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
December 15, 2020

A final look at the CARES Act COVID stimulus package that allowed Coronavirus related distributions from retirement accounts and waived required minimum distributions in 2020. Joe and Big Al also discuss last-minute action items to reduce your 2020 tax burden, including Roth conversions, tax-loss harvesting, tax gain harvesting, and charitable giving strategies. The fellas go over when you should be doing Roth contributions and how much of your portfolio should be in Roth accounts, and they answer a question on lowering taxes from swing trading.

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Show Notes

  • (00:49) Have the 2020 Tax Rules Changed? Does the COVID Stimulus / CARES Act Affect Taxes?
  • (07:08) Do Coronavirus Related Distributions Impact Roth Contribution Income Limits?
  • (13:31) The Wash Sale Rule, Tax Loss Harvesting and Tax Gain Harvesting
  • (19:53) What Percent of My Portfolio Should Be in Roth?
  • (25:17) Should I Contribute to Employer Roth While in a Low Tax Bracket?
  • (31:40) Can I Reduce My Taxes from Swing Trading?

Free resources:

WATCH | 2020 End of Year Tax Planning YMYW Webinar

LISTEN | YMYW PODCAST #268: CARES Act: What’s in the Coronavirus Stimulus Package

LISTEN | YMYW PODCAST #274: CARES Act: Distributions, RMDs & Dependents

LISTEN | YMYW PODCAST #278: Can You Do a Coronavirus-Related Distribution to Roth Conversion?

Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth® we take one more look at the CARES Act – you remember, that was the COVID stimulus package earlier this year that did a number of other things like allowing Coronavirus-related distributions from your retirement and it waived required minimum distributions in 2020. Joe and Al also provide some last-minute action items to reduce your 2020 tax burden, including the ever-popular Roth conversions, tax-loss harvesting, tax gain harvesting and some charitable giving strategies. The fellas go over when you should be doing Roth contributions and how much of your portfolio should be in Roth accounts, and they answer a question on lowering taxes from swing trading, after they figure out what swing trading is.  I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Have the 2020 Tax Rules Changed? Does the COVID Stimulus / CARES Act Affect Taxes?

Joe: All right. We got Judi. And she writes in and she goes “To the YMYW trio. First, let’s get the important things out of the way. I drive a 2015 Buick Encore, metallic silver. That means gray.” Thanks, Judi with the sexy car there driving around.

Al: I can picture it, silver. Or gray.

Joe: “I have a terrier dog, a 20-year-old cat, and two foster kittens.” Oh, it’s just a regular farm. “I usually listen to the YMYW podcasts while gardening and I must apologize, but my question is not about backdoor Roths.” Thank you very much, Judi. “I was wondering if there have been any changes in the tax rules for 2020? Or can I use the 2019 rules to get a fairly good estimate for 2020? Also, will what they called the stimulus check have any effect on my taxes? Thanks so much. Appreciate the knowledge and the humor.” So she’s looking at end of year tax planning. She’s going what real major changes happen in 2020? And then the stimulus check that she got, is that going to affect anything on her taxes?

Al: So first of all, the 2020 tax rules are almost identical to 2019. The only change Judi, is going to be there’ll be a little bit of inflation indexing on the brackets, but for all practical purposes, you can just use the same tax rates for 2019 for your estimate for 2020. And the same rules, same standard deduction, almost everything is going to be roughly the same. So yeah I would say that works.

Joe: The biggest changes that happened in 2020 was the CARES Act. And the CARES Act brought a stimulus check. So she received the stimulus check. And people always ask this question it’s- with our clients now they’re doing end of year tax planning, it’s like do I add this to my taxable income? How does this work? And the stimulus was actually a tax credit that they paid people in advance.

Al: That’s what’s tricky. It’s really a 2020 tax credit that you already got. Hopefully, you got it.

Joe: So they’re going to give us a tax credit for 2020 but people needed the cash earlier to get it next year. And so they looked at your 2019 or 2018 tax return and if you qualified for the stimulus check they sent you the check itself versus giving you a tax credit. So a tax credit you save money in tax so that’s extra cash in your hands. Or in this case, they just cut you a check to get you extra cash.

Al: And the way it works is if your income was low enough for the most recently filed year, whether would have been 2018 or 2019, if your income was low enough they just sent you a check. Now if your income was too high you get one more chance in 2020, where if you’re income’s low enough you could get a check. But in either case, whether you got a check in 2020 or 2021 which would be next year, it’s not taxable.

