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
April 28, 2020

In this jam-packed episode of the Your Money, Your Wealth® podcast, stimulus payments for self-employed, dependents, and those who message us on Facebook, plus, the paycheck protection program, coronavirus-related distributions, Roth and Backdoor Roth conversions, tax-loss harvesting, and the solo 401(k).

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Show Notes

  • (00:46) Dependents, Self-Employed and Stimulus Checks
  • (04:14) A Paycheck Protection Program Strategy?
  • (09:26) Roth Conversions and the CARES Act: Coronavirus-Related Distributions
  • (16:54) How Do I Update My Direct Deposit Info for the Stimulus Check?
  • (20:07) We Converted $30K Due to Take Advantage of the Market Drop. When Do We Pay the Tax?
  • (25:47) Do the Pro-Rata Rules Apply on My Backdoor Roth Conversion?
  • (29:09) What’s the Deadline for a 2019 Roth Conversion?
  • (31:16) Tax Loss Harvesting: Does My Strategy Work?
  • (35:52) What is a Solo K? The Solo 401(k) for the Self Employed (With Profits)
  • (00:00) Strategy for Untaxed Roth Conversions in Illinois

Free resources:

YMYW LIVE WEBINAR | The CARES Act: Now What? With live, open Q&A with Joe Anderson, CFP®, especially for YMYW listeners! Wednesday May 13, 12pm Pacific / 3pm Eastern. Register now!

IRS.gov: Update your direct deposit information or check on the status of your CARES Act Coronavirus stimulus payment here




Listen to today’s podcast episode on YouTube.


What types of investments you hold in which accounts can play a big part in how much tax you pay now and in the future. Click the link in the description of today’s episode in your podcast app to go to the show notes and download our brand new guide on Why Asset Location Matters for free.

Today in this jam-packed episode of Your Money, Your Wealth®, we talk about stimulus payments for self-employed, dependents, and those who message us on Facebook, the paycheck protection program, round two of which started since this episode was recorded, coronavirus-related distributions, Roth conversions, tax-loss harvesting, the solo 401(k), and yes, we even have a few Derails at the end of the episode. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

Dependents, Self-Employed and Stimulus Checks

Joe: We got one from Kelsey. “Hello, my name is Kelsey and I have a question about the stimulus checks. My parents claimed me as a dependent in 2018. Neither of us have filed for 2019 yet. If they file soon and will not claim me as a dependent, will I be able to get a stimulus check? I’m a 22-year-old college student and live and pay rent on my own, so I’m independent. Also, my dad is self-employed and does not set aside taxes with each paycheck so on tax season they owe a lot. How much will it cost them not to claim me as a dependent?” So, there’s two questions here Big Al. One’s a tax question. So she’s claimed as a dependent. She’s 22 years old.

Al: So presumably a full-time college student which means her parents can claim her as a dependent. But there’s very little benefit.

Joe: There’s zero benefit.

Al: In the past you got about a $4000 deduction for dependents exemption and that went away in 2018 with the new tax act, JOBS Act. But at any rate, there’s not much reason Kelsey for your parents to claim you as a dependent and they shouldn’t because if they claim you as a dependent, you cannot get the stimulus check. So there’s really no reason. Joe there are some reasons why parents should still claim their kids. If their kids are 17 and under, they get the child credit. So that’s one thing.

Joe: Which is what? That’s significant. So if Kelsey was 17 years old, that’s a $2000 tax credit.

Al: Yeah, per kid. So that’s a big deal. Or Joe if you have a single parent if they claim a dependent then they can get head of household, which is a better tax rate, better tax rates. So I guess in this particular case, Kelsey your dad could potentially claim your medical expenses but that’s probably not going to amount to any savings whatsoever because of the thresholds that you have to get over. So I would say there’s really no benefit for your parents to claim you as a dependent, so you should not. And then the second part is how do you get your stimulus check? Because if you were filed as a dependent in 2019- or 2018 sorry, you would want to file 2019 right away yourself so that you could get in the rolls, get your stimulus check; otherwise you’ve got to wait till you file your 2020 return and not be a dependent on that return. But then you’re waiting a whole year to get that money.

Joe: So if you haven’t filed, file, tell your parents not to claim you as a dependent. It’s not giving them any tax savings. I get it because they’re still used the old tax law. Hey well, I’m going to claim you because I’m self-employed and money comes in and then cash flows so all over the place when you’re self-employed sometimes so paying taxes sometimes it’s feast or famine. So I get what her dad’s doing. But claiming her as a dependent is basically hurting her.

