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 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
February 20, 2024

Erik in MN is divorced, and the OC Birdman of South OC is getting divorced. Should Erik contribute to pre-tax retirement accounts or Roth? How should the Birdman and his soon-be-ex time the sale of their house and the filing of their taxes? Plus, Don has questions about the 401(k) rule of 55 and excess 529 plan college savings. Valerie in Portland wants to know what to do with her old 401(k), and how to invest her new retirement accounts. An advisor tells K-Dog in IN to save cash or open a Roth, then live on those funds and get free ACA “Obamacare” healthcare in early retirement. Is that really possible? Also, what should be Laura in WA’s sequence of retirement withdrawals, and is there any benefit to her doing Roth conversions? Should RJ in CA convert his or his wife’s rollover IRA to the top of the giant 24% tax bracket? 

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Show Notes

  • (01:06) 401(k) Rule of 55 and Excess 529 Plan Funds (Don, Everywhere, USA)
  • (06:03) What to Do With Old 401(k) and How to Invest New Retirement Accounts? (Valerie, Portland, OR)
  • (11:39) Is My Early Retirement Spending & Free Healthcare Plan Really Possible? (K-dog, Northern IN)
  • (22:13) Should I Contribute to Pre-Tax or Roth Post-Divorce? (Erik, Minneapolis)
  • (28:27) How to Sell House and File Taxes While Finalizing Divorce (OC Birdman in South OC)
  • (33:07) What’s the Sequence of Retirement Withdrawals? I Don’t See the Benefit of Roth Conversions (Laura, Seattle – Olympic Peninsula)
  • (40:42) Roth Conversion to the Top of the Giant 24% Bracket? Which Rollover to Convert First? (RJ, Anaheim)
  • (49:09) The Derails

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Andi: Erik in Minneapolis is divorced, and the OC Birdman of South OC is getting divorced. Should Erik contribute to pre-tax retirement accounts or Roth? How should the Birdman and his soon-be-ex time the sale of their house and the filing of their taxes? That’s today on Your Money, Your Wealth® podcast number 469. Plus, Don has questions about the 401(k) rule of 55 and excess 529 plan college savings. And Valerie in Portland wants to know what to do with her old 401(k), and how to invest her new retirement accounts. An advisor tells K-Dog in Indiana to save cash or open a Roth, then live on those funds and get free healthcare in early retirement. Is that really possible? Also, what should Laura in Seattle’s sequence of retirement withdrawals be, and is there any benefit to her doing Roth conversions? Should RJ in Anaheim convert his or his wife’s rollover IRA to the top of the giant 24% tax bracket? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

401(k) Rule of 55 and Excess 529 Plan Funds (Don, Everywhere, USA)

Joe:  Got Don from everywhere, USA. Must drive a little RV.

Andi: Did you read this in advance?

Joe: No, I didn’t. Um, oh, you wrote that. Did he write that or did you write that?

Andi: Read on.

Joe: All right.  “Hey, Andi, Joe and Big Al, my wife and I love the show. We listen on hikes, walks, long drives. Just a couple quick questions for you. Number one, Rule of 55.  Do I have access to only my current employer 401(k) when I retire at 55? If I roll prior employer 401(k)s into my current plan before retiring, will I have access to the money before age 59 and a half? I know, I know. Don’t roll the 401(k) to an IRA if I want access between age 55 and 59 and a half. Got it.”  He wants to retire at 55?

Al: Apparently, yeah.

Joe: He’s got some monies?

Al: Yep.

Joe: Rolling into the 401(k), does he have access to the money at 55?  The answer is yes.

Al: Yeah. And in an active 401(k), as long as you retire at age 55 or later or older, right? And you have money in your company’s 401(k), you retire, you can have access to it. Of course, you’ll pay taxes on it, like any withdrawal from retirement account, but you don’t pay the 10% penalty. And that’s true at age 55, all the way to 59 and a half. 59 and a half, you can take any money out of any retirement plan without penalty.

Joe: Most people don’t know that. So Rule 55, 401(k)s only. You have penalty free withdrawals at age 55 if you separate from service at age 55.

Al: Only for that plan. Not your old plans. Only that plan that you have at that point.

Joe: And not IRAs. IRAs is always 59 and a half.

Al: Right.

Joe: So what happens is people retire at 55. Let’s say they need the money, but they roll it into an IRA. Now they don’t have access to it until 59 and a half, unless they do a 72T tax election or some, you know, stuff like that.

Al: Which is not only a little bit complex, it also, you won’t get out near as much as you want.

Joe: Yeah, it’s not great.  Okay, next question, he goes, “Left over 529 money.  Can you think of any reason why this is a bad idea? We saved our kids leftover 529 money for the benefit of future grandchildren.” Wow, these guys are planners.

Al: Yeah, they are.

Joe: “And our kids can gift us money out of the kindness of their hearts. Everyone wins. Our kids get some college funds for their kids starting from a large balance rather than zero. And we get a future tax-free income stream. Being cognizant of the annual gift tax exclusion-“ Oh boy. Is this guy CPA?

Al: It could be.

Joe: “- during the Social Security RMD phase of life.” I could just see his spreadsheets now.

Al: Oh yeah, or an engineer.

Joe: Oh my goodness graces. Yeah, that’s fine. Just keep funding. I guarantee the guy’s loaded anyway. He’s got an abundance of cash.

Al: If you need the cash flow, it does work, right? But otherwise, I don’t know. If you got the cash, most people would say it was for the kids, now it’s for the grandkids. End of story.

Joe: Yeah. But he’s going to get a tax-free loan back for those kids.

Al: Tax-free income. Right?  Now, like I say, if you need it, fantastic. If you don’t need it, I would just let it go to the grandkids.