Joe: Right. It is a tax credit. So if you qualified for 2020 tax return it would just come as a credit. They won’t send you a check.

Al: That’s right.

Joe: They’ll just credit it off your taxes.

Al: You’re right about that. That is the difference. Yep.

Joe: Let’s see. Anything else that CARES Act brought was the coronavirus related distribution. So if she wanted to take money out of her overall retirement account she could without a 10% penalty if she is under 59 and a half, avoid the 20% mandatory withholdings. Let’s see, what else? What’s different in 2020? Well, we had a pandemic, but that didn’t necessarily have to do with your taxes. RMDs. I don’t think Judi- so if she took a required minimum distribution- you don’t have to take an RMD if you’re 72. So those are just kind of minor things. But-

Al: I think I’m assuming since she’s asking the question late in the year she’s just kind of thinking about year-end tax planning and there’s really no material changes in that so you can use the 2019 rates and laws. But you’re right, so the CARES Act brought a few things that we just talked about that did change. But it’s not like- we have the same tax brackets. There’s not any new major legislation that really changed things significantly.

Joe: Give Judi 5 things that she should look for end of year tax planning.

Al: 5 things. Well, when you sort of look at your income and if you want do a little projection, look at your taxable income, take a look at your bracket. And if you’re a low enough bracket, can better consider a Roth conversion-

Joe: Yup, there it is. Every single question, Roth conversion. You got it.

Al: Backdoor Roth?

Joe: If your income is too high, we’ll do a backdoor Roth.

Al: If your income is too high and you can itemize you might look at adding more to charity; you might use a donor advised fund. If you are over 70 and a half you could do a qualified charitable distribution. If you do give away to charity you might look at giving appreciated securities away. If you have a business that’s cash basis you might look at prepaying expenses to create more deductions. So there’s a few things.

Joe: So some of the things was like bunching expenses, right?

Al: Yeah.

Joe: A lot of that changed with the Jobs Act because everyone now is, or not everyone, but a lot more people are taking the standard deduction versus itemizing.

Al: Yeah that’s right.

Joe: So maybe paying an extra mortgage payment doesn’t necessarily benefit people as much.

Al: And typically what I would say for most people that we see nowadays if you don’t have a mortgage you’re probably not going to itemize unless you give a lot away to charity. Because you’re limited to $10,000 for taxes as a tax expense and if you have no mortgage then if you’re married you’d have to give about $14,000, $14,000 or $15,000 away to charity to even claim a itemized deduction. So that’s where bunching comes in, like let’s say you normally give $10,000 a year. So you would never be able to itemize because your $10,000 taxes, $10,000 contributions is $20,000 and you’re below the married $25,000 let’s just call it. So if you do all your donations in one year, $20,000 in one year, plus your taxes, now you’re $30,000, at least you get to itemize one year. The following year then you don’t itemize. So that’s where bunching could come in.

Joe: All right Judi. Hopefully that helps. Thank you very much for the details. Appreciate that.

Do Coronavirus Related Distributions Impact Roth Contribution Income Limits?

Joe: We got Jenny from Portland, Oregon. She writes in. “Hi Joe, Al and Andi. I love your podcast. I have been binge listening and learning a ton. Thank you. My question concerns is the coronavirus related distribution offered for 2020. We are considering taking a distribution of $100,000 then accounting for it on our taxes over the next 3 years. Our problem is that we have already contributed the max to our Roth IRA accounts this year, husband and I. If we add $33,333 to our income, it will put us over the income threshold allowed to contribute to a Roth. Could you confirm if the CRD is included or excluded in the calculation used to determine income limits that contribute to the Roth IRA? Thank you very much for your help.” Jenny in Portland Oregon. She drives a 2009 Toyota Highlander.

Al: And no pets.

Joe: No pets.

Al: For such a big car.

Joe: It’s a giant car. She probably hikes.

Al: Anyway, Jenny, yes-

Joe: She probably goes- Portland Oregon. She maybe goes to the breweries.

Al: Probably. There’s a lot of good hikes. I’ve been at a hike there. I forget the name, but it was a cool hike. But yeah, Jenny-

Joe: I don’t think ‘cool’ and ‘hike’ should ever be involved in the same sentence.

Al: I do. I think hikes are cool.

Joe: I think hikes like the most- oh it’s awful.

Al: I love hiking.