Al: And you’re right. It used to make a big difference for your parents but it doesn’t anymore with your age.

A Paycheck Protection Program Strategy?

Joe: We got another question from the stimulus with Tennessee Dave. “My question has to do with the paycheck protection program, part of the coronavirus stimulus package.” Well, thank you, Tennessee Dave, for explaining that. “I’m self-employed and file as a sole proprietor and I have just one employee, me. From what I understand I can obtain through this program but I don’t understand the rules by which this loan can be forgiven. It seems from what I have been able to read that I just have to use the funds to keep paying myself at the same rate as before the crisis to qualify for forgiveness. But this seems too good to be true. Do I have to demonstrate somehow that my business income was adversely affected this year? What if after all said and done, 2020 my income really didn’t go down? I am expecting a downturn this year but don’t know for sure and don’t want to take on the extra cost of paying a loan back with interest if it isn’t needed, but also don’t want to pass up what seems like could be free money. Can you clarify the rules as to how the program could apply to me? Thanks for your help. Tennessee Dave.” Well this is an interesting caveat for in here.

Al: It’s a great question because PPP- First of all it ran out of money. The Senate just approved a-

Joe: $320 billion?

Al: $320 trillion-

Joe: -trillion?

Al: Yeah, well, billion.  What did I say, trillion?

Joe: Billion.

Al: Yeah, it was a big number. It was billion, sorry. So, they have this rule where the amount of loan that you can apply for is like two months of your salary and that’s- But there’s a limitation on $100,000 per person. So self-employed- a sole proprietor doesn’t pay themselves salary. It’s the profit in the business that’s the self-employment income. So that’s what makes this kind of a little bit tricky. And so your self-employment income is going to be what you make that couple months after you received the PPP loan to determine whether you’re gonna get the loan forgiveness. And I’ve got to be honest Joe, this is so complicated, I’m not even completely clear on the rules on the forgiveness yet. But what I will say is information seems to be coming out daily. And so I would just keep abreast of that. Unfortunately, that’s the best I can do. What about you Joe?

Joe: I think what I would do if I was Tennessee Dave is I would apply for the loan. Because basically here’s the deal. It’s two months of rolling payroll so I don’t know if you would- from that perspective- so two months of his pay is what he’s going to get as a loan. Is that worth it? And if so go through the process to do it. And the worst case is that let’s say it’s not forgiven for Dave. I mean it’s still a good rate. It’s 4%. You get some cash. And then if you want to pay it all back right away and then do it. Or it’ll give you a little bit of a cushion with really good interest rate. So at the end of the day if you have- let’s say you make $100,000, what’s- the loan amount is not going to be anything crazy. If he makes $1,000,000 well then it could be $200,000 loan. But if he’s making $1,000,000, I don’t even know if he needs it or qualifies.

Al: Joe, let me help you out if he makes $1,000,000, it’s limited and it’s just him-

Joe: It’s only $100,000 income. So his loan amount is going to be-

Al: – two months of that. So 1/6 of that. So call it $18,000, $17,000; $18,000, something like that. So I’ve got this is from the Treasury. It says ‘how much of your loan will be forgiven? You will owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent and utilities, for payments over 8 weeks after getting the loan.’ So basically, what they’re saying is that 8 weeks after you get the loan, if you’re using the money for payroll, mortgage interest, rent and utilities, it can be forgiven. But then there are all these tests Joe. How much income? How much salary you have to have? In the case of sole proprietors, salaries, profit, salary equals profit, self-employment income. So that’s what kind of makes it tricky for self-employed people.

Joe: Hopefully that helps Tennessee Dave.

Roth Conversions and the CARES Act: Coronavirus-Related Distributions

Joe: Tennessee Dave with a follow-up question. Didn’t Tennessee Dave just also email us again today?

Andi: Oh, did he? I haven’t seen that yet.

Al: He’s proficient, like it.