Joe: “Sure, there would be negative impact on the financial aid for the grandkids. And yeah, there might be some required generational skipping tax filings, right?”

Al: Uh, no.

Joe: “But are we missing anything here?

Al: The reason that-  generation-skipping tax filings is generally when you’re over the exclusion, which is what? $13,000,000 per person at the moment.

Joe: That’s a lot of schooling.

Al: It’s a lot of education, but-

Joe: It’s a lot of education there.  “Oh, we are full-time RVers-”

Al: Well, you’re right.

Joe: Yeah. I’ve got this guy nailed down. I’ve already pictured what he looks like. I know what he’s driving. I know what he’s wearing. I know what he’s drinking. “- for 13 years now, hence the Everywhere USA official residence of San Diego or SD.” That’s South Dakota.

Al: Not San Diego.

Joe: I guess I don’t know.  “Not that it will factor in any of your answers. Lately we’ve been thinking of following Big Al around on his many globetrotting vacations just in case he drops his fat wallet.”

Al: That’s possible.

Joe: Yeah, he’s going to Belize next week. There you go. See if the RV will make it to Belize.

Al: Yeah, drive quickly.

Joe: Falling in the wrong hands. “We got your back, Big Al. We drive a 2019 Ram 3500 diesel.”  Well, that’s a big truck. “Does a job pulling our 5th wheel beautifully. We both enjoy a light lager and a wide variety of fruity drinks.  If we’re looking for a little more kick in the pants, we deserve it sometimes, Long Island iced tea or honey med that fit the bill.”

Andi: Mead. Honey mead.

Joe: “Honey mead. It fits the bill. Thanks for all you do. See you down the road.” Alright, Don. Awesome question. Good comments.

What to Do With Old 401(k) and How to Invest New Retirement Accounts? (Valerie, Portland, OR)

Joe: “Hello, my sister has been a raving- has been raving-“ well it’s the sister.

Al: “- sister’s been raving about our podcast.”

Joe: “Has actually had her questions aired on the podcast. She’s a Maserati driver.” I remember Maserati. Maserati lady.

Al: Me too.

Joe: She had millions. “I’m not nearly as fancy as my sister and drive a dependable 2019 Honda CRV. Only a couple payments left and appreciate a nice cold can of dry cider. My financial question goes like this.  I recently started a new job at the community college, and I’m wondering what to do with my old 401(k), a mix of Roth and traditional, and how to invest in my new employer’s retirement options. I’m rolling my old 401(k) plan to an IRA. Good idea?  How does this work with two types  if I only have a Roth IRA currently? I have about 20% of my gross income to invest. Should I go pre-tax with the 403(b) or 457, or a post-tax brokerage account?  I already fully fund a Roth IRA every year.  Community college retirement automatically invests funds by employer PERS.” So, he’s a public employee retirement system. They’re 6% of income, 403(b) is 2% of income.  Additional invest options of personally fund without matching 403(b) and 457. Thank you for your time and consideration, Val.”

Al: Valerie.

Joe: Valerie.  Okay.

Al: Well, first question is, you got a 401(k) that has a Roth and traditional, you want to roll it into an IRA. Fine idea, you just have to set up an IRA. You got a Roth IRA already, set up a regular IRA also, and the Roth part goes into the Roth IRA, the traditional 401(k) part goes into the traditional IRA. Simple as that.

Joe: Easy peasy. Yep.

Al: Is it a good idea?  Sure. You got more investment options. You have more control.

Joe: Could be more expensive. Could be cheaper.

Al: Could be cheaper. Yeah. So it, it depends, it depends on your new plan. Maybe your new plan is great and maybe you can roll that into your new plan if you’d rather go that way.

Joe: So she’s got a 403(b) and a 457.

Al: Oh yeah, you can’t roll that.

Joe: A lot of people are like, hey, what is a 403(b)? What’s a 457 plan? So 403(b) plans, that’s school districts, hospitals, nonprofits have a 403(b). Most people are, you know, are familiar with the 401(k). Very similar plan, some nuances there. So she’s going to save 20% at the community college. Should she go into a 403(b)? She’s already fully funding the Roth, or should she go 457?  Well, the difference between a 403(b) and a 457 is that the 457 is a deferred comp plan, but for large community colleges, you’re still investing in mutual funds. So you have access to the money at any time without a 10% penalty.  So, but you want to look at the choices.  I would have to learn a little bit more about the plan, but there’s, I think there’s some pros to the 457 plan than there are in the 403(b) plan. Would I put 20% in the 403(b) versus a brokerage account? I don’t know, it depends on how much money she’s got.

Al: Yeah, I think you’re right. You gotta look at the plans, see what the investment options are, right?

Joe: I don’t know how old she is, I don’t know how much money she’s got, I don’t know when she wants to retire.  So, if, just off the cuff. Already funding a Roth IRA, would you go pre-tax, 403(b), 457, or a retirement plan, or would you go brokerage account?

Al: Yeah.  And a 403(b) or 457, do either of those have a Roth option?

Joe: Most of them do.

Al: Most of them do.

Joe: I would check that.

Al: I would do that. I do that over brokerage. Unless you want to build up your brokerage account to buy a home or something like that, right?

Joe: Yeah. I think it’s easier just to put the 20% in one of the retirement plans through your paycheck.

Al: And then you don’t even think about it, right?

Joe: And then you’re done.

Al: Yeah. Yeah. Yeah.

Joe: And if you have a Roth option, go 10% Roth, 10% pre-tax.

Al: There you go.

Joe: You’d probably get more complex than that, but I think-

Al: At least that’s a start.

Joe: Yeah.

Al: Without knowing anything else about you, that’s what we’d say.