Joe: Yeah.

Al: Anyway, I want to answer her question, the answer is, it is included in income for the Roth contribution limits, unfortunately.

Joe: So it’s included in MAGI, modified adjusted gross income, so it would blow her up.

Al: It is. So now you have two choices. One is you can re-characterize your Roth IRA to a regular traditional IRA, likely non-deductible; or you can pull it back out by the due date of the tax return and you can even do that all the way to the extended due date, if you extend your return and that goes to October 15th. But if you do that you also have to pull out any additional earnings or growth in the account and you have to pay taxes on the growth and you have to pay penalty on that growth if you’re under 59 and a half.

Joe: So when you look at a coronavirus related distribution and what Jenny’s trying to do here is that she’s got money in a retirement account and she wants probably to unload some of that stuff. It doesn’t seem like she needs it she just wants to get it out of the retirement account. And so with the CRD,  you can pull $100,000 out of a retirement account and you can either pay yourself back in the retirement account over 3 years or pay the tax over 3 years. And Jenny is electing to pay the tax over 3 years. So she wants to get $100,000 out; then she’s like if I pay $33,000 in tax each year, or the income is going to show up on my tax return each year. What I would do if I was Jenny is this, I would figure out where she falls in regards to income. Let’s say- because as a single taxpayer the phase-out start at- what is it?

Al: Single?

Joe: Sounds like Jenny single, isn’t it? She just said Jenny. Portland area, Oregon.

Al: Could be.

Joe: $130,000 is the other side of the phase-out.

Al: $125,000 to $140,000 but I’ll find out.

Andi: She does say ‘we’ are considering taking a distribution. I think she’s married. Yeah. And she says ‘husband and I’.

Joe: Well maybe I was just thinking about Jenny and I and her Toyota Highlander. I was just visualizing myself with Jenny with no pets. I just assumed she had no husband. So I was just giving her advice while we’re driving around Oregon.

Al: Could be.

Joe: So she’s married. So now let’s look at it. So it’s $160,000 or no- brain fart-

Al: $196,000.

Joe: $196,000 to $206,000. So $33,000 is going on this thing. So she and her husband were eligible prior to the $33,000.

Al: That’s what it sounds like. Yep.

Joe: So then I would just back out the CRD to figure out what that number is to keep her in the threshold.

Al: You could do that too because you have 3 years-

Joe: – to pay it back.

Al: So let’s say you’re all only a few thousand dollars over, then put that back in so that when you take that, divide it by 3, you’re still under the $196,000.

Joe: Right.

Al: Yeah that’s true. The other thing is you could actually pay back the IRA within 3 years but you still have to include 1/3 of it on your tax return and you still cannot do a Roth contribution. So that’s what’s tough about this is it may not even be taxable if you pay the IRA back but in the meantime, you have to include it on your tax return. You have to pay taxes and it increases your modified adjusted gross income and can blow up your Roth contribution.

Joe: If I pay my CRD back the same year I take the distribution, I am not including that on my tax bill.

Al: No of course not. But since you can do it in 3 years-

Joe: Right right right. Right.

Al: That’s what I’m saying.

Joe: Got it. Even though you paid it back, maybe you paid it back next year is what you’re saying. You still blow yourself up for this year.

Al: I think some people are pulling out free money for 3 years. But you have to pay the tax 1/3 each year. And then if you put the money back in the IRA in year 3, then there is no tax, you have to file an amended return and get your tax money back that way.

Joe: Got it. Got it. Yes. As I read this it says ‘husband and I’. So sorry.

Al: And plus there’s a ‘we’. But you were-

Joe: Sorry Jenny-

Al: -thinking about Portland.

Joe: Yeah. Breweries. You know, just joyriding.

Al: I’m thinking about cool hikes and you’re thinking about breweries.

Joe: There we go. Hopefully, that helps. So Jenny from Portland, thanks for the email.

Visit the podcast show notes at YourMoneyYourWealth.com to download our 2020 Tax Planning Guide and CARES Act Guide for free, and to listen to our previous discussions about taking Coronavirus Related Distributions, and what’s in the CARES Act stimulus package that affects you, your retirement account distributions, and your dependents. Click the link in the description of today’s episode in your podcast app – that’ll take you to the podcast show notes where you can get to ALL that free stuff, including the full transcript of this episode, and you can ask any money questions you might be left with – or tell Joe about your favorite brewery or tell Al about your favorite hike! Or heck, tell me about your favorite band! Now let’s get to more of your tax planning questions.