Joe: “Hi Joe. Big Al. “Want to do more Roth conversions this year while the stock market is down. I’ve heard you say that under the CARES Act, I can take an IRA distribution this year and pay the tax over the next 3 years instead of paying it all in 2020. If I take the distribution and convert it to a Roth IRA can I still pay the tax over 3 years? Also, is there any limit to the amount of distribution I can take and still pay tax over 3 years? Thanks. Tennessee Dave.” Let’s- first of all what he’s talking about is that I guess the COVID or coronavirus related distribution from retirement accounts. You could pull up to $100,000 out of the retirement account and you could either pay that retirement account back over a 3-year time period or you could defer the taxes over a 3 year time period. However, you have to qualify for the coronavirus related distribution. And what the qualifications are is that you have to be diagnosed with COVID. You don’t want that. Or your wife, dependent, spouse, kids that were diagnosed with it. Or let’s say you had kids that were in school, but now you have to stay at home to take care of them. That would qualify. If you got furloughed, laid off, you lost wages, maybe you’re a small business owner then had a shutdown, all of these are qualifications. But the last one that the IRS put in Al, is interesting because it’s pretty broad. It’s like well anything that the IRS finds suitable will qualify.

Al: Pretty open-ended.

Joe: It’s pretty open. So, I’m not sure if you qualify, Tennessee Dave. So, if you want to go for it. There are so many things with this distribution Al, a lot of people are affected by this virus. Almost everyone is to some degree it seems like. And so now let’s say I’m a retiree and I’m taking dollars out of my retirement account to live off of. So if I pull out $50,000 to live off of but I’m affected by the COVID, does that mean now I can then pay the tax on the $50,000 distribution over 3 years even though I have been taking distributions from my retirement account? Do CPAs really gotta get involved and say well I see you took a distribution from your retirement account. You want to defer to the taxes over 3 years? Do you want to throw in to see if you qualify for this thing? So there’s going to be- how about if you take out $50,000 today because you’re hurtin’. I’ve been sitting at home for 6 months. I take those dollars out. I qualify but I have it in my bank account and then all of a sudden in December, things are better. I don’t necessarily need it. So I’m going to decide to keep it. But then I convert it. There’s so many different I guess nuances here that I’m not sure how the IRS is ever going to track that money.

Al: I think that if you do qualify for this special 3-year rule then it’s actually retroactive to January 1st, but you do have to qualify. I guess I would say, if it’s a distribution you can’t convert a distribution to a Roth IRA. But you could put it back in the IRA. And then convert it. But you don’t get the 3 years on a Roth conversion, it’s 3 years for distributions. The whole point of this is if you need the money. You basically get to use it without having to pay taxes upfront. And by the way the 3 years would be the default. You pay the tax over 3 years but you can elect to pay it in the first year, being this year. So if you want to pay the tax this year because your tax rates lower you can certainly do that. But then you also have 3 years from the date of the distribution to put it back in the IRA without paying tax. So you have a couple of choices but you can’t do this with a Roth conversion. It doesn’t work.

Joe: But here’s the deal I think there’s additional planning that we’re going to have to take a look at. Because right now well if I take $100,000 out, I gotta live off of it and then you can pay the tax over the next 3 years. But how about if I pull $100,000 out and then I can pay myself back over 3 years. Correct?

Al: Yeah. Yeah. You can put it in-

Joe: No but let’s say I take it from my 401(k) plan, I put it into my IRA, and then I would say convert some of that over the next 3 years. Maybe I have a 401(k) plan that I never had access to because I was under 59 and a half. I use this COVID-related distribution to take $100,000 out of my 401(k) plan. If they waive the mandatory distribution, I put it into my IRA. And then from there, I convert that money over the next 3 years. So there could be some interesting things. Or how about if I’m already taking a distribution from my retirement account that I’m living off of. So instead of usually I have to pay the tax this year for that distribution. So, in this case, would then I split that distribution tax over 3 years?

Al: You could. If you qualify.

Joe: Right exactly. There’s a lot more to this that we’ll see later on this year.

Al: And I think a question might come up. Like what if I decide to pay the tax over 3 years and then I pass away? It can happen to some older people. Well then, your estate will have to pay the tax. You don’t run away from it. It still has to be paid.

Joe: That’s kind of morbid, Al.

Al: I suppose.

Andi: But you have to plan for worst-case scenario, you know?

Al: I’m thinking of if I’m my dad’s age, no offense Dad. But I don’t know if I’m going to be here 3 years.

Joe: Wow.

Andi: Oh man.

Al: Actually, he’s told me- let’s see, he will be 87 this year. And we talked about him turning 90. He goes ‘God, I hope not.’ That’s what he told me.

Joe: So he’s pretty happy then is what you’re saying.

Al: Yeah, very happy. Love, lovin’ life. Livin’ large. I tell ya, my parents are in University City and they’re holed up and it’s- life is not the best right now.

Joe: Life is unique for all of us, for most of us.

Al: Yeah.

How Do I Update My Direct Deposit Info for the Stimulus Check?

