroe, Social Security expert Mary Beth Franklin, Forbes contributor Jeff Levine, and a guy called Cubert who is planning to abandon his cubicle at the ripe old age of 46. Subscribe to the podcast for free at YourMoneyYourWealth.com so you don’t miss a thing.

35:21 – Are We Nuts to Go with CDs in a Traditional IRA?

JA You heard YouTube’s getting a little bit of problems here. Did you read that in the paper?

ACL I don’t think I’ve heard that. What’s up?

JA: Like with the fake downloads. People are buying people to download their stuff.

AC: Oh, to make their videos look more popular to get more followers so they get more advertising dollars. I see. It’s a great idea we should’ve tried it. (laughs)

JA: Oh yeah. Ruthie, I think she just got raided by the FBI. My mother. We got six million views. I think she’s got 5,987,000 minutes. (laughs) She just loves it. Invites the neighbors over, “they’re talkin’ Roth IRAs, you’ll love this!”

AC: Oh she actually watches?

JA: I doubt it. She used to be a big fan of everything Your Money, Your Wealth®.

AC: She used to call into the show.

JA: Remember she was on the program one time. We had that segment, it was called the Mojo Money Minute or something like that?

AC: Right. We featured some great company and she wanted to feature a coffee house or something. (laughs) She was so nervous. It wasn’t the worst we’ve ever had. We had a banker one time that completely froze. We ask questions and answered them. “What’s a private baker?… Well, I guess that’s where you help people with their private affairs. And what kind of services do you provide?… I guess you make some loans probably.” (Joe and Al are cracking up at this point.)

JA: Oh my god that was hilarious. ‘So, you’re a private banker? (silence) Hello? So what the hell is a private banker? (silence) “Uh, help!” Remember she asked for help!

AC: She said “Tom, help!”

JA: I go, “we’re live on the radio, lady”!

AC: Fortunately there was a cohort that answered every question. He was a lender but he answered all her questions. the call. They had their marketing person filming the whole thing.

JA: Yes it was awful. That was a couple years ago.

AC: I don’t think it went on their website. It shouldn’t have.

JA: I don’t think so. (laughs) Yes. We’ve had quite the guests on this show.

AC: They’re improving. They’re getting much better.

JA: Yeah we had Meb Faber, he was on a couple of weeks ago. Then we had Morgan Housel. Steel trap, Andi, steel trap.

AC: Who do we have this week?

JA: We have Alan Clopine and Joe Anderson. It’s just us this week. Andi’s slacking off.

AC: She doesn’t agree with you by the expression. Well I went on vacation last week so it kind of messed her up

JA: Yeah. Last week’s show was awesome.

AC: I’m sure it was. (laughs)

JA: We had sexy Joe Schwashinger? What’s his name?

AL: Schweiger.

JA: Joe Schweiger. We talked about some annuities and life insurance because he’s our insurance specialist.

AC: Did you learn something?

JA: I learned a couple of things. Not much, I had to kind of school him a little bit. He was a little nervous.

AC: This microphone, when you’re not used to it. It’s intimidating. You gotta be careful what you’re saying.  Got a question?

JA: I do. This is an email sent to us from Cynthia. “Hi, Al and Joe.” Not sure why you’re name is first.

AC: Yeah, I think that’s because I’m the smarter one.

JA: (laughs) Well that’s probably true. “First, Love your show.” Thank you, Cynthia. “Has anyone ever told you that you are the NPR Car Talk of Personal Finance?”

AC: Yeah. Tappet Brothers personal finance – do you listen to that show?

JA: I do now. (laughs) I’ve heard that before.

AC: Yeah we have. Actually, I just listen to that on this trip. Now, one of the brothers passed away so they’re on reruns. But that is, bar none, the funniest talk show that there is, I think.

JA: “I think you’re hilarious.”

AC: So that’s quite a compliment Cynthia, I appreciate that.

JA: “But you know what you’re talking about.” Well, sometimes we do.”I have a general investment question, please. Husband and I are both 63 and he retired last week,” Congratulations. “And I will retire in a few months.” Awesome. “We have a net worth of five million dollars including two point one million dollars and before tax retirement accounts. The broker assigned to our accounts at Fidelity tells us we are invested too aggressively in U.S. stocks at 80%, foreign stocks at 15%, and 5% bonds. He’s right, as we have never been excited about investing in bonds.” Bonds are not exciting.

AC: Yeah. They are boring.