Joe: And then just borrow money from your sister.  She’s got millions.

Al: Have her sell her car. She doesn’t really need it.

Andi: Whether you’re getting ready to retire or already living that dream, you gotta make sure everything you’ve saved will cover your expenses for the rest of your life. Watch Protecting Your Retirement Income on YMYW TV to learn how to safeguard your retirement nest egg. Joe and Big Al are joined by special guest Brian Perry, the Chief Investment Officer at Pure Financial Advisors, who explains how playing it too safe with your investments can backfire. Watch Your Money, Your Wealth, 6:30 am Sunday mornings on CBS8 in San Diego and KIRO7 in Seattle, or watch it on demand in the podcast show notes, where you can also download 10 Steps to Improve Investing Success. This guide contains key investing principles that’ll broaden your investment universe and help control your emotions and your risk – which can lead to higher returns in your portfolio, and retiring with more wealth. Take your investing skills to the next level. Click the link in the description of today’s episode in your favorite podcast app, go to the show notes, watch YMYW TV, and download 10 Steps to Improve Investing Success for free – you’ll find it right before the episode transcript. 

Is My Early Retirement Spending & Free Healthcare Plan Really Possible? (K-dog, Northern IN)

Joe: Alright, we got “Hey Andi, Joe, and Al. Greetings from K-dog.”

Al: K-dog. Awesome.

Joe: Northern Indiana. K-dog.  “I love the show. Discovered about a month ago. I can’t get enough. My drink of choice is a little strong, black-” Alright. The guy’s named K-dog, and he drinks black coffee.

Al: Coffee.

Joe: “I drank plenty of beer in my younger days.” That’s where the K-dog came from.

Al: Yeah, I think so.

Joe: You can’t get rid of K-dog.

Al: It stuck, right?

Joe: “So coffee and water is about as exciting as it gets for this guy. My wife will slug some wine down on occasion, but those occasions are far and few between. My wife has a 2011 Toyota Sienna. And I drive a 2013 Buick LaCrosse.” Oh, Buick. “I’m an IT manager. And my bride is a teacher’s aide at a local elementary school. We got about $135,000 between us, and I throw about $12,000 pre-tax annually in my 401(k).  That number includes the company match.  She’s 57, I’m 56.  House is worth $600,000 and we have about $100,000 left on the mortgage yet, 2.625%. We plan to live in the house until we die or no longer able to live on our own.  Total 401(k) balances is $900,000.  Social Security at 67 is $54,000 annually. Cash on hand about $15,000. I’m thinking we want about $6000 a month after taxes in retirement, no pensions or annuities. If you don’t mind, can you answer a couple of questions. Here they are. I had a financial planner tell me I needed to start saving cash or start a Roth IRA.  And understood the need for a Roth, but his reasoning surprised me.” Ooh. Oh, this should build.

Al: This will be good.

Joe: Dun, dun, dun.

Al: What could it be?

Joe: Oh, I don’t know. I’m excited.  “He told me, if we retire early and only take a minimal amount of our pre-tax dollars as income, we would qualify for free Obamacare before we are eligible for Medicare. That would allow us to withdraw approximately $28,000 in pre-tax dollars, pay no income tax, and qualify for free healthcare.  We would need to live off of the Roth money or cash we have on hand. Is that really possible?  I’m also curious about what your thoughts are in getting the mortgage paid off early or taking the extra payments and dumping them into a Roth. Mathematically it makes sense, but getting rid of a $900 a month payment in retirement is also very attractive. At a current payment rate, it’ll be paying off in 4 years. If we don’t pay any extras, it’ll be 10 years before it’s gone. I appreciate your spitball fellas.  I hope you have a blessed Thanksgiving.” Oh, we’re right off-

Andi: Well, this was sent on November 20th.

Joe: Oh boy. Hey, happy Thanksgiving-

Al: For 2024. Well, we’re not-

Joe: We’re early.

Al: – quite ready.

Joe: We’re really early.

Al: Yeah, we’re very early on this one.

Joe: Alright, so, he’s got a financial planner, he’s like, hey man, you need to save some money in cash. He doesn’t tell us how much money he wants to spend, though.

Al: Well, yeah, he wants to spend about $6000 a month.

Joe: Oh, I’m sorry, so that’s-

Al: Call it, what, $72,000?

Joe: Okay, and so, he wants to bridge the gap-

Al: Well, I mean, he’s got, so let’s see, what’s he need, he needs about $18,000, call it $20,000, and a $900,000,  that’s what he’s got currently, and it’s going to be more when he retires. I don’t know when he wants to retire, I don’t think he said that.

Joe: But he’s bridging the gap until Medicare, so Medicare’s at 65.

Al: I know.

Joe: So how many years does he want to bridge $72,000?

Al: I don’t know.

Joe: Because he’s not going to claim Social Security until 67.

Al: Right.

Andi: Well, he does say he wants to retire early, according to the financial planner. “He told me if we were to retire early, it would only take a minimal amount of tax dollars, pre-tax dollars.”

Al: Yeah. But I think that-

Joe: The cash on hand or the Roths need to be probably $500,000 to bridge the gap, depending on what retire early is?

Al: But that’s not the question. And we don’t know when he wants to retire. His question is, if he does retire early, can he pull, can he take money out of the Roth or pay in cash and then get the Affordable Care Act insurance?

Joe: I understand that, but he does not have any money in Roth.

Al: Well, he wants to put it in, so he’s going to work for a while.

Joe: How old is K-dog?

Al: He’s 56.

Joe: Okay, he’s going to retire early, so let’s say 4 years. 60.

Al: We don’t know, we’re guessing. That would have been helpful to know.