The Wash Sale Rule, Tax Loss Harvesting, and Tax Gain Harvesting

Joe:  We have a question from Owen from San Diego. He goes “Dear Joe, Big Al and Andi. This is Owen from San Diego. Congrats on your 300th podcast.” Well, thank you very much. It was probably our 700th.

Al: We didn’t get credit for the first 400 or 500?

Joe: We didn’t. Because they were awful.

Al: Well, we didn’t have Andi.

Joe: Yes.

Al: They were no good.

Joe: Yeah. I’m not even going to go there.

Andi: Thank you, Al.

Joe: “You continue to be the most entertaining, useful financial podcast out there. I listen to you guys during my walks in the neighborhood and I always look forward to Tuesdays so I can hear your new bantering. Question, can Joe explain backdoor mega door-?” Oh my God. Are you kidding me?

Andi: “It seems it needs further discussion.”

Joe: God. “Could Joe explain backdoor and mega backdoor Roth strategies? It seems this needs further discussion. Just kidding. Thank you all and appreciate that. I do have a question about a wash sale rule.” All right.

Al: Now we got something new.

Joe: Perfect. “If a security at a loss in my taxable brokerage account and purchased the same or similar security in my IRA within 30 days of that sale, is that allowed?” So let’s explain what a wash sale rule is.

Al: So if you’ve got let’s say a stock like Amazon that maybe has gone up in value that you hold outside of your retirement account. So this is in a brokerage account. Well that’s a bad example because that’s gone up. Let’s think of a stock that’s gone down like Penny’s.

Joe: JC- Ok.

Al: For example. So it’s gone down in value. And you want to sell it so you can then take that loss against other capital gains but you’re bullish on Penny’s. You think it’s going to come right roaring back. So you want to buy it right away. So you still have the stock and the IRS says no, you can’t do that. You’ve got to wait 30 days. You’ve got to be out of the market for 30 days. Otherwise, this loss doesn’t count. That’s why they call it a wash sale. That the loss washes away. So then the question is ok, I get that. I can’t sell Penny’s and buy Penny’s up back at the same time to create this loss but can I buy it in my IRA? That’s the question. The answer is no, you cannot do that. However, the second question is not that I would do it, how would IRS ever know? The answer is, they would never know. And a lot of tax is on the honor system. So you have to know the rules and hopefully most people follow them. But no, they would never know. The only reason they could ever find out is-

Joe: – is they look at your transactions of-

Al: – they audit you and ask for your IRA statement-

Joe: – and transactions of the IRA statement.

Al: And the only reason they would go that deep is if you had a lot going on that they want to make a case out of this. It’s very unlikely.

Joe:  But it is not allowed. So again, wash sale rules. So tax-loss harvesting. We probably talked about that just as much as we talked about the mega backdoor Roth IRA.

Al: We probably have.

Joe: But it’s a very- it’s a tax tool that can be very beneficial for people that have a lot of money in a brokerage account.

Al: And I think how that works best is maybe you’ve got like at an index fund like S&P 500 for example and S&P 500 goes up sometimes, goes down sometimes. So earlier in the year, let’s say the month of March, if you’d just bought the fund, it could have gone way down. And so you actually want to sell it to create a loss. But you think the market’s going to come back at some point, and in fact it did come back. So you’d like to buy it right back to receive the market recovery, but you can’t. You have to wait 30 days. However, you can buy something similar, like a-

Joe: – a total U.S. market index fund.

Al: Yeah, Wilshire 5000, 3000, whatever you want to call it, you’re still in the stock market. It’s not identical, but you still will receive recovery when it comes back. If you want to get back into that original security, that S&P 500 index fund, you can do that, you can sell the substitute fund that you bought in 31 days and then buy the other fund back. So that’s OK.

Joe: So when it comes to capital gains the reason behind this is that they wanted to encourage capital investment. And so when you invest in something outside of a retirement account if it’s at a gain and you sell it you have capital gain treatment which is lower than ordinary income as of today. There could be talk of changing the capital gains rate to ordinary income if you have a very high income. And we can talk about the new president-elect’s tax code at another time as we get a little bit more clarity on what happens in Georgia, probably in January. But so, on the upside they give you a break, a discount if you will on taxes. If you lose money they also give you a break in taxes where you can take a capital loss and offset that against future gains or you can offset $3000 of that loss against ordinary income. But they don’t want people to I guess take advantage. You get a loss. You sell it and then you buy your security right back just to take the cap- there was no intent really to sell it. You’re just taking advantage of the law. But on the flip side you can- there’s something that’s called tax gain harvesting. If you’re in the 12% tax bracket there is no capital gain. So you bought a stock for $5 it’s worth $10 today. If you’re in that 12% tax bracket you could sell that stock even at a $5 gain per share and not pay any tax at all and buy that stock the same day. You just increased your basis now to $10 a share.