Joe: We’ve got Robbie. He writes in via Facebook Messenger. “I made a 2018- I made a 2018. OK. Made a-” This guy is making a lot of things, Robbie.

Al: Rob contributed 18. 2008 he made 18.

Joe: “I made a 2018. I made a tax return. The loan company and they use the direct deposit information through their bank. But I get SSID through direct deposit at my bank. My question is where will the $1200 stimulus package money go to?” Oh my God, um- so, Robbie filed a tax return.

Andi: At a loan company I think. And they use the direct deposit information for the loan company’s bank instead of his.

Joe: “I made a tax return. The loan company-“

Al: He prepared a tax return for the loan company. That’s what he did.

Joe: “I made a tax return.” How do you make tax returns?

Al: You just fill it out. You’ve made it.

Joe: What’s wrong with people?

Al: I can answer this question, sort of.

Joe: Does it go to his bank? “How can I fix to go to my bank?” So Andi, you know I got this thing fixed. Just send him that link where it’s like when people don’t know where the hell the money is gonna go. There’s a link that you can go and say send it here.

Andi: I did. And that’s what I sent him. And it’s IRS.gov/coronavirus/economic-impact-payments. And I will put that in the podcast show notes.

Al: And if you don’t want to remember all that just type in IRS.gov then it will say ‘coronavirus tax relief’. And then it will say ‘check your payment status’. And that’s the first thing you do, is you check your payment status. You got to put your full name, your Social Security number and your address. And then it will tell you, has it been scheduled, and if so it’ll tell you what bank account it’s going to and it puts in the last four digits. I know this because I checked it for both my sons.

Joe: How about you? You’re not getting one?

Al: I didn’t qualify.

Joe: Wow look at the big wallet on Big Al.

Al: Big income. I put mine in and it said ‘no way, Jose’.

Andi: Technically you’re only supposed to look for your own payments but-

Al: I have special power of attorney so not to worry.

Andi: Got it.

In addition to that IRS link to update your direct deposit or check on your check, I’ve also posted our CARES Act Guide in the podcast show notes. Download it for free to find out about some of the recovery, retirement, unemployment, and other provisions that may benefit you. And don’t forget to share today’s episode of Your Money, Your Wealth® with friends so they can also make the most of the stimulus package too. To access all the free resources mentioned in today’s episode, just click the link in the description of the episode in your podcast app. And since this stuff is fairly complex, click the Ask Joe and Al On Air banner there in the show notes and send in any questions you have, either as a voice message or as an email.

We Converted $30K Due to Take Advantage of the Market Drop. When Do We Pay the Tax?

Joe: Let’s get to Chidam in ChiTown. ” Hi Al and Joe. Thanks for the great podcast every week.” Isn’t this the guy that hated us, then liked us and hated us then like us?

Andi: Yes. Well I think so. I’m assuming so.

Al: Well didn’t he get us confused with another podcast, right?

Andi: That’s what he says. Yes.

Joe: Got it. It’s what they all say when we call them out on air.

Al: It’s true.

Joe: “I’m a regular listener by the way. Last time you read my question, you derived my location as Louisville, based. I’m actually asking from Chicago. Anyway, thanks for helping many of us with very candid answers week after week. Here is my question. I went ahead and converted $15,000 of me in my wife’s traditional IRAs to Roth to take advantage of the market drop. I understand we owe taxes right away on the $30,000 we converted. We will continue to be in the 24% tax bracket for 2020 even after conversion. My question is when and how do I pay taxes on the $30,000 conversion? Waiting till next April is not ideal is what I’m hearing. I had the option of automatically withholding the 10% or more during the conversion but chose not to do it. Please advise. Thanks, and look forward to your answer on the air.” I don’t know how old Chidam is. I think he’s younger. I’m guessing. Under 59 and a half is what I’m seeing, what I’m thinking.

Al: Yep.

Joe: So if he did withhold taxes on a conversion if you’re under 59 and a half, you would have been withheld a 10% penalty on the withholdings. So I’m glad he did not do that. So do not withhold taxes from a Roth IRA conversion if you’re under 59 and a half because the withholding will be subject to a 10% penalty. The conversion itself is classified as a rollover but if you withhold taxes from a conversion that doesn’t classify as a rollover or a conversion. It’s a distribution and it’s a non-qualified distribution that would be subject to the 10% penalty. So I’m glad you did not do that if you’re under 59 and a half. Don’t withhold taxes on anything when you’re doing conversions. Now when should he pay the taxes is his question in regard to maybe penalties Al. So, if he converted $30,000, he can wait until April 15th but would he be subject to a tax penalty for underpayment?