Joe: Right, so let’s say 4 years, he retires at 60. Hypothetically, K-dog retires at 60. He’s gotta bridge 60 to 67 of income because he wants to take it then. His Medicare is going to come in at 65. So can he pull the money out of his retirement account and qualify for Obamacare? Or Affordable Care Act? The answer is absolutely yes, but he’s not going to have enough money to cover $72,000 a year of income.

Al: Right. Yeah, so, so I guess your point, so we’ll start there, is when he retires is very important in this whole equation, whether this actually works or not. If he retires, let’s just say he retires at 64, so there’s one year gap, right? Between then and Medicare, right? So, so then maybe it works because-

Joe: He will need $50,000 bucks.

Al: – because now you got $900,000 you’re adding $12,000, you know over what 7,  6 or 7, 8 more years, right? So, you know probably have $1,300,000, $1,400,000, you know, something like that.

Joe: But what is the, so the income for Medicare, or for the Affordable Care Act, to get the subsidies, is-

Al: – for a married couple, I don’t have the table in front of me, but I’m going to say it’s low $20,000s. And so-

Joe: – times a poverty level or something, right?

Al: Well, well the poverty level is a number, and then it can be up to 4 times. So if you want free insurance, it’s got to be below that $20,000 number. Now, and that’s gross income, not taxable income. So I think there’s a misunderstanding there. You may pay no income taxes, but you may have to pay some insurance if you’re over that. Just have to look up the table, what the table is for a married couple. I’m thinking it’s around $20,000. But if you make $28,000 or whatever the number you said, you’re still going to get reimbursements from Obamacare because you’re within 4 times the poverty level, which in that example would be about $80,000.

Joe: But here’s the problem with that, is that he wants to spend $72,000, right? Okay. And then $28,000 is the max that let’s say he can pull from his retirement account.  So $44,000 needs to come from somewhere. So his planner said, save money in cash. So let’s say he retires at 60, he needs $44,000 times 5 is $220,000 in cash or $220,000 in a Roth IRA to cover the shortfall for that gap period.

Al: Right. And he’s got $15,000.

Joe: He’s got $15,000.

Al: And he’s saving $12,000 a year.

Joe: Including match.

Al: Including match. Yeah. So we’re a little bit short here.

Joe: All right. So it’s like the planner throws out hey, well, you know what, if you win the lottery, you’ll be a millionaire.

Al: So I guess-

Joe: Come on, I guess, I mean, I can throw out some stats. You know what, if you make a billion dollars a year of income, you’ll be in the highest tax bracket. Okay, that will never happen.

Al: Well, if I go back to my premise of retiring at 64, you probably have enough saved to cover one year. Okay. Right? Oh, yes. If you retire at 60, where’s the cash coming from? The guy’s grinding to save all this cash. He’s not going to put any money in his 401(k). That $12,000 is not going to go to cash. It’s after-tax dollars that he’s not going to get a tax deduction for.

Al: Here’s the other-

Joe: It’s going to go into cash. And he’s going to save 17 cents on Medicare premiums.

Al: Well, he will save for a year or whatever, more than that. But anyway, here’s another problem. He’s grossing $135,000 and he thinks he can live on $72,000. Really? Have you tried it? Try it right now and try saving $30,000, $40,000 a year and see if you can live on $72,000. If you can do it, maybe this works. If it doesn’t, you’re probably working to 67.

Joe: Yep.  Yeah, he’s close. He’s done a good job. You got $1,000,000. It’s all in a retirement account.  I would look at, all right, well, you make $135,000. You’re in the 22% tax bracket. That bracket’s going to be 24%, 25%. Does it make sense to now get some money into a Roth, not necessarily a contribution, but do a conversion? Let’s say instead of taking that $6000 that you were going to jam into cash, you do a conversion for $35,000 to get into a Roth and you pay $6000 in taxes. So you’re leveraging the conversion. So $6000 is going to go into the Roth, or you’re going to give it to the IRS to pay the tax on the conversion. I just made that number up. So it’s $6000 point- or $7000 actually, right? Let’s say it’s 22%. So $27,000 bucks, right? That’s pretty close.

Al: Yeah, you were. Right. Yeah. So at any rate. Yeah. The second question is, should you pay off the mortgage early? 2.6%. Not really. However, I get the idea of not having a mortgage. If you wanna do some of both Roth and mortgage, go for it. But I wouldn’t put a lot of money at paying the mortgage off at that low interest rate.

Joe: Yeah. But $900 a month, you just get rid of a $900 a month payment. And you don’t have to stress about that. You got a hundred- I mean, you have income now. I would pay it off. I mean, I get the arbitrage.

Al: Oh, you would? Okay.

Joe: I would because I think he spends more than he realizes.

Al: Well, I think he does too. I, so here’s what I would do. I would put money to Roth. Well, this is where the big wallet came from. Remember you asked me, which would I do? I said, I’d do both. Yeah. I’d put money into a Roth and pay off my mortgage early. And you said, Oh, look at the big wallet on Big Al and somehow that stuck.

Joe: Yeah. Yeah. I’m going to pay off the mortgage right now and save a bunch of money.

Should I Contribute to Pre-Tax or Roth Post-Divorce? (Erik, Minneapolis)

Joe: Eric from the mothership, the homeland.

Al: Wow. Where are you from? Minneapolis. How about that? You know him?

Joe: Probably.

Andi: How many people are there in Minneapolis?

Joe: I know them all.  People.

Al: It seems like you know a lot from Minnesota.

Joe: “Dear Joe and Al, I love the show. I’m single, drive a 2020 Land Rover Discovery.” Oh, it’s my boy E.  I call him E Dog.

Al: E Dog.  That works.