Al: And there’s no cost to do that. No taxes. Now there could be state taxes. And you have to be careful because if your capital gain is big enough to push your taxable income above $80,000 married, $40,000 single, then some of that is going to be taxed.

Joe: Cool. Oh and “love the sense of humor. Thanks a lot.” San Diego native right here, he’s in our backyard, Al. Invite him over for couple Coors Lites.

Al: I think so.

What Percent of My Portfolio Should Be in Roth?

Joe: We got another question here, let’s see- from Kickass Seabass.

Al: Like it.

Joe: Remember that movie, Alan? Kick his ass. Seabass.

Al: No.

Joe: Andi?

Andi: I remember you talking about it. We’ve talked about it on the show before and I think that’s this person that’s emailed us. You called him Seabass.

Joe: Yeah. Seabass. He’s a trucker, wears a hat. Dumb and Dumber. You guys don’t remember that? And then he was like he threw salt over him and then it and then it was, he got all upset. He was like ‘kick his ass, Seabass.’

Al: I couldn’t hear any of that because I can’t hear Andi today. But I did see part of Dumb and Dumber.

Joe: If we would videotape this show, we could call it Dumb and Dumber on Finance.

Al: It reminded me of you and me.

Joe: Which one are you? Lloyd or Harry.

Al: I don’t know. Which one-

Joe: You’d be Jeff Daniels.

Al: Jeff Daniels. I would be Jeff Daniels.

Joe: For sure.

Al: You’d be Jim Carrey.

Joe: Yep. All right. “Hi Andi, Al and Joe. No particular order. Love the show. I listen to many financial podcasts and while there are many that are informative, yours is only one that is also entertaining. So keep up the good work. My question is the following, wife and I are 36 years old and have a combined adjusted gross income of $343,000. And we will both be maxing out 401(k) contributions starting this year. We are late to retirement- we are late to the retirement enlightenment party. We like the automation of contributing to 401(k)s and tax deductions. But fear that at some point it will truly be unwise from a tax planning standpoint to put more money into a tax deferral account because of the required minimum distributions in the future. We would like to spend $120,000 annually in retirement. At what point, what upper limit value in 401(k) money must we start putting money into Roth or post-tax 401(k) to minimize taxes in the future while also maximizing tax benefits currently? Maybe asked another way, what percentage of our retirement assets ideally should be in Roth?” When should they start looking to kind of maneuver their money around? That’s a really good question and it’s hard question to answer without knowing account balances. Because he’s making good money and he’s young. So he’s 36, 46 let’s say. I don’t know. Who knows when he wants to retire, but he could work for another 30 years. And if he’s maxing out his retirement accounts for the next 30 years and he has been maxing out his retirement accounts for the last 10 years let’s say, he’s going to have a ton of money in deferred accounts. If he wants to spend $120,000 then it’s looking at I want the tax deduction now because I’m making $350,000 a year. But when should I start thinking about tax diversification?

Al: It is a tough question Joe, because when you make this much money, you’re in a high bracket. And let’s just round it to $350,000, standard deduction of $25,000 let’s just say. So taxable income of about $325,000 which is the top of the 24% bracket. And so if you decide then to switch over to the Roth side, then that’s going to be taxed at 32% plus state. So it’s expensive. So that’s the hard part. Now if you’re gonna be working a lot of years and your income is only going to go up, you might as well bite the bullet and start getting some in the Roth now because it’ll be harder later even. But on the other hand, I don’t know, it’s hard to pay taxes, hard to pay the tax and avoid the tax deduction when you’re in such a high tax bracket. So I would likely just continue the regular 401(k) and think about the Roth option later on when the income was a little bit lower.

Joe: I would do the exact opposite.

Al: I know you would.