Al: He might. I’ll try to keep this simple Joe, because this as you know can get sort of complicated. I think the best thing to look at is look at the taxes on your last year’s return. So in this particular case it’s 2019. So you would have to know what that is. Or at least have an estimate of what that is and then you look at this year’s withholding. And if this year’s withholding covers last year’s tax you don’t need to make an estimated payment. You just wait till April 15th. No harm no penalty. There is one caveat to that and that is if your income’s over $150,000 your withholding has to be 10% greater than your tax. So just take your tax times 110%. If your withholding is at least that amount, you’re good to go. If that’s not true-

Joe: But he’s over- he’s in the 24% tax bracket. So his income’s over $150,000.

Al: Well that’s good point. Good point. So he probably would have to do 110% of last year’s tax, compares this year’s withholding to that and make sure that there’s enough paid in. If there’s not, then you would have to make some estimated payments. Those are due 4 times a year. Those are due in April 15th, June 15th, September 15th and January 15th of the following year. And when you start making those payments is depending upon when you do the Roth conversion. So if you did the Roth conversion between January 1st and March 31st, then you’d have to make the first estimated payment April 15th. And the amount of estimated payment is 25% of what you would owe over the course of the year. So that’s how that works. If you do the Roth conversion later then it’s a lot more complicated and I think I want to leave it at that because this can get so friggin complicated to try to explain this. But I will say this, and this is what most people do, most people say ‘ah, I don’t really care that much’ because once they understand the penalty is only 3% interest charge. It’s usually not very much.

Joe: And it’s a $30,000 conversion. So with a couple percent interest, it’s not gonna be that big of a penalty if he waits until April.

Al: Let’s just say 25% tax because it’s easier math. So you have $7500. So then you divide that by 4 over 4 quarterly payments. And so let’s say he didn’t make the first one which is something just under $2000. So he gets charged 3% at $2000. So what’s that? $60. That’s the penalty on that payment. Second payment is over 10 months that’s a smaller amount. So that just gives you an idea. We’re usually talking tens or maybe low hundreds of dollars of penalty not thousands. Now if you’re the kind of person that doesn’t want to pay the IRS a dime more than they have to, then, by all means, take the time to compute it. But for all the rest of us it gets pretty complicated.

Do the Pro-Rata Rules Apply on My Backdoor Roth Conversion?

Joe: He’s got another follow up question. He’s like “Hey Joe and Al. Thanks for the great show every week. Your advice in Roth conversions really helped me.” Thanks for that. “Have about $250,000 in a rollover IRA from previous 402 plans.” It’s a 401(k) plan.

Al: That’s the other kind.

Joe: Those are the other kinds.

Andi: I think that was a typo. Give him a break.

Joe: No one gets breaks here.

Al: We just- we read it as it comes out.

Joe: That’s right.

Al: 402(k). Have you heard of the 402(k)? We’re not going to be able to answer this question Joe, because we don’t know about the 402(k).

Joe: We don’t know what the hell the 402 is.

Andi: Chidam’s on the cutting edge here.

Al: That’s right.

Joe: “So does it factor in to pro-rata rule when I do backdoor conversion? I understand I can move this to an existing employer 401(k) plan but I prefer to keep it in a rollover IRA because I like the fund choices I have unless it impacts how you calculate the percentage of post-tax, pre-tax, pro-rata rule. Thanks for everything you guys do.” So ‘I have about $250,000 in a rollover IRA from a previous 401(k). Does that factor into pro-rata rule?’ So yes, it does. So the $250,000 that you have in an IRA, that’s exactly what it’s going to do. Because it’s an IRA plan. So the pro-rata rule is based on all of your IRAs. So if you’re making non-deductible IRA contributions and then converting them, that’s a Backdoor Roth conversion; because Chidam as he just talked about in his previous e-mail is in the 22% tax bracket. So he might be disqualified from doing standard Roth IRA contributions. So he’s doing non-deductible IRA contributions and then converting them. But that $250,000 is now going to be calculated in the pro-rata rule. So the amount of money that you’re converting that is going to be basis or tax-free is going to be very, very low. So I would recommend you roll that $250,000 into the overall 401(k) plan or slowly convert out the $250,000 that you currently have over- you could do more conversions that way depending on what bracket that you want to convert to. So that’s my thought on that.