Joe: “I love to drink a good Manhattan. I’m a doctor and currently a W2 employee. I would appreciate a good spitball from you. I currently have $700,000 in a pre-tax 401(k), $200,000 in a Roth 401(k), $151,000 in a Roth IRA, $232,000 in a brokerage account, and $250,000 in a deferred comp, which pays 1/10, starting in 10 years, when I hope to retire.  Currently 57 years old. I was divorced 3 years ago and pay $11,000 a month to my ex-wife for her life.”

Al: Wow.

Joe: $11,000.

Al: That’s up there.

Joe: Oh my.  $11,000.  That’s a lot of cash.

Al: It is.

Joe: That’s way more than most people make.

Al: It is. So, maybe-

Joe: He’s a doctor.

Al: Maybe he makes some good money. I’m guessing.

Joe: I don’t mean to rub it in there. “That’s $11,000 after tax each month-“, he writes.  “I lost my ass.  That’s the divorce. So I’m wanting to plan my contributions carefully. My question has to do with my 401(k). I’m solidly in the 37% federal income tax bracket.” It’s not a tax deduction anymore, Alan. Before that $11,000 you could write off on his tax return.

Al: Well, it depends when your divorce went through, but I think 3 years ago-

Joe: That was right on the-

Al: It was, I’m guessing it’s not a deduction.

Joe: Time goes by so fast.

Al: Yeah, I think it was more than 3 years ago where that changed.

Joe: “I’m maxing out my 401(k) currently with one half going pre-tax, one half going into Roth, plus my company puts in $14,000 per year pre-tax. In addition, I’m contributing $10,500 after-tax to my 401(k) and then converting to my Roth every year. Plus, I do my full backdoor Roths in addition to adding about $80,000 per year to my brokerage account.  I nearly zeroed out asset-wise in my divorce, so what I would like to know is if I should be putting all my 401(k) contributions in pre-tax now to take advantage of my tax bracket or all Roth. The Roth conversions in my 401(k), even a consideration.  In retirement, in addition to Social Security, I have $136,000 in pension, $35,000 in rental income and a trust that I inherited that will pay me approximately $90,000 a year in taxable income for life.” Geez.

Al: Yeah.  So if you’re keeping score, income of $260,000, current liquid assets of about $1,300,000.

Joe: $260,000 in retirement, $135,000 plus a little rental, plus a little inherited trust.

Al: I’m assuming that and the salary had a factor in the $11,000 going out the door.

Joe: Okay, so $260,000, single. Do you think he’s going to get married again?

Al: No. I don’t think so.  Would you in that case?

Joe: I don’t know. I think that would be tough. That would be tough. So, if I was Eric, I’m going 100% Roth.

Al: Perfect. And I’m- not me.  I’m going 50/50 at most Roth. I probably would do less than that. I probably would do 25% Roth.

Joe: $260,000 of income in retirement.  What’s his tax bracket going to be?

Al: Well, it’s already off the charts.

Joe: It’s going to be giant. I think 37% is going to be cheap for Eric.

Al: Maybe.  I don’t know. It’s- I don’t, I just don’t like doing big amounts going to Roth when you’re in the highest tax bracket. But I get it. I mean, so we’re scheduled to go back to 39.6%, but we’re also supposed to get our state tax deduction back, which offsets that. So that’s about same, same. Could it go up above 39.6%? Absolutely could. So I think that’s your gamble there.

Joe: Well, he’s young enough where he’s got time, right?  How old is he? 57?

Al: 57.

Joe: He’s 57 years old.

Al: And he’s got $700,000 in pre-tax right now. It’s not like it’s a couple million, where he’s still adding, right? I don’t know. I’d probably put 25% of Roth, 75% traditional.

Joe: He’s not gonna miss the tax deduction.  He’s already ripping checks for $11,000 to the ex.

Al: I know, but that’s-

Joe: Just taking a couple extra bucks to the IRS, you’ll have a big that pot of tax-free money in the future.

Al: That’s painful when you sign that tax return. Anyway, two different answers. So Eric, you pick what you want.

Joe: Yep. I don’t know. I’m closer to Eric’s age. Not by long. I mean, he’s way older than me.  Way older. But he’s still young.

Al: He’s just about split our difference.

Joe: He’s still young. He’s a young cat.  But I like Roth. I mean, if I’m in a really high tax bracket, I’m going to go all Roth.

Al: You’re going Roth.

Joe: Yep. Because I have cash flow. I have income.

Al: You can afford it.

Joe: And it’s like, I’m not going to remember the tax deduction of a couple of bucks 20 years from now. What I’m going to remember in 20 years from now is that there’s going to be a really good size tax-free pool of money that I don’t have to worry about the IRS. I took the uncertainty of taxes off the table.

Al: Well, and given that you’ve already got all this fixed income, and rental income, and trust income-

Joe: Trust income? You don’t think he’s got some more cash coming?

Al: Which is all ordinary income. yeah, so there’s some validity in that, Eric. I still- I wouldn’t do all myself, but I get Joe’s point.

How to Sell House and File Taxes While Finalizing Divorce (OC Birdman in South OC)

Joe: “Please use OC Birdman in South OC.” Oh boy, what the hell is this? “OC Birdman at South OC”  Is this like a riddle?

Andi: He’s from Orange County. He’s the Birdman.

Joe: The Birdman,

Al: In the South, so maybe-

Joe: We got K-dog, we got Birdman, we got-

Al: South OC, Newport Beach, Laguna Beach, San Clemente.

Joe: Alright. “Long time listener. 4 years.” Birdman! Killing it!  “First time contributor. I drive a 2018 Ford Edge. And my wife drives a 2021 Kia Telluride. A little drink of choice is a Paloma.”