Joe: I would. And the Seabass, he’s making $343,000 a year. I get it. You’re 36 years old. I would jam everything into a Roth right now. Because let’s say if he starts from scratch and he works another 30 years. He’s gonna have around $4,000,000 just strictly in deferred accounts. Who knows where the hell tax rates are going to be? I don’t know if they’re going to be lower or they’re gonna be higher. But if he’s in the 24% tax bracket right now, that’s pretty damn low. We were telling people to convert at the 25% tax bracket all day long.

Al: But he’s not. He’s-

Joe: He’s at the top of the 24%, right?

Al: The top of the 24%.

Joe: OK well at the very- how much room does he got?

Al: Well that- I guess is the $343,000- is that before the 401(k) or after?

Joe: Who knows? I mean we don’t know. We get Jenny saying taxable income when it’s gross income. We got Kick his ass Seabass- I mean who knows what these guys are doing?

Al: Well see, so the-

Joe: So he’s gotta look at his taxable income. But I don’t care. 32%, bite the bullet. I don’t-

Al: I wouldn’t.

Joe: I would. For sure. At 32%, I would save all of that money. Let’s say would you rather in 30 years have $4,000,000 tax free? That you don’t give a hoot about taxes? Or would you be like, look at this money honey? Right. And then it’s, oh guess what? We only have half of it because we got to give it all the taxes. Because you know college is gonna be free at that point. Food’s free.

Al: Well anyway, different strokes for different folks.

It’s finally here, our Ultimate Guide to Roth IRAs is ready for you to download for free from the podcast show notes at YourMoneyYourWealth.com. It explains in depth what a Roth IRA is and how you can benefit from having one, how a Roth IRA differs from a traditional IRA and from a Roth 401(k), the rules for contributing to a Roth, Roth conversions and backdoor Roth conversions, the rules for taking withdrawals from your Roth account, and more. Given how much Joe LOVES answering Roth conversion questions lately, this comprehensive resource will come in VERY handy. Click the link in the description of today’s episode in your podcast app to go to the show notes to download your Ultimate Guide to Roth IRAs for free, and of course, if you still have questions, just click the Ask Joe and Al On Air banner there in the show notes and send them in.

Should I Contribute to Employer Roth While in a Low Tax Bracket?

Joe: We have Nick from Omaha, Nebraska writes in. “Currently utilizing my employer’s pre-tax 401(k), 457, HSA plans to control my AGI each year. I contribute as much as necessary to keep my adjusted gross income at or around $25,000 to get the maxed tax credit and refundable child tax credits. Being married with 3 children this scenario gives me no tax liability and actually gives me effective tax rate of negative.” How in the world is Nick living? He’s got 3 kids.

Al: Right and he’s got his taxable income, or AGI below $25,000, which means his taxable income is zero.

Joe: It’s negative.

Al: Yeah.

Andi: Negative 43%.

Al: He must have other money he’s living off of I’m guessing.

Joe: He’s got a little trust- a little trust fund? Ohhhh.

Al: That’s what it would seem like. Yep. Something happened somewhere.

Joe: Yeah we’re not judging. Well maybe a little bit. When we hang up we’ll be like ‘Nick, that lucky-”

Al: Lucky Nick. Good for you Nick.

Joe: “This seems to be the best scenario as it gives me a guaranteed return. However I’m wondering if I should be utilizing my employer’s 401(k) 457 Roth option as well, while I’m in such a low tax bracket. Any help would be greatly appreciated. Context, I’m 30 years old, wife’s 28, married with 3 children. No debt, paid for house and have been contributing to Roth IRA separate from our employer plans for both the wife and I over the years, as well as a taxable account. Love your show, mainly Andi.”

Andi: I know it looks like I added that but honestly Nick did actually include that.

Al: 30, 28, house paid off.

Joe: Yeah.

Al: That’s pretty good.

Joe: Yeah. 30 years old, wife’s 28. You got a paid-off house. I got millions in the bank.

Al: Got lots in the bank.

Joe: I make $25,000-

Al: I’m gaming the system so I get the credit.

Joe: I love it. I love Nick. He’s killing the game.

Al: So he’s- when he’s talking about tax credit, he’s talking about the earned income tax credit which, when you have kids and your income is low enough you actually get a refundable credit. So that’s how he can get a credit of over $10,000 by making zero.

Joe: So he calculated that is that he’s getting a 43% rate of return.

Al: Yeah that’s right. Guaranteed Rate of Return.