Al: I agree with that. I think that maybe what you do is you look at the investment choices in the 401(k) plan and if really there are a lot worse than what you think you could do in your IRA, maybe it’s not worth doing a Backdoor Roth in that particular case. Maybe- is he married? From the last email?

Joe: Yeah.

Al: I don’t remember. So you can have your spouse do it. And maybe that’s good enough. If the investment choices are really a problem.

Joe: Yeah. But I don’t know, I mean come on, the 401(k) plans now? Everyone’s getting sued if they’ve got a crappy 401(k) plan.

Al: But some of- are still- there are insurance companies involved sometimes and they’re not always the best of investments. But I agree with you. They’re a lot better now than they used to be.

Joe: Sure. I don’t know. I think maybe he wants to dabble into some other things.

Al: That could be.

What’s the Deadline for a 2019 Roth Conversion?

Joe: Let’s go back to the e-mail bag here. We got sea bass.

Andi: No it’s not Joe. Come on.

Joe: Kick his ass. Sea bass. You don’t know what movie I’m referring to do you?

Al: Of course not.

Joe:  So it’s what? How do you pronounce it then? Sabas?

Andi: That would be my guess.

Joe: I’m gonna call him Sea bass.

Andi: I’m sure he’ll love it.

Joe: That sounds so much better. Right? That’s a badass name.

Andi: This from a man who renames towns from Akron to A-kron.

Joe: Yes.

Al: So if he lives in Sacramento, he’s probably not sea bass. Just sayin’.

Joe: I’m just going to say kick his ass, sea bass. Or Sabas, from Sacramento, 64 years old. “When is the deadline to make Roth IRA conversions so I can use that conversion for the 2019 tax year? I already did one. And plan to use that one for next year. But got to thinking I should do another one and use it for my 2019 return.” Well, I’m sorry. You have to do a Roth conversion in the year of the calendar year.

Al: The year that you want it to show up on your income, you’re absolutely right. I think that’s- people get confused Joe, because the contribution you can do till April 15 typically, this year till July 15th because of this extension on the taxes and that’s for 2019. So even though today we’re April 22nd you can still do for ’19 a $6000 contribution. And then another $1000 catch up if you’re 50 and older. So $7000 you can still do that; assuming you get earned income and assuming that your income is below a certain specified threshold of $122,000 single to $137,000 is the phase-out. See I’m looking at my cheat-sheet here- and married is $193,000 to $203,000.

Tax Loss Harvesting: Does My Strategy Work?

Joe: We got Tim. “I was listening to a recent broadcast in which Joe responded to a question on tax-loss harvesting. My question is. Why the hell did Joe respond instead of Big Al?”

Al: That should be the question.

Joe: “My question is if I sell a long term stock in 2020 for a $5000 loss from purchase price and not purchase another stock right away can I write the $5000 loss off against estimated 2020 taxes owed a $5000 dollar for dollar? Such that there would be no taxes owed. $5000 tax owed minus $5000 long term loss equals zero tax owed.” Tim. No. Big Al should have responded to that. That would have been really cool.

Al: That would be really cool. So the $5000 loss is a capital loss which you can use $1 for $1 against other capital gains-

Joe: But not after capital gains tax.

Al: That’s right. It reduces your income. Not your tax. And then if you don’t have any other capital losses, you can take $3000 of that against ordinary income. So now let’s just say your salary is $100,000. Now you get that $3000 loss. Now your salary’s like it was $97,000, so you pay tax on $3000 less at your current tax rate.

Joe: That would save about maybe $1500. It’s not like a tax credit, is what he’s referring this to.

Al: It’s a deduction to save you in your current bracket. That’s true for federal and state by the way.

Joe: So the $5000 capital loss will offset future capital gains. So let’s say you have a stock loss of $5000 but then you have another stock gain of $5000. You sell the one that has the gain of $5000. That loss will offset that gain, dollar for dollar. So there would be zero taxes owed in that scenario. But if you have the $5000 capital loss and you owe $5000 of taxes, the $5000 capital loss is not a tax credit. It’s just a loss to offset future gains or a deduction of $3000 against ordinary income.