Andi: I don’t know what that is.

Joe: That’s a little tequila. “ Or a bourbon on the rocks.  And we have a one-year-old Australian Kelpie.”  Kelpie? “Kelpie puppy named Lulu.  My wife and I bought our house in 2012 at the bottom of the real estate market for $450,000. It’s now worth $1,000,000.  Unfortunately, we are in the planning stages of getting divorced.” Oh, boy.

Al: Yeah, too bad.

Joe: Andi, we got the divorced little-

Al: Gotta go on.

Andi: Hey, it’s two questions. Come on.

Joe: “We intend to sell our-“ Well, we had a widow question, a divorce- couple of divorce questions-

Al: Yeah, we’re- Yeah, okay.

Joe: So they bought their dream home. Well, stop calling yourself the Birdman.  Birdman in South OC. Okay, that’s a little piece of life advice.

Al: Is that, was that a factor here in what’s going on?

Joe: It could be.  “We’re in the planning stage of getting divorced. We intend to sell our home and we will want to take advantage of the $500,000 capital gains exemption while we’re still married. My question is, if we sell the home in February and finalize the divorce later in 2024, how would we file taxes in 2025, married versus single, and still qualify for the exemption? But should we wait until 2025 to finalize the divorce so we can file 2024 taxes as married filing jointly? Love this show.” Love you, Birdman.  “Thanks for the spitball.” Alright, good question.  Him and Mrs. Birdman, Birdwoman.

Al: Yeah, right.

Joe: Splitting.

Al: Ex, ex Birdwoman.

Joe: Splitting.

Al: Soon to be.

Joe: So, $500,000. So you get the 121 tax exclusion. So as long as you live in the house 2 out of the last 5 years, you can exclude $500,000 of growth from your primary residence. If you’re single, it’s $250,000. It’s cut in half.

Al: That’s right. And so, here, yeah, so you don’t have to be married. So, so let’s say you get divorced and you’re single. So just make sure when you, in the divorce decree, that you each get 50% of the home. So when you sell it, you each get your $250,000 exclusion. And then same, right? You’ve got the same issue. Otherwise, if one person gets the home, and the other one, doesn’t, you might have trouble getting the full $500,000.

Joe: So let’s say he gets, Birdman is taking the home, but he’s selling it. So does he get, if he, if Birdman gets 100% of the pro- I can’t keep saying Birdman either.

Al: You keep, you have been . Just keep it up.

Joe: If he’s like, all right, I get the house, let’s sell the house and I’m gonna take the $1,000,000. But they have to be married for them to- for him to get the full $500,000 exclusion if he’s walking with the $1,000,000.

Al: Well, that’s what I’m saying. If he gets the house and he sells it when he’s single, he gets $250,000. But if in the divorce decree, it’s split 50/50, when they sell it, they each get half the proceeds. They each put their share on their return. They get $250,000 each. That’s what I would do.

Joe: All right. Very good. Thanks for the question.

Andi: Is the Federal Reserve about to start cutting interest rates? Can the Magnificent 7 continue driving stock markets higher? Will domestic or international politics sink the markets? Join Brian Perry, CFP®, CFA, at noon Pacific time on Wednesday February 28th for a Q1 Financial Market Update webinar and find out. Brian will provide his insight into the state of the markets, the economy, and the world, and he’ll answer your financial questions, live and in real time! Click the link in the description of today’s episode in your favorite podcast app to go to the show notes and register for the webinar. It’s free, but you have to sign up in order to receive the link to attend.

What’s the Sequence of Retirement Withdrawals? I Don’t See the Benefit of Roth Conversions (Laura, Seattle – Olympic Peninsula)

Joe: Let’s see, Olympic Palencia, we got Laura from Seattle.

Andi: Peninsula.

Joe: What did I say?

Andi: I’m not sure.

Joe: I’m telling you. I’m going on fumes here.

Al: You’re on fumes, huh?

Joe: I got this.

Al: Yeah. Okay.

Joe: I’m gonna pull through.  “Hey, Andi, Al, Joe, love your podcast and appreciate the humor interwoven into what can often be a stressful topic.”

Al: Not for us.

Joe: Yeah. Just gotta keep it light and easy.

Al: Yeah, we like it.

Joe: Yeah. It’s only money.

Al: It’s only your financial well-being forever.

Joe: Only your financial well-being. It’s either, you know, you got a roof over your head or you’re homeless.

Al: To be blunt.

Joe: Steaks or ramen.  All right. So it is stressful. That’s why we try to keep it light. We try to keep it fun.  Helping people out here.

Al: You know, I think what’s super stressful for a lot of people, they’re used to a paycheck, money coming in every single month or week or whatever it is, and then all of a sudden they retire. It’s like, the money is not showing up in the checking account.

Joe: I do not want to spend that money I saved.

Al: I saved it. I’m not, I’m going to blow through it.

Joe: I don’t want to touch it.

Al: I get the feeling.

Joe: All right.  Is that why you’re still here?

Al: Yeah. I’ll be here through my last gasp.

Joe: “Question for you. My understanding is that the conventional withdrawal strategy is to tempt a brokerage account. Then the traditional IRA and lastly, the Roth IRA. Would it make sense for me to first draw from my traditional IRA in order to decrease the amount of future RMDs, which while I need to begin taking at 75, right? I have $1,300,000 dollars in my brokerage account. Husband has no brokerage. $1,100,000 in my traditional IRA.  Husband has $1.62.”

Al: Actually-

Joe: Oh my gosh, I have millions, millions and millions, and my husband, he’s got nothing.  Tell me what happened to my life.

Al: Actually, husband has a $162,000.”

Joe: Oh.  “Husband, no brokerage.  I have several million in a retirement account. Husband, no IRA.”