JA: Very boring. “Ok, now this is my question. Since my husband just retired with $500,000 in his before tax 401(k), should we transferred that sum to his Fidelity to traditional IRA and create a five year CD ladder inside his IRA? We’re thinking about 5 $100,000 CDs with staggered maturity dates up to five years. We are nuts.” Oh, “are we nuts?” Sorry, Cynthia! “Are we nuts to go with CDs in a traditional IRA? All five CDs would be FDIC insured as they would be purchased by Fidelity from different institutions. And we right now would realize an average return of about 2.8 or 14 grand per year. To us this seems like a very conservative way to hang on to about 25% of our retirement assets while we let the rest ride in the market. What do you think?”

AC: That’s a great question because bonds have their pros and cons and CDs have their pros and cons. I think I’ll start with the U.S. stocks at 80%, foreign stocks at 15%. That’s 95% in the stock market for people that are just about to retire. I would agree, that’s a little bit rich in terms of being aggressive. And the reason is because well I don’t know your situation, Cynthia.

JA: We need more information here.

AC: But I’m going to make an assumption, which is, you may need this money for your retirement income, and if so, that’s why you want to have some safety because the stock market is not always reliable day after day.

JA: Cynthia, here’s what I would look at. First of all, you are retiring in a couple of months and your husband just retired. So you’ve got two point one million dollars in retirement accounts. So it is this $500,00 that is in his 401(k), is that on top of the $2.1M?

AC: No, I read that as part of the 2.1.

JA: OK. So is there any after-tax monies?

AC: Right. That’s that’s a great question.

JA: Is there any Roth monies? How much do you have in cash? What is your Social Security benefits? What is your pension benefits? And how much money are you spending? That is going to dictate your overall portfolio. Do you have kids? Are you charitably inclined and  everything else. So what do you want to look at is to say, “we want to spend $100,000 a year. We’re both 63 years of age, so we probably have a 30-year life expectancy. So I don’t want to pull any more than 4% out of the portfolio on any one given year.” With that being said, at 63, do you have a pension in place? If you do not, what’s your Social Security benefit and what your Social Security strategy? When do you want to claim your benefits? Is it 63? Is it full retirement age? Or is at age 70? And then do you want to claim yours and have your husbands claim later? Or should you do the opposite? Whatever. You need a claiming strategy there because that’s going to be a fixed income stream for the rest of your life. Then you can determine, now I have my fixed income. I want to spend a hundred thousand dollars, maybe my Social Security benefit is fifty thousand dollars combined. Just hypothetically. So I’m short $50,000. They got $2.1 million. $50,000 into $2.1M, Al, is a pretty low distribution rate. You’re looking at what 2.5%? 2% and some change. Then you have to pay a little bit of tax on that. Then there’s a cost of living adjustment. So if your distribution rate is 4 and your only pulling 2%, the demand for the portfolio is not all that much. So having a larger weight to equities is just fine, in my opinion. The bigger question is, OK well how much should be in fixed income? And should she select a CD ladder versus a bond portfolio? I’m not a big fan of her doing, “hey, let me do a $100,000 CD to get $14,000 of income, because do they need that $14,000 of income, or are they going to keep it in the IRA? Are they going to take the interest, are they going to distribute it out of the overall account? Is that enough, or are they going to have to take distributions from another part of the overall portfolio? So I think this is the problem with people segmenting certain parts of their portfolio or certain parts of their financial plan without looking at the big picture. What is the tax implications of the income? How much money do you need from the overall portfolio? Do you have kids that you want money to go to? How much money do you actually need and so on and so forth. All of this is going to help you to devise the correct portfolio for you, versus just listening to your broker at Fidelity saying, “hey, you’ve got too much money in stocks.” What the hell do you know? Don’t tell me that, broker from Fidelity! (laughs)

AC: (laughs) Anyway, I agree with that. And that’s true of almost every question we get. We don’t really have enough information, so for us to answer properly, we have to make up assumptions.

JA: But I think I can give her a track to run on. Then you can have a more constructive conversation with your broker at Fidelity and say, “hey maybe you should take a look at this, maybe help me with a little bit more,” versus saying, “yeah, I’ll buy $500,000 of CDs, let’s just ladder this thing out…” But I do like CDs and I do like bonds. But I think we can educate our listeners on both at some point.

Yep, that’s me over here not doing anything – except making sure that you can actually listen to this podcast. Anyway, in that survey, you also told us you love hearing Joe and Big Al answer listener questions and in order to do that, we need you to send us yours, just like Cynthia did! You’ve got two options: call and leave your question in a voicemail at (888) 994-6257 or email it to info@purefinancial.com. Hit that “go back 10 seconds” button in your podcast app if you missed that. And hey, we take requests too – if there’s something you want to hear on the show, you don’t have to wait until the next podcast survey. Email it to us!

Subscribe to the podcast at YourMoneyYourWealth.com – or you can find us on Google Podcasts,  Apple Podcasts, or your favorite podcast app. Listen next time for more Your Money, Your Wealth, presented by Pure Financial Advisors. Get a free financial assessment at 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.