Al: I think we know of, I should say hypothetically, just for compliance purposes. Hypothetical situation, where an individual was paying attention to the stock losses because they had a lot of stock losses with this market. They actually intentionally sold the stock at a loss. They bought something similar. So they’re still in the market. That’s what tax-loss harvesting is. You intentionally sell at a loss, buy something similar but in the meantime you’ve got a big loss on your tax return. In this hypothetical example it was $200,000. There’s a lot of potential stock losses that were taken. Now this individual then sold a piece of land, real estate at a big gain and was wondering, ‘can I net the stock loss against the gain’? And the answer is yes. The stock- It’s a capital loss against the capital gain. It doesn’t matter what kind of capital loss or what kind of capital gain. It’s those two net together. So that’s a case where if you’re paying attention right now and you’ve got some stock losses, take advantage of them. Do tax-loss harvesting. You can net them against other stock gains later or you can use it against the property or any other capital gain.

Joe: It’s a phenomenal strategy to really take a look at, to make sure that you can save future tax burden in the future. Unfortunately, it’s on a tax credit. So next time, Tim.

If you skipped the intro of the episode, you missed the fact that there is a brand-new guide to Asset Location waiting for you to download for free. It’ll tell you about a strategy that, hand-in-hand with tax-loss harvesting, has the potential to lower what you pay in tax now and in the future. You’ll also find our guide to the 5 Year Roth Clock, which outlines the Roth IRA withdrawal rules based on your age and some other factors. And thanks to Marion in Fresno, a regular listener who untangled everything Joe and Big Al have said on YMYW about the 5-year rules to help us compile that Roth clock guide! YMYW listeners help the fellas make this show as valuable and entertaining as it is. If you have a contribution, comment, or question, Click Ask Joe and Big Al and in the podcast show notes and send it in.   

What is a Solo K? The Solo 401(k) for the Self Employed (With Profits)

Joe: We got one here. “Hello, Joe and Al. This is Kent from Mission Hills here in San Diego.” Hello, Kent from Mission Hills. “Have you ever heard of a Solo K? This is supposed to be a self-directed form of IRA where the account holder can deposit up to $63,000 per year, tax-deferred. Since it’s self-directed, you get invested into projects or stocks and bonds etc. at your own discretion. Second part of that question; is that something that can only be set up in Nevada?” You know how he wrote Solo K too? I think he went to like a seminar, Al. You were pitching like self-directed type products, like you could buy real estate and- who knows what the hell it is. But a Solo 401(k) – all that is, is that if you’re self-employed, you can set up your own 401(k) plan. Some people call it a Solo 401(k); some people call it an individual 401(k). It’s just a 401(k) plan for a sole proprietor.

Al: That’s exactly right, Joe. So you can do a self-directed one. We’ll get to that in a second, but Solo K,  you can do in the normal way which is to invest in stocks, bonds, mutual funds, that sort of thing and you can put this current year 2020, you can put up to $57,000 in. That would be the employee and the employer portion, both. Of course, you have to have that much income to be able to cover it. But let’s just say you do $57,000. Plus if you’re 50 and older you get a $6500 catch up so you can actually be $63,500 in the current year. So that’s true of all Solo 401(k)s or Solo Ks, or individual 401(k)s, whatever you want to call it, but I think you’re right. I think Ken’s talking about probably a seminar or webinar. He went to, listened to, where they talked about self-directed IRAs or in this case self-directed solo 401(k)s. And a self-directed just simply means you can invest in assets that are non-traditional, which the most common I would say is real estate. That’s what you see most people investing in and there’s nothing wrong with that. There’s a lot of reasons why I don’t really like real estate in retirement accounts because you lose a lot of tax benefits and we’ve done whole shows on that. But just suffice to say it wouldn’t be my favorite way to go but you can do it. You certainly do not have to set it up in Nevada. It’s anywhere you want to. Although I’m guessing that this seminar/webinar that he went to probably wants you to set up an LLC. And they probably suggested Nevada for privacy; so you can set up an LLC to hold an asset in your self-directed Solo 401(k) and now we’re getting kind of complicated. But I think that’s what he’s kind of asking.

Joe: I think everything that he’s asking is that sometimes with these seminars/webinars, dinner workshops and things like that, they’re creating ‘hey this is something that’s brand new’. And they’re trying to just spice it up that they’re super experts in this area where it’s a fairly common thing. But you know this Solo K is like written all in cap letters maybe they called it something else. You know what I mean?