Al: I like the $1,100,000 in IRA. Husband, $1.62.”

Joe: Oh. “$106,000 in my inherited IRA, inherited prior to the SECURE Act, $30,000 in my Roth IRA, Husband has $60,000.”

Al: Oh, husband wins on ____ the Roth, he’s been listening to the show big time.

Joe: “I got $200,000 in cash and CDs. I have a pension of approximately $9000 annually with a 2% COLA, 75% survivor benefit.  Our annual spending after taxes is $108,000 to live comfortably with a little bit of travel built in.  It looks like my RMD would be pretty close to the 3% or 4% safe withdrawal rate, so I don’t really see the benefit of doing Roth conversions. Although, I understand, the traditional IRA could potentially be much higher by the time I’m 75.  Not to sound cold, but we don’t- I don’t want to leave anything to my husband.  Not to sound cold, but we do not have any financial legacy goals for our children.” That’s cold.

Al: That’s actually, that’s what most people say. It’s okay.

Joe: It’d be nice, but it’s not necessary.

Al: You’re adding your own inflection. I like it.

Joe: “They are secure on their own, and they have careers, and they will not need the money. If they did, I could see the value in doing Roth conversions to save them some tax burden in the future. If I’m off base here and should be converting, I’d appreciate your thoughts. My husband will begin taking his Social Security beginning in early 2024 and will approximately see $24,000 a year. I plan on waiting until age 70 and will receive $36,000 a year. I’m currently 61, my husband’s 67, we’re both retired, and he drives a white truck. This is how much I know about vehicles.”  How much do you know about your wife? That he’s got a $1.62 in his IRA, he’s got no brokerage, and he’s got $60,000 in a Roth, and he drives a white truck.

Al: That’s all you need to know.

Joe: I don’t know what he drinks. I don’t know what he eats.  I don’t know where he sleeps.

Al: I haven’t seen him for a while.

Joe: Oh, literally no clue on what make or year it is. That’s kind of funny. “I drive a 2007 Lexus 350.”

Andi: She knows that though.

Joe: Yes. She knows her car.

Al: Oh, yeah. Sure.

Joe: “Husband does not drink, but I enjoy a glass of Pinot Grigio.  Thanks for any non-advice you have.”  Ah, Laura. Great question. A lot of good material in this one.

Al: Plenty. Where do you want to start?

Joe: Well, she’s got $1,300,000 in her retirement account. Husband has zero. Yeah. Like 62. He’s 60. She’s 62?

Al: 61.

Joe: Okay. So he’s got 15 years.

Al: So I did a little math.

Joe: So it’s going to be $3,000,000.

Al: $2,500,000 at 6%.

Joe: Yep.

Al: $3,000,000 at 7% or 8%.

Joe: Right. So $3,000,000, let’s say your RMD at 75 is going to be 4%. 4 times 3 is 120-

Al: $120,000 of ordinary-

Joe: – ordinary income. Plus your Social Security of $34,000, given inflation, let’s call it $40,000, given your husband’s Social Security of $34,000.

Al: And your pension.

Joe: And your pension of $10,000.  That’s $200,000 and some odd thousand dollars of income.

Al: And your brokerage account, interest and dividends.

Joe: Yeah, $1,100,000.

Al: And capital gains coming out of there.

Joe: So it’s not about necessarily a wealth transfer play. It’s about keeping those RMDs in check, because the RMDs is going to continue to grow on her. As she ages, more and more money has to come out of the account. As more and more money comes out of the account, what do you think that’s going to do to her tax bracket? It potentially is just going to keep going up, and more of that money is going to be lost to taxes unnecessarily.

Al: Yeah, so I think a lot of people, when they think about this, they’ve read an article that says, or they’ve talked to somebody, you’re too old to convert, there’s not enough time to make it up, right?

Joe: Or do you want to leave a legacy to your children?

Al: Right. But the thing is, what we’re trying to get across here is this is for you. It’s not for your kids, it’s for you to save taxes. Think of the tax bracket you’re going to be in starting at age 75. That’s what you’re trying to avoid, those higher taxes in the future.

Joe: How about the white truck husband dies?  He doesn’t have any assets, now she’s single.

Al: Now much higher tax rates.

Joe: Now you have a single tax bracket versus a married tax bracket. Yeah, you want to definitely get money out of the retirement account. You can live off the brokerage account. Start doing conversions now. You can convert to the top of the 12% over the next several years. Maybe tell your husband to push out his Social Security a little bit to keep some of that income off the tax return. Maybe you pay him $24,000 a year out of your brokerage account.

Al: Yeah, or maybe go to the top of the 22% bracket or maybe go to the IRMAA rates, right? I mean, there’s all kinds of ways to think about this, but yeah

Joe: All right. Laura, great question. Thank you. Hope that helped.

Roth Conversion to the Top of the Giant 24% Bracket? Which Rollover to Convert First? (RJ, Anaheim)

Joe: RJ from Anaheim, California. He goes, “Hey, Joe, Al, Roth conversion question from Anaheim, California.  I’m retiring at 62 next year. Wife will be turning 70 next year and already retired.  We will both start collecting Social Security next year. Total income with pensions and Social Security will be about $100,000. Expenses calculated at $120,000 per year.  House paid.  No debt. Accounts $1,400,000 in a retirement account, $630,000 in a Roth and $190,000 in a taxable account. We’ve been doing conversions up to the IRMAA threshold, about $50,000 per year for the last 4 years.”  Good for you, RJ. I bet he’s been listening to this show for 4 years, Big Al.

Al: It’s possible.

Joe: $50,000 bucks because, what is he,  $630,000 in a Roth? That’s pretty good.