Joe: So what does he do? He’s thinking about should I be utilizing the Roth option? So I guess Al, talk to me about the Earned Income Tax Credit. If he then- do you know the thresholds of that tax credit off the top of your head? Al: No, not off the top of my head. But since he brought up $25,000, let’s just use that. So in other words-

Joe: Is it a dollar for dollar or let’s say if I make $26,000- is it pro-rata? Does it kind of-?

Al: Yeah. It’s a pro-rata thing. But if your income is low enough and if you have children all of a sudden some really cool things happen to your tax return. You get- it’s basically like you had additional withholding that you didn’t really have. And so the government pays you. It’s called a refundable credit. It’s the best kind of credit there is. And as one very smart tax advisor who I went to a seminar years ago he said ‘refundable credit equals fraud’. Because when there’s a refundable credit people have a tendency to make up numbers on the return to get free money.

Joe: Got it.

Al: I’m not saying Nick is committing fraud.

Joe: Oh absolutely not.

Al: No. But people do that.

Joe: Sure. Because he’s gonna 401(k), 457 plan that he’s maxing out. So he’s sheltering probably $40,000 a year-

Al: So we can only assume he’s got other money to live off of. And so-

Joe: But he lives in Omaha, Nebraska. I don’t know. $25,000. No mortgage. Three kids.

Al: I’m sure he lives pretty tight.

Joe: Cheerios.

Al: They don’t have shoes.

Joe: Oh, they got boots. They’re probably Sorels. It’s cold there. So would you give up the tax credits to build more tax-free money? I guess is the question.

Al: No. I mean he’s in a sweet position. If you start putting more of your money into the Roth you’re gonna be over that earned income tax credit-

Joe: He’s gonna lose it.

Al: – and your effective rate in the Roth conversion will be like 100% or more.

Joe: So let’s say Nick is saving hypothetically $45,000 into a retirement account. And then so he’s got another $25,000 of income. But then he’s getting an additional $10,000 of income from the government as a refundable credit. So essentially he’s getting another match from the IRS of $10,000. I would take that milk train as long as you can get it.

Al: Yeah. It’s not necessarily what the credit was designed for. But nevertheless, he’s arranged his affairs in such a way to take advantage of it. So there you go. No, I wouldn’t add any more income Nick, you got a sweet deal. Keep that going as long as you can. Eventually, probably your income will be high enough where you can’t pull this off anymore. And then at that point is when I would start doing Roth contributions.

Joe: But we’ve seen people then have millions and millions that with the whole Affordable Care Act-

Al: Yes. We have. Exactly.

Joe: That’ll screw up my subsidies.

Al: I’m not doing a Roth conversion.

Joe: Oh my God, it just-

Al: I remember one person in particular several years ago. This was probably someone that had $3,000,000 or $4,000,000 and they were trying to keep their income below whatever, $35,000, whatever it was to get the full Obamacare Affordable Care Act credit. And you kind of blew up at him. And said ‘dude, this is not what this is for.

Joe: I mean he’s tripping over dollars to pick up pennies. Yeah I kind of lost my-

Al: Yeah.

Joe: We got to lead people to show them the right way to handle their money. And so he wanted to keep a couple of bucks in this Affordable Care- I don’t know.

Al: And he had- he had a lot of money in his 401(k).

Joe: Right. And I was like ‘dude, you’re gonna blow yourself up. I don’t care.’

Al: Trying to save this little credit you get.

Joe: Right. So that just kind of tells us personality.

Al: Anyway, that earned income credit if you can qualify for it, is actually pretty generous.

Can I Reduce My Taxes from Swing Trading?

Joe: We got Randy from Texas. “Good morning- evening Joe, Al and Andi. Emailing you from Texas, Houston area. Driving a Honda Pilot, Randy’s a cat person. Wife is allergic to cats.” So that’s why he’s a cat person?

Al: I think that means he can’t have his cat that he loves.

Joe: Got it.

Al: I love it how every time you say a car name, Andi shows it on the screen.

Andi: That’s because I don’t wanna spend a lot of time trying to talk about what it is, what it looks like.

Joe: Got it. Houston, Texas and he drives- yeah, that looks kind of like a Houston, Texas kind of car.

Al: It does, yeah.

Joe: So he’s a cat person just like Big Al. Big Al’s a huge cat person.

Al: I don’t recall ever saying that.

Joe: “Wife is allergic to cats. Converted to-

Andi: Corgi.

Joe: Corgi via wife.” What is converted to Corgi? Help me.