Al: I think that’s exactly right. I can just imagine the presenter at this was probably- when he said I got something to share with you and probably looked around and see if anyone’s listening as he goes and this is for your ears only. And he probably said Solo K and everyone, oh my gosh, Solo K, what is that? That’s kind of how some of these things are and I don’t want to make fun of it because maybe it’s completely legit. But my feeling is usually with a self-directed IRA or self-directed Solo K, people tend to invest in real estate. And some quick problems with that is you have to pay all cash for the real estate which is very hard to do particularly when you live in San Diego with the price of properties. The second issue is when you need to repair your property you’re limited to the cash inside the IRA. And if you don’t have any cash, you can’t fix it. And if you put your own money in it’s a prohibited transaction. Then when you get to age 72, you got to start doing required minimum distributions and if there’s no cash, you have a 50% penalty for not doing the required minimum distribution. And if you sell the property there’s no current taxation. But to ever get any dollars out of it, it’s all ordinary income. And you’ve just taken the most tax-efficient asset that there is, which is real estate, which is capital gain income, and created ordinary income from it. And furthermore, if you pass away, your heirs do not get a step-up in basis on the property. They still have to pay ordinary income on the gain. Whereas if you own the property yourself, you pass away, the heirs get a step-up in basis, which means the new cost basis is what the value is at the date of your death. So they can sell it and pay no tax. There’s just almost, in my view Joe, there’s not a lot of good reasons to own real estate inside an IRA or a 401(k).

Joe: Also you have to be self-employed. That’s the missing link here too. You need to be self-employed to set up a Solo K.

Al: And you have to have profits in your self-employment.

Joe: Yes. And you need profits. And you can’t have another 401(k) through your employer. You know what, I have a 9 to 5 job, I got a W2. I’ve already maxed out my 401(k) plan at my work. But now I’m going to set up the Solo K. And I’m going to put $63,000 into it and I’m going to set up an LLC in Nevada and then purchase a property or whatever it is. So just be careful with how things sometimes are presented. The solo 401(k) is an individual 401(k) plan for self-employed individuals, $63,000 per year is the appropriate amount, if you’re over 50 and if you have the profits in the business to fund it. If you have employees this does not work. Because there are rules in regards to setting up 401(k) plans if you have employees. Now you have to set up a safe harbor plan. And so just understand that this is for self-employed individuals and if you are self-employed and you have the profits by all means you can do something like this. But maybe he didn’t even know- who was this? Kent, didn’t even know that you have to be self-employed.

Al: And I think- I’ve been to stuff like this or listened to it on webinars and a lot of times they’ll say well you just set up your own business. And it’s like so you’re thinking all I need to do is set up a business and not even worry about whether it’s profitable. And if there’s no profit and you can’t do anything and if you’re already in another 401(k), you can’t even- once you max out that $19,500 for individual or $26,000. So yeah, there’s a lot of issues here potentially.

Strategy for Untaxed Roth Conversions in Illinois

Joe: We got Brad. He writes in from Illinois. “Hi  Joe, Al and Andi. I love the show. Listen every week. Have a question about conversions from a traditional to a Roth IRA. I live in Illinois and as I understand it Roth conversions are not taxable with regards to our 5% state income tax. My question is can I convert $7000 from a traditional IRA to a Roth IRA, paying the federal tax of course, and making $7000 tax-deductible contribution, I’m over 50, to another traditional IRA in the same year? The effect on my federal tax would be a wash but I would save $347 in state income taxes, $7000 times 4.95% since the traditional contribution is tax-deductible but the Roth conversion is a non-taxable event. Am I interpreting this correctly? If so would this strategy also work on a larger scale? I’m using my 403(b) deduction at work and $26,000 per year and then converting $26,000 from my traditional IRA to a Roth, saving $1200 per year in state income tax. I appreciate your thoughts and look forward to your upcoming shows.”

Andi: Man, Kenny from Granite City, Illinois, really started something with this untaxed Roth conversions discussion.

Joe: Do you follow the math there, Big Al?

Al: I do. And Brad I would say we are not tax experts for Illinois. But assuming that what Kenny told us, that we’re going to just go with that, that Roth conversions are not taxable. Your logic Brad sounds sound to me. Again I don’t know the law in Illinois. I’m just kind of going on what I’ve been told. But if that’s true, if you can get a tax deduction for putting money into a 401(k) or putting money into a deductible IRA and then turning around and converting it and not paying taxes and I’m talking state taxes only, Federal taxes, of course, it’s fully taxable. Federal taxes it’s a complete wash but for state taxes it sounds like at least from my limited knowledge of Illinois tax that does work.

Joe: So the distributions on retirement accounts is tax-free. So you do the conversion. It’s not going to be taxed. You do the deductions so you’re going to get the deduction, you save the money there and then you keep doing this. So you get a little bit of a pop from the state of Illinois. So I like your thought process, Brad. Keep up the good work.


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