Al: That’s excellent.

Joe: “Now for the question-“ He’s modeling some software for a Roth conversion. Just retire.  Go to Portugal.

Al: Convert as much as you can and travel.

Joe: Have a cocktail.  “Suggesting we are doing conversions up to the 24% tax bracket-” Whoa boy, that’s a big bracket.

Al: It is.

Joe: “- for 2024 and a little smaller in 2025.  And that would drain our taxable for best possible lifetime tax.”  He’s modeling this thing out. He’s going to convert to the, what’s his life, so what he’s doing, he’s like, he’s going to do some giant conversions. Get it all out.

Al: Yeah. And then see what this looks like.

Joe: See what it looks like and what’s going to be the maximum tax savings over my lifetime.

Al: Right.  And he’s 62, so according to actuarial tables, he will live till, let’s say, 84?

Joe: 90.

Al: I mean, it could be more, but I’m just saying what it is currently.

Joe: Right. “Our thoughts are to stay the course and keep doing conversions to IRMAA threshold. Also, models say, take out my rollover first instead of my wife’s. She comes to RMD age in 3 years. So that was a little confusing.”

Al: I disagree with that.

Joe: I disagree with that too.

Al: Yeah, you always want to convert the older of the two if you have a choice.

Joe: What model is he modeling?

Al: I don’t know, because she’s going to have to take her RMD pretty quickly.

Joe: “We would appreciate your spit balling questions. And thank you for the great content and podcast. We love IPAs. And we’ll go down to one car next year, 2022 Suburban-” Suburbs, Subaru, Subaru,  “- Subaru Outlook.” alright,  RJ, alright, cool,  so he’s modeling,  stop modeling,  stick with what you’re doing. He’s got $1,300,000, the wife, I’m guessing-  the wife has what?  Or is that total?

Al: Well, I’m assuming it’s total.  That must be total, because he didn’t say it was just his. So I would convert your wife’s first, because she’s older. That makes a lot of sense.

Joe: The only reason why this modeling, if he’s using some sort of software program- the only reason why I could see why they would  model his first, because he probably has a lot more money in a retirement account, is the only reason.

Al: Yeah, but still that makes no sense.

Joe: It doesn’t make any sense. You just convert all of her’s out.

Al: Yeah, if it’s small, right? And I wouldn’t, I don’t think you gotta go to the 24%.  I think 12%. I don’t know what your income is right now.

Joe: He’s just going to the IRMAA limit.

Al: IRMAA limit, oh yeah.

Joe: So IRMAA limit, for those of you that don’t know what IRMAA means.

Al: That’s $206,000.

Joe: So that’s your Medicare premium. So how Medicare works is that they look at a two year look back and depending on what your income is going to determine your Medicare premiums. And so if you’re adding ordinary income, so you have to be careful when you are converting once you get to Medicare age 65. Or around that age because the more income that you have from let’s say a conversion is going to add to ordinary income and then that potentially could increase your overall Medicare benefits. So he’s right on he’s looking at he’s like, hey I’m, just going to go to the top of whatever IRMAA limit to keep my Medicare premiums at bay. But then he’s start playing with some software and he’s like should I go to the 24%, which is a giant bracket. He can convert what, $400,000 or something stupid.

Al: Yeah, that’s correct.

Joe: So that’s going to blow up his liquidity.  His RMDs would be nothing,  I would not do that.

Al: Yeah, I’d either go to the top of the 22% bracket or IRMAA, they’re actually close to each other. I would not do more than that, there’s no need to.

Joe: He’s 62.  He’s got plenty of time to get the money out.

Al: I totally agree. Yeah, I don’t think there’s that big a sense of urgency. I mean, the reason you do it, you get it over with and don’t think about it.

Joe: Rip the Band-Aid off.

Al: I get it, but I think you can pay less taxes by doing this a little bit more sensibly.

Joe: And at $1,100,000, he’s already got $600,000 in a Roth. Continue to go to the top of the 22%, he’s going to have $1,000,000 plus in a Roth IRA. You take an RMD out of the retirement account, the max RMD if he does this correctly could be like $30,000, $40,000 bucks.

Al: Yeah, plus you got $190,000 in the taxable account. You’re going to eat that all up.

Joe: It’s going to be dead.

Al: And pay taxes- I don’t think you want to do that.

Joe: Right. I would do a conversion. Yeah, 12%, 22%. I like that. Here’s the modeling that he should be doing is to take a look at, all right, here’s my income, here’s my expenses, here’s my draw rate, and then map that out with inflation and put the right taxes in there. And say, all right, well, if I take the RMD from the retirement account, it’s going to be X, how much excess income do I need? Well, I can take it from the Roth and pay zero, and I can take a little bit from the brokerage account and pay potentially zero. Your money’s going to stretch that much further, so you want to have a balance in all of them, at least to utilize the zero or 10% tax bracket from a qualified distribution, right?

Al: Right. And the good news is RJ already has a lot of balance. So we’re just wanting to make this even better.

Joe: Right. He’s going on the other extreme.  You got to tell us what the modeling stuff he probably made himself.

Al: It’s Excel.

Joe: That’s it for us. Laura, great question. Thank you,  Andi. Wonderful job putting the show together once again.

Andi: Thank you.  Thank you for running on fumes for us to finish out the show today.

Joe: Oh, we killed it. I got plenty of energy.

Al: Yeah, it was fun.

Joe: Well, it’s always a good time. All right. We’ll see you guys next week. Show’s called Your Money, Your Wealth®.

Andi: K-Dog, J-Dog, and A-Dog, the Lincoln Lawyer, DRY cider, and tequila stories in The Derails at the end of the episode, so stick around.

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The Derails



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.

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