Andi: He went from being a cat person to being a dog person.

Joe: What the hell is a Corgi?

Andi: I’m gonna show ya. That’s a Corgi.

Al: There ya go.

Joe: Oh boy. Converted to- well, that’s kind of half cat. Looks like a half cat.

Al: A dog that looks like a cat.

Joe: Looks like- yeah, it does. So “30s, married, 2 kids. If someone made $5000 every month in short term gains from the stock market swing trading every month for a total of $130,000-” Is this a hypothetical? ‘-what are your thoughts to help reduce taxes by year-end? Thank you for helping me answer this question for someone else.” Whatever Randy. Randy is a cat person, marries this beautiful bride. And then he goes ‘well I converted to Corgi’. I don’t even know what the hell this is- where is this going? And then now he’s a swing trader. To me it’s like- swing trader, I thought he converted to something else. But his wife had the Corgi-

Al: She couldn’t stand the cat so-

Joe: But the Corgi and him were doing something else. So I don’t know- but swing trading. He’s making money, I guess.

Al: Well if you make $5000 a month in short term gains, how do you get up to $130,000? Isn’t that $60,000?

Joe: It is. It is.

Al: I’m not sure about that either. What does swing trading even mean? Is that short-term trader, I guess?

Joe: It’s short term gains. So he’s just- yeah he’s swinging.

Al: Swinging from the fences.

Joe: He’s swinging that.

Al: So anyway it is- it’s ordinary income. There’s not much you can do to reduce tax on ordinary income.

Joe: We can see Randy just walking his Corgi. Talking about listening to the podcast. Oh man, I wish you would give me some swing trading tips.

Al: My experience of people that make $5000 or $10,000 every month in the market short term gains, that gravy train changes when the market turns-

Joe: – fairly quickly. Well, it’ll get a little shorter then.

Al: If you could time it right.

Joe: Randy’s got the skills. I have no not doubt. But if someone made $5000 every month in short term gains from the stock market swing trading every month for a year for a total of $130,000. Your math is really good, Randy.

Al: I don’t get that either. I guess to get to his question, what can he do about taxes on ordinary income? So that’s the hardest kind of taxed income to do anything with.

Joe: Can he put his trading business or trading activity- can he call it a business?

Al: Not really. I mean there’s something called, I guess it’s a trader in the IRS code and then you can set it up as a business. So like every- at the end of the year, all of your positions are considered sold and I don’t know. There’s all these rules- it’s way too complicated. I’d have to look them up to be able to tell you what they are. But there is that category. I don’t- I still don’t think it’s earned income though. I think it’s still portfolio income. So I’m not sure you could do a retirement plan on that. I think all that does-

Joe: Short term gains is still portfolio income.

Al: All that does is allow you to deduct your expenses on schedule C for your business. I think that’s what you get from it being a trader, professional trader, for the IRS rules.

Joe: Well I guess- I’m sure in all of his trades, he’s never lost.

Al: No.

Joe: If he did like- in a blue moon, let’s say he makes a bad trade and has a loss-

Al: But that hasn’t happened.

Joe: Never. Never to Randy.

Al: But just in case.

Joe: Just in case, you could take that loss and offset that gain.

Al: You can.

Joe: It’s like a gambling loss. We have individuals that come in that have million dollar gambling winnings and then million dollar gambling losses.

Al: And they can prove it.  It reminds me of someone that goes to Vegas. Have you ever heard someone come back and say ‘oh yeah I lost my-

Joe: Ass-ets?

Al: Yeah.

Joe: Ass-ets? Yep.

Al: Trying to figure out how to say that nice.

Joe: Most-

Al: Actually a lot of times people- the people that are more honest say something like ‘I kind about broke even’, ‘covered the cost of the trip.’

Joe: You know the real gamblers, they don’t ever tell you that they’re going. Because it’s not like ‘hey I’m going to Vegas’. I was making some money one time in Vegas and I was like ‘how about a room’. I kept screaming that ‘how about a room.’ And they gave me this awful, awful room just to shut me up. All right. That’s it for us today. Thanks Andi, wonderful job once again.

Andi: Nice job engineering, Joe.

Joe: Hopefully the sound quality is all right. We’ll see you guys again next week. The show’s called Your Money, Your Wealth®.


Joe getting lost in the grocery store and Dumb and Dumber coming right up if you like the completely non-financial Derails, stick around